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, 2022, which was filed with the Securities and Exchange
Commission (SEC) on December 6, 2022 and is available on the SEC's website at
www.sec.gov.
Overview
We develop, design, manufacture and service custom-engineered equipment and
systems which (1) distribute, control and monitor the flow of electrical energy
and (2) provide protection to motors, transformers and other electrically
powered equipment. We are headquartered in Houston, Texas, and serve the oil and
gas and petrochemical markets, which include onshore and offshore production,
liquefied natural gas (LNG) facilities and terminals, pipelines, refineries and
petrochemical plants. Additional markets include electric utility and light rail
traction power as well as mining and metals, pulp and paper and other municipal,
commercial and other industrial markets. Revenues and costs are primarily
related to custom engineered-to-order equipment and systems and are accounted
for under percentage-of-completion accounting, which precludes us from providing
detailed price and volume information. Our backlog includes various projects
that typically take a number of months to produce.
The markets in which we participate are capital-intensive and cyclical in
nature. Cyclicality is predominantly driven by customer demand, global economic
and geopolitical conditions and anticipated environmental, safety or regulatory
changes that affect the manner in which our customers proceed with capital
investments. Our customers analyze various factors, including the demand and
price for oil, gas and electrical energy, the overall economic and financial
environment, governmental budgets, regulatory actions and environmental
concerns. These factors influence the release of new capital projects by our
customers, which are traditionally awarded in competitive bid situations.
Scheduling of projects is matched to customer requirements, and projects
typically take a number of months to produce. Schedules may change during the
course of any particular project, and our operating results can, therefore, be
impacted by factors outside of our control.
Within the industrial sector, specifically oil, gas and petrochemical, the
demand for our electrical distribution solutions is very cyclical and closely
correlated to the level of capital expenditures of our end-user customers as
well as prevailing global economic conditions.
One element of our strategic focus is to strengthen our project portfolio beyond
our core oil, gas and petrochemical end market sectors. Over the past year these
efforts have contributed to a record backlog of projects coming into Fiscal
2023. There has been an increase in the planning and capital funding within
North America on LNG and related facilities as the market responds to the
increased international demand for LNG and gas to chemical processes utilizing
low cost gas feedstocks. As a result, the business has been awarded a number of
large contracts that have had a positive impact on our backlog. Additionally,
diversification efforts outside of our core oil, gas and petrochemical end
markets have resulted in an increase in backlog across the utility and
commercial and other industrial sectors as well.
Various factors resulting in global economic uncertainty negatively impacted our
results over the past two years. Uncertainty and demand disruptions resulted in
considerable volatility across commodity markets. We continue to experience
supply chain disruptions driven predominately by availability and cost
volatility across our raw materials, components and labor force. All of these
factors contributed to the lower margins realized in Fiscal 2022 relative to
prior oil and gas cycles. As we address supply chain disruptions, we continue to
work with our suppliers of key components and commodities to meet our customer
commitments. Additionally, we have adjusted our pricing models with our
customers in response to the increased cost environment.
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Results of Operations
Quarter Ended March 31, 2023 Compared to the Quarter Ended March 31, 2022
(Unaudited)
Revenue and Gross Profit
Revenues increased by 34%, or $43.6 million, to $171.4 million in the second
quarter of Fiscal 2023, primarily driven by the increase in project backlog.
Domestic revenues increased by 54%, or $47.2 million, to $134.2 million in the
second quarter of Fiscal 2023. Included in our domestic oil and gas sector
revenues is the large domestic industrial project awarded in Fiscal 2020, which
accounted for approximately 8% of our consolidated revenues for the second
quarter of Fiscal 2023 compared to 16% in the same period in the prior year.
International revenues decreased by 9%, or $3.6 million, to $37.2 million in the
second quarter of Fiscal 2023. Our international revenues include both revenues
generated from our international facilities as well as revenues from export
projects generated at our domestic facilities.
Revenue from our core oil and gas markets (excluding petrochemical) increased by
17%, or $9.0 million, to $62.6 million in the second quarter of Fiscal 2023,
while petrochemical revenue increased by 37%, or $7.0 million, to $25.9 million
in the second quarter of Fiscal 2023. Revenue from our utility markets increased
by 40%, or $12.3 million, to $42.7 million in the second quarter of Fiscal 2023.
Commercial and other industrial market revenue increased by 285%, or $16.5
million, to $22.2 million, driven by an increase in traditionally non-core
markets such as data centers, university projects and other miscellaneous
applications. Revenue from all other markets combined increased by 17%, or $1.6
million, to $10.7 million in the second quarter of Fiscal 2023. These increases
in revenue were driven by improved market conditions and our strategic effort to
diversify our business. Revenue from our traction market decreased by 27%, or
$2.7 million, to $7.3 million in the second quarter of Fiscal 2023.
Gross profit increased by 75%, or $14.4 million, to $33.4 million for the second
quarter of Fiscal 2023. Gross profit as a percentage of revenues increased to
20% in the second quarter of Fiscal 2023, compared to 15% in the second quarter
of Fiscal 2022. The increase in gross profit was directly attributable to volume
leverage and factory efficiencies as a result of the increase in volume, project
execution, as well as effectively managing inflationary pressures while
maintaining pricing models to correspond to current cost levels.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by 28%, or $4.8 million,
to $21.8 million in the second quarter of Fiscal 2023, primarily due to $2.4
million of increased variable incentive compensation resulting from improved
earnings. Selling, general and administrative expenses as a percentage of
revenues remained flat at 13% during both the second quarter of Fiscal 2023 and
the second quarter of Fiscal 2022.
Income Tax Provision
We recorded an income tax provision of $2.5 million in the second quarter of
Fiscal 2023, compared to an income tax provision of $1.8 million in the second
quarter of Fiscal 2022. The effective tax rate for the second quarter of Fiscal
2023 was 23%, compared to an effective tax rate of 305% for the second quarter
of Fiscal 2022. For the three months ended March 31, 2023, the effective tax
rate was favorably impacted by the estimated Research and Development Tax Credit
(R&D Tax Credit), in addition to the projected utilization of net operating loss
carryforwards in the UK that have been fully reserved with a valuation
allowance. These benefits were offset by state income tax expense, certain
nondeductible expenses and an income inclusion related to U.S. global intangible
income.
Net Income/Loss
In the second quarter of Fiscal 2023, we recorded net income of $8.5 million, or
$0.70 per diluted share, compared to a net loss of $1.2 million, or $0.10 per
diluted share, in the second quarter of Fiscal 2022. This increase in net income
was primarily due to the increase in bookings over the last 12 to 18 months
which has led to an increase in revenues.
Backlog
The order backlog at March 31, 2023 was $1.0 billion, an increase of 50% from
$679.8 million at December 31, 2022 and an increase of 132% from $440.0 million
at March 31, 2022. Bookings, net of cancellations and scope reductions,
increased by 237% in the second quarter of Fiscal 2023 to $508.2 million,
compared to $150.8 million in the second quarter of Fiscal 2022, primarily
driven by improved strength across our core oil, gas and petrochemical market
sectors.
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Six Months Ended March 31, 2023 Compared to Six Months Ended March 31, 2022
(Unaudited)
Revenue and Gross Profit
Revenues increased by 27%, or $63.9 million, to $298.3 million in the six months
ended March 31, 2023. Domestic revenues increased by 39%, or $65.1 million, to
$234.3 million in the six months ended March 31, 2023. International revenues
decreased by 1.9%, or $1.2 million, to $64.0 million. Our international revenues
include both revenues generated from our international facilities as well as
revenues from export projects generated at our domestic facilities.
Revenues from our core oil and gas markets (excluding petrochemical) increased
by 10%, or $9.5 million, to $106.1 million in the six months ended March 31,
2023, while petrochemical revenue increased by 34%, or $12.3 million, to $48.4
million in the first half of Fiscal 2023. Revenue from our utility markets
increased by 37%, or $19.2 million, to $71.1 million in the six months ended
March 31, 2023. Traction market revenue decreased by 33%, or $7.0 million, to
$14.4 million in the six months ended March 31, 2023. Commercial and other
industrial market revenue increased by 152%, or $23.7 million, to $39.3 million,
and revenues from all other markets combined increased by 49%, or $6.3 million,
to $19.0 million in the first six months of Fiscal 2023.
Gross profit increased by 63%, or $20.4 million, to $52.9 million in the six
months ended March 31, 2023 as compared to the first half of Fiscal 2022. Gross
profit as a percentage of revenues increased to 18% in the first six months of
Fiscal 2023 as compared to 14% in the six months ended March 31, 2022. The
increase in gross profit was directly attributable to volume leverage and
factory efficiencies as a result of the increase in volume, project execution,
as well as effectively managing inflationary pressures while maintaining pricing
models to correspond to current cost levels.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by 17%, or $5.7 million,
to $38.7 million in the six months ended March 31, 2023, primarily due to $3.2
million of increased variable incentive compensation resulting from improved
earnings. Selling, general and administrative expenses as a percentage of
revenues decreased to 13% during the six months ended March 31, 2023 compared to
14% during the six months ended March 31, 2022.
Other Income
We recorded other income of $0.3 million in the six months ended March 31, 2022
related to a gain on the sale of land. We did not record other income during the
six months ended March 31, 2023.
Income Tax Provision
We recorded an income tax provision of $3.0 million in the six months ended
March 31, 2023, compared to an income tax provision of $0.4 million in the six
months ended March 31, 2022. The effective tax rate for the six months ended
March 31, 2023 was 23%, compared to an effective tax rate of negative 10% for
the six months ended March 31, 2022. For the six months ended March 31, 2023,
the effective tax rate was favorably impacted by the estimated R&D Tax Credit,
in addition to the projected utilization of net operating loss carryforwards in
the UK that have been fully reserved with a valuation allowance. These benefits
were offset by state income tax expense, certain nondeductible expenses and an
income inclusion related to U.S. global intangible income. Similarly, the
effective tax rate for the six months ended March 31, 2022 was favorably
impacted by the estimated R&D Tax Credit and the projected utilization of net
operating loss carryforwards in Canada that were fully reserved with a valuation
allowance.
Net Income/Loss
In the six months ended March 31, 2023, we recorded net income of $9.6 million,
or $0.80 per diluted share, compared to a net loss of $4.1 million, or $0.34 per
diluted share, in the six months ended March 31, 2022. This increase in net
income was primarily due to the increase in bookings over the last 12 to 18
months which has led to an increase in revenues.
Backlog
The order backlog at March 31, 2023 was $1.0 billion, an increase of 72% from
$592.2 million at September 30, 2022. Bookings, net of cancellations and scope
reductions, increased by 178% during the six months ended March 31, 2023 to
$720.0 million, compared to $258.5 million during the six months ended March 31,
2022. The significant year-over-year increase was due to strength across our
petrochemical, oil & gas and commercial and other industrial market sectors.
22
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Outlook
Recently we have seen cyclical recovery across our core oil, gas and
petrochemical markets combined with increased global demand for cleaner-burning
fuels as well as related processes utilizing low cost gas feedstocks. Our order
activity in our core markets has been strong and includes some large domestic
LNG and petrochemical projects. This strong commercial activity has increased
our backlog to over $1.0 billion, which is a record for Powell. Additionally,
diversification efforts outside of our core oil, gas and petrochemical end
markets have also been a driver of our increase in backlog. This strong backlog
of projects and pricing initiatives in response to persistent inflationary
pressures should continue to drive increased revenue volumes throughout the
remainder of 2023 and into 2024.
Our operating results are impacted by factors such as the timing of new order
awards, project backlog, customer approval of final engineering and design
specifications and delays in customer construction schedules, all of which
contribute to short-term earnings variability and the timing of project
execution. Our operating results also have been, and may continue to be,
impacted by the timing and resolution of change orders, project close-out and
resolution of potential contract claims and liquidated damages, all of which
could improve or deteriorate gross margins during the period in which these
items are resolved with our customers. Disruption in the global supply chain has
negatively impacted our business and operating results as well due to the
reduction in availability and uncertainty in the timing of the receipt of
certain key component parts and commodities. These factors may result in periods
of underutilization of our resources and facilities, which may negatively impact
our ability to cover our fixed costs, or inhibit our ability to deliver
completed products on time. We will continue to remain focused on the variables
that impact our markets as well as cost management, labor and supply chain
challenges. We will also continue to adjust to the global conditions in order to
maintain competitive cost and technological advantages in the markets that we
serve.
Liquidity and Capital Resources
As of March 31, 2023, current assets exceeded current liabilities by 1.7 times.
Cash, cash equivalents and short-term investments increased to $163.1 million at
March 31, 2023, compared to $116.5 million at September 30, 2022. This increase
in cash was primarily driven by increased project volume and the timing of
contract billing milestones. We typically allocate a significant percentage of
the progress billing to the early stages of the contract. These favorable
billing milestones along with our increase in project backlog are the primary
drivers for our increase in cash at March 31, 2023. We believe that our strong
working capital position, available borrowings under our credit facility and
available cash should be sufficient to finance future operating activities,
capital improvements and research and development initiatives for the
foreseeable future.
On March 31, 2023, we entered into a second amendment (the Second Amendment) to
our credit agreement with Bank of America, N.A. (as amended, the U.S. Revolver).
The Second Amendment increased the revolving credit facility extended to us
under the U.S. Revolver, which is available for both borrowings and letters of
credit and expires September 27, 2024, from $75.0 million to $125.0 million. As
amended by the Second Amendment, the U.S. Revolver states the lesser of $50
million or 50% of readily and available cash may be deducted from the amount of
letters of credit outstanding (not to be less than zero) when calculating the
consolidated funded indebtedness, which is a component of the consolidated net
leverage ratio. We have the option to cash collateralize all or a portion of the
letters of credit outstanding, which would favorably impact the consolidated
funded indebtedness calculation and the consolidated net leverage ratio.
As of March 31, 2023, there were no amounts borrowed under the U.S Revolver, and
letters of credit outstanding were $44.8 million. As of March 31, 2023, $80.2
million was available for the issuance of letters of credit and borrowing under
the U.S. Revolver. We are required to maintain certain financial covenants, the
most significant of which are a consolidated net leverage ratio of less than 3.0
to 1.0 and a consolidated interest coverage ratio of greater than 3.0 to 1.0.
Our most restrictive covenant, the consolidated net leverage ratio, is the ratio
of earnings before interest, taxes, depreciation, amortization and stock-based
compensation (EBITDAS) to funded indebtedness, which includes letters of credit.
An increase in indebtedness or a decrease in EBITDAS could restrict our ability
to issue letters of credit or borrow under the U.S. Revolver. For further
information regarding our debt, see Notes E and F of Notes to Condensed
Consolidated Financial Statements.
Approximately $32.6 million of our cash, cash equivalents and short-term
investments at March 31, 2023 was held outside of the U.S. for our international
operations. It is our intention to indefinitely reinvest all current and future
foreign earnings internationally in order to ensure sufficient working capital
to support our international operations. In the event that we elect to
repatriate some or all of the foreign earnings that were previously deemed to be
indefinitely reinvested outside the U.S., we may incur additional tax expense
upon such repatriation under current tax laws.
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Operating Activities
Operating activities provided net cash of $55.5 million during the six months
ended March 31, 2023 and used net cash of $13.0 million during the same period
in Fiscal 2022. Cash flow from operations is primarily influenced by the timing
of milestone payments from our customers, project volume and the associated
working capital requirements, as well as payment terms with our suppliers. This
increase in operating cash flow was primarily due to the favorable timing of
contract billing milestones resulting in increased cash flow as our backlog of
projects has increased (as noted above).
Investing Activities
Investing activities provided $0.3 million during the six months ended March 31,
2023 and used $7.6 million during the same period in Fiscal 2022. The increase
in cash provided by investing activities in the first six months of Fiscal 2023
is primarily due to short-term investment activity.
Financing Activities
Net cash used in financing activities was $6.8 million during the six months
ended March 31, 2023 and $7.2 million during the same period in Fiscal 2022,
which primarily consisted of approximately $6.1 million of dividends paid in
each period.
Critical Accounting Policies and Estimates
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 management 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 fiscal year ended
September 30, 2022, which was filed with the SEC on December 6, 2022.
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