Powell Industries Inc (POWL) 2003 Q4 法說會逐字稿

Good morning ladies and gentlemen and welcome to the Powell Industries fourth-quarter 2003 earnings conference call. At this time all participants are in a listen-only mode. Following today's presentation instructions will be given for the question-and-answer session. (OPERATOR INSTRUCTIONS) As a reminder this conference is being recorded today, Tuesday, December 9, 2003. I would now like to turn the conference over to Mr. Ken Dennard, managing partner of DRG&E.

Thank you and good morning everyone. We appreciate you joining us today for Powell Industries conference call to review fiscal 2003 fourth quarter and year-end results. We would also like to welcome our Internet participants listening to the call as it is being simulcast live over the web. Before I turn the call over to management I have the normal housekeeping details to run through. You could have received a fax and/or an email of the earnings release this morning; occasionally there are technical difficulties experienced during these broadcasts, so if you did not get your release please call our offices at DRG&E and that number is 713-529-6600. Also, if you would like to be on a permanent distribution list, please relay that information to us.

There will be a replay of today's call, and it will be available via webcast by going to www.DRG-E.com or a recorded replay will be telephonically available for the next seven days by calling 303-590-3000 using a pass code of 560919 and that information is in today's press release. Also note that information reported on this call speaks only as of today December 9, 2003 and therefore you are advised that time sensitive information may no longer be accurate as of the time of any replay. Also as you know this conference call includes certain statements, including statements related to the company's expectations of 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 actual results may materially differ from those projected in the forward-looking statements. These risks and uncertainties include but are not limited to the competition and competitive pressures, sensitivity to general economic and industry conditions, international political and economic risks, availability in price of raw materials and execution of business strategy. For further information please refer to the company's filings with the Securities and Exchange Commission. Now with me this morning are Tom Powell, the company's President and Chief Executive Officer and Don Madison, the company's Chief Financial Officer. Tom.

Thank you, Ken and good morning to all of you. We thank you for joining us for our fourth quarter conference call. Generally speaking, market conditions from the third quarter persisted into the fourth quarter where we saw continued weakness and depressed pricing levels in all of our product markets. In our previous call, I had stated that we appeared to be at the bottom of the cycle. We still believe that is the case. Our opportunities are increasing, but competitive levels are still fierce. I believe we will continue to get our fair share of available and profitable business.

On the upside we are seeing an improvement in our businesses relating to the modification upgrade and replacement of equipment associated with the aging electrical and utility infrastructure. We are hopeful that this is a sustainable trend which has been created somewhat by the blackout in the Northeast. It is certainly a positive, but in our opinion, we won't get a strong general recovery in our markets until the Legislature passes an energy bill. In fact, this bill affects directly and indirectly many of our primary customers, oil and gas, utility, refineries, alternative energy sources, environmental and chemical industries. I will elaborate more on this and other segments of our business after Don Madison's comments and now I will hand the call over to Don for a detailed review of our financial results and our outlook.

Thank you, Tom. Our fourth quarter was similar to our third, challenging. Revenues for the fourth fiscal quarter were $57.2 million compared to last year's results of $75.3 million. The fourth-quarter revenue decline was due to a continued weakness in most of our markets versus a year ago, when we were still benefiting from strong power generation markets. Gross margin for the quarter was 21 percent compared to last year's record fourth quarter of 24.4 percent. Gross margin in this quarter continues to be adversely impacted by lower production volumes and competitive pricing pressures.

Our SG&A expenses for the quarter were $8.5 million compared to $9.9 million in the same period a year ago, a reduction of $1.4 million. SG&A as a percentage of sales was 14.8 percent in the fourth quarter versus 13.2 percent in last year's fourth quarter primarily due to lower sales volumes. Earnings before interest and income taxes or EBIT for the fourth quarter were $3.5 million versus $8.4 million a year ago.

During the quarter interest income increased by $134,000 to $191,000 compared to the same period of the previous year. Interest expense totaled $58,000 for the quarter. Our debt consisted primarily of the remaining balance of the loan agreements funded with proceeds from the tax-exempt industrial development revenue bonds used for the completion of our North Lake facility which totaled 7.2 million dollars at year-end.

In September 1998 we entered into a $10 million term loan with a maturity of five years. Our final payment of the remaining principal was paid in September and at year end, this loan had no remaining balance. Our income tax provision was $2.4 million in the fourth quarter, which includes an accrual of $900,000 net of federal income tax benefit for revised estimates of state tax exposures related to prior years.

Over the past several years, our business has expanded and we are now conducting activities in more states. Since we may have underestimated our tax exposure in some of these states, we have increased our provision accordingly. These revised estimates primarily rate to our record business volumes in 2002, but to a lesser extent also relate to prior years. Going forward, we believe our effective tax rate will range from 37.6 percent to 37.9 percent.

Net income was $1.2 million versus $5.1 million in the fourth quarter of 2002. Earnings per diluted share were 12 cents compared to 48 cents a year ago. Our backlog as of the end of the fourth quarter was $157 million compared to $178 million at the third quarter and $189 million at last year's fourth quarter.

New orders in the quarter were $36.3 million versus $35.8 million in the third quarter, and $49.3 million in last year's fourth quarter. We generated cash flow from operations of $2.8 million and invested approximately $1.2 million in capital improvements during the fourth quarter. Resulting in free cash flow from operations of $1.6 million and for the full year generated $31.9 million in free cash flow.

As of quarter end, days sales outstanding averaged 71 days compared to 68 days at the end of the third quarter. This is consistent with our historical average approximately 70 days. Turning to our business segment, for the fourth quarter the Electrical Power Products segment reported revenues of $50.2 million compared to $69.6 million with the same period last year. As mentioned earlier, most of our markets in this segment have weakened this year compared to last year. Income from continuing operations before income tax for Electrical Power Products was $3.1 million compared to $7.7 million last year. The Process Control Systems segment reported revenues of $7 million versus $5.8 in last year's fourth quarter. Income from continuing operations before income taxes for Process Control Systems was $0.5 million versus $0.7 million a year ago.

Now for our full year results. Revenues were $253.4 million versus a record $306.4 million last year. Gross margins for the year came in at 19.3 percent compared to 22.1 percent last year. Earnings before interest and income taxes or EBIT for the full year were $13.7 million versus $28.7 million a year ago. Interest income for the year was $578,000 an increase of $280,000 compared to 2002. Interest expense totaled $403,000 a 20 percent reduction from the previous year.

Our provision for income tax reflects an effective tax rate of 44.9 percent in fiscal 2003 compared to 37.1 percent in fiscal 2002. This reflects revised estimates for state tax exposures related to prior years. As mentioned earlier going forward we anticipate our effective tax rate to range between 37.6 percent and 37.9 percent.

Net income from continuing operations for 2003 including the effect of the change in accounting principle of $510,000 for the adoption of FFAS 142 was $7.1 million or 67 cents per diluted share. Versus a record $17.9 million or $1.67 per diluted share last year. Excluding the effects of a change in accounting principle, net income from continuing operations for the year was $7.6 million or 71 cents per diluted share versus $17.9 million or $1.67 per diluted share last year.

Full year Electrical Power Products revenues fell 20 percent from last years' record level of $283.6 million to $227 million. Income from continuing operations before income taxes for this segment was $17.5 million compared to $27.4 million last year. Process Control Systems revenue for the year were $26.4 million, up 16 percent over last year. Income from continuing operations before income taxes for Process Control Systems was $1.4 million compared to $1 million in fiscal 2002.

For the full year, we have generated free cash flow of $31.9 million. Which consists of net cash from operations of $36.5 million less capital investments of $4.5 million. We ended the year with $42.3 million in cash and marketable securities compared to $14.4 million at the end of fiscal 2002. And we reduced our debt from $12 million to $7.4 million.

Now, looking ahead to our first quarter in fiscal 2004. For fiscal 2004, we expect full year revenues to range between $220 million and $235 million. Full year earnings are expected to be between 48 cents and 63 cents per diluted share. Free cash flow to range between 5 million and 10 million dollars. We expect first-quarter earnings to range between 8 and 13 cents per diluted share. With that, I will turn it back to Tom.

Thank you, Don. In spite of a quarterly performance similar to the prior quarter, we are seeing some signs of encouragement in the marketplace. As I said on our last call, domestically, opportunities seem to be picking up and international inquiries have increased as well. But mind you, it is still a highly competitive business. Specifically, we are seeing an improvement in our apparatus service business, where we are seeing a trend towards fast cycle requirements to modernize electrical apparatus for safer and more reliable operations. We are seeing an increase in the replacement of aging circuit breakers and relay systems and the field modification of existing equipment where we are adding more sophisticated sensing, remote control, and data acquisition components. This is encouraging and we do expect to have further opportunities in this area as the economy picks up.

We are working on numerous projects that have stalled and are waiting on the passage of an energy bill. We are optimistic that its passage may come in the first quarter of calendar 2004. That should add some momentum to our business going into the second half of the year. Again, this bill should have a broad impact across the spectrum of our domestic activities.

We are seeing some companies that have decided not to wait on the bill's passage and they are moving forward anyway. So there are some positives on the horizon. For instance, we just received a significant order for a new coal-fired generating station. The point here is that this is a coal-fired unit. One of the first in the country in a number of years now. There are other similar coal-fired project opportunities we're working on.

For some of our domestic independent power producers activity is picking up. Not only domestic, but some that moved into the international arena. A number of existing utility, specifically coal and lignite generating units are improving their environmental processes to reduce flue gas sulfur emissions. Internationally, we are seeing more activity out of the Middle East. West coast of Africa, Central and South America. Also the weaker dollar might help our success in those areas.

New project activity in the Gulf of Mexico is improving after a lull over the past twelve months. We are now beginning to see more interest and inquiries from major oil companies in the offshore platform arena and expect a positive impact in late 2004, and the year 2005 and beyond. We are very well positioned for that business with our expanded and improved offshore production facilities.

I would like to comment on our research and development efforts. Research and development expenses were higher this year than last year in spite of a 17 percent decline in revenues. R&D expenditures were $3.6 million in 2003, versus $3.4 million in the prior year. We have successfully advanced our offerings due to our strong R&D efforts with the expansion of our family of our position of technology and products, and we continue to make progress in our solid-state product lines. We are encouraged by the developments in this arena and we intend to continue aggressively with our research and development efforts.

As I said we're still at the bottom of this cycle; I believe the signs of encouragement should have a positive effect on the last half of this year. But the first half will remain difficult. As most of you know, our business lags the initial stages of an economic expansion and as the economy continues to improve many of our customers will again invest in their businesses and our business will certainly strengthen. With that, we will be happy to open it up for calls and questions.

Ladies and gentlemen, at this time we will begin the question-and-answer session. (OPERATOR INSTRUCTIONS) George Gaspar.

Yes, Robert W. Baird, good morning to everyone. Congratulations on a good gross margin result considering the lower level of activity. I think that demonstrates some of the cost-effectiveness that you all are demonstrating. My question relates to your backlog 157 million. Can you break it down the Switchgear (indiscernible) process control elements in that backlog, and also what of that backlog represents international versus domestic?

Our backlog as of the end of the year broke down by Electrical Power Products totaled just under $100 million in total. The Process Control Systems was approximately 60.5, it is 987 versus 60.5 in total (technical difficulty) to the 157. I don't have specifics on the international content in that other than it is increasing. Our revenues during the past year improved from just under 9 percent international revenues to mid teens, and I believe that would be consistent with what you would see in our backlog.

Follow-up question would be on discussion Tom that you mentioned, comment you made on the coal-fired connection that you have an order on. It brings to mind the point of what is cooking here in terms of the forward look of the power generation market? Is there a switch from peak shaving to more electric baseload as you view the discussions that you are having going forward? Can you give us a little color on the kind of market that we might be looking at over the next couple of years in terms of size of power generation?

My crystal ball is not clear, George. We are seeing some opportunities for some gas-fired units. And we are seeing more opportunities right now in the coal-fired arena and not so much for peak shaving. But, for the larger units. And obviously gas, what did gas close at yesterday? Six?

It was in the high six dollar range, near seven.

It sure seemed to me that is going to push even more toward coal and lignite, rather than gas. But we are seeing opportunities on both ends of the spectrum, going forward several years, I still believe that there is a fundamental need for more generating capacity in the country. Beyond that, I don't know how to comment George.

Sidoti & Co. Good morning gentlemen. Tom, in your press release, you said that the general business inquiries seem to be picking up. Does that suggest that the industrial market is starting to increase their order activity, or am I reading too much into that?

The industrial activity has actually this year picked up slightly from the previous year. While the electric utility side has diminished. There is some concern with the passage of recent environmental legislation where it appears that we have taken some of the teeth and some of the mandated dates, we have extended some of those dates that has actually slowed down some projects. But in general, we see an opportunity for new business but more specifically in replacing some of the aging infrastructure and products, and the addition of more sophisticated remote-controlled projects for Switchgear systems.

Some of the projects that you referred to in your comments that have stalled, in your forecast for the year ahead, are you assuming that those projects come back on stream?

Of course, I always approach this stuff pretty conservatively, but I do feel that there are some projects waiting for the legislation to pass so we will really know the playing field. Specifically with refineries, flue gas emissions and other things that are part of this bill. Some of our customers obviously produce ethanol, MTBE, Isooctane, and other products and all of these have some modernization projects on the board, but they are not going to do anything until they really know what the playing field is going to be all about.

Fair enough. What is the gross margins, George touched on it, that is the best you guided in the past year. When I look at the gross margin over the past couple quarters, is it sustainable at this rate? Have you taken enough cost out to keep it this way or is there something else going on at this line?

Let me try to answer a little bit. Some of the fluctuations that you are seeing in there is the price levels of specific projects. You're going to see some fluctuations going forward just like you have seen in the past. Yes, I think we have taken out substantial amount of costs in our business and that allows us to be more competitive and to improve our overall results due to it, but you are still going to see some fluctuations due to the size of the projects and the profitability of the individual projects in the backlog going forward.

So, while you may not be able to maintain the 21 percent in the third quarter you did something like 17.5 percent, you will do something in between those two numbers?

I think based on what I know today, those are reasonable ranges to consider in the near term.

Okay. Can you just give us an update on the acquisition environment? I know that is one of your target uses for the cash and after that I will get back in queue.

We've looked at several opportunities in the past year, some rather substantial. I'm sorry to say that none of those have come to fruition at this point. Some of these businesses just don't believe it's a good time to do anything with the economy in the current situation. So, we remain active, looking and having discussions, but nothing to write home about at this time.

Thank you.

(OPERATOR INSTRUCTIONS) George Gaspar.

Tom, I'd like to pursue a little bit your comment that came off of the discussion on the coal facility and the blackout, post the blackout. I mean there is obviously some reports on the situation. They have been published to an extent. Is there anything surfacing that you are picking up vibrations on where there would be a tendency to be more diverse in the location of power generating facilities to support the grid in a broader way then the consolidated way that it has been supported in the past? If in fact that is true, it’s going to require the Switchgear moving power on and off at certain locations. Maybe this is just a theory I have, but can you shed any light on that?

George, we are seeing opportunities from the East Coast the northeast coast to the southeast coast to the West Coast and it's generally moving the generation, obviously it has to be in a friendly area, but moving it closer to the source of usage. And absolutely, there is many more opportunities for substations. I don't how to elaborate more than that on it, George.

If I could do a follow-up on your comments on the offshore area indicating that there has been a lull, but you're sensing seeing somewhat of a pick maybe for delivery towards assuming second half of '04 and '05. What is the mix? What has been the mix let's say up to the period of the lull? Mix, when I say mix I mean international to domestic, and how do you view the new cycle going forward whenever that takes place. How do you judge the domestic international mix to be?

Generally what we're seeing George, let's say 100 percent opportunity. Probably 65 percent of it is international. The 35 to 40 percent would be domestic almost all of that in the Gulf of Mexico. A lot off the West Coast of Africa. There are some opportunities that are going to take place in Latin America offshore. So, obviously the closer it is to our (indiscernible) operation, the better chances that we have and of course most of these major companies are based right here in Houston which certainly helps.

Okay, I will get back into Q.

Richard Leader. (ph)

Good morning gentleman. Tom, I admire your optimism with the energy bill.

Must be the medication I'm on.

I was the one that was just defeated of course, really didn't have as much about power in it as I would have presumed earlier. Even regardless of the energy bill itself, I guess there are things going on within the bureaucracy, the federal energy regulatory commission for example which could in fact mandate certain standards that were otherwise optional at this point. So, in some respects, I don't think your business necessarily needs the energy bill, but perhaps I would like your comments as to whether you think the federal energy commission could move ahead and take some of the power away from the states and perhaps the local utilities to mandate more controlled power flows over the entire system, whether this is just an add-on to your thoughts on the energy bill?

Pretty political, that's a pretty political question, that I don't, I am qualified to answer and it sounds to me like that is something that will take much longer to get resolved, that is just the basic energy bill that we're looking at. I don't see that happening in the foreseeable future.

You think the energy bill will happen (multiple speakers) network standards?

That's right. I wish I could say more than that, (inaudible) am qualified.

Jerry Heffernan.

Jerry Heffernan of Lord Abbott & Company. You made the comment regarding industrial type orders have improved; it's the utility based orders have really fallen off. Can you give us a comment or talk about the backlog the obviously the Electrical Power backlog falling from 150 to 96. Give us an idea of how that looks in regards to industrial type of orders versus utility back orders?

Let me see if I can respond to that at least to give you a little bit of insight. I don't have the specific mix that is in our backlog, but I can tell you where we ended the year from a revenue standpoint. From a revenue standpoint, our utility revenues total about 32 percent of our overall business. Industrial was 49 percent, and municipal including attraction (ph) power revenues totaled 19 percent. That compares to 2002 where we were 57 percent in utilities, 27 percent industrial, and 17 percent in municipal. The trend is definitely softened significantly in the utility standpoint and overall business volumes. I think that is similar to what you would see if you analyzed our backlog.

In that regard, you think it is holding at the '03 levels, or is it indicating a further fall off in the utility portion?

From a bookings viewpoint we see, we actually see more opportunities and I believe that will pick up. I don't know how significant that will be. All of those segments we may see a pickup, of course that will not affect revenues until the last half or the fourth quarter of the coming year.

Certainly it takes a while to flow through. In regards to the utility's falling off, how did the industrial component do in the aggregate? Certainly it was up dramatically as a percentage of the revenues? But, was it up in the aggregate? I'm struggling to figure out the numbers here. You happen to have them right there.

I got the current year; I do not have the last year in front of me, I have to do a quick math myself on last year.

At one time, I know that in the industrial world mining operations were a good source of business for you and certainly the commodity prices of many mine commodities are up strong. I was just curious as to how that business is looking for you?

We have seen some recent opportunities and secured an international order for a mining operation. We are seeing a little more activity in that and surprisingly pulp and paper, we have just recently seen more activity in that.

Okay. Can you give the '03 and '02 revenues by domestic and international?

In '02 we had, I mean in percentage, 9 percent of our overall revenues were international. This year I believe the number is going to be reported right at 16 percent.

John Franzreb.

I was wondering in the backlog, how much is the Lincoln Tunnel project a portion of that backlog? If you could update us on the project status? And thirdly, what kind of earnings contributions you expect from that business in the current fiscal year?

Let me comment on that. Basically, last year I don't have the exact numbers of what we actually claimed in revenue, but I believe it was going to be a little over $1 million range. No big change materially from what we reported last quarter from the early startups of that quarter. When you're looking at our process control systems business segment overall, we anticipate growth in both volume as well as earnings looking in 2003. But, there is still a lot of open questions as to the exact number we are going to realize by the end of the year. We've got some ranges that we factored in for overall guidance.

Okay. So, in the backlog, how much of the PCS business is that project?

The overall backlog is around 60 million dollars, about 35, $36 million is the Lincoln Tunnel.

That project you asked how that project was going, its going very well, we got some of our top managers on that project. We are doing pretty well there. We were hopeful for an extension by the middle of this year, for another part of that project; we don't know at this time that that will happen. We are finding that most of these municipals now if tax money is available, it is going more to cement and Rebar (ph) to reinforce vulnerable infrastructure projects. So, going forward currently, that business segment will, it will be tight.

Thanks a lot, Tom.

George Gaspar.

John and Don, could you comment on any revenue stream that you recorded in the quarter that would reflect payments on claims that you had outstanding with previous work performed? Can you give us an update on the total of these claims, what they look like now in total? What kind of odds you're putting on collecting payments at different percentage levels?

I hate to sit down here and try to give you odds. Obviously we are optimistic that we will ultimately be successful and are pursuing some of these claims that we talked about in the past. We have three or four projects that are in that situation, and there has not been a material change from when we last talked in the last 90 days on any of these projects. (indiscernible)revenue standpoint, regarding these large projects we talked about, there has not been any incremental revenue as a result of negotiated claims settlement. Obviously, as the small projects you have that is part of the close-out of any project and those revenues have been reported as the projects were closed out.

Can you give us an estimate on what the claims total at this point in time?

No, I cannot.

Originally, I thought the number was in the 15 to 20 million range.

George, that is still close to correct, and we have made some progress on those, but as you can appreciate right now with the low tax basis, these municipals regarding that cash (technical difficulty) pretty tightly. I think we will see some of those issues resolve from the middle to the end of this coming year.

A question on light rail. Now that budgets are getting settled in at the municipal levels around the country, maybe not the way we would like to see them, but they are getting settled. Is there any light at the end of the tunnel on light rail orders coming in?

You say orders coming in? I know we're certainly bidding some projects, but many of the larger projects have slipped out now until the latter part of '04 '05 before they even bid. There is no sense in going through that process when there is not money to spend.

All right. Thank you.

Gentlemen, there are no further questions at this time. Please continue.

All right, folks, if that is it, we appreciate visiting with you today. Thank you for joining us. I hope everybody has a happy holiday season, and that concludes our remarks for today. Thank you very much.

Thank you, sir. Ladies and gentlemen this concludes the Powell Industries fourth quarter 2003 earnings conference call. If you would like to listen to a replay of today's conference call please dial 303-590-3000 with pass code 560919 pound. (OPERATOR INSTRUCTIONS) You may now disconnect and thank you for using AT&T teleconferencing.