Powell Industries Inc (POWL) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Powell Industries fourth quarter earnings conference call. During today's presentation all parties will be in a listen only mode. Following the presentation the conference will be open for questions. (Operator Instructions) This conference is being recorded today Wednesday, December 8, 2010.

I would now like to turn the conference over to Ms. Karen Roan with DRG&L. Please go ahead ma'am.

Thank you, Jeremy, and good morning, everyone. We appreciate your joining us for Powell Industries conference call today to review fiscal 2010 fourth quarter and year-end results. We would also like to welcome our Internet participants listening to the call simulcast live over the web. Before I turn over the call to management I have the normal details to cover. If you did not receive an e-mail of the news release issued this morning please call our offices at DRG&L and we will get one to you. That number is 713-529-6600. Also, if you want to be on the permanent distribution list for Powell news releases please relay that information to us. There will be a replay of today's call and it will be available by webcast by going to the Company's website at www.PowellInd. com. Or a recorded replay will be available until December 15, 2010, and information on how to access the replay was provided in today's news release. Please note that information recorded on this call speaks only as today, December 8, 2010, and therefore you are advised that time-sensitive information may no longer be accurate as of the time of any replay listening.

As you know this conference call includes certain statements including statements relating 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 competitive pressures, sensitivity to general economic and industry conditions, international political and economic risks; availability and 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.

With me this morning are Pat McDonald, President and Chief Executive Officer, and Don Madison, Executive Vice President and Chief Financial and Administrative Officer. I will now turn over the call to Pat.

Thank you, Karen, and good morning, everyone. Thank you for joining us today to review our fiscal 2010 fourth quarter and full-year results. Following my initial comments on the quarter and current market environment, Don will cover the financial details. Then I will return with some final remarks.

During the course of the year we have had the benefit of a strong backlog, change orders and favorable closeouts of existing projects. The longer the economy remains suppressed, the more we see customers without a sense of urgency to move projects into orders, and those that we have, along to completion. This is in strong contrast to two years ago when satisfying customer needs was an everyday challenge. Our fourth-quarter operating results are more reflective of our markets and the dilemma our customers are facing. However, there is a great deal of pent-up demand. And we believe we will see much of that business. As it took time for us to feel the impact of the economic downturn, it will take some time for Powell to benefit from new investment activity.

In the fourth quarter we made a strategic decision to exit our joint venture in Kazakhstan which was associated with our Canadian acquisition. While our pre-acquisition evaluation showed this to be a profitable business, it was largely dependent on a few customers. Subsequently, the largest customer of the JV decided to exit the market, which put the viability of this business into question. We believe that going forward, the potential of this business will not justify the financial and management capital required on the part of Powell. Fortunately, we realized this early in our ownership. As a result, we incurred a goodwill impairment charge and a deferred tax valuation allowance. Don will discuss these charges in greater detail in a few moments.

Operationally, the Canadian business has been showing the growth we expected. We are encouraged by the ten-fold increase in the backlog of equipment orders since we acquired the business. This is a positive trend and we expect continued growth in 2011. We are also encouraged by our new employees' ability to transition Powell solutions. This demonstrates a great win/win when you combine the name of Powell and our Canadian employees on the ground talking and working with Canadian customers. Many of our short-term operational objectives in Canada have been accomplished. And we are continuing to work on our strategic initiatives.

On the electrical product side, we have further plans to incorporate Powell's capabilities such as power control rooms and communications systems into the Canadian market. We will continue to work closely with our domestic service organization to build a startup and commissioning program. And we will continue to enhance and grow our overall service and valve repair business. We entered Canada for strategic reasons. We will be a long-term participant in the Canadian market as a Canadian company and remain confident in our future prospects.

Fiscal 2010 was the second-best earnings year in the history of the Company when you consider our annual earnings of $2.93 before the two non-cash charges. And our balance sheet is the strongest in the history of the Company.

I will now turn over the call to our Chief Financial Officer, Don Madison, to review our financial performance for the quarter and year. And then I will make some final remarks.

Thank you, Pat. Revenues were $133.8 million in the fourth quarter fiscal 2010, a decrease of $31.5 million compared to the fourth quarter of fiscal 2009. Gross profit as a percentage of revenues was 22% compared to 21.5% in last year's fourth quarter. However, due to lower revenues, gross profit decreased by approximately $6.1 million to $29.5 million. Selling, general and administrative expenses were $21.6 million, an increase of approximately $1.3 million compared to the fourth quarter of fiscal 2009. This increase primarily relates to the operating activity of Powell Canada.

Amortization expense was $1.3 million, an increase of approximately $400,000 compared to the fourth quarter of fiscal 2009. This relates to the acquisition of Powell Canada. In the fourth quarter, we reported an impairment of goodwill of $7.5 million. This non-cash charge is primarily due to our decision to exit the joint venture in Kazakhstan, as well as a first year loss at Powell Canada. In addition, we recorded a foreign deferred tax valuation allowance of $3.9 million which eliminated the financial statement tax benefits related to the impairment of goodwill and the operating loss at Powell Canada. This valuation allowance will be adjusted to offset future income tax provision on future foreign profits. Excluding these two non-cash charges, net income for the fourth quarter of fiscal 2010 was $4.5 million or $0.38 per diluted share. Compared to $9.9 million or $0.85 per diluted share in the fourth quarter of fiscal 2009.

For the 12 months ended September 30, 2010, revenues were $550.7 million compared to $665.9 million in fiscal 2009. Gross profit was $142.1 million or 25.8% of revenue in fiscal 2010. Compared to $145 million or 21.8% of revenue a year ago. This increase in gross profit relative to revenues resulted from favorable market conditions at the time of order placement, as well as reduced project costs. Additionally, the successful negotiation of change orders contributed to the increase in gross profit. Selling, general and administrative expenses were $84.5 million compared to $80 million in fiscal 2009. This increase primarily relates to the acquisition of Powell Canada. In addition to ongoing operations, we incurred transaction fees of approximately $2.4 million. Amortization expense was $4.5 million for fiscal 2010 compared to $3.5 million in fiscal 2009. This increase relates to the acquisition of Powell Canada.

We recorded an impairment of goodwill, as described earlier, totaling $7.5 million. Interest expense, net of interest income, for fiscal 2010 decreased by $366,000 to $610,000 compared to a year ago. For fiscal 2010 our provision for income taxes reflects an effective tax rate on earnings before income tax of 44.1%. Excluding the foreign deferred tax valuation allowance of $3.9 million, our effective tax rate was 35.1% compared to 34.2% for fiscal 2009, and 35.3% for fiscal 2008. For the 12 months ended September 30, 2010 net income excluding the non-cash charges for impairment of goodwill, and the financial statement treatment related to tax consequences was $34.3 million or $2.93 per diluted share. Compared to $39.7 million or $3.43 per diluted share in fiscal 2009.

As of September 30, 2010 our order backlog was $282 million compared to $310 million as of June 30, 2010 and $366 million a year ago. New orders were $106 million in the fourth quarter, compared to $136 million in the third quarter and to $100 million in the fourth quarter of fiscal 2009. For fiscal 2010 cash provided by operating activities totaled $64.1 million. Investments in property, plant, and equipment totaled $4.4 million. As of September 30, 2010 we had cash and cash equivalents of $115.4 million compared to $97.4 million at the end of fiscal 2009. Long-term debt and capital lease obligations, including current maturities, totaled $6.9 million compared to $9.5 million at September 30, 2009.

Looking ahead, based on our current business conditions, and our existing backlog, we expect full year fiscal 2011 revenue to range between $475 million and $575 million. And full year earnings to range between a $1.25 and $1.75 per diluted share. We continue to maintain a strong balance sheet and expect to generate solid cash flow.

At this point I'll turn it back to Pat.

Thanks Don. Let me make a few more comments and then we'll be happy to take your questions. During the slowdown in 2009 , all of our markets -- energy, utilities, industrials, transit, and municipal -- were negatively impacted by the global recession. Now we are seeing signs of stability in our key markets. We are seeing an increase in the quotation volume and we are anticipating that some of the offshore production platforms will go forward in fiscal 2011. We continue to prepare for the future and the opportunities it will bring, and to keep moving forward while taking every opportunity to gain greater capability.

During this year, we focused on improving our operational processes, such as project management, and therefore have greatly enhanced our overall performance. As a result, we expanded our core competencies which make Powell an even more reliable supplier. We are also investing in new products and technologies. This past year we introduced two new offerings into the market place, both of which improved safety in the field. Our Powell-backed switchgear system for the IEC market and a new monitoring technology designed to place sensors and extract real-time thermal data.

Our strong balance sheet supported our geographic expansion into Canada, a major oil and gas market. This is important to our strategy and to our goal of effectively and efficiently serving our customers wherever they are located. Overall, we expect to see modest improvement in business activity over the coming year, primarily from outside the United States. We continue to stay focused, both on strengthening our current relationships and obtaining new customers, as well as expanding our products and services to support clients in North America and around the world.

At this point, we will be happy to answer your questions.

Thank you. We will now begin the question-and-answer session. (Operator Instructions) And our first question comes from the line of John Franzreb with Sidoti & Company. Please go ahead.

Good morning, guys. It seems to me that the incoming order book has stated a loss of $100 million for a year and a half, it looks like now. When you put together your guidance for 2011, are your assumptions that that's the minimum threshold for incoming orders going forward, or would you expect a further weakening from that order outlook as it stands today?

We actually would believe that we are going to see an order growth in 2011. As I said, our quotation activity has gone up. It's back into our realm of things. We have already seen one of the offshore platforms come in here in our first quarter. So, I think we are seeing some activity that's going to point to a little bit of growth in that order backlog. The second side of our orders have been as a result of more service activity related to the Canadian acquisition. We do have a higher preponderance of book and bill type stuff that comes in. So yes, it stabilized over a period of time and we think that that stabilization is there. But we are also looking forward towards a growth in our order volume over the next year.

Okay, that is great news. Secondly, my calculations based on what Don was saying is that you have more than $9 of net cash per share on the balance sheet. With an improving order backlog, I would assume you'd be free cash flow positive and you won't have to eat much into that. What are your thoughts about deployment of cash at this point?

John, clearly from the strategy that we've been implementing, nothing has changed. We are still looking as to how do we grow the Company. How do we utilize our financial strength, looking at acquisitions. And nothing has changed from that perspective. As we've talked in the past, our board constantly reviews other options. But at this point in time, that is the direction we have been given.

So acquisitions is what you're saying is a priority for the cash?

It continues to be a priority for the cash, that is correct.

Okay thanks a lot.

Thank you. Our next question comes from the line of Rick Hoss with Roth Capital Partners. Please go ahead.

Hi, good morning. So on the guidance related to your expectations or bookings, of the backlog, do we expect that to be recognized in the next nine months? Is that a good way to look at it?

Whenever we look at our backlog, we realize there are two components to it. Most generally, at the end of any year we believe we are going to recognize the majority of that backlog through the next 12 months. However, as we've always said, our transit projects typically have a longer life cycle to them so we always try to factor those back out, as we are looking at that. But that's a smaller piece of our overall backlog. But yes, we do believe that of the $280 million the high preponderance of it we will convert that in the next 12 months.

Okay. So, if we think of it from a new order perspective, the previous question was about you are looking at about $100 million for the quarter, then you are looking at maybe a $400 million run rate and then add on the Powell Canada which does not necessarily hold a lot of backlog, right? So if you think about $75 million is what it did the year you acquired it, Is that how you're getting to that $475 million bottom number of the guidance?

Well, of course, since December of last year, Powell Canada has been in our order run rate. So that $100 million per quarter that we've been running has been inclusive of the Powell Canada orders that have been coming in. So the way we're looking at that is we are banking probably more this year on new orders that are going to come in in the first six months that we are going to be able to convert into the revenue stream for 2011. More so than we have in the last couple years where we had a much larger backlog and were very much more confident in that revenue stream that we thought we were going to be looking at.

Okay, yes, that makes sense. As far as the gross margin line, if you look at the EPS guidance that you've given on that revenue number, that range, it's implying a higher gross margin than you've historically run at. And I'm assuming that this is from a higher contribution from what you just talked about, with the Powell Canada. Is this consistent?

I think when you are looking at our overall gross margin going forward, I still think you will see downward pressure year-over-year. But yes, we fully expect that we will be able to keep gross margins in the 20%-plus range which would be substantially higher than we've seen in historical down years.

Right. So, excluding the last three quarters, which were synthetically elevated. But if you look at, say, '09 and '08 levels, you were at 20% for '08 and 22% for '09. I would assume that you would be closer to that 22% range in '11.

That's a reasonable number to be thinking about. But again, we fully understand that until business opens up a lot, there will be continued pressure from every competitor who is going after every job. We have to be sharp to get every one. And let's not forget, there is commodity inflation really starting to creep in right now, especially into the copper area that has jumped up significantly due to demand and also the devaluation of the US currency.

Thank you. Our next question comes the line of Fred Buonocore with CJS Securities. Please go ahead.

Hi, good morning, Pat and Don. Pat you referred to pent up demand. You think you see pent up demand in various areas and it's obvious with your orders not being placed for quarters and quarters and quarters that that would be logical. Where do you think the most pent up demand exists that we would see released soon, if you will, based on what you're seeing? And then as part of that, have you seen actual bookings improve through your first quarter? And can you venture at least in a mid-single-digit or something like that to give us a sense how much you think backlog could go up in fiscal '11?

Gee, Fred, I think you have about five questions in there.

That was one.

That was a great run-on. I love that. Let me try to explain how I look at pent up demand. As you know, all of our customers that we deal with are very very big companies that have tremendous balance sheets. They are sitting on billions of dollars of cash. And they have to be in a capital intensive environment for them to grow and to continue on. So I look at pent up demand in that way because they have to make their capital intensity work for them. So we are starting to see a little bit of that.

I think a lot of it also, as we've talked about in previous quarters, there's been a lot of uncertainty based on the political environment that has been going on. I think there has been some stabilization of that. I still think we have yet to see whether or not that's going to fully play out. I do believe, as I've said, the production platforms for those wells that were drilled, especially let's say in the Gulf, are going to start going forward. My fear for the long-term future is still five of 33 drilling platforms have left the Gulf. There's been only one or two permits yielded so far since the moratorium was put in for drilling. So I'm still fearful for the long-term of where the Gulf is going to play. There was an article in the Houston Chronicle last week about the fact that almost all of the exploration people have moved out of the Gulf region. So they are looking for their next finds somewhere other than the Gulf area. So we have to be prepared to go with that.

So I think all that bodes well for us going forward, as people release their capital spends. The question's going to be for us, is that a blip or is that going to be a long-term next growth cycle.

Got it. And can you give us a sense for roughly, as you look out, as you look at the activity that you are seeing and the pent up demand that you are looking at, do you think backlog -- are you looking for a meaningful increase in backlog through the year? Realizing you don't have great visibility. Or would you call more modest?

I'm looking for a backlog increase that will sustain our revenue side that we are looking for in 2011. And I can't say whether it's going to be modest or meaningful. And as we've always talked about, we always have to be careful of any one quarter because any one large order that would come in can really jump our backlog number up, but that's one order out of many.

Sure, fair enough, that makes sense. Thank you.

Thank you. Our next question comes the line of Brent Thielman with DA Davidson. Please go ahead.

Hi, good morning, Pat and Don. First question, sales for the quarter came in a bit shy of the range of guidance from August, and I was just wondering whether this was just due to timing of orders or maybe a large project, the schedule got pushed out. Just anything in particular that we should be aware of that might impact the next couple quarters?

I don't think there's anything significant, as I said in my opening comments. We didn't see the drive of our customers to close out jobs. So that has a tendency to elongate those, and when they get elongated, then we see our revenue stream stretch out over a longer period of time. And our service business was also much lower in the quarter, which, again, has been a trend for the year, that not only have people not been doing their capital spend, they weren't doing their maintenance spend either.

Okay, that's helpful. And then I'm curious, are you seeing any significant changes in the quotation activity or order entry, in particular on the utility side? And maybe the same question on the transit side, outside that traditional oil and gas customer base.

On the utility side, not seeing much of really anything changing the dynamics that we've seen over the last three to four quarters. Until people are willing to take on rate increases, I still don't see much changing on the utility side of things. Transit side of things, it's been an up-and-down. We've seen still some good activity. Again, I would point out we had really good activity out of our Canadian side of things on transit, some things that we would not have seen in the past. And we also collected one order on a transit project as a result of our acquisition in Canada. So, we are seeing some nice uptick quotation activity in the transit. We'll watch and see how the orders get placed.

Sure. Okay, thanks very much. Good luck in the coming quarter.

Thank you. Our next question comes from the line of Ned Borland with Hudson Securities. Please go ahead

Good afternoon, guys. Just sticking with Canada here for a minute, I was wondering if you could just talk about the level of price competition up there? And do you think long-term you can perhaps get your margins in Powell Canada up to the core Powell gross margins?

You've got to remember, Canada is two very distinct businesses. Our service business, which is human capital intensive. And the growth that were seeing now in our product business. I do believe when we talk our products, I see no reason why combined and consolidated, our margins of our business activity on equipment in Canada should be any differently than what we see in our other businesses, when it relates to equipment. There is no doubt, a lot of competition in Alberta for people and human capital intensity. And there's a lot of price pressures up there. So, that margin will always be distinctly different than our equipment side of the business, but one that we want to make sure that we are maximizing our efforts and we are concentrating on those customers that are going to be long-term valued customers for Powell.

Okay, and just a follow-up to Canada here. Did you mention the transition costs and what they were in the quarter?

In the quarter, they were beginning to taper down. We have not actually laid them out. But they were not a material impact in the fourth quarter relative to the previous two quarters. Basically our transition costs are winding down.

Okay.

Thank you. (Operator Instructions) Our next question comes the line of Craig Bell with Enerecap Partners. Please go ahead.

Good morning, guys. Pat, I just wanted to follow up on your answer a few minutes ago on the service market being soft. I know you had talked about that last quarter, that it was softer than you expected. It sounds like it still is. Has that really changed much from last quarter, or is it pretty much the same? And what I'm really getting at is has it weakened further?

I think where we maybe got caught in euphoria, we typically see a pickup in our service business late in the year as people work toward spending their monies and things like that. So, I think it just ended up being a continued softness of what we had seen in the previous quarters, as opposed to any pick up that we would normally see.

Okay. And then in your prepared remarks I think you talked about Canada and adding in power control rooms and other products into that operation there. Is that going to require any significant CapEx from you?

I don't think so. We do power control rooms in other facilities and we keep our capital intensity fairly low. We will work to start without much capital intensity and see how well it's accepted and see how well we grow. We also have e-house builders up there that we can procure from, and do our integration with them. So we will run strategy back and forth of what we actually build ourselves and what we procure from others.

Okay, great, thanks a lot.

Thank you. (Operator Instructions) And our next question comes from the line of George Gaspar with Gaspar Reports. Please go ahead.

Good morning, Pat, Don.

Hey, George, how are you?

Good, great, super good, thank you. Question on your backlog, any you may have touched this, I don't know. Domestic international, can you break that down? And can you talk about how much of it is transportation related, oil and gas drilling, platform and other? And then also on backlog, you're indicating that the Canadian acquisition had a tenfold increase, can you highlight what that represents in terms of backlog at this time?

George, we historically have not broken down our backlog by business segment and location, domestic and international. I can say philosophically that the backlog somewhat mimics what you've seen in the recent revenues. We do have a backlog in there that goes out beyond the current year for transit. Most everything else, both domestic as well as international, will be shipped in the next 12 months.

Okay. All right. And a general question on the oil spill effect. Do you sense that this tremendous slowdown in the Gulf of Mexico deepwater drilling and the inability to obviously get completions and push platform construction, do you see that impacting here, intermediate, long-term? Do you have any feel for that at all?

Yes George, I believe it's more long-term for us because again, there are significant wells out there that have already been drilled and cemented that are waiting going into production. So where we participate, again, is always on the production side. So we are starting to see some of those get let. Again my fear is without new exploration and/or new drilling in the long-term, it's going to have an impact on us in the Gulf region.

Okay. All right, thank you.

Thank you. Our next question is a follow-up from the line of Rick Hoss with Roth Capital Partners. Please go ahead.

Quickly, Don can you give me gross profit numbers for EPP and PCS?

Let me see if I can find that for you here quickly.

Hang on a second

I've got to look it up, I wasn't prepared for that one Okay I'll give you the absolute dollars. The dollars in gross profit in electric power products was $133.8 million and in process control system was $8.3 million. I'll let you do the calculation.

Okay perfect. Thanks guys.

Thank you. Management, I show no further questions in queue. Please continue.

Thank you, again, for joining us today. We greatly appreciate your interest in Powell. And we definitely look forward to talking to you again next quarter.

Ladies and gentlemen, this does conclude the Powell Industries fourth quarter earnings conference call. If you'd like to listen to a replay of today's conference, please dial 1-303-590-3030 and enter the access code 438-6408 followed by the pound key. The replay will be available until December 15, 2010. Thank you for your participation. You may now disconnect.