Powell Industries Inc (POWL) 2011 Q2 法說會逐字稿

Good day ladies and gentlemen. Thank you for standing by. Welcome to the conference call for Powell Industries. 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, November 9, 2011.

I would now like to turn the conference over to Karen Roan of DRG&L. Please go ahead.

Thank you, Alicia, and good morning everyone. We appreciate your joining us for Powell Industries conference call today to review yesterday's press release. We would also like to welcome our internet participants. Before I turn over the call to management, I have the normal details to cover. If you did not receive an email of the news release issued yesterday afternoon, 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 email 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 via webcast by going to the Company's website at www.powellind.com, or a recorded replay will be available until November 16th, 2011. Information on how to access the replay was provided in yesterday's news release.

Please note that information reported on this call speaks only as of today, November 9, 2011, 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 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 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 & Exchange Commission. Now with me this morning are Tom Powell, 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 Tom.

Thank you, Karen. Good morning everyone. Thank you for joining us today to review yesterday's press release. As you may know, I returned as interim CEO only five weeks ago. Today's audio conference is the first I have conducted in over three years. Believe me, I take no pleasure in today's announcement. Now for the issue. As part of our normal audit process, we recently discovered errors in the financial reporting from our Powell Canadian operation.

After further review of the facts, management and the Audit Committee concluded that our financial statements for the second and third quarters could no longer be relied upon. We will issue corrected financial statements for these quarters as soon as the auditing process is completed. In a few minutes Don will go over the specifics of the issue and its impact on our fourth quarter and year end results. Since this discovery we have taken the following corrective action. We have strengthened the accounting function in Canada, and hired a new Controller for that business. He has over 20 years of industry experience.

Members of the accounting and the operations staff in Canada have received additional training in Powell's accounting policies and project management procedures. And we will continue to follow that very closely. We have engaged a full time specialist to evaluate and make recommendations for improvements to the estimating, the operations, project management functions, of the field services and installation part of the Canadian business. This individual has extensive experience, 30 years or so, in these disciplines.

We are confident that his examination and oversight will strengthen our project management, our financial reporting, and the use of Best Practices in Canada. As a result, we have already implemented a number of process changes, including new checks and balances. We have also strengthened the organization by adding a Human Resources Manager in Canada. Obviously while we are clearly disappointed with these results, and their impact on these issues, and their impact on our results, I want to emphasize the importance of our Canadian operations to our strategy.

Our oil and gas customers conduct operations all over the world, and western Canada represents some of the largest reserves in existence. Many of our customers currently have projects in Canada, and there will be many more in the future, making Powell Canada critical in our ability to serve our customer base. We reiterate our long-term commitment to this very key market. Now I will turn over the call to Don Madison to discuss the details.

Thank you, Tom. As disclosed in our news release, these errors occurred in our financial reporting process at our Canadian business unit. These areas indicate material weaknesses in internal controls. At the beginning of the third quarter Powell's ERP business system was implemented in Canada. During the same period we experienced some turnover in our Canadian accounting staff, and as a result we failed to maintain appropriate control over our financial reporting process.

In addition, we failed to recognize that our estimating and project management processes in our fuels, service and installation business were not robust enough to properly manage many of the projects awarded over this past year. Specifically, these areas were caused by first the inaccurate recording of customer change orders which overstated earnings in the second quarter. During the second quarter a contract scope dispute occurred in Canada. Based on initial discussions with the client, our project manager was under the belief that the client would be authorizing a change order for extra work. Change orders for extra work were received, but were insufficient to cover our total costs on the project which was completed in August.

Powell has a policy not to recognize claims for extra work until we have a contractual change order from the client. We have provided additional training on Powell's project management and accounting policies and procedures. Second, an erroneous journal entry recorded in Accounts Payable caused an overstatement of earnings in the third quarter. Third, we failed to properly close out costs on several jobs, and the application of an incorrect overhead rate resulted in an overstatement of earnings in the second and third quarters. These issues occurred during the transition to Powell's business system, and as a result of inexperience on the new system these errors were not detected until the fourth quarter.

The cumulative effect of these errors will cause a reduction in previously reported net income for the nine months ended June 30, 2011 of approximately $2.7 million, or $0.23 per diluted share. In addition, in the fourth quarter we will record an impairment of the remaining intangible assets related to the acquisition of Powell Canada totaling $7.2 million, or $0.61 per diluted share. This noncash impairment charge is a result of continued losses on Powell Canada. Finally, we have executed execution related challenges on some projects in Canada, and continue to experience margin pressures throughout the organization which will impact our fourth quarter results.

We will discuss the details of our fourth quarter results and recent market activities during our fourth quarter conference call in December. As a result of the above mentioned items, the financial reporting errors for fourth quarter margin and cost pressures and noncash impairment of intangibles of Powell Canada, we now expect fiscal 2011 revenues to be approximately $560 million, and our fiscal 2011 net loss to be between $0.20 and $0.25 per share. Excluding the noncash charge for impairment of intangible assets and the nonrecurring charge related to the departure of our former CEO, earnings for fiscal 2011 would be forecasted to range between $0.51 and $0.56 per diluted share. A non-GAAP table was included in yesterday's press release. Now I will turn the call back to Tom for some closing remarks.

Thank you, Don. We are not at all pleased to have to restate earnings and correct information that we previously released. On behalf of myself, the Board of Directors, and the management team I apologize for these issues. While we were not aware of the situation before the year end audit process, it is clear that we failed to manage it effectively. What I can assure you is that we recognize the problem. We have taken appropriate actions. We believe this experience will ultimately result in tighter controls, and a better Company. I can assure you that we will work hard to regain your confidence in Powell. Now at this point I would be happy to try to take your questions. Thank you.

Thank you. (Operator Instructions). Our first question is from the line of John Franzreb with Sidoti and Company. Please go ahead.

Good morning, guys. Welcome back, Tom. Great way to come back, huh?

I was enjoying ranch life. But I am back.

Generally, it seems to me we have had now a couple times with recent acquisitions, Powercomm, the JV didn't work out and now we are having problems with Powell Canada. Are you giving too much freedom to the management of these businesses? Talk a little bit about why we are having these issues?

John, the two that you spoke of really one in the same acquisition, it just had two facets. To answer your question, in my opinion is that we did make mistakes during the integration of Powell Canada that we should have been closer to the business to be able to identify some of the concerns that we now see, and something that we need to fully analyze and understand before we go forward with any additional acquisitions.

We have strengthened the overall management team, corporate management team here with a new HR director, a new corporate sales marketing guys. All of that has taken place in the last year. We now have more resources to go to these various outlying groups and work with them. I am obviously disappointed in what we have not accomplished, but we are working very hard to get back on track with Canada. Also, unfortunately this was a distraction for some of the people that were focused on other parts of the business, so this was a big lesson for us, and we will be back on track shortly.

Okay. And if I heard correctly, you are not going to discuss the pricing pressures to the fourth quarter results? Did I hear that correctly?

That is correct.

My second question is when would the restated Qs be available?

We do not plan to publish the restated Qs until we complete the audit to ensure there are no additional changes that come to light, because of the materiality issues with the PwC review. We did put out an 8-K last night that basically gives you an indication of what we expect the second and third quarters restatement to be, I do not anticipate it to be materially different, but we have not completed all of our work. That restatement basically pushed, give me a second, it basically took $0.11 out of the second quarter, reducing the previously reported $0.21 to $0.10, and third quarter the 8-K shows that the previous quarter was reported at $0.14, and now will be reported at $0.03. Excuse me $0.02.

Thank you. The next question is from the line of Brent Thielman of D.A. Davidson. Please go ahead.

Good morning, guys.

Good morning.

Yes, I guess I was just hoping to get a little bit more background on why the restatements are just isolated to the second and third quarters, and sort of what gives you the confidence that these issues are sort of isolated in Q2 and Q3?

The issues occurred, one was a truly operational issue on a specific order where an expected change order was recorded that never materialized. That was very easy to identify that situation, and where it should be as far as which quarter. The other issues all basically the root issue between the other three issues, are the early learning curves and mistakes made during the implementation of our business system in Canada. They would have all been identified and corrected, but due to materiality issues and due to the timing of our year end audit relative to when we implemented the system, these came out at the, late in the fiscal year. The other three were the inexperience on the system and turnover in the accounting organization that occurred virtually concurrently.

Okay. That is all I had. Thanks, guys.

Thank you. The next question is from the line of Brad Evans with Heartland. Please go ahead.

Yes, thanks for taking the questions.

Yes, sir.

Tom, just curious with as you come back into the interim CEO role, is that something you intend to take on more permanently?

Say that again?

You have got the title of interim CEO. I am just curious if that interim moniker will come off at some point? Will you take the reins permanently?

I am having difficulty hearing. I have got a cold.

The answer is, Brad, is that the Board of Directors has formed a search committee for a CEO. Thee are diligently going through the process of defining a position description, a profile for the position, and have engaged to retain search firms who begin that process. I think in the amount of time they have had to work on it, they made a lot of progress and are working diligently to bring in a CEO from outside of the organization to serve in the near future.

We have already identified now that I understand the question, I am sorry, my hearing is going along with my age. We have identified several very good candidates at this point, and hopefully we are going to move forward as expeditiously as we can to get a permanent CEO.

You made the comment that we will be back on track shortly. What does that mean?

My job is to come in here and focus on the needs of the future. My efforts are on energizing the employees, visiting our customers, examining our processes and strengthening the Canadian operation. I believe I will have these, I think I will have things turned very shortly. It is possible that there are some issues in the backlog that the margins would be rather tight on, but I believe I can have the organization turned shortly.

The existing backlog of in question is should be substantially turned in the next 2 to 2.5 quarters.

Okay. The backlog, was the book-to-bill ratio positive in the fourth quarter?

I am sorry?

Was the book-to-bill ratio, did you grow backlog in the fourth quarter?

The fourth quarter when you are looking at, I really don't want to get into discussing fourth quarter because we are still in the analysis of it. From an order perspective, orders were slightly down in the fourth quarter, but activity to date in the first quarter back on track with what we saw early last, in fiscal 2011. So we have talked about the timing of orders and how it can make an anomaly in any one quarter. I think you are going to see an anomaly in our fourth quarter being down slightly from the previous quarters, but we expect to see a good rebound in our first quarter.

Yes.

I will hop back in the queue. Thank you.

Thank you. (Operator Instructions). The next question is from the line of Larry Litton with Second Line Capital. Please go ahead.

Two questions. First of all, I didn't follow Mr. Patrick's departure of a couple months ago. Is that completely a coincidence to these events, or is there some relationship?

The accounting errors and the need to restate our second and third quarter financial statements were not known at the time of Pat's departure.

So there was no issues of questions of tightening up the controls, or anything like that at the time of his departure?

No sir. Simply stated Pat left the Company due to a difference in management style and approach.

Okay. And then again I know you don't want to talk too much about the industry. Maybe conceptually the statement about the general market price pressures. Anything you can color that in with? Is that do you think an economic decline? Is it a new competitor from somewhere doing something differently? Is that just everybody putting projects on hold and turning the screws a little bit? Can you color that a little bit?

Yes, sir. Many of our larger competitors, one of the bigger segments in their markets is residential commercial work, and then general industry. All of those are not doing very well right now based on economic conditions in the country, so their focus now, much of their focus is turned towards our area of strength which is the oil and gas market. So it is simply a matter of five dogs fighting over the same bone.

Has something changed at the margin if you will in the last couple months from say six months ago?

Let me respond to that one. Basically when we were on the conference call and talking over the last couple of quarters, there appeared to be a stabilization in the price levels. There appeared to be some strengthening in utility and some of the miscellaneous markets. I would say that our penny on that now has been reversed with what we have seen over the last 90 days. The economy has a whole both domestically and outside of the United States appears to be fragile and to the point that capital investments in these other markets are not materializing, and if anything may even be getting tighter.

Okay. That is very helpful. Thank you.

Thank you. (Operator Instructions). The next question is a follow-up from the line of Brad Evans with Heartland. Please go ahead.

Yes. Don, your fourth quarter cash balances, should they be meaningfully different than what we saw in the third quarter?

No.

Tom, what are your thoughts in terms of deploying that cash? I mean, the acquisitions have caused some problems as we just discussed. Do you feel like it might be a good opportunity to return some of that capital to shareholders through a share buyback with your stock likely to be down meaningfully today?

I imagine that would be a conversation at the next Board meeting, but really hard to comment on that, my issues, my mindset has been on making some things a little better around here.

When is the next Board meeting?

December. December 14th.

You have got roughly $13 a share in cash on the balance sheet. Your stock is going to be trading below or near book value on the open here today. Why philosophically without, your personal opinion, why would it be a bad idea to be buying back stock at this level?

I didn't say that.

I am just curious what your personal opinion might be on that matter?

I am not smart enough to answer that right now. I could use your advice.

I would urge to you buy back stock. How is that?

Okay. That will go into the compute bracket.

Thank you.

Yes, sir.

Thank you. The next question is from the line of Noelle Dilts with Stifel Nicolaus. Please go ahead.

Hello.

Noelle, your line is open. Please go ahead.

Hello. Good morning. Can you hear me?

Yes.

Hi. Sorry about that. Don, you mentioned that you are looking at these kind of I guess maybe we will call them low margin projects in the backlog coming out over, being worked through over the next couple of quarters. As far as I understand it, you have some projects in the backlog that have lower margins, some that have better margins. Can you give us some general thoughts on--?

Let me rephrase my thoughts there. Let me clarify. What I was attempting to do was following up on Tom's comment regarding where we have found the issues in the Canadian organization. That subset of our backlog should turn substantially in the next couple of quarters.

Okay.

We are not trying to convey any message on the overall aggregate backlog of Powell Industries.

Okay. That helps. Can you give us any general thoughts on the margins that are, of the projects that are currently in your backlog, overall just generally looking out for 2012, can you give us any indication of where you think margins are going relative to where are you looking at gross margins in 2011?

Let me just step back up to the big picture. When we talked in the past and I still firmly believe based on the analysis that we have done an evaluation, that the backlog, the quality of the backlog and the strength of the backlog that we are going into fiscal 2012 is stronger, and have better margins in aggregate than what we saw a year ago going into 2011. That backlog should provide us the opportunity and our personal expectations that will show improvement in the run rate in 2012 over the run rates that we have experienced in 2011 from the backlog.

Okay. And then the project delays that you talked about in the press release, can you just give us a little bit more color there on what you are seeing, if it is broad based or if it is isolated to a certain geographic region, or market subset?

I would say it is more related to some large scale projects that we are participating on, and those large scale projects are just not moving as quickly as we would have anticipated earlier on in the process. We are being, our rate of response clearly is being driven by the overall project schedule of the client. I would say it is more a project by project related, not a broad brush industry related issue.

Okay. Thanks. Appreciate that.

Thank you. The next question is a follow-up from the line of Larry Litton with Second Line Capital. Please go ahead.

Apropos of the question about the cash, and then the comments about the strategic importance of Canada, are there any significant strategic gaps you think you need to fill via acquisitions, or is that not a priority? I realize short-term the priority is the existing business, but in terms of the strategic road map are acquisitions important at this point?

Larry, let me try to respond to that. When are you looking at the, there are two two-ways of approaching the business. One is greenfield investments, the second is acquisitions. Both have risk and both of them have challenges associated with them. I would say the biggest area that we are looking at is continuing to say how can we better serve our clients? Where are they going? Where do we need to be in response to where the projects are? What is changing from a technology and from a product needs standpoint to assist our clients with managing their facilities? So when you are looking at where we are going to go strategically, it is going to be consistent with where we have been in the past, is how do we stay close to our clients? How do we prepare ourselves both in products and geographic locations to be prepared to support their projects? We have been a long-term, our goal is to have long-term relationships, and to penetrate those relationships growing even stronger with those industries and clients that we work with, and that is where our strategy will continue to try to focus on.

I appreciate that. Are there clear identified geographies that you want to fill that are important, and are there any clear new technological issues that you want to fill that are important, given the changing dynamics, or it is just the nice thing but not necessary in terms of new technologies and geographies as you see it today?

When you are looking at where the industry is going, there are clearly things that we are discussing regularly at our Board, looking at the relative priority and the timing. Timing, there are needs out there that we see over the next ten years, but clearly trying to pick the timing of where we need to be and when, is as important a part of the process as knowing where we need to go, and that is what we can try to continue to evaluate at each of our Board meetings.

Okay. Thank you.

Thank you. (Operator Instructions). We do have a follow-up question from the line of Noelle Dilts with Stifel Nicolaus. Please go ahead.

Looking back at the first three quarters of the year, can you give us any sense of what you think the losses were at Powell Canada in general?

Overall, the losses at Powell Canada were significant, but at this point in time I really don't want to start disclosing the financial performance of any one subset of the business. Most of these situations, particularly over the last couple of quarters involve specific projects. That is where our focus is as far as turning the business around, is identifying how we are falling short either on the estimating or on the execution of projects, and that is what we have to do to ensure that the future performance is in line with our expectations.

Okay. Thanks.

Thank you. We have a follow-up question from the line of John Franzreb with Sidoti and Company. Please go ahead.

Could you provide a little color behind the accounting staff departures on Powell Canada, why did that happen?

Basically it is not a huge organization. There were two professionals other than the Controller in that organization. Both of the professionals left within about a four-month period for better opportunities within the region. One was actually looking at a betterance in the perspective of the individual. One was looking at starting a family, and was looking for a position that was not necessarily a 40-hour position. The second individual found a better opportunity for their career growth. The market in the Edmonton and the Alberta area is a competitive one when it comes to human resources, because there is actually more work and more opportunities than there are people.

Right. That is what I was wondering, Don. Is it difficult to staff people up there?

It is more difficult there than it is in most of our other locations. Are there good people, absolutely. Are we having trouble recruiting? Not necessarily. There is always the risk that we have which is greater than at other locations of a better opportunity presenting itself down the street.

Okay. And regarding the project delays, are they going to all hit in the fourth quarter, or are they spilling into the first quarter?

I am sorry, John?

The project delays?

The project delays, it is just a general issue. I think you will continue to see them, some of these very large projects that we're trying to support over the next quarter as well. The materiality of it and do I have any specific information, no. I don't see anything that is going to radically change the start up progress on some of these projects.

Okay. Thank you.

Thank you. There are no further questions at this time. I will turn it back over to management for any closing remarks.

Thank you for joining us today to discuss these difficult issues. We appreciate your continued interest in Powell. We look forward to talking with you again next month on our fourth quarter call. Thank you for being with us. Good day.

Ladies and gentlemen, this concludes the conference call. If you would like to listen to a replay of today's conference, please dial 303-590-3030, and enter in the access code of 4485830. Thank you for your participation, and you may now disconnect.