Powell Industries Inc (POWL) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Powell Industries third 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. This conference is being recorded today, August 7, 2013. I would now like to turn the conference over to Ms. Karen Roan. Please go ahead.

Good morning, everyone. We appreciate your joining us today for Powell Industries conference call to review fiscal 2013 third quarter results. We would also like to welcome our Internet participants listening to the call simulcast live over the internet. 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 and would like one, please call our offices at (713)529-6600 and we will get one to you.

Also, if you want to be on the permanent email distribution list for Powell releases, please relay that information to us. There will be replay of today's call and it will be available by webcast by going to the Company's web site at www.powellind.com, or a recorded replay will be available until August 14th and information on how to access the replay was provided in yesterday's earnings release. Please note that information reported on this call speaks only as of today, August 7, 2013.

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 strategies. For further information, please refer to the Company's filings with the Securities and Exchange Commission. Now, with me this morning with Mike Lucas, President and CEO, and Don Madison, EVP and Chief Financial and Administrative Officer. I will now turn the over to call to Mike.

Thank you, Karen. Good morning, everyone. We really appreciate you joining us this morning to review our fiscal 2013 third quarter results. I'll make a few opening comments and then I'll turn the call over to Don to discuss the financial details and then we'll take your questions. Our third quarter proved challenging as we continue to see projects schedules move out, especially on large projects. Revenues were impacted by these schedule changes, but we were able to maintain solid earnings this quarter.

As mentioned in the last call, we continue to see a soft market for our IEC products and as a result we took some action this past quarter to resize our workforce in the United Kingdom. With that now behind us, we are refocused on aggressively pursuing active projects. Orders picked up this quarter, showing sequential and year-over-year improvement. But timing for both project awards and schedules of current projects remain difficult to forecast. Schedule changes on a few select large projects in our backlog have shifted revenues out of this year and into fiscal 2014.

We're continuously working to mitigate these schedule impacts. Favorable project mix along with solid project execution, productivity improvements and focused cost management help support the solid earnings this quarter. Extended timelines continue for inquiry activity, new order awards, and project schedules on large projects. We believe this uncertainty in timing will continue into fiscal 2014. Activity for small and mid-sized projects, however, has remained consistent over the past few months. Overall we remain optimistic about the underlying strength in our core markets, oil and gas is expected to remain strong, and there are several large projects Internet with Petro chemical and LNG that are moving into the early engineering stages.

We also see solid growth prospects in Canada. And this past quarter we've seen some uptick in our inquiry activity in the utility markets. Our two new facilities in Edmonton, Canada, and Houston, TX, remain on schedule. We've just begun some early production work in our Edmonton facility, and expect to have the move completed by the end of September. Our move into the Houston facility will begin later this month. These investments are well timed and will give us the capacity and manufacturing footprint needed to capture the long-term growth we expect. With that, I'll now turn the call over to Don to review the financial details. Don?

Thank you, Mike. Revenues were $179.5 million in the third quarter of fiscal 2013, compared to $194.1 million for the third quarter of fiscal 2012. Project timing continues to impact current year revenues. Gross profit as a percentage of revenue was 21.4% in the third quarter, compared to 22.6% in the third quarter of fiscal 2012. This decrease in gross profit is primarily result of margins associated with the mix of projects. Selling, general and administrative expenses were $24 million, compared to $25 million a year ago.

This decrease primarily relates to a decrease in depreciation expense as our existing business systems became fully depreciated in December of 2012. Amortization expense was $415,000, a decrease of $289,000 compared to the third quarter of fiscal 2012. During the quarter, we recorded restructuring and relocation charges of $1.7 million. Our operations in the United Kingdom have been negatively impacted by market conditions and competitive pressures. We reorganized certain non core operations and eliminated certain positions to realign our workforce and recorded a restructuring charge of $1.1 million for severance costs.

Additionally, we recorded $600,000 related to the relocation and start-up efforts in connection with the construction of our two new facilities of which approximately $300,000 was a reclassification from SG&A expenses, or costs incurred earlier in the year. We've reported net income of $9.3 million or $0.77 per diluted share for the third quarter of fiscal 2013. This compares to $12.1 million or $1.02 per diluted share for the third quarter of fiscal 2012. For the nine months ended June 30, 2013, revenues $487 million compared to $533 million in the same period a year ago.

Domestic revenues decreased by 3.4%, and international revenues decreased by 15.6%. These decreases are primarily due to the completion of several complex oil and gas construction projects that were in process during fiscal 2012. Additionally, this year we've encountered a number of customer-driven scheduled changes, which have deferred revenues to fiscal 2014. Gross profit for the nine months increased $5.5 million to $104 million. Gross profit as a percentage of revenues increased to 21.3%, compared to 18.5% for the first nine months of fiscal 2012.

Year-over-year operating improvements from our Canadian operations, as well as margins associated with the mix of projects and our focus on cost management contributed to the increase in gross profits. SG&A increased $4.1 million to $70.2 million compared to the same period a year ago. This increase is primarily related to increased personnel costs and commissions, sales commissions, as well as an increase in long-term incentive compensation.

Also included are increased legal expenses, primarily related to our efforts to pursue project claims in Canada. These increases were partially offset by decrease in depreciation expense. For the first nine months of fiscal 2013, amortization expense was $1.2 million compared to $2.1 million a year ago. And as we discussed earlier, we recorded restructuring and relocation charges of $1.7 million in the third quarter. In the second quarter of fiscal 2013, we received a settlement from the previous owners of our Canadian business in the amount of $1.7 million, which was recorded as other income.

Our provisions for income taxes reflects an effective tax rate of 25.6% for the first nine months of fiscal 2013, compared to 27.4% a year ago. These rates are below statutory rate, primarily due to the differences and the availability of federal research and development tax credits, and the utilization of loss carry forwards on Canadian income. For the nine months ended June 30, 2013, net income was $23.5 million, or $1.96 per diluted share. Compared to $17.8 million dollars, or $1.50 per diluted share a year ago.

Before charges for restructuring and relocation costs, net income for the first nine months of fiscal 2013 was $24.9 million, or $2.08 per diluted share. Our order backlog, as of June 30, 2013, was $496 million, compared to $522 million last quarter, and $433 million a year ago. New orders were $155 million in the third quarter, compared to $124 million in the second quarter and $133 million in the third quarter of fiscal 2012. For the nine months ended June 30, 2013, cash provided by operating activities totaled $89 million. Investments in property plant and equipment totaled $54 million, which includes approximately $42 million investment in our new facilities.

At June 30, 2013, we had cash of $125 million, compared to $90 million at September 30, 2012. Long-term debt and capital lease obligations, including current maturities, totaled $3.6 million. Looking ahead, based on our backlog and revised project schedules, we have reduced our expected full-year fiscal 2013 revenues by $25 million to range between $650 million and $675 million. Full-year fiscal 2013 earnings guidance remains unchanged.

We expect full-year earnings to range between $2.30 and $2.55 per diluted share. Included in our earnings outlook is an estimate of $0.25 per diluted share for one-time costs related to the start-up of two new manufacturing facilities, most of which will be incurred in our fourth quarter. At this point, Mike and I will be happy to answer your questions.

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

I guess I want to start with the last item. The guidance. Can you just tell me if it includes the UK restructuring costs? Is it included or excluded in the guidance? As about $600,000 so far of incurred costs of the facility costs, just kind of clear that up for me, Don.

The one-time cost incurred in the workforce resizing in the UK is included in our guidance. And the one-time cost associated with the start-up of the two new facilities is included in the $0.25 of which about $600,000 has been incurred year-to-date. And we expect approximately another $2 million to $2.5 million to be incurred in the balance of the project, most of which will be in the fourth quarter, a small amount of that could roll over into our October time period.

Okay. And last quarter, if I remember correctly, you had implied that the orders in the second half would be similar to the orders in the first half. Given the third quarter intake number, do you think you'll have a bang-out fourth quarter or you're going to fall short of that because of the delays? Can you discuss the dynamic of what's going on there?

Yes. John, this is Mike. I suspect the fourth quarter bookings to probably be more in line with what we just saw in the third quarter. The new awards also just seem to be dragging out as well. We're not seeing the projects go away. Activity is still good. It's mainly on those large projects, It's just taking a lot longer to make decisions and get final awards done.

Is there any particular reason why?

I think it's been still related to some of the resource constraints. We've talked about previously in the call. And these large projects just seem to be going under a little extra scrutiny. A little bit more robust testing, a little bit more justification to get them through the hurdles. Just taking longer than anticipated.

Okay. I'll get back too queue. Thank you.

Our next question is from the line of John Tonawontang, with CJS Securities. Please, go ahead.

Very nice job on the margins. Thanks for taking my questions.

Good morning, John.

Good morning. We're a bit more than a year into this paradigm of engineering constraints, and delay in projects. What are the engineering firms doing to mitigate this shortage and when can we expect it to be resolved?

That's a tough question. We see a lot more of these larger projects involving international engineering firms. So you see some of it being spread around the world to lighten the load. People are still scrambling for engineering resources and we're even seeing some signs of maybe scope of supply that would have been done at an EPC firm. Is there a way to rebalance that and move it back to the suppliers? In some cases we're starting to see scope of work being asked, can we handle it. Can it be moved and redistributed between EPC firms and suppliers. It's not a quick fix.

Okay. And then obviously gross margins continue to be quite good for you guys. What level do you expect to be sustainable and what will that look like when your facility transitions are complete, maybe if some big Petro chemical projects come online as well?

John, when you're looking at gross margins, clearly we're working to see from a cost containment and productivity standpoint, continued positive movement in that area. When you're looking at the impact in the near term, let's don't forget that in the fourth quarter, while we are breaking out on the separate line on the P&L under restructuring, relocation, the hard costs associated with the physical transfer of product and production from facilities, they're still expected to be some soft costs that will hit the cost of goods sold and therefore, gross profits and margins.

So, therefore, in the fourth quarter, I would expect there to be some softening in our gross margins. I think you'll see improvement next year as we start operating in the new facilities and get the new processes that we've got in place smoothed out. Relative to where that's going to end up, when the new facilities, with as many balls are in the air right now, it's a little bit hard to say. I think that who we saw before, you'll see earlier improvements as a result of moving into the Canadian facility, given the amount of work that's in front of us and the capacity strength and the cost that we're incurring, producing product in Houston and shipping it to Canada. And I think it will take us a little more time to realize those benefits in the expansion here in Houston.

Great. Thank you very much.

Our next question is from the line of Brent Thielman, with D.A. Davidson.

Yeah, Mike. I thought your comments around the utility side of things was a little more positive than maybe we've heard in some time. Can you kind of elaborate a little bit more on what you're seeing there?

Yes. And it's simply a one-quarter data point. I wouldn't read that yet that into a trend. But we did this last quarter, see an uptick in inquiry activity. Our quotation level is up a little bit. It's still significantly slanted towards environmental projects, as opposed to generation capacity expansion or anything like that. But it's a one-quarter data point. Hard to call it a trend. But it was pretty good in the third quarter.

Sure. Understood. And at this point are you done with the restructuring process in the UK?

We are. Yes, we are.

Okay. Great. I'll get back in queue. Thanks.

(Operator Instructions). Your next question comes from the line of Noelle Dilts, with Stifel Nicolaus. Please go ahead.

My first question is kind of a housekeeping question. Can you tell us the tax rate that you're looking at for the fourth quarter, and directionally where you're expecting the tax rate to go in 2014?

Well, there are a lot of moving parts in our tax rate right now. When you're looking at the near term, I think part of the variable will be is the ultimate profitability of our Canadians and what we can use from a loss carry forward protection there, coverage. A lot of the one-time costs will be incurred in Canada. So that's a little bit of a variable. But at this point in time, I would say that we're going to see a modest increase in the fourth quarter. Probably something more in the neighborhood of 28% to 28.5% effective tax rate for the full year.

I'm speaking to the full-year impact as of the end of the fourth quarter. When you're looking at next year, again a lot of it is going to depend, well, let me back up again. Part of this quarter's benefit and this year's benefit is a catch-up in R&D tax credits that we've been able to record. Two issues there. One is the R&D tax credit expired the first quarter of last year, and we're retroactively replaced this year. Second part of that puzzle is that we went through a new formal R&D tax credit review, but working with a third party.

And we're able to evaluate that and get some benefit this year, including amending tax returns for the prior year, that helped drive our effective tax rate down. Next year, I think you're going to be back to where we had talked in the previous quarter. Something north of 30%, probably in the 31%, 32%. But again a lot of that is going to depend on the benefit that we get on the NOLs in Canada.

Okay. Great.

Does that help?

It does. Thank you. My second question is on the international markets where you're seeing softness. Would you say that's more market driven or are you seeing a change in the competitive dynamics in that market?

No, I don't think it's changed much. It's mainly in our IEC product line. It's been fundamentally soft for a while and we just took this opportunity to adjust some fixed costs, because frankly we don't see it turning that quickly. It's mainly on our IEC product line.

Okay. And then finally, I think last quarter you talked about the opportunity in the Petro chemical market that you were seeing over ten projects where you saw opportunities greater than $30 million each. Is that what you're still looking at or has that changed at all?

The number of projects are still there. The size of the projects are still there. We're starting to see a little earlier inquiry activity. We've been saying in the past, inquiry activity this year, order activity next year. But we've got to overlay a little caution on that. These are all very large projects. And just like we've seen in other places, we're anticipating that those larger projects could have these longer decision making processes. So the pipeline still looks the same. The timing is difficult to judge.

Okay. Great. Thank you very much.

Our next question is a follow-up from the line of John Tonawontang. Please, go ahead.

You mentioned a little bit of an increase Petro chemical and LNG inquiry activity. I'm just wondering what your historical penetration or market share looks like in that sector? Is it similar, to what you have in oil and gas?

Certainly for the US, the Gulf Coast based Petro chemical, yes. It's been very high and similar to what we have in oil and gas. Very well established, good install base there.

Okay. Great. That's it.

The next question is another follow-up from the line of John Franzreb.

I'm just wondering how has it been staffing the Edmonton facility? Can you talk a little bit about that?

John, we're still successful staffing up. We're working hard to staff up here in between now and the end of December. I think we will be seeing fairly sizable increase in the workforce. Our ability to recruit, we've had good success to date. There are a few isolated issues like project management that have been more difficult than others. But by and large I think we are pleased with the success that we've had to date and don't believe we'll have a major challenge getting the workforce to where we need it to be early next year.

Okay. And with large projects being pushed out, has there been any change in the pricing environment for those jobs?

Not really that we've seen. The pricing has been maintained relatively consistently. We do look for opportunity, if we couldn't push some of the inflationary increases through where we can. But I don't think there's any change in the pricing outlook.

Okay. Thank you very much, guys.

Our next question is from the line of Jon Braatz, with Kansas City Capital.

Don, let me get this right. There will be separate line item for the relocation expenses in the fourth quarter?

Yes. If you looked in the press release you'll see that we broke out the $1.7 million. We'll add to that number in the fourth quarter for costs incurred in the fourth quarter. Like I said earlier, I think a small amount of that will bleed over into October. The majority will be in the fourth quarter.

Were there no relocation costs in the second quarter?

Basically that was the $300,000 reclassification in the first half of the year. That just rolled up into other expenses and then we got to debating here internally and thought it made more sense to break that out and make it visible.

Okay.

So what we did is we reclassed the $300,000 down to the included with the $1.7 million. So if you really look at it, $1.4 million was incurred in the third quarter. And about $300,000 was incurred in the first half. Most of it in the second.

Okay. Secondly when we look at these big large projects being pushed out to the right a little bit, in terms of the timeline, is there any similarity between these projects? Are they all being delayed three months, six months or is it all across the board? Any consistency in terms of that delay?

Not any real visible pattern. And even on the projects like we said, we have in backlog, we're seeing dates move out even on existing projects that are committed and underway. But not any pattern you can see where you could reset the whole timeline X number of months. No. It just seems to be slow creep.

Okay. Is there one particular project that has been extended further than others? Does it go out years, or 18 months, or something like that?

No.

Any of the delays go that far out?

Nothing that we've got on our radar list that's been delayed that long. Well, there was a couple of offshore projects you read about, probably could have seen in the papers where the big oil companies postponed those indefinitely.

Sure.

But the other projects nothing sliding out 18 months. It's usually four weeks here, six weeks there. It's slow creep.

Okay. Thank you very much.

(Operator Instructions). Our next question is from the line of Shawn Boyd, with Next Smart Capital. Please, go ahead.

Quick question here on CapEx. It came in a little lighter in the quarter at I think it's $20.5 million. Did we just push that over into the fourth quarter? Or are we expecting maybe a lower CapEx budget for the year now?

No. Basically it's just sliding to the latter part of the year, the overall construction costs of these two facilities are still pretty much in line where we've been thinking they've been now for the last six months. I think what you're going to see is that as we wrap up some of the final payments, are actually going to probably slide into the first quarter of next year. But overall we're still going to be around $80 million, about $25 million, $26 million yet to be spent. Most of that should be incurred in the fourth quarter. But some of it will roll over into probably the October, November time period.

Okay. Is that still bring you down on a total for the year, fiscal 2014, take us back to a more regular $10 million to $15 million level?

Yes. Basically I would say that next year we're still early into our thinking is what we're planning for next year. But my expectations are that next year going to be plus or minus $10 million. Plus whatever we have carry over on the buildings. And there may be some carry over on the machinery and equipment as well. But basically carry over on the two large projects and plus another $10 million plus or minus the new projects.

Got it. Okay. Thanks for the color on that. On the large projects getting pushed, the only question there is have there been any that have shifted out to the point where you're putting a much lower probability of those projects even getting back into the order book?

No. Not really. The number of projects in the pipeline, the health of the pipeline, the probability we think we've got on some of those jobs, fundamentally not shifted. It's timing.

Okay. So in terms of order growth, I understand what you said about our old target of having the second half equal the first half. You were very clear about fourth quarter orders being similar to Q3. But as we move into fiscal 2014, it sounds like we should be able to expect that resumption of order growth fairly early in the year. First half of the year. Is that correct or no?

I would be cautious as to put the timing on that. The reason that I'm saying that is because of the difficulty we're having as to when some of these projects are going forward. As Mike mentioned a few minutes ago, it's the engineering resources, plus I think particularly when you're looking at the Petro chemical, what I'm hearing is that there's just a lot of analysis going on when they're going through the engineering analysis stage, as to how big they want it, what the production is going to be and there's a lot of iterations that are going on in the process, in addition to just the limitation of resources.

I don't know that's going to materially change in the near term. We're optimistic that we'll see that lift during the year. But to say it's going to lift in the first half of the year, we don't have enough clarity to make that comment at this point.

Got it. Okay, Don. Last question for me. Your comment on the tax rate, just want to clarify something. You talked about 28% to 28.5%. Is that a fourth quarter tax rate, or what you expect the full year to be?

Full year.

Got it. Thanks, gentlemen. Good luck.

Thank you.

(Operator Instructions). Our next question is from the line of Richard Leader, with First Houston Capital. Please, go ahead.

Let me ask you about the cash. That's a nice problem to have. Other companies have a lot of cash sitting on their balance sheets and they say a lot of it is overseas and would be subject to a tax penalty if it was brought home. That cash is not situated at Palin in that sort of fashion, is it?

Clearly we do have some cash that is parked offshore, as a result of cash generated by our international operations. But that's a relatively small percentage of our total cash. The vast majority of our cash is being held within here in the US.

And are share buybacks or cash dividends part of the plans for that cash at the present time?

At this point in time they're not part of the plan. They are always part of the discussion that takes place at our Board meetings as to what's the appropriate earmarking, utilization of our cash. But at this point in time that's not in our plans.

So acquisitions might be in your plans? Can you just comment as to the acquisition pipeline as to whether it's full, empty, or any comments at all?

At this point in time, that we have continued to focus on where we want to grow next, but most of our internal efforts have been making sure that we get these facilities up and running and transferred into smoothly. I think you'll see we'll be putting more of our internal resources of looking at that next area of growth in the coming year. But I don't think there's anything in the pipeline that would be immediate as far as impacting our cash of any significant amount.

Okay. Thanks.

There are no further questions at this time. I'd like to turn the call back over to management for closing remarks.

Well, just in closing, I'd like to say our markets are very healthy still. Our attention this fourth quarter is going to be focused on operational execution with delivering the backlog we have, managing through these schedule changes and getting our factories moved. We're in excellent shape regarding these infrastructure investments we're making. We think we're very well set up for next year. We want to just thank you again for dialing in, for your interest in Powell, and we'll talk to you next quarter. Good-bye, everyone.

Ladies and gentlemen, this concludes the Powell Industries third quarter earnings conference call. If you'd like to listen to a replay to today's conference, please dial 1-303-590-3030 with the access code of 462-7818. We'd like to thank you for your participation. You may now disconnect.