Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Powell Industries Inc (NASDAQ:POWL)
Q4 2019 Earnings Call
Dec 5, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings and welcome to the Powell Industries' Earnings Conference Call. [Operator Instructions] A brief question-and-answer session will follow the formal presentation. [Operator Instructions]

I would like to turn the conference over to your host Zach Vaughan of Dennard Lascar Investor Relations. Thank you. You may begin.

Zach Vaughan -- Investor Relations

Thank you, operator and good morning, everyone. We appreciate you joining us for the Powell Industries' conference call today to review fiscal year 2019 fourth quarter results. With me on the call are Brett Cope, Powell's Chairman and CEO; and Mike Metcalf, Powell's CFO. There will be a replay of today's call and it will be available via webcast by going to the Company's webcast powellind.com or a telephonic replay will be available until Decrease 12. The 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 December 5, 2019 and therefore, you're advised that any time-sensitive information may no longer be accurate at the time of replay listening or transcript reading.

This conference call includes certain statements including statements related to the Company's expectations of its future operating results that may be considered 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 these 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 more information, please refer to the Company's filings with the Securities and Exchange Commission.

Now I'll turn the call over to Powell's CEO, Brett Cope. Brett?

Brett A. Cope -- Chairman of the Board, President, Chief Executive Officer

Thank you, Zach and good morning, everyone. Thank you for joining us today to review Powell's fiscal 2019 fourth quarter results. I will make a few comments and then I will turn the call over to Mike for more financial commentary before we take your questions. We are pleased to report another quarter of solid progress with both strong revenue and net income growth. Revenues increased to $149 million or 10% sequentially and net income improved to $6.5 million, a 29% improvement from our third quarter. We are also pleased to report fourth quarter improvements in both gross profit and free cash flow. Mike will provide more details on these metrics in his prepared remarks. These increases were the result of the sustained momentum we experienced throughout 2019, including the following highlights.

Projects and pricing discipline combined with operational execution, improving backlog quality, optimization of resource planning around our people and facilities and our sustained focus on cash flow. Our new orders totaled $162 million in the fourth quarter and $676 million for the full fiscal year 2019. This is compared to $78 million in the fiscal fourth quarter of the prior year and $459 million for the full year fiscal 2018. Backlog at September 30, 2019 was $419 million, a 61% increase from the $261 million at September 30, 2018. Throughout fourth quarter and for much of our fiscal 2019, we've experienced increased demand primarily from customers in our core oil, gas and petrochemical markets. Along with these improved market conditions, we have continued to work through lower margin projects that were booked in late fiscal 2018 and into early 2019.

Combined, these trends have resulted in the positive growth, quality and mix of our backlog, which have helped to support improved operational contributions across most of our divisions. Powell's largest operational challenge continues to be the recruitment and retention of high quality employees in an exceptionally tight labor market. To keep pace and to meet the needs of our customers, we are strategically balancing our use of independent contractors, management of overtime, hiring and training of new employees against our ability to leverage our people and project execution across our facilities. We believe this concentrated focus will accelerate both long term decisions and the prioritization of short term actions.

We also continue to actively manage and adjust resource planning to mitigate inflationary pressures by diligently monitoring and working with our supply chain partners that are able to optimize visibility, improved productivity and lower costs to confront these dynamic market conditions. While our core markets in the US have trended upward throughout 2019, Powell's international operations, particularly in Canada and United Kingdom have only recently begun to show signs of recovery. Backlog and other indicators have shown a marked resilience in the face of persistent volatility in the various international markets and geographies we serve.

As we entered the first quarter of fiscal 2020, I'm pleased to report that trends from our core end markets associated inquiry activity have improved substantially when compared to a year ago. We continue to see the majority of new project activity coming from our domestic oil, gas and petrochemical markets. The abundance of low cost natural gas and domestic markets continues to be one of the key economic drivers of future project activity. Our current pipeline remains active, particularly as we bid projects of larger and of varying size when compared to last year.

We continue to actively bid and pursue smaller base business projects to optimize capacity in the second half of fiscal 2020. And activity continues for several larger projects that pending final funding and award would execute over an 18-month to 24-month window. As it stands today, the timing of client investment decisions around these larger projects is likely to result in a more lumpy and longer market cycle that could continue throughout 2020 as these projects will take longer to work their way through the production schedule. We also continue to partner with our customers by ensuring that we can support them on engineering only activities. By collaborating with them and our engineering partners during the early phases of detailed engineering, we can help our customers bridge their project schedules until such time as the project receives full investment funding.

In addition to the training and development of our employees, Powell has experienced the benefit of sustained investments in research and development throughout industry cycles. The market challenges over the last several years were no exception. We maintained our focus on R&D through these difficult years and developed new products allowing us to expand into new markets and we developed lower cost designs of our existing products to enhance productivity and our manufacturing operations, all while meeting or exceeding our customer specifications. As we enter our fiscal 2020, we are taking strategic steps to increase our commitment to our employees as well as increase the allocation of capital to advance the innovation of our products and services through our investment in research and development. This added investment will allow us to accelerate new offerings across the portfolio of our electrical solutions and help extend our service capabilities.

Our emphasis on R&D is the result of close customer collaboration and strong execution of our many years of multiple products and technological transitions. We expect our increase in R&D spending to ramp up in fiscal 2020 and extend into 2021. While we are optimistic about the trajectory of 2020, we continue to position Powell and its resources to identify and prioritize projects that we can efficiently execute in order to deliver stronger results to match the market conditions.

In closing, fourth quarter revenues were up substantially. Order activity was strong and backlog continues to grow across our business. The healthy tailwind of our core domestic markets and our fiscal 2019 ending backlog has positioned us well for the first half of fiscal 2020. While the commercial pipeline remains active, the team continues to work through the timing and seasonality dynamics necessary to optimize second half capacity for fiscal 2020.

With that, I will turn the call over to Mike to provide more detail around our financial results before we take your questions.

Michael W. Metcalf -- Chief Financial Officer, Executive Vice President, Treasurer and Secretary

Thank you, Brett and good morning, everyone. Let me first start with some highlights from our fourth quarter and then move to the full fiscal year results. Orders for the fourth quarter were $162 million, up 12% sequentially and higher by $84 million year-over-year. As Brett mentioned, we're benefiting from the industrial sector end market demand, specifically within the downstream oil and gas space, which led to fourth quarter bookings activity. Our book-to-bill ratio finished the fourth quarter of fiscal 2019 at 1.1, flat sequentially, while our fourth quarter ending backlog remains strong at $419 million, $158 million higher than a year ago and $12 million higher versus the prior quarter.

Revenues for the quarter were $149 million, up 10% on a sequential basis and higher by $14 million or 10% versus the fourth quarter of fiscal 2018. The strong top line growth was generated primarily in the domestic industrial sector. Specific to geographic revenue segmentation, domestic revenues for the quarter were higher by 4% or $5 million to $114 million versus the prior year and were up by 10% sequentially. International revenues from both our foreign operations as well as export shipments from our domestic facilities increased by 34% or $9 million year-over-year to $34 million versus the fourth quarter of fiscal 2018 as the international market activity continues to improve.

From a market sector standpoint, revenue generated from the industrial sector increased by 21% sequentially to $120 million in the fourth quarter of fiscal 2019 and was higher by $20 million or 20% compared to the prior year. The downstream oil and gas sector driven by natural gas supply and related pricing continues to generate strong inquiry activity and petrochemical expansions and upgrades. Revenues generated from our utility sector decreased by 12% or $3 million to $19 million in the fourth quarter of fiscal 2019 versus the same period a year ago.

And revenues from the municipal sector were lower by 28% or $4 million, down to $9 million in the fourth quarter of fiscal 2019 versus the prior year. Our gross profit increased by $5 million on both a sequential and year-over-year basis to $29 million in the fourth quarter of fiscal 2019. The gross profit rate in the fourth quarter was 19%, an improvement of a 170 basis points sequentially and up a 140 basis points year-over-year and favorable productivity driven by higher plant volume and fixed cost leverage across our domestic manufacturing facilities.

Selling, general, and administrative expenses were $20 million in the fourth quarter of fiscal 2019, 13% of revenues which was lower by 30 basis points versus the prior year and higher by 65 basis points sequentially, primarily due to year end performance based compensation. We reported net income of $6.5 million or $0.56 per share in the fourth quarter of fiscal 2019 compared to $1.5 million or $0.13 per share in the same period a year ago. Free cash flow in the fourth quarter of fiscal 2019 was $34 million, $37 million higher than the fourth quarter of fiscal 2018.

For the full fiscal year 2019 ended September 30, revenues increased $68 million or 15% versus the prior year to $517 million. Domestic revenues generated a $73 million increase versus the prior year, while international revenues were slightly lower by $4 million versus fiscal '18. Gross profit as a percentage of revenues increased to 17% compared to 15% in fiscal '18, a 230 basis point improvement on favorable pricing levels and plant utilization throughout the year. Selling, general, and administrative expenses as a percentage of revenues improved by 140 basis points to 14% compared to 15% in fiscal 2018, driven by higher revenues across the business in fiscal 2019.

SG&A expenses increased 5% or $3 million to $70 million as the business volume increases, requiring additional selling and support staff to deliver and execute the incremental volumes. Our effective tax rate for the total year fiscal 2019 was 20%. This reflected the US federal statutory rate and was also favorably impacted by our Canadian operations, which utilize a net operating loss carry-forwards that is fully reserved through a valuation allowance. Reported net income for the full year fiscal 2019 was $9.9 million or $0.85 per share. Free cash flow was $64 million in fiscal 2019, an increase of $97 million versus fiscal 2018, driven substantially through better working capital performance. Investments in property, plant and equipment was $4 million through fiscal 2019 flat with the prior year spend. At the end of fiscal 2019, we had total cash and short term investments of $125 million, which was $50 million higher than our fiscal '18 year end position. Long-term debt including current maturities was $800,000.

Looking forward, we anticipate the current level of end market activity will continue into 2020, helping to fill available capacity across our facilities. However, we do recognize the project timing may impact plant loading and revenue timing throughout the year. Considering the current landscape, we remain optimistic that full year fiscal 2020 will result in a solid increase in revenues over 2019 levels, enabling us to leverage this incremental volume and margin to fund a double-digit increase across our research and development initiatives.

In general, for the total year fiscal 2020, we are optimistic that second half project timing and associated factory loading will provide another year of profitability. Specific to the first quarter of fiscal 2020, we do anticipate that seasonality will have an impact on the sequential earnings comparison. However, we expect a favorable year-over-year comparison.

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

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Jon Tanwanteng with CJS Securities. Please proceed with your question.

Jon Tanwanteng -- CJS Securities -- Analyst

Good morning, gentlemen. Thank you for taking my questions and very nice quarter.

Brett A. Cope -- Chairman of the Board, President, Chief Executive Officer

Thank you, Jon.

Michael W. Metcalf -- Chief Financial Officer, Executive Vice President, Treasurer and Secretary

Thanks, Jon.

Jon Tanwanteng -- CJS Securities -- Analyst

Let me just start with -- the orders have averaged about $170 million in the past four quarters. Is it reasonable to assume that you're going to generate around that level of revenue over the next four? And kind of what are the puts and takes to the scheduling and the recognition liquidation of that from a quarterly perspective?

Brett A. Cope -- Chairman of the Board, President, Chief Executive Officer

Yeah, Jon. I think as you look at our trajectory on our backlog, roughly 80% of the current ending backlog we think is going to be convertible into 2020. So that's kind of how you do the math. It's clearly not going to be evenly split across the quarters, but that's how we're looking at that.

Jon Tanwanteng -- CJS Securities -- Analyst

Okay. Great. And in terms of the margin that you're receiving, you did a great job this quarter 19%. Can you sustain that as you go into 2020 and beyond or were there some timing or other project specific benefits that you realize?

Michael W. Metcalf -- Chief Financial Officer, Executive Vice President, Treasurer and Secretary

Yes. I mean look it was a very strong quarter from a gross profit perspective and we were very pleased with that. I would note that we experienced our first quarter in quite some time that most of our reporting segments, reported positive sequential productivity and mix, which was very good. This was really driven by our North American operations and spanned across most of our product lines. Overall, the largest contributor to the gross profit exit rate at 17% on the year and 19% in the quarter was really generated by the favorable mix in the backlog of our downstream oil and gas volume predominantly in our US facilities.

Jon Tanwanteng -- CJS Securities -- Analyst

Okay. Got it. So I guess the question is, in your current backlog exiting Q3, does that margin look as favorable or is that more of a one-time thing?

Michael W. Metcalf -- Chief Financial Officer, Executive Vice President, Treasurer and Secretary

What I would offer Jon is as we look forward into 2020 and our international operations ramp up, there are different dynamics in the UK and Canada with respect to price and efficiencies, which could be a headwind -- a little bit of a headwind as we head into 2020. Secondly, as we work these large projects and as Brett and I have communicated previously, they're in very competitive environments and we may have a little price pressure on some of these larger projects.

Jon Tanwanteng -- CJS Securities -- Analyst

Okay. Great. Thank you. I'll jump back in queue.

Operator

[Operator Instructions] Our next question comes from the line of John Deysher with Pinnacle Capital Management. Please proceed with your question.

John Deysher -- Pinnacle Capital Management -- Analyst

Good morning and nice quarter.

Brett A. Cope -- Chairman of the Board, President, Chief Executive Officer

Good morning, John.

Michael W. Metcalf -- Chief Financial Officer, Executive Vice President, Treasurer and Secretary

Thank you.

John Deysher -- Pinnacle Capital Management -- Analyst

Just curious you mentioned R&D spending a couple of times up double-digits going into the new year. What is the budget for R&D in the coming year and what exactly are you spending that on?

Michael W. Metcalf -- Chief Financial Officer, Executive Vice President, Treasurer and Secretary

John, we typically run 1%, 0.25% of revenues historically. We're going to look to increase that a little bit in the next year to two years and primarily around our electrical solutions, breakers, switchgear. There's a few markets that we've had some success in over the last couple of years and there are some trends that we're watching that we think it's the right time to ramp up some investments for those markets in the future.

John Deysher -- Pinnacle Capital Management -- Analyst

And you said it indicated it would be up at least mid double-digits, is that what I heard?

Michael W. Metcalf -- Chief Financial Officer, Executive Vice President, Treasurer and Secretary

Yeah. Greater than 10, but maybe less than 50, somewhere in there.

John Deysher -- Pinnacle Capital Management -- Analyst

Okay. I don't think you've mentioned capex for -- fiscal 2020. What's that budget?

Michael W. Metcalf -- Chief Financial Officer, Executive Vice President, Treasurer and Secretary

Yeah. We're anticipating holding capex about flat maybe up a little bit as we look at some of the productivity initiatives we've got in the pipeline, but nothing drastic -- no drastic changes there, John.

John Deysher -- Pinnacle Capital Management -- Analyst

Okay. Good. And finally the use of subcontractors, just curious what percentage of the year end labor base is contractors and how do you oversee that? I know a lot of companies have difficulty managing external contractors. So I was curious, what's the percentage and then how do you manage that?

Brett A. Cope -- Chairman of the Board, President, Chief Executive Officer

I don't really -- just struggle a bit with the actual percentage. I'm going to say it's probably less than -- probably somewhere between 5% and 8% of the workforce in the fourth quarter, but it varies John. The offshore facility that we have, we've always had good relationships with supply partners. We are able to leverage that right now in some of the other facilities, especially in the US where we have tighter markets. We're seeing it creeping a little bit in the UK, which traditionally we haven't. So we're working on solving that issue right now. Trying to figure out the right balance with long term hires and contractors and get back to the model that we're comfortable with, of course, balancing that against future needs as well.

John Deysher -- Pinnacle Capital Management -- Analyst

And you feel the internal controls are adequate to keep that in line?

Brett A. Cope -- Chairman of the Board, President, Chief Executive Officer

We do. Safety is always first and we work with our supplier partners through our supply chain group to go through the qualification process and the review process and we're in constant communication with that. So it does always create a different dynamic when you bring in, like I said offshore, we're more comfortable with that because typically the way we run the yard, the other facilities a little bit more diligence to watch it and make sure that we have good communication to manage it.

John Deysher -- Pinnacle Capital Management -- Analyst

Very good. Thank you.

Brett A. Cope -- Chairman of the Board, President, Chief Executive Officer

You bet.

Operator

Our next question is a follow-up question from the line of Jon Tanwanteng from CJS Securities. Please proceed with your question.

Jon Tanwanteng -- CJS Securities -- Analyst

Mike, just on the fantastic cash flow in the quarter, do you get to keep all of that going forward, or was it just the timing thing that's going to be reversal for any reason? And two, assuming you got to keep it, what is the only change to your capital allocation priorities?

Michael W. Metcalf -- Chief Financial Officer, Executive Vice President, Treasurer and Secretary

Yes. So, yes, it was a great cash flow, free cash flow year and specifically in the quarter. As we look forward to 2020 and you kind of look at where we are sitting with receivables and payables etc, the way I would tend to view the year playing out is we could have an uptick early in the year and some of these larger projects, I think, if they materialize, if they were to materialize, you're going to use some working capital to ramp up on those. So probably kind of -- probably, I would estimate a wash. I wouldn't estimate anything, a big ramp-up. And with respect to capital allocation, to Brett's point on the R&D, that's one of the reasons that we really want to leverage some of those capital to grow the business in our products and services.

John Deysher -- Pinnacle Capital Management -- Analyst

Okay, great. And then just on the topic of large projects in your pipeline, what's the status of them potentially coming later this year? Number one. And number two, did you have any medium or large projects in your order book in the past quarter?

Michael W. Metcalf -- Chief Financial Officer, Executive Vice President, Treasurer and Secretary

Second question first, Jon. Fourth quarter had two moderate projects in the $15 million to $25 million range both from the core markets. Going forward, there are a number of large projects that are -- we talked about in the last couple of quarters as you know. Some of them are still more uncertain in terms of full funding, but the work continues on those. And then there are a couple that are funded and activity is very intense over the last -- really last couple of quarters and -- but the larger the project, the more uncertainty on timing. So, of course, you got to win it and even once you get it, there's always moving to the right once you get the project. So

John Deysher -- Pinnacle Capital Management -- Analyst

Got it. When you say activity is intense, is that on your end or just from -- in the industry pipeline?

Michael W. Metcalf -- Chief Financial Officer, Executive Vice President, Treasurer and Secretary

Industry pipeline.

John Deysher -- Pinnacle Capital Management -- Analyst

Got it. Okay. And the timing for you is still expected to be more toward the end of the year in terms of landing a potential order?

Michael W. Metcalf -- Chief Financial Officer, Executive Vice President, Treasurer and Secretary

Yeah. It's one of those things, you don't want to call, so you call it. There's just -- there's a lot of work, there is a lot of estimating and engineering support that we're providing on multiple projects and timings. They're very active and if they pull the trigger, hopefully we're at the table there in the final negotiation.

Jon Tanwanteng -- CJS Securities -- Analyst

Got it. Understood. Thank you, guys.

Michael W. Metcalf -- Chief Financial Officer, Executive Vice President, Treasurer and Secretary

Yeah. Thanks.

Operator

This concludes today's question-and-answer session. I'd like to hand the call back to management for closing remarks.

Brett A. Cope -- Chairman of the Board, President, Chief Executive Officer

Thank you, Doug. Our fourth quarter delivered solid performance with sequential improvements in our top and bottom line. The strength of our backlog combined with the strength of our balance sheet provides solid momentum as we head into fiscal 2020. Powell's ability to meet the constant market challenges, while working to minimize the impact on both the business as well as our customers is a strength and a differentiator of our business model.

Our employees have and continue to do a tremendous job delivering incremental efficiency gains in order to meet the changing needs of our customers and markets, which underscores our ability to secure future projects and drive new strategies to improve productivity and profitability. I would like to thank our valued customers and our supplier partners for their continued trust and support to Powell.

And with that, thank you for your participation on today's call. We appreciate your continued interest in Powell and look forward to speaking with you next quarter.

Operator

[Operator Closing Remarks]

Duration: 28 minutes

Call participants:

Zach Vaughan -- Investor Relations

Brett A. Cope -- Chairman of the Board, President, Chief Executive Officer

Michael W. Metcalf -- Chief Financial Officer, Executive Vice President, Treasurer and Secretary

Jon Tanwanteng -- CJS Securities -- Analyst

John Deysher -- Pinnacle Capital Management -- Analyst

More POWL analysis

All earnings call transcripts

AlphaStreet Logo