Powell Industries, Inc. (NASDAQ:POWL) Q1 2017 Earnings Conference Call February 8, 2017 11:00 PM ET
Natalie Hairston - Senior Vice President, Dennard Lascar Associates
Brett Cope - Chief Executive Officer
Don Madison - Chief Financial Officer
John Franzreb - Sidoti & Company
John Tanwanteng - CJS Securities
Greetings and welcome to the Powell Industries' First Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. An interactive question-and-answer session will follow formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.
I’d now like to turn the conference over to your host, Ms. Natalie Hairston. Thank you. You may begin.
Thank you, and good morning, everyone. We appreciate you joining us for Powell Industries’ conference call to review fiscal year 2017 first quarter results. We’d also like to welcome our Internet participants listening in the call live over the web.
Before I turn the call over to management, I have the usual 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 Dennard Lascar and we will get one to you. That number is 713-529-6600. Also, if you want to be on the email distribution list for Powell 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 powellind.com or a recorded replay will be available until February 15. The information on how to access the replay was provided in yesterday’s earnings release. Please note that information recorded on this call speaks only as of today, February 8, 2017 and therefore, you are advised that any time-sensitive information may no longer be accurate at the time of any replay listening or transcript reading.
As you know, this conference call includes certain statements including statements related to the Company’s expectations of its future operating results that may be deemed 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 more information, please refer to the Company’s filings with the Securities and Exchange Commission.
With me on the call are Brett Cope, Powell’s Chief Executive Officer; and Don Madison, Chief Financial Officer.
Now I’ll turn the call over to Brett. Brett?
Thank you, Natalie, and good morning, everyone. Thank you for joining us today to review our 2017 first quarter results. I will make a few comments and then I'll turn the call over to Don for more financial commentary before we take your questions. Over the past 60 days or so since we shared our 2016 results and discussed our outlook for 2017 not much is changed. Powell's major challenge entering 2017 was our beginning backlog. As we discussed in December, our backlog had dropped below $300 million at the end of 2016 due to continued downward pressure on our business and uncertainties in our core markets of oil and gas including petrochemicals. Our first quarter revenue of $110 million is a direct result of these headwinds.
Across the company, incur activities has remained steady relative to what we've experienced over the last several quarters. We did not see any short-term fundamental changes to market pricing or the timing of awards that would significantly impact our 2017 performance. However, during the first quarter we did experience an increase in coding activity in our after market services and had some success in filling short-term production gaps. From an operational perspective, our teams across Powell have continued to perform well and delivered solid operational performance relative to our backlog. Starting in late 2016 and continuing through our first quarter of 2017, we utilize our people's assistance to move projects between production facilities to quickly meet changing customer needs. This effort was successful in meeting customer schedules and we believe this learning process will prove invaluable when the market returns. This will allow Powell to both quickly ship resources and projects to the facilities that best serve the customer and to better leverage our resources and optimize our performance across the business.
I'd also like to highlight our team in Canada for delivering strong first quarter operational results. The team executed efficiently on their backlog throughout last year and has carried that momentum through the first quarter. Well done. Across the company, we continue to adjust our spending as a proactive response to lingering market conditions. We will continue to invest in R&D, customer service and other initiatives in order to expand our product lines and meet customer needs and we remained focused on leveraging our internal initiatives to boost operational efficiency, reduced cost and further improved cycle time.
Despite our challenges for 2017, I continue to believe that we are in a strong competitive position with a great balance sheet and have significant opportunities to drive growth once capital spending in our key market improves.
With that, I'll turn the call over to Don.
Thank you, Brett. Revenues decreased by 26% or $40 million to $110 million in the first quarter of fiscal 2017 compared to the first quarter of fiscal 2016. Here are some comparisons to the first quarter of fiscal 2016. Domestic revenues decreased by $20 million to $86 million and international revenues also decreased by $20 million to $25 million. These decreases are the result of the decline in our project backlog.
Gross profit as a percentage of revenues decreased to 14% in the first quarter of fiscal 2017 compared to 15% in the first quarter of fiscal 2016. Gross profit decreased by $8 million to $15 million. Our Canadian operations experienced an increase in gross profit which was offset by decline in gross profit from our domestic operations.
Selling, general and administrative expenses decreased by19% or $4 million to $16 million in the first quarter of fiscal 2017. Our SG&A as a percentage of revenues increased slightly to 14% due to lower revenues. We recorded benefits for income taxes of $1.4 million in the first quarter. In the first quarter of fiscal 2017, we recorded a loss of $300,000 or $0.03 per share compared to a loss of $459,000 or $0.04 per share in the first quarter of fiscal 2016. Excluding restructuring and separation cost, net income for the first quarter of fiscal 2016 was $2 million or $0.18 per share.
New orders placed during the first quarter were $91 million resulting in a backlog of $271 million, compared to a backlog of $291 million at the end of the fourth quarter and $391 million a year ago.
For three months ended December 31, 2016 cash provided from operating activities was $3 million. Investments in property, plant and equipment totaled $1 million. At December 31, 2016, we had cash and short-term investments of $95 million compared to $97 million at September 30, 2016. Long-term debt including current maturities was $2 million.
Looking forward, we expect we'll continue to be adversely affected by uncertain market conditions. Second quarter revenues are not like to improve sequentially from our first quarter. And we continue to expect to report a net loss of fiscal 2017.
At this point, we'll be happy to answer your questions.
Our first question comes from John Franzreb from Sidoti & Company. Please go ahead.
Good morning, guys. I guess I just want to start with your reference that you made to pricing environment. Brett, is it fair to say things stabilize you kind of indicated last quarter and it was kind of tough getting tough across the balance of fiscal 2016. Are your thoughts now that we've kind of hit a stable environment in the pricing environment?
John, I guess fair to say I haven't seen any further erosion. I haven't seen a lot of improvement. But I don't -- I think it's fair to say in the first quarter of 2017 we haven't seen any further erosion in the price market.
Okay, good. And regarding your R&D initiatives, could you kind of elaborate what type of projects you are working on, maybe end markets adjacent products? Can you just kind of talked to what your R&D dollars are being spent on?
Sure. So maybe three buckets I break it into. There is a wide range of things we are looking at. Key focus areas in the short term, anything that would improve the cost position of the product or flow to the factory to give us a better price in the market for existing products. We are looking at products extensions that will round out better competition in geographic markets, in our core markets. As far as new markets such or expanding in other markets we may not be a strong and some development but not majority of our R&D spend right now.
Can you give like an example like its expanding which are the markets in 2016 maybe?
In terms of our -- where we focus the R&D?
So I talked a little bit out in past calls about, there is a lot buzz in the market around the Internet-of-Things and how that might apply to the electrical industry. So we have been focused on I'll say automation but the sensor side of getting the information out of the switchgear. So a lot of with changes in demographics, the change in the industry, lot of customer, the way they manage their production assets is also changing. So there is lot more clamor for the information that at least in the analytics and what you do to information. We've had very good reception from our development and new development that front with our customers as we've rolled out some new sensor technology that would give them a lot more information about how the asset is performing in the field. When you take action what you need to do with the asset and how to better manage the life of the asset. So we see really good response to 2016 with what our development plans are there.
Our next question comes from John Tanwanteng from CJS Securities. Please go ahead.
Good morning, gentlemen. Thank you for taking my question. When would be the earliest you think you can see an inflection point in revenue or profitability just given the environment that we are in?
John, that is the most difficult question that we deal with each and everyday as we look and try to plan the business. There are no strong indicators in the marketplace that we can point to that says that's when the market is going to turn. So you are really getting into a lot of just conjecture and so at this point in time I don't think that we could give you an accurate projection as to when that would be.
Okay. And then you mentioned the R&D side but what about on the acquisition side. How should we think of how much cash you would or could use at some point of if you find an attractive target and would any sort of leverage be on the table at all?
We have leveraged the business in the past for acquisitions. But with our current cash balance, I don't think that would be likely that we would need to do so. But if the right opportunity were to come along and felt right from a strategic standpoint, the company has used leverage in the past to support acquisitions.
Okay, great. And Brett I think you mentioned filling in some of the schedule, were you referring simply to the second quarter or were you talking about the quarter just posted?
Yes. In the first quarter, we ended the year, we talked in also in our last call about the slide in those lending orders but once we have the orders in house that's been initial headwind in planning our business. So provides a production gaps when that happens. So to get the business react in the long cycle market to fill those gaps is a challenge but we did have some success filling that in the second quarter. And kind of working on the third as having -- so definitely in the first quarter we were pleased with some of the performance in some of our units that were able to do that so --
Thank you. This does conclude the question-and-answer session. I'd like to turn the floor back over to management for any closing comments.
Thank you, Matt. Despite incremental improvements in market sentiment, we have not seen any sign of significant increases in our customer spending behavior. However, we have seen a slight increase in planning activity that may prove to benefit the company in mid to late 2018. Until then we believe the prudent approach is to prepare for more challenging times ahead. We'll continue to align our operating cost with market conditions, but the same time prepared for future opportunities. We believe Powell's solid foundation, products, processes and infrastructure will enable us to further improve upon our customer focus model and providing a one stop shop for products, systems and service solutions. Most importantly, we are financially strong, which allows us to strategically manage our business through the cycle, just as we've run through cycles for the past 70 years. Thanks again for your interest in Powell and we look forward to speaking with you next quarter.
This concludes today's teleconference. Thank you for your participation. You may disconnect your lines at this time.
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