POWL
#Thank you, <UNK>, and good morning, everyone.
Thank you for joining us today to review our 2016 third-quarter results.
I will make a few comments and then I will turn the call over to <UNK> and then <UNK> for more commentary before we take your questions.
Solid operational performance, both project execution and manufacturing efficiencies drove our third-quarter earnings performance.
Quarter over quarter performance in both our Houston and our UK operations resulted in improved gross margins, thank goodness.
I am also pleased that our Canadian operation reported solid earnings again this quarter.
Our business, like many others in the current environment, is facing the headwind of drastically reduced spending by our clients.
Oil and gas capital spending has limited the number of opportunities for new work and competitive price pressures are sharply increased on the remaining projects.
Believe me, we are turning over every stone.
We are seeing fewer opportunities in all markets, not just oil and gas.
As we work through these difficult market conditions, we will continue investing in our future.
Cost initiatives continue to be a major focus of the operation.
We are increasing our attention on research and development efforts to improve the cost of our existing products while continuing work on additional features, intelligence, and new products.
We believe R&D is paramount investment in <UNK>'s future, and will have a positive and far-reaching impact on our business.
Meanwhile, we are going to ensure our valued clients are supported by our best in class products, services and customer support.
So at this point, I will turn it over to <UNK> to provide some additional color on the operations.
Thank you, <UNK>, and good morning and thank you to everyone for joining on today's call.
As <UNK> mentioned, our Canadian, UK and Houston electrical operations posted better than expected results.
Over the past several months, we have taken solid steps to improve project execution and operational efficiencies.
I would like to recognize and thank our employees for their flexibility and contributions as we work through these challenging market conditions.
Employees have stepped up across the Company, training on new skills and cross-training across production lines to allow portability.
Our engineers have engaged and developed processes and procedures to more effectively share workloads across division mines to better address the demands of our backlog.
In addition, employees have supported various initiatives to take temporary assignments to assist in short-term needs and to capitalize on their unique manufacturing efficiency strengths.
We truly appreciate their support.
As we enter our fourth quarter, we will continue to improve our project efficiencies, ensuring that we are achieving delivery commitments, and in some cases accelerating our project schedules to meet changing customer needs.
As <UNK> notes, we are increasing our focus on our product development activities to provide increased benefits, improve safety and enhanced communication features to our customers, and improve our cost position.
We continue to experience softness in our orders and backlog.
The decline of capital spending in our core oil, gas and petrochemical markets continues to be a headwind on new orders, especially associated with onshore and offshore production and pipeline projects.
The number of large megaprojects has also declined as the number of new plants or large expansions are being delayed, primarily due to a lack of funding by our customers.
Additionally, we are experiencing increased price pressure on new orders as competition continues to intensify.
Even though our oil and gas markets are soft, we continue to make progress growing our markets where we have not had a strong presence historically.
We have been successful in lining several contracts from new clients in various geographical regions and new market sectors.
In addition, we are expanding our focus on opportunities that extend the strength of our electrical and integration solutions, as well as capitalize on <UNK>'s full breadth of service and product offerings.
Before I turn it over to <UNK>, I want to stress that we believe successful outcomes require a disciplined and nimble decision-making process.
While we cannot predict when order activity will begin to improve, we believe we have laid the groundwork to manage through this challenging period.
Now let me turn the call over to <UNK>.
Thank you, <UNK>.
Revenues decreased by $44 million, or 25%, to $133 million in the third quarter compared to the third quarter of fiscal 2015.
Domestic revenues decreased by $40 million, or 30%, to $94 million in the third quarter, and international revenues decreased by $4 million, or 8%, to $39 million due to fewer number of projects in our backlog.
Gross profit as a percentage of revenues increased to 21% in the third quarter of fiscal 2016, compared to 19% in the third quarter of fiscal 2015 due to the improvements in international operations, driven by project improved execution, operational efficiencies and reduced costs in our Canadian operations.
The increase in gross profit from our international operations was offset by a decline in gross profit from our domestic operations, as margins were negatively impacted by reduced volume and a cost overrun related to a large transit project.
Selling, general and administrative expenses as a percentage of revenues increased to 15% in the third quarter compared to 10% a year ago due to the increased expenses and lower revenue.
In the third quarter, we incurred $647,000 in restructuring and separation costs.
In the third quarter of fiscal 2016, we reported net income of $4.9 million or $0.43 per diluted share.
Excluding restructuring and separation costs, income in the third quarter of fiscal 2016 was $5.4 million, or $0.47 per share.
For the nine months ended June 30, 2016, revenues decreased by 13% or $64 million to $435 million compared to the same period a year ago.
Gross profit as a percentage of revenues was 19% compared to 16% in the first nine months of fiscal 2015 due to improvements in our international operations.
Selling, general and administrative expenses decreased by $506,000 to $58 million compared to the first nine months of fiscal 2015.
SG&A expenses as a percentage of revenues increased to 13% compared to 12% for the first nine months of fiscal 2015 due to reductions in year-over-year revenues.
In the nine months ended June 30, 2016, we incurred approximately $7.7 million or $5.3 million net of tax in restructuring and separation costs, as we aligned our management, salary, and hourly workforces with anticipated production requirements.
We recorded an income tax provision of $844,000 for the nine months ended June 30, 2016.
The effective tax rate for the first nine months was 8%, which was favorably impacted by the mix of income from our Canadian operations and the utilization of net operating loss carryforwards in Canada that were fully reserved with a valuation allowance.
Additionally, the effective tax rate was favorably impacted by $841,000 due to the retroactive restatement of the R&D tax credit.
For the nine months ended June 30, 2016, we reported net income of $10 million or $0.87 per diluted share.
Excluding restructuring and separation charges, net income for the first nine months was $15.3 million or $1.34 per share.
New orders received during the quarter were $88 million, resulting in a backlog of $312 million compared to a backlog of $357 million at the beginning of the quarter and $518 million a year ago.
At the end of our third quarter, we had cash of $89 million compared to $44 million at the beginning of the fiscal year.
For the first nine months of fiscal 2016, cash provided by operating activities totaled $62 million.
Investments in property, plant and equipment totaled approximately $2 million.
Also during the same period, we paid dividends totaling $8.9 million and repurchased $3.7 million of Company stock to complete our share repurchase program.
Long-term debt, including current maturities, totaled $2.4 million.
Looking ahead, based on our backlog and current business conditions, we expect full-year fiscal 2016 revenues to range between $550 million and $565 million compared to our previous guidance of $520 million to $560 million.
And we expect adjusted earnings to range between $1.30 and $1.45 per share compared to our previous guidance of $0.80 to $1.10 per diluted share.
Our earnings guidance excludes restructuring and separation charges.
We will continue to evaluate additional actions that may be needed to align our operating costs with market conditions.
In closing, I would like to remind everyone of our strong financial position.
At the end of the third quarter, working capital totaled $183 million, of which $89 million was cash.
Over the coming quarters, we expect our cash balance to continue to increase as we complete many of the projects currently in process.
We have virtually no debt and have nearly $60 million available under existing credit agreements.
We are well prepared to manage the business through the depressed capital spending we are currently experiencing.
At this point, we will be happy to answer your questions.
Well, for the balance of the current year, we are looking at approximately $115 million to $130 million.
Looking at beyond that, it's going to be something that we are going to have to manage on a month by month, quarter by quarter basis, because the market predictability today is very challenging.
<UNK>, it's <UNK> <UNK>.
Impossible to predict; conditions with our customers are ---+ we are engaged heavily day-to-day on all the projects; still a lot of pressure on the whole cost chain to get a project justified and even funded.
And then of course the competitive pressures aren't getting any better, so it is a challenging environment.
I think we are seeing probably a more balanced ---+ during the most recent weeks, months.
We have seen some that have pulled in, but we are also seeing a couple of the projects that are being extended due to the client's construction schedule.
So I would say today it's a little more balanced.
We are having some success at filling in some of our production holes with short cycle business.
We continue to pursue that and, like I say, with our current capacity situation, we are in a much better position to respond to the short cycle requests than we have been in the past, so that is a small positive in the current situation.
Let me open that, and I will let <UNK> add some more color.
The overall activity probably has not changed dramatically in the last 90 days.
I think what we are seeing is the same thing that we've seen in the past with ---+ when we talked about the $40 million projects; they seem to slide to the right before their actual closing.
Today, we are seeing that same phenomenon, but it's with the $8 million to $10 million projects.
We are seeing them go through more and more rounds of iterations of trying to squeeze the cost out of the project, re-bidding it, and the whole process is moving the award further out than what we would have experienced on that same size order two years ago.
The only thing I would add, first on the activity quoting has been relatively constant, again, quarter over quarter.
The delays on not just getting the funding, also a challenge.
And besides the price competition, I would say there is also increased requests on terms risk, that have created new challenges in the market.
So it's definitely a buyer's market.
I think the most significant impacts of what we need to do are behind us.
It's something that we continue to manage and watch on a week by week, month by month basis.
There will ---+ may be some minor adjustments that we'd have to take at individual facilities to make sure that we are properly aligned with our skill sets and the available backlog, but I don't see any major changes that are going to be needed going forward.
For cash flow, it is expected to continue to be positive.
We do expect our cash balance to increase between now and over the next one to two quarters as we roll through projects that are currently in process.
From a utilization of cash, you've got the standard textbook type approaches, but internally, we have spent more time discussing what the right approach would be to growing the Company through potential acquisitions.
So, that is something that is more keen to our mind today than it might have been with some of the operational challenges we had a year or so ago.
<UNK>, we look ---+ we're looking more often at every opportunity to look at the risk profile for <UNK>.
Not just the impact on the margin of the job, but the risks associated with it as we continue to execute better on the existing backlog.
So, there are cases in the last quarter where some of the terms have gotten to the point of it just doesn't make sense.
The risk for the benefit is just out of balance.
And we have ---+ that has added to the competitive pressure.
So it's not all price.
There are some things in there that are a little strange and I don't think in the best interests of the Company.
But there is considerable price pressure and we aren't just walking.
We do look at them and I would say more closely today.
<UNK>, let me weigh in here while these guys are giving me dirty stares (laughter).
I would rather take work at no margin, no profit, to keep the pool of talented people we have in this organization.
And I am going to do my ---+ we are going to do our very best to keep everybody that we have on board this organization, and that means we may take some jobs at no margin.
Sure.
So utility, both the generation and T&D have held pretty constant quarter over quarter.
T&D as we noted in the last call was sort of an uptick that maintained this last quarter.
The offshore market we talked about continues to be extremely challenged I think of all the market sectors geographically.
We are still seeing ---+ I think, again, the last call we noted Middle East being the least depressed of the core oil and gas, and geographically Canada being one of the more tougher markets in oil and gas.
But commercially we are still ---+ which we depend on our channels, some of our OEMs ---+ continues to be okay.
So utility and commercial I would say holding pretty constant period over period.
That is in part what happened in this past quarter.
While it was still driven predominantly by operational efficiencies, there was nothing that was substantial as far as any one order.
But as we moved towards the end of the project, you do tend to get favorable pickup.
We are moving towards the end of projects in our backlog and I would expect that phenomenon to continue near-term.
I think the best use ---+ this is me speaking, personally ---+ the best use of cash long-term is to find a way to grow the business through an acquisition.
But on the table you can't rule out dividends and you can't rule out additional stock repurchases like we did a year ago.
Okay.
Gentlemen, rest assured, ladies, we have been focused on expanding our sales coverage, improving our operational efficiencies and cost structures.
We are a strong organization in weak market conditions, but we will get where we need to get.
I want to thank you for joining us today; look forward to speaking with you again next quarter.
Have a good day.
