Prepared remarks
Thank you, operator, and good morning, everyone. Thank you for joining us for Powell Industries conference call today to review fiscal year 2025 second 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 website, powellind.com, or a telephonic replay will be available until May 14. 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, May 7, 2025 and therefore, you are 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 future 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. With that, I’ll now turn the call over to Brett.
Thank you, Ryan, and good morning, everyone. Thank you for joining us today to review Powell’s fiscal 2025 second quarter results. I will make a few comments and then turn the call over to Mike for more financial commentary before we take your questions. Our second quarter marked another solid performance. The team across Powell delivered gross profit dollar growth of 33% on revenue growth of 9%, which translated into record earnings per diluted share of $3.81 in the quarter. The electric utility and commercial and industrial sectors remain growing bright spots for Powell as compared to the prior year, they grew by 48% and 16% respectively. These two sectors have and will continue to become more meaningful contributors to our total results. New orders in the quarter totaled $249 million, an increase of 6% compared to the prior year. New project activity was driven by our commercial and other industrial markets, as well as the oil and gas sector.
We booked two large projects in the quarter, one for a new Greenfield LNG facility to be located along the U.S. Gulf Coast. As we have shared on previous updates, the fundamentals and market outlook for this sector remain very encouraging. The other significant award this past quarter is for a large mining project in Canada for the production of potash. This award underscores how our people and facilities are demonstrating the strength of Powell. Our investment in Canada has always been focused on building a diverse portfolio of customers across the sectors that we serve. Each of these projects were approximately $50 million. Our gross margin in the quarter was 29.9%, which reflects disciplined project execution, the benefit of closeouts, as well as continued operating efficiency across the business. Mike will discuss our margin outlook for the second half of the year, but more broadly, we remain encouraged by our second quarter margin results.
On the bottom line, we recorded net income of $46 million in the second quarter or $3.81 per diluted share, which was 38% higher than the prior year and a record quarterly earnings per diluted share for Powell. Our backlog remains strong at $1.3 billion and the overall composition, margin profile, and project schedules of our backlog remain very encouraging. We have revenue visibility well into fiscal 2027, and our order book is well balanced across the sectors we serve. In addition to our strong financial results in the quarter, we continue to make important strategic progress to expand and diversify our product portfolio. During the quarter, we commercially launched several new and innovative products. The first is a grounding switch, widely used in international IEC switchgear designs, our new product will be the first to meet a new developing standard for the North American market. This product is mainly focused on industrial markets such as oil and gas, but is an enhancement that we will ultimately seek to commercialize into all three of our major sectors.
We’ve also received orders for a new compact substation that our team has engineered and recently introduced to the market. The Powell control aisle substation provides optimized workspace along with environmental protection for utility and unit substations. This is configured to order media voltage substation reduces the installed cost of the substation while providing our customers with a safe, environmentally protected aisle to service the switchgear. Our initial awards for this are in support of battery energy storage projects being developed and installed to support the utility grid. We also showcased our first design of a low voltage switchgear product specifically designed for the data center and associated commercial market. This product increases our ability to compete within the four walls of the data center where there are significant incremental content opportunities. We are also working towards adding the commercial infrastructure and the required sales channels necessary to better compete in this important vertical for Powell.
The launch of these latest products serves as continued validation of the increased R&D spend that we have undertaken over the past several quarters, and it monetizes intellectual property that has been on our balance sheet for nearly two years. Most importantly, it furthers our aim of advancing our product-centric strategy to improve the overall future mix of product versus project-based revenues. We have just completed and received our occupancy permits on the capacity expansion at our electrical products facility here in Houston. I am pleased to share that this investment is on time and was finished on budget. This incremental capacity will play a critical role in advancing our key strategic priority to commercialize new products through organic investment in our R&D function, positioning us to better compete and capture greater share in all three of our key market sectors. Manufacturing of both the station breaker that we launched last summer and our new power control aisle substation will start in the third fiscal quarter.
We will begin to recognize revenue through the balance of this year with more modest accretive additions in fiscal 2026. Looking ahead, the outlook for each of our end markets remains positive. The fundamentals for our oil, gas and petrochemical markets support our expectation for continued strength in these sectors. Specific to the fundamentals of the U.S. Natural gas market, price spreads across global markets remain favorable and conducive to U.S. export activity. The funnel of LNG projects that we are tracking continues to support our expectation for a strong cycle of greenfield and brownfield activity with generally a higher volume of projects that are either in process or currently being evaluated compared to the prior cycle. Activity within our commercial and other industrial market also remains healthy and includes activity within the data center market. Over the past few months, we have not seen any change or slowdown in activity within the data center market and our efforts to further penetrate the data center market and expand the total content opportunity for Powell within this market sector are progressing well.
Lastly, the outlook for our electric utility market remains positive. We continue our sustained and decade-long effort to drive success for Powell in each of our three home geographies, the U.S., Canada, and the United Kingdom. Overall, we are very pleased with our financial results in the first half of this fiscal year and confident in how we position Powell to grow in each of our three major sectors. Our volume expectation in each of these sectors remains a tailwind, and we expect continued strong performance for the remainder of fiscal 2025. With that, I’d like to turn the call over to Mike to walk us through our financial results in greater detail.
Thank you, Brett, and good morning, everyone. In the second quarter of fiscal 2025, we reported total revenue of $279 million compared to $255 million or a 9% increase versus the same period in fiscal 2024. New orders booked in the second fiscal quarter of 2025 were $249 million, which was 6% higher than the same period one year ago. As we continue to focus on diversifying the business across sectors outside of our core industrial, oil and gas, and petrochemical sectors, we continue to experience positive momentum across the utility and commercial and other industrial sectors with backlog in these sectors at 29% and 13%, respectively, of the total business backlog. With these end markets continuing to contribute to the solid order activity in addition to the sustained commercial activity across most of our other core end markets, this combined to result in a 0.9x book-to-bill ratio in the current quarter.
As a result, we reported $1.3 billion of backlog at the end of the second fiscal quarter, $42 million higher versus the previous year and $29 million lower sequentially. Compared to the second quarter of fiscal 2024, domestic revenues improved by 5% to $228 million, while international revenues were 33% higher, driven by increased project volume across our Canadian operations as well as an increase in activity in the Middle East and Africa. In total, international revenues were up by $13 million to $51 million in the second fiscal quarter. From a market sector perspective versus the second quarter of fiscal 2024, revenues increased 48% and 16% in the electric utility sector and the commercial and other industrial sector, respectively, reflecting our ongoing strategic focus to expand our presence across these two end markets. Additionally, the light rail traction power sector experienced a substantial increase versus the second fiscal quarter of 2024, growing by 122% or $5 million, albeit on a small revenue base as we continue to be very selective in this market sector.
Across our core industrial end markets, the petrochemical and oil and gas sectors were lower by 13% and 3%, respectively, versus the same period one year ago as we grow closer to completion of the large petrochemical and LNG mega projects that were booked in fiscal 2023. Gross profit increased by $21 million to $83 million in the second fiscal quarter versus the same period one year ago. Gross profit as a percentage of revenue increased by 530 basis points to 29.9% of revenues versus the same period a year ago and was 520 basis points higher sequentially. The margin rates exiting the backlog continue to benefit from the large projects nearing completion which have continued to generate strong project closeouts during the quarter, contributing roughly 275 basis points to gross profit as a percentage of revenue during the second fiscal quarter and approximately 125 basis points on a fiscal year-to-date basis.
Additionally, margins have also benefited from the strong volume leverage and exceptional operational execution across all of the manufacturing divisions globally. Given these solid fundamentals and based upon margin levels in the order book, we anticipate that margin rates through the remainder of fiscal 2025 should align with the reported margin levels through the first 6 months of fiscal 2025 and excluding the impact of the aforementioned project closeouts. Selling, general and administrative expenses were $22 million in the current period, higher by $1 million on a higher level of compensation expenses across the business versus the same period a year ago. SG&A as a percentage of revenue decreased by 40 basis points to 7.8% in the current fiscal quarter on the higher revenue base and overhead management. In the second quarter of fiscal 2025, we reported net income of $46.3 million generating $3.81 per diluted share compared to a net income of $33.5 million or $2.75 per diluted share in the second quarter of fiscal 2024.
During the second quarter of fiscal 2025, we generated $22 million of operating cash flow driven by higher earnings generated in the second quarter, partially offset by negative working capital impact as we allocate capital to fund projects in the order book. Investments in property, plant, and equipment in the fiscal second quarter totaled $4.1 million, driven in large part by the facility expansion at our electrical products facility in Houston. At March 31, 2025, we had cash and short-term investments of $389 million compared to $358 million at September 30, 2024, and $373 million at December 31, 2024. The company does not hold any debt. As we move into the second half of fiscal 2025, we anticipate continued strength operationally based upon current factory utilization levels, project execution, and backlog quality. Notwithstanding the typical challenges of project timing and mix, coupled with the current macroeconomic uncertainties, Powell is well positioned to continue delivering strong results both financially and operationally for our customers and shareholders alike. At this point, we'll be happy to answer your questions.
Questions and answers
Brett and Mike, a couple of questions on the LNG outlook. First of all, the LNG award in this quarter, did that have anything to do with Trump unpausing the pause, so to speak?
I honestly don't know for certain, but I would say overall, if you look year-over-year, Jon, it absolutely is impacting the industry. The activity is up.
Okay. And continuing on that theme. And I'm not all that close to the LNG industry. But some of the things that I read, they talk about maybe some lower energy prices, tariffs add in to cost and so on. And that before it was sort of a regulatory risk with the buying and administration now there seems to be some commercial risk on the returns on the economics of LNG projects. Is that really an issue at this point? Or do you see any commercial pause as the industry reacts to the tariffs and additional costs that may be facing the industry?
Yes. That's a really good question. And like you, I read and I'm consuming as much information on world trading economics, right? There was one in the press here not too long ago about China and what they're doing on cargoes, but they really, if you look historically haven't bought a lot of cargoes, but when we meet with our clients about jobs that last quarter or even the future work, where are they at in their FID status and selling out future capacity to hit their FID dates. I would say generally, it's very robust drive forward sort of discussions. So whatever really is happening behind the scenes and their interaction with their customers gives me certainly an element of confidence that Mike and I and the management team are wanting to understand as much as you are in your question. And I would say today generally is very positive as we look forward.
Okay, any reason, given all the insight that you're getting with your clients and so on, that some of the projects, let's say, they still make sense, but they're going to be pushed a little bit to the right in terms of FID?
Not sitting here today. It is a risk that's in the back of my mind because of tariffs and you think about, okay, what's going to happen on steel. When I think about the things we don't build that they need to build on these large facilities. That is part of the chat we have with the Board and the management team. But really, I'm sure I'll get a question today on capital. We're actually thinking about another phase of investment offshore to prepare frankly.
I want to go back to Mike's statement about the gross margins benefiting from about 270 basis points of closeouts. I'm curious about two things. One, given the demand environment, why can't you be more aggressive in pricing for gross margins? And two, what should we be thinking about as a normal close-out contribution on a quarterly basis or an annual basis for that matter, if you want to push it back further, just so that we can get a bit of feel for it?
John, it's Brett. I'll address the first question, then hand it over to Mike for the closeout matter. Regarding market demand and pricing, we look for opportunities, but as we've indicated over the last few quarters, the market has reached a point where it isn't worsening. It hasn't declined; it has remained stable since around 1.5 to 2 years ago. That trend continues. Some of our competitors have improved their capacities since their lowest points during the pandemic, and those have stabilized over the past few quarters. However, there is still potential for conditions to tighten again. The macroeconomic uncertainties in certain smaller markets for Powell could be significant. If those markets start to improve, we might see a shift in conditions. We're monitoring this for opportunities, but for now, the market is holding steady from one quarter to the next.
Yes. And John, I'll add in there, as we've experienced over the last year or so, Q1 was a seasonal low, as you know, and we didn't see much in the way of project closeouts in Q1. But the second half of fiscal '24 and this last quarter that we reported saw very strong project closeouts that benefited the margin rate. This is also coupled with strong project execution and operational leverage that I mentioned in my prepared comments. So as we look forward for the remainder of fiscal '25, we anticipate a similar exit rate from a margin perspective from backlog, but excluding the elevated level of project closeout gains. So in the absence of any anomalies, as we look forward to the remainder of the year, I think a reasonable barometer for the margin rates exiting backlog would approximate a normalized rate in the range of 26% to 27% on a year-to-date basis.
Yes, Mike, what I'm trying to say is that we should consider project closeout benefits since they have been a frequent topic and it seems important to acknowledge them, at least in the overall context.
Yes. I guess just to calibrate on that. We are in a project business. There are inherent risks in these long lead projects. And the project team has done a phenomenal job retiring the risks on the risk register. So we have the rewards of their hard work over the last year. If something goes the other way, and it is a project business, it could. But we haven't seen that over the last year.
Okay. Just a little bit on the capacity expansion. Can you kind of update us on how much of incremental revenue you would expect in 2025 and maybe an annualized basis as we think about 2026, Brett?
I am very excited and pleased with the team's ability to complete the expansion on schedule. We have orders arriving this quarter; however, they will be relatively small for the rest of the year. If we consider percentage of completion accounting, we expect low double-digit order volumes. As we progress, this will lead to increased engineering efforts and early builds on the projects. Looking ahead, we anticipate that next year will see an increment of about $20 million to $40 million as we successfully launch our projects in the market. Furthermore, as I mentioned earlier, we recognize the potential for improvement with the land we hold in reserve in the Houston area. We are in discussions about deploying capital for enhancements on three different facilities with available acreage in the coming months.
Yes. Very interesting. I think you said offshore, that's surprising and good news.
Yes, there are really out there. A couple of improvements in this next one could be sizable, so...
Which I guess just walk into the question, and I asked you last quarter and maybe the quarter before that, I don't recall, but you can't deny that the cash continues to swell $325 million. And even if half of it is deployed, it still leaves you with a sizable number relative to historic standards. What are the updated thoughts?
I'll return to your earlier question. As we introduce the new products, if a few of them succeed as we hope, we will have performed well in our design efforts and understanding the market, allowing us to grow quickly. We will begin to explore opportunities for expansion because we will exceed the capacity of our current facilities. We are aware of the market landscape and have conducted some analysis regarding existing buildings and crane usage. The crane capacities of these new products are lower than some of the heavier equipment we have traditionally manufactured over the years. Nevertheless, we continue to assess our current footprint. If necessary, we could plan for a longer business cycle to meet capital needs. Our goal is for the former scenario to be the case. Meanwhile, regarding our developments on the substation side, we have available land, including the additional 10 acres we acquired with the factory purchase. This land is relatively unencumbered and presents an option for us. Additionally, we secured another 10 acres at the offshore yard, where we made some minor improvements a few years ago with 150,000 square feet of lay down area, but there is significantly more potential there, which we are currently considering as we approach fiscal Q3.
Right. Got it. And just one question. Has the Board considered a stock split at all? I was curious about the discussions surrounding that.
I think we discussed whether to initiate a buyback or explore opportunities in the market utilizing the strength of our stock. With more shares available, I understand the implications and the ongoing conversations with some shareholders. However, we want to approach this carefully to ensure we achieve the right long-term returns.
Maybe I go back to another one on cash guys. I guess, position you're in. I get a lot of questions around why not consider a buyback, just given where the stock is, where it's at? Are you signaling some of those organic things you see that you just talked about are just so compelling. And then any updates on M&A potential as well?
Yes, Chip, it's Brett. I'll begin, and Mike may want to add to this. This is basically a signal. We have healthy discussions with the Board every quarter. We understand the implications of a potential buyback, but the float is quite low. When I weigh that against the efforts we've been focused on over the last two to three years in the market, particularly in terms of both inorganic and organic growth, and considering the time required to introduce these to the market, it’s clear. As mentioned in response to Franzreb's question, if these products succeed, we have expectations for market returns, which will require us to allocate some capital. This has been our underlying strategy, alongside other activities in the M&A space. I want to emphasize that as I mentioned in the last two quarters, we have shifted our long-term strategy, which was discussed in the December report, and it came up last quarter. Activity in this area remains very active, and Mike, the team, and I are regularly involved, feeling that progress is being made steadily and effectively.
Great. That makes perfect sense. If I could ask just one or two more questions. One growth in the electric utility sector really stood out. Could you provide any additional insights on what you're seeing there as you move forward? Also, you mentioned the data center and highlighted that low-voltage product. Can you share more about the potential for getting inside the facilities and how we should consider the timeframes for that?
On the utility side, I'm really enthusiastic about this business. I enjoy sharing updates with our investors and highlighting that it currently represents 25% to 30% of our revenue. We have intentionally developed a strategy to recognize our team at Powell, who have been diligently working, especially in our home countries, as I mentioned earlier. We're actively pursuing opportunities in this area, part of our organic development plan focuses on enhancing our product offerings to capture a larger share of the market in the 38 kV sector, and we are increasing our efforts to expand our team in specific regions. When examining the U.S. market, particularly among the investor-owned utilities and other major players, our approach to reaching customers has become much more strategic than at any time in Powell's history. This shift has brought about a refreshing change for both us and our clients, allowing us to better understand their needs and develop tailored solutions for the future.
We are experiencing positive momentum in the U.S., Canada, and the U.K. Regarding the data center market, while it's still a smaller portion of our growth, it has been growing rapidly when looked at from a percentage perspective. Last quarter, we secured some significant wins with well-known companies using traditional equipment, which is exciting for us. The fixed pattern breaker design we tested last quarter was quietly showcased at a recent event as a preliminary step in introducing the product to the market. This design is promising for facilitating operations within data centers. Nonetheless, I want to emphasize that we are making strides in the market with our existing products. As we add capabilities and continue to enhance our offerings, we anticipate making our solutions more valuable and believe we will achieve success.
Great. That's very helpful, Brett. And maybe if I could sneak one last one in. Just on tariffs, maybe a finer point. I guess, one, any risk to margins just on passing on some things and then your sort of domestic positioning overall, is that a strategic advantage?
I believe it is. When comparing Powell to our competition, based on my industry experience and understanding of how we supply at Powell, we should be minimal compared to our competitors. There should be cost and price opportunities for Powell. However, as we delve into building substations and major buyouts, I'll mention batteries. Very few batteries, if any, will come from regions east of us, like India and beyond, but they will all need to be imported. A typical large lead-acid battery weighs between 400 to 500 pounds, and there are usually multiple batteries used in a substation, which presents some risk. Therefore, we are collaborating with our clients and their customers to make sure these costs are understood and that Powell should not absorb these costs. This is our strategy. We are doing everything possible to reduce the impact of the project and the project's potential liabilities. While I anticipate some effects, I believe we will be quite successful in managing those. There might be minor inflationary impacts related to material costs or other unseen factors, but I expect we will address those over time. The more significant impacts may arise in the short term when we aim to pass through those costs.
Our next follow-up question comes from John Franzreb from Sidoti & Company.
Yes. Just on the data center discussion. Can you just tell us what kind of annualized run rate you're at? And Brett, you said you expect it to grow at a double-digit pace on a go-forward basis. Did I hear that correctly? Well, when I look at the growth of the commercial and other industrial sector, it's growing, but I don’t know you announced it a few years ago.
Yes. John, when we broke out the commercial and other industrial sector back in '23, if you looked prior to this data center wave that we're currently navigating through, it was roughly 6% of the total revenue. And that's grown now to mid-teens. And that growth is really attributable to the data center volumes.
So I mean, there are other things in that sector, John. But just like I noted last quarter, they're not $50 million LNG jobs, but they are for gear, when we sell gear only into a job. They're nice chunky orders that are improving as we better understand the market, better position Powell demonstrate to those clients and their engineering partners how we do things. So that process is that effort that we have to undertake or any client in any sector as we engage. It's paying; it's starting to pay dividends, so...
This concludes our question-and-answer session. I would now like to turn the conference back over to Brett Cope, CEO, for any closing remarks.
Thank you, Sagar. Mike and I are fortunate to work with the most talented group of people that you'll find in the industry. Thank you to our employees for their incredible contributions to our stellar results this past quarter. I would like to also thank our customers for their continued trust and support to Powell. We have and will continue to recognize the importance of transparent, agile execution and working to support critical project delivery milestones. Powell is committed to your success. Thank you to everyone for joining us this morning. We appreciate your continued interest and support and look forward to updating everyone next quarter.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.