Powell Industries, Inc. (POWL) Earnings Call Transcript & Summary

Welcome to the Powell Industries Earnings Conference Call. [Operator Instructions]. Please note this event is being recorded. I'd like to turn the conference now over to Mr. Ryan Coleman, Investor Relations. Thank you, and over to you.

Thank you, and good morning, everyone. Thank you for joining us for Powell Industries conference call today to review fiscal year 2026 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 12. The information on how to access the replay was provided in yesterday's earnings release. Please note that the information reported on this call speaks only as of today, May 5, 2026, 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 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 turn the call over to Brett.

Thank you, Ryan, and good morning, everyone. Thank you for joining us today to review Powell's fiscal 2026 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. The Powell team delivered another solid quarter of operational efficiency and order growth as the momentum we experienced at the start of our fiscal year continued through the second quarter. Activity levels across each of our core end markets remained healthy with notable strength in the quarter from liquefied natural gas projects, a mix of electric utility distribution and generation projects and also data center projects within our commercial and other industrial market sector. Revenue in the quarter grew a steady 6% compared to the prior year and continued solid project execution across the company delivered a gross margin of 29.6%. We recorded $490 million of new orders in the quarter, bringing our midyear total to nearly $1 billion in new awards. I would also note that our order book in the quarter continued to be very well balanced across the markets in which we compete. During the quarter, we were awarded 2 mega projects, one for a data center and a second for an electric utility generation project. Each of these projects are in excess of $75 million in value. The balance of the order book in the quarter was comprised of a higher number of small- and medium-sized projects. Our backlog now sits at $1.8 billion, 12% higher than the prior quarter and 33% higher than 1 year ago. The growth in our backlog now provides visibility well into our fiscal 2028. The composition remains healthy with a mix of projects of varying sizes that will help maximize productivity across our manufacturing plants. As of quarter end, the electric utility market represented 30% of our total backlog, while the oil and gas market, excluding petrochemical and the commercial and other industrial markets each accounted for 29%. The diversification of the business in the electric utility market and more recent expansion of our commercial and other industrial market anchored by a demand driver from data centers are contributing to reduced cyclicality in the business, allowing us to plan beyond the current cycle and invest more broadly alongside our customers with greater visibility. At the same time, our outlook for our core oil and gas market remains strong. We are in the initial phase of a multiyear build-out of LNG export capacity. We believe the structural cost and competitive advantages possessed by U.S.-based exporters has been elevated by the risk of multiyear long capacity impairments across the international markets and the need for importers to diversify and replace those volumes. We are also cautiously optimistic that the petrochemical market is in the early stages of a cyclical inflection after several years of lower activity levels. We are seeing some activity in the gas to chemicals market and are further encouraged by recent upward price revisions within the global polyethylene market. I'd like to take a moment to mention a commercial development that took place subsequent to quarter end. I am very pleased to share that Powell was awarded a mega project for the first phase of a new greenfield data center. The scope of this award is in support of a behind-the-meter design for the first phase of a planned multiphase campus. This project award is in excess of $400 million. This project now marks the largest project award in Powell's history. This award is a testament to our employees, our culture and the entire Powell team across the company as we assembled a multi-division, multi-country execution plan to meet the demanding time line on this project. To that end, recent order trends, our market outlook and our continued organic product development continue to support prudent additions in manufacturing capacity. Last quarter, we signed a lease for incremental space located near our Ohio facility. This past quarter, we leased office space in the Houston Metro area, which will serve as a second satellite engineering center. This center complements our initial satellite engineering office that we announced and opened last year. The second center is geographically located to further enhance our ability to add critical members to our world-class electrical and mechanical engineering and design teams. In response to the growth of our backlog, we are evaluating a smaller lease facility of approximately 50,000 square feet near our Mosley campus. This space would help support a new $8 million investment in fabrication equipment for short-term rapid expansion of our metal fabrication capacity. We have previously shared our efforts to evaluate a larger investment in a facility that would require $70 million to $100 million of capital and provide upwards of an additional 250,000 to 300,000 square feet of factory capacity. While we continue this assessment, we are currently evaluating complementary options for bridging between short-term requirements via a leased facility versus a somewhat longer-term option of a greenfield facility build-out. We are being very thoughtful throughout this process and expect a decision within the next few quarters. Meanwhile, the expansion of our Jacintoport facility is progressing on schedule. This incremental 335,000 square foot of capacity will be critical to ensuring our ability to support all of our end markets, but specifically by providing our oil and gas customers with a premier domestic facility to produce engineered-to-order power distribution solutions for both on and nearshore projects as well as continued support for offshore applications. Operationally, our teams across our facilities are rising to meet the challenge of accelerating growth. We remain disciplined on the commitments we have made to our customers while staying focused on continuous improvement and driving incremental efficiencies throughout every step of our operations. As noted earlier in my comments around the recent large data center award, Powell has a market-leading strength that is inherent in our people and internal collaboration. When our teams across our North American facilities come together, we are able to leverage our substantial footprint to tackle large challenges, either for a single project or a broad step-up in market demand as we are currently experiencing. Critically important to our growth and future needs, I would also like to call out the increased efforts of our strategic sourcing and supply chain teams. It is essential that our team engages our partners to both broaden and deepen those relationships and optimize our supply chain in support of our future growth. On the M&A front, we continue to evaluate a growing pipeline of inorganic opportunities that complement our organic initiatives and better position us within key markets. Candidates include complementary products and/or capabilities to our current portfolio or oriented toward building out our services franchise. Along these lines, our recent acquisition of Remsdaq continues to progress well and has quickly proven synergistic and accretive across the company. Lastly, pursuant to our ongoing efforts to build a stronger, more diversified business, we have recently begun investing in resources to build a wider funnel of government-related work, including U.S. military and defense applications. These are markets with secular long-term growth drivers that typically carry recurring revenue profiles, which would be conducive to growing our services franchise. We are in the early days of this effort, but believe our U.S.-centric supply chain, operations and workforce leave us well positioned to play a critical role within the markets that support our national security and defense. On a related note, we'd like to briefly commend the White House's recent presidential determination under Section 303 of the Defense Production Act, which formally designated both substations and switchgear among other electrical products and their upstream supply chains as essential to national defense. Ensuring the domestic production of critical electrical gear is essential to America's ability to deploy large-scale grid infrastructure and the presidential memorandum authorizes the Department of Energy to expedite procedural requirements and immediately deploy federal capital to expand domestic grid manufacturing capacity. In summary, we remain very pleased with our financial performance for the first half of the year and are encouraged by the commercial dynamics that we continue to see across the markets we serve. 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 2026, we reported total revenue of $297 million compared to $279 million or 6% higher versus the same period in fiscal 2025. New orders booked in the second fiscal quarter of 2026 were $490 million, which was nearly double the orders booked in the same period 1 year ago and included 2 mega orders, each with an order value exceeding $75 million. The first mega order reflects the largest utility order that the business has ever recorded and is for a large generation facility in the Eastern United States. The second mega order in the quarter for medium voltage electrical distribution equipment is destined for a data center in the Central United States. As a result of the strong commercial activity across our key end markets, the book-to-bill ratio for both the second quarter as well as the first half of fiscal 2026 is 1.7x. The continued momentum across all end markets, particularly domestically and the resulting orders volume in the second fiscal quarter elevated our backlog to $1.8 billion, a 33% increase or $438 million higher versus the same period 1 year ago and $189 million higher sequentially. The composition of our backlog continues to diversify with our core industrial end markets across petrochemical and oil and gas representing 33% of the total backlog while the electric utility and commercial and other industrial markets represent 30% and 29% of the $1.8 billion of backlog, respectively. As Brett mentioned, in early April, after the close of our second fiscal quarter, the business secured a mega order in the data center end market with a value in excess of $400 million. This order value is not reflected in either the orders or backlog numbers for the second fiscal quarter of 2026 and will be included in our fiscal third quarter reported numbers. Turning to revenue. Compared to the second quarter of fiscal 2025, domestic revenues were higher by $4 million or 2%, while international revenues were up by $14 million to $64 million, primarily driven by the offshore projects that are being executed in the Far East and Africa as well as an uptick in project volume across our U.K. operation. From a market sector perspective, revenues increased 35% in the commercial and other industrial market versus the second quarter of fiscal 2025, while the electric utility and the oil and gas markets increased 14% and 11%, respectively. Offsetting these increases, the petrochemical market declined by 37% versus the same period 1 year ago on the softness across this end market over the past several quarters, while the light rail traction power market was lower by 10% on relatively light volume as a percentage of the total business revenue. Gross profit increased by $5 million to $88 million in the second fiscal quarter of 2026 versus the same period 1 year ago. Gross profit as a percentage of revenue was slightly lower by 30 basis points to 29.6% of revenue versus the same period a year ago and was 120 basis points higher sequentially. Margin rates exiting backlog continued to benefit from strong execution and volume leverage across all of the Powell divisions with favorable project closeouts contributing roughly 90 basis points of margin tailwind in the second fiscal quarter of 2026. Selling, general and administrative expenses were $26 million in the current period, an increase of $4 million compared to the same period a year ago, primarily driven by higher compensation expenses across the business. SG&A as a percentage of revenue increased by 90 basis points year-over-year to 8.7% in the current fiscal quarter, but declined sequentially by 130 basis points, reflecting a higher revenue base in the second quarter of fiscal 2026. In the second quarter of fiscal 2026, we reported net income of $45.9 million, generating $1.25 per diluted share compared to net income of $46.3 million or $1.27 per diluted share in the second quarter of fiscal 2025. On April 2, 2026, the company effected a 3-for-1 forward split of its common stock and proportionately increased the number of shares of authorized common stock from 30 million to 90 million shares. Each shareholder received 2 additional shares for every 1 share held on the March 20, 2026, record date. The shares of common stock retain a par value of $0.01 per share. Trading began on a split-adjusted basis at market open on April 6, 2026. Share and per share amounts disclosed have been retroactively adjusted to reflect the stock split. During the second quarter of fiscal 2026, we generated $51 million of operating cash flow, principally driven by higher earnings generated in the second fiscal quarter. Investments in property, plant and equipment in the fiscal second quarter totaled $1.8 million, reflecting modest capital spending on equipment maintenance and production assets as well as capital expenditures related to the Jacintoport expansion project. The majority of the $12 million to $13 million planned investment to upgrade the Jacintoport fabrication yard is expected to be incurred during the second half of fiscal 2026. At March 31, 2026, we had cash and short-term investments of $545 million compared to $476 million at the September 30, 2025, and $501 million at December 31, 2025. The company does not hold any debt. Looking forward, as we move into the second half of fiscal 2026, we remain encouraged by sustained commercial activity across our core end markets. Coupled with our continued focus on execution, our ability to leverage volume across our global manufacturing footprint and the size and quality of our backlog, Powell is well positioned to deliver strong cash flows and earnings performance for the remainder of fiscal 2026. At this point, we'll be happy to answer your questions.

[Operator Instructions]. We have the first question from the line of Tomo Sano from JPMorgan.

Congrats on the quarter. Given the strong $490 million in orders booked in Q2 and there was addition of the $400 million-plus data center orders, how should we think about your order outlook for Q3 and beyond? Also in light of this growth and how do you plan to manage the associated increases in SG&A and R&D expenses, please?

Tomo, it's Brett. I'll take the first part of that and have Mike jump in on the SG&A side. The outlook is strong. Activity entering Q3 here, there's no let up just as the prepared comments, we started at the beginning of the year, Q1 going into Q2. We feel good about all 3 of our core drivers in the commercial and other industrial, which is really blossoming over the last 2 years. Oil and gas, which we're built for, a very solid outlook. I love the utility space, and so we are hunting hard in that space with this -- it's always in the distribution side, but now with the uptick in generation, that's business that we won as well. The capacity adds that we're doing, the incremental so far, the larger one that's under evaluation. The data center order in the prepared comments was a team effort. It has roughly a 2-year burn. It will run through the end of fiscal '28. As we typically share on the calls, we're very thoughtful about our schedules, and we feel good about how it lays in across all of our facilities and meeting the commitments we made on that job. We feel pretty good as we sit here. On the cost side, we are making some investments in the business. We've largely invested in some of the strategic pillars that you find on the investor slides, especially around service and automation. On the heels of the acquisition of Remsdaq, we've added resources in the states to start expanding that business, along with some of the synergistic adds we found in the data center market in the short term, but we're still progressing our medium- and long-term plans that align with the reason we bought the business to begin with, which was to expand in the utility market.

Tomo, this is Mike. With respect to SG&A costs, they continue to trend in the upper single digits as a percentage of revenues as we invest in some of these new programs that Brett alluded to. The increase on a year-over-year basis really is driven by higher base and to a lesser extent, variable incentive compensation expenses in the first half in addition to the Remsdaq acquisition. Remember, for the first half of last year, we didn't have Remsdaq in the numbers. This year, we do. As we focus on growing the business organically and standing up some of these new capacity adds to address the market demand, in addition to that, investing in new initiatives such as the government initiative that Brett talked about in his prepared comments, these are both investments that we're making in SG&A from a people and infrastructure perspective that we feel will generate a positive return as we look forward. You asked about R&D as well. R&D is trending higher. We view that as a favorable attribute. We finished the quarter about 1.4% of revenues. You can expect this to probably hold in that range between 1% and 1.5% as the team ramps up the organic initiatives to develop and commercialize new products.

Just one follow-up, if I may. Your strong core engineering capabilities and along with the execution strength such as the ETO and key systems, we think have clearly earned the customer trust. How do you view the evolving competitive landscape given increasing demand and expanding supply? What steps are you taking to maintain your competitive edge?

It is become much more competitive in the last couple of years, a lot of new entrants, some new private equity money coming in and trying to build up some new models, slightly different than what we do, but everybody is playing in the same general area. We take pride in the fact that we have a long tenured group, a very family approach in the way we compete. In the prepared comments, we are adding a second center here in Houston to attract additional talent to the team. We think that will prove fruitful here in the next couple of quarters. We're also reengaging some of our offshore centers, expanding their capability, doing some training and investing there to ensure that we have options that are offshore as well. Then sort of buried within the whole model, Tomo, is in the data center and discrete commercial markets, we talked in the last couple of calls about what will the engineering load of this mean to Powell, this cycle that is going to be a lot more product-centric. We're still early innings, but we're starting to see that with -- around the company. Mike and I just finished up our spring operational tours where we go around all the plants. I can share that, again, very early innings, but it looks to be that we are seeing some nice engineering efficiency on these large jobs in the data center market, which will reduce the burden and allow us to make some adjustments in how we allocate our resources going forward on these different segments. That's an encouraging sign that we suspected and are starting to see some early returns to that thesis.

We have the next question from the line of Chip Moore from ROTH Capital.

Maybe a follow-up on that $400 million-plus order you got in April, fantastic. I guess, is that all outside? Or is this some inside the 4 walls as well? Then you mentioned first phase, you talk about potential for additional phases. Maybe start there.

Chip, it's Brett. Yes, fantastic opportunity. The other comment I'd share it's an opportunity like as you've got to know our model, when you get in earlier and given our strong engineering capability and our ability to work with our clients and really affect a great solution regardless of the market, that's exactly what this was. We were brought in early on a behind the meter. It's not a simple job where they're generating on site. There's some complexity around that. Again, that fits us very well. It is all outside the data center, the initial award. It's sizable. It's a couple of gigawatts initial phase, and then there are multiple plan phases that will -- we're anxious to see if that progresses over time. Certainly hopeful that it will. It is in the NeoCloud space. I'd share that as well. I think we'll get a shot at the internal side of the data center on this one. No guarantee sitting here today, but we're certainly going to do everything we can to put our best foot forward as this evolves now that we're on the early phases of this. We're certainly following that commercially and see if we can get that over the line.

Brett, maybe 2 more on that one. Just margin implications, given it's such a large order and then the time line being pretty quick. Just how are you thinking about any execution risks there and how are you going to manage that?

Yes. I think the margin potential fits with the comments made a little bit today in earlier calls. I definitely believe there's opportunity in here as we unlock our product-centric models as they develop across the company. There's a lot of -- once you do the initial design, it's a multiproduct it's actually quite wide reaching to the different products that we offer at Powell, a mix of voltages, quite a bit of 15 kV, a lot of 38, both primary switchgear as well as secondary switches that we produce here along with the cable bus product out Chicago. It actually touches just about every division in the company in the North American footprint. That's on the prepared comments, the comment we put together. I think for each one of the divisions will unlock some potential as we ramp up the volumes. Then on a time frame, it is. It's not like it's $400 million over the next 5 years. It's a 2-, 2.5-year build-out, because we were able to use this incredible footprint that we have in the company, it was really a team effort. We came together and kind of broke the order apart. We've done that in the past on other jobs. I go all the way back to Hurricane Harvey, where we had a -- we talked on the call back then about a job that came in and the client needed it really quick. That's a super exciting competitive advantage that Powell has, I believe, unlike others, where our footprint is so similar from factory to factory with metal fab and our processes that we can lever that in times of need or market demand like we're seeing now. That is absolutely what we've done here and super excited to have been -- have earned the award and anxious to really make it a success. As you noted, see the additional phases in the future years.

If I could sneak one last one in, just around capacity. You did a good job sort of outlining where you're going and the potential to grow capacity. Just given strength across all your markets really and data center, in particular, if you were to see similarly sized opportunities, what's your ability to meet those as they come along?

Yes, we're definitely reacting. That's the comments in the prepared remarks. Along any job when we evaluate schedule, we always -- we look at everything all the way down to supply chain. Again, I also noted that in the prepared remarks, so we are clearly adding short-term capacity here in Houston, especially around that, which we can control the metal fab side. We noted in the comments also about while the organic build continues, we are clearly looking at a pivot in the near term to maybe add a larger lease space. It's a little bit more efficient. There's a lot of builds in different locales, including here in Houston and some other commercial centers in North America, where things are already there and with minimal modification, we can get them more productive quicker. I think that if and when the next one comes, we could follow the same model and the constraints would be people and supply chain, which neither of those is easily to unlock, but we would attack it with the same vigor that we attack this one. Mike and I are very involved in the supply chain side and the whole team. The last couple of quarters have gone out to really understand it much better, to ensure that as we make our schedules on our proposals and we make our firm commitments that we're back on supply chain, so we don't have a miss there. Then as long as we can unlock that, it will come back to just attracting talent and getting them trained into the Powell model to execute. That would be the #1 concern moving forward.

We have the next question from the line of Manish Somaiya from Cantor.

My first question is on pricing power. Brett and Mike, you talked quite a bit about strong markets, but in your commentary, you mentioned pricing is stable, broadly keeping in line with inflation. Why aren't we getting more pricing if the markets are strong as they are?

We are getting some price, Manish, for sure. In certain product areas that have become constrained in the demand supply curve, we are absolutely moving up price incrementally in those markets across all 3 verticals, when you look at how we're competing in the oil and gas industrial market, utility market, we're very sensitive to where you can push price and where you need to sort of hold your ground. We are pushing price. I think we'll start between that and the efficiency gain as we start to build our plans for '27 and beyond, we'll get a good feel in Q4. I don't think it will come out so much in the numbers in Q4, just kind of thinking forward, but internally, we'll start to see it. I kind of go back to the earlier question on our reviews, where I was giving the answer going around and looking at the efficiency that we're building into there. I think that will come out as price. We'll be able to better report on it as we hit the end of this fiscal and then prepare into '27. Kind of noted that a little bit over the last couple of calls, and I think we'll be able to quantify it a little bit better as we get through the next quarter or 2 in the company and give you a better report as to what that is.

My other question pertains to you guys taking on larger, more complex projects. How should we think about the cadence for margins going forward? Then more specifically on the $400 million-plus award for the data centers, was that a solo award? How does that change your perspective on the TAM for Powell when it comes to data center market? What percentage of market share is reasonable that you can achieve in that?

Well, those questions, in my mind, go together because on this particular job, one of the things we talk about is we really do well on the complex power -- sorry problem. This one is -- it has a degree of complexity that we haven't seen in some of the other data center jobs that we've been building our market segment on. When we got involved early on this one, there is a really unique complexity on the behind-the-meter design that's akin to a power island that we might see on an industrial facility or even an offshore platform where you're generating and distributing load locally. That these behind-the-meter ones clearly have that. They have a higher degree of complexity around the gear. They have a higher degree of complexity around the automation, and it fits us very well. I'd say the TAM on a behind-the-meter is going up for Powell, say, beyond a straight utility connect. We're interested in both. It's not that we won't pursue both models, but the behind-the-meter opportunity for Powell clearly going up with this complexity equation. Depending on how they're generating, whether it's a mix of resources or renewable, there's a whole bunch of ideas out there that we're seeing come across the commercial front. I'd say our excitement for that potential is growing.

Brett, just on that, the $400 million award that you got post the quarter end, was that a solar contract? Or was that split?