Powell Industries Inc Q4 FY2025 Earnings Call

Thank you, and good morning, everyone. Thank you for joining us for Powell Industries conference call today to review fiscal year 2025 fourth quarter and full year 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 November 26. 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, November 19, 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 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 fourth quarter and full year 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 fourth quarter marked a solid finish to another record year for Powell. Compared to the fourth quarter of last year, we achieved gross profit dollar growth of 16%, revenue growth of 8% and the generation of $61 million in operating cash flow. Our teams delivered a record quarterly gross profit of 31.4%, which was 215 basis points better than the prior year and a record quarterly earnings per share of $4.22 per diluted share. Our fourth quarter performance is a testament to the ongoing high level of project execution across all of our operations, combined with the steady progress against our strategic goals. The revenue profile of fiscal 2025 was driven by the strong growth in our nonindustrial markets, including both the Electric Utility and our Commercial and Other Industrial sectors. These two markets accounted for 41% of our revenue in fiscal 2025 and currently comprise 48% of our total backlog. Five years ago, these two market sectors accounted for just under 20% of our backlog as our focused effort to diversify the business and grow in these strategic markets has produced important results for the future of Powell. The Light Rail Traction market also had notable contributions during the year, with revenue nearly doubling compared to the prior year as we experienced increased levels of commercial activity in this end market throughout fiscal 2025 versus the prior year. We booked $271 million of new orders in the quarter, which was roughly 1% higher than the prior year. There were no mega projects in the quarter as our order book was comprised of a higher volume of small- and medium-sized projects. For the full year, we booked $1.2 billion of new orders, 9% higher than fiscal 2024. We finished the year with a backlog of $1.4 billion and registered a book-to-bill of 1.0x for the full year. Today, our backlog and project schedules are well balanced across the markets and geographies we serve. We also benefit from a healthy mix of large projects as well as core smaller and medium-sized projects that help maximize productivity across our manufacturing plants. With that said, we have begun to see some divergence emerge as we close out 2025 across our key end markets. We believe this is reflective of a global economic environment that is operating at very different speeds, driven by country, region and sector imbalances. Overall, the quality and visibility into future order activity continues to be very good, with strength driven by Electric Utility, data center and natural gas market opportunities, including large-scale LNG and related natural gas projects, which is offsetting some softness in portions of our traditional oil and gas and petrochemical markets, such as refineries and polyethylene and polypropylene facilities. We continue to actively review and evaluate our available manufacturing capacity. In August, we announced the next phase of our $12.4 million investment that will add an incremental 335,000 square feet of productive capacity at our Jacintoport facility in Houston. While the Jacintoport yard can be utilized to support any of our customers and market sectors, this investment is primarily focused on supporting our Oil and Gas customers, particularly the incoming wave of anticipated LNG project development work that we expect to come to market over the next 3 to 5 years. The production and export of U.S. LNG is clearly going to play a critical role in the global energy landscape, and this investment ensures that we continue to advance our industry-leading role in the fabrication of engineered-to-order power distribution solutions for critical applications. This announcement brings our cumulative investment at the Jacintoport fabrication yard to approximately $20 million over the past 8 years and nearly $40 million across our 3 Houston manufacturing facilities to support our organic growth plans. We expect this phase of the Jacintoport expansion to be completed by the second half of fiscal 2026. We continue to evaluate our entire manufacturing footprint for opportunities supporting growth and expansion, along with options that may further improve productivity. We believe that investments like these are the best use of our capital as the project timelines and execution, return on capital and payback periods are highly compelling for our shareholders. On the inorganic side, we closed the acquisition of Remsdaq during the fiscal fourth quarter. We continue to be incredibly excited around the future of our electrical automation strategy as we now work to complete the integration of the Remsdaq team into the larger Powell family. We are already experiencing commercial interest around Remsdaq's products across the multiple markets that we serve, including Electric Utility as well as data center applications within our Commercial and Other Industrial market sector. Our teams began quoting Remsdaq's products and technology in North America during the fourth quarter, introducing these products to customers on this side of the Atlantic as well as integrating their existing commercial efforts in the U.K. with Powell's customer base there. We are confident in our ability to scale our total Powell automation offering at margin-accretive economics in the coming years. As we enter our fiscal 2026, the Commercial environment for each of our end markets remains positive as we are optimistic that the momentum we built throughout our fiscal 2025 will continue into the new year. The fundamentals in the Oil and Gas market support our expectation for continued order strength. Specific to the fundamentals of the U.S. natural gas market, the pipeline of LNG projects that we are tracking continues to support our expectation for continued momentum for both greenfield and brownfield orders. Activity within our commercial and other industrial market also remains healthy, and our progress to further penetrate this market is progressing well. Recent data points and industry commentary by data center operators continue to identify power availability and reliability as key constraints to capacity growth and AI data center expansion. As a critical supplier of power distribution and control equipment, we continue to see elevated levels of activity as operators execute their capacity growth plans. Opportunities are growing in both size and volume as well as product applications as we expand our presence in this strategic market. The outlook for our Electric Utility market remains robust and balanced across the customers and geographies that we serve. The growing wave of investment in electrical infrastructure to meet growing demand levels is broad and durable, and we expect another strong year of activity in 2026. I want to thank the entire Powell team for another record year for their commitment to Powell and our customers and suppliers alike by helping to further our unique position as a supplier of critical electrical distribution components to a growing array of applications. With that, I'd like to turn the call over to Mike to walk us through our financial results in more detail.

Thank you, Brett, and good morning, everyone. I will begin first with the fiscal fourth quarter business results and then move to the total fiscal year 2025 results. Revenues for the fourth fiscal quarter of 2025 increased by 8% to $298 million compared to the same quarter in fiscal 2024 of $275 million, and was also higher sequentially by $12 million, driven predominantly on the strength across our electric utility sector. Net orders for the fourth fiscal quarter were $271 million, $4 million higher than the same period a year ago, driven by strong year-over-year activity in our commercial and other industrial, Light Rail, Traction power and Electric Utility sectors, which was offset by lower commercial activity across our petrochemical and oil and gas sectors. Overall, we remain encouraged by the level of commercial activity across all the end markets that we participate in. Considering this level of new order bookings, coupled with the sustained strength of our top line performance, the book-to-bill ratio was 0.9x for the fiscal fourth quarter and 1.0x for the full year fiscal 2025. Reported backlog at the end of fiscal 2025 increased to $1.4 billion, $41 million higher than the end of fiscal 2024 on an increasing proportion of Electric Utility, commercial and other industrial and Light Rail Traction power backlog, partially offset by lower petrochemical backlog levels versus the prior year. As we exit fiscal 2025, our Electric Utility and Oil and Gas sectors each now make up one-third of our total backlog. Overall, we are very pleased with both the execution across the business, driving record revenue levels for the year as well as our orders performance continuing to grow and diversify our backlog position as we enter fiscal 2026. Compared to the fourth quarter of fiscal 2024, domestic revenues of $239 million increased by $4 million or 2%, while international revenues increased by 38% to $68 million on higher volume across most of our international manufacturing and service locations. From a market sector perspective, revenues from our Petrochemical and Oil and Gas sectors were lower by 25% and 10%, respectively, on challenging comparisons resulting from the large industrial project orders that were booked in fiscal 2023 and executed predominantly in fiscal 2024. In the fourth quarter of fiscal 2025, the Electric Utility sector doubled versus the same period one year ago, while our Light Rail Traction sector increased by 85%, albeit on a smaller revenue base, and the Commercial and Other Industrial sector was lower by 9% on project timing. We reported $94 million of gross profit in the fiscal fourth quarter of 2025, which was $13 million or 16% higher than the same period of fiscal 2024. Gross profit as a percentage of revenues increased by 215 basis points to 31.4% of revenues in the current fiscal quarter. The higher quarterly margin rate is primarily attributable to continued strong project execution across the business, delivering favorable project closeouts, resulting in an incremental 100 basis points to the fourth fiscal quarter margin rate. Additionally, we have maintained pricing levels and combined with strong throughput across the business, which is driving incremental volume leverage and productivity, these variables have created a tailwind to margins across most of our operating divisions. Selling, general and administrative expenses increased by $5.5 million or 25% on higher levels of compensation expenses as well as the Remsdaq acquisition costs. SG&A expenses were $27 million in the fiscal fourth quarter or 9.1% of revenue compared to 7.8% of revenues a year ago. In the fourth quarter of fiscal 2025, we reported net income of $51.4 million, generating $4.22 per diluted share compared to net income of $46 million or $3.77 per diluted share in the fourth quarter of fiscal 2024. We generated $61 million of operating cash flow in the fiscal fourth quarter, driven mainly by higher earnings during the period. In August, we completed our recently announced business acquisition of Remsdaq Limited for a total consideration of $18.4 million, which includes cash acquired of $4.6 million. This transaction had a net cash impact of $11.5 million in the fiscal fourth quarter with contingent payments of roughly $2 million to occur in future periods. In addition, investments in property, plant and equipment totaled $1.8 million during the fiscal fourth quarter as we invest in capacity and productivity projects across the business. As we recently announced, we've embarked on a critical project that will expand our capacity at our offshore yard in Houston, further strengthening Powell's position in supporting the production and export of U.S. LNG. This roughly $12 million investment falling predominantly during fiscal 2026 will help to ensure that we can confidently fulfill delivery commitments to our customers. Now recapping our total year fiscal 2025. Revenues of $1.1 billion increased by $92 million or 9% compared to fiscal 2024. Notably, our Electric Utility and the Commercial and Other Industrial sectors were higher versus fiscal 2024 by 50% and 19%, respectively, while the Petrochemical sector was lower versus the prior year by 19%. Orders were $1.2 billion, 9% or $94 million higher versus fiscal 2024. Overall, we've been very pleased with the activity across all the end markets that we serve and the resulting orders mix through fiscal 2025. Gross profit as a percentage of revenues grew 240 basis points year-over-year to 29.4% or $51 million higher than fiscal 2024. The margin rate continues to benefit from a stable pricing environment, exceptional project execution, coupled with incremental volume leverage and successful operational and commercial strategies that continue to address the macro inflationary challenges across the supply chain. Selling, general and administrative expenses were higher by $11 million versus the prior year. Overall, net SG&A expenses as a percentage of revenues were higher versus the prior year by 20 basis points at 8.6% of revenues in fiscal 2025 versus 8.4% in the prior year. In fiscal 2025, research and development spending increased $2 million or 17% versus the prior fiscal year as we continue to make progress on new product design and development. Total R&D spend in fiscal 2025 was $11 million or 1% of revenues. We reported net income of $180.7 million or $14.86 per diluted share in fiscal 2025 compared to $149.8 million or $12.29 per diluted share in the prior year. Operating cash flow generated in fiscal 2025 was $168 million versus $109 million in the prior year, driven by higher income generated versus the prior year. In addition to the acquisition of Remsdaq, which was a net cash usage of $11.5 million in fiscal 2025, total capital spending on property, plant and equipment was $13 million in fiscal 2025, $1 million higher than the prior year as we completed the expansion of our breaker manufacturing facility in Houston, which spanned across both fiscal 2024 and fiscal 2025. At the end of fiscal 2025, we held cash, cash equivalents and short-term investments of $476 million, $118 million higher than our fiscal 2024 year-end position, reflecting the sustained level of commercial activity across our end markets, coupled with the strong execution across the business. The company holds no debt. Looking forward, we are confident that the strong commercial momentum we experienced across our key end markets in fiscal 2025 will carry into fiscal 2026. We believe that the composition and the quality of the current backlog, combined with the sustained business profitability supported by a stable pricing environment, volume leverage and disciplined project execution will provide meaningful tailwinds for continued performance. In addition, the company's strong liquidity position and solid balance sheet support significant financial flexibility, positioning Powell for another successful year in 2026. At this point, we'll be happy to answer your questions.

Congratulations on another impressive quarter. Gentlemen, I'd like to start with the current operating environment. Can you talk a little bit about if there's been any meaningful change in the competitive landscape or maybe the pricing environment today versus, say, a year ago?

Thank you, John. It's Brett. To address each of our three main sectors, as I mentioned in my prepared remarks, the Oil and Gas market remains strong for Powell. Although certain areas, like Canada and the North Sea in the U.K., are experiencing slight softness due to policy changes, other segments, particularly gas, have shown resilience. Recently, we've seen significant growth in the utility sector, a market we've strategically targeted for years. With increasing demand and the commercial and industrial segment, especially data centers, the market appears to be more driven by demand and less sensitive to price changes. In contrast, the softer areas of the oil and gas subsectors are somewhat more price sensitive. In summary, the market dynamics vary significantly by region and sector at this time, making it less uniform than in previous periods.

That makes sense. That makes sense. I'm kind of also curious about your thoughts about seasonality, especially considering the backlog profile. I know in years past, it's been de minimis to volatile. How would you kind of characterize how should we expect the upcoming first quarter to kind of lay out given the current job outlook?

Yes. John, this is Mike. I'll address that one. As we always see in every fiscal year, our first quarter of fiscal is the October, November, December with the holidays and such. We do anticipate that sequentially, as we exit the fourth quarter and report our first quarter, it seasonally is softer due to what I just mentioned. That said, as we look forward on a total year basis, we still are very optimistic about next year.

Okay. All right. And just one more question, I'll get back into the queue. Regarding the SG&A, you mentioned there are maybe some one-time M&A expenses in the quarter. How big were those expenses, just so I can maybe rightsize SG&A on a go-forward basis?

Yes, sure. For the fourth quarter specifically, we saw an increase of about $5 million compared to the previous year. Approximately $3 million of that was related to variable compensation, and just under $2 million was associated with acquisition-related legal and valuation services.

Maybe just first for me, C&I, it sounds like you feel very good about the trends there. I think you called out opportunities growing and maybe some urgency on price. Just with the modest decline in the quarter, was that largely timing or anything to call out there? And then on the go forward, how are you viewing the opportunity in some of the newer products you're offering there?

Yes. I think in this quarter, it's mainly about timing. If you look at that sector, Chip and Brett, the opportunities are clearly expanding, both in terms of what we have previously mentioned that we aim to bring to market for data centers and in our external initiatives, where we always find room to engage. We're making significant progress on both fronts, and the range of opportunities for Powell is undeniably increasing. Reflecting on last quarter's activities, there has been a surge in discussions and numerous "what-if" scenarios. We're currently quoting some substantial projects, and our growth over the last two years has been really impressive.

Got it. And Brett, I guess, the corollary on utility, that phenomenal growth this quarter. You've been working on that for a long time. But I guess, sustainability of growth there, the trends you're seeing, obviously, it looks like in backlog, demand is quite healthy, but any more color there?

Really, I’m very pleased with this strategy focused on utilities that we've been developing for over a decade, and I appreciate the question. Mike and I were just discussing this before the call; if you look at the oil and gas sector compared to utilities in our backlog, they are equally weighted. We want both segments. We greatly value our oil and gas customers and have built strong relationships over the years, and we aim to establish a similar rapport with utility customers in North America and the U.K. We believe the demand outlook is promising. This involves our efforts in the distribution side of substations, and with the rising demand, we intend to capture as much of that opportunity as possible. This is an excellent growth area for Powell in distribution, especially with our strategies in electrical automation and services. All three of our strategies are relevant here.

Great. Sorry, I have one more question about the C&I data center. Brett, I'm curious about your thoughts on the growing interest in 800-volt DC architectures. Are you involved in this area, and what potential role do you see for yourselves as this technology evolves?

Yes, we have been meeting with several people regarding the DC switchgear we provide for traction. Currently, we have a DC breaker that fits this requirement, and there is a design in place for a rectifier. We would need to conduct some R&D to adapt this for a DC infrastructure suitable for the data centers at the power levels being discussed. If we consider the future development of DC systems, we will still have the AC connection. For the current power levels, we would maintain the 38 kV primary switchgear, and that is expected to remain consistent for the DC systems as well. However, as we delve into the DC distribution for the data center architecture, Powell technology will need to play a role, necessitating some investment in the rectifier solution. There are various alternatives to consider when planning the distribution scheme for any facility. We've had discussions with several professionals in the field about what we do and what steps we need to take to meet future requirements. We're actively engaged in that conversation.

Great. Appreciate that. And maybe, Mike, for you, just back to the margins and pricing. I think you called out you feel good on backlog and sustainability. Just remind us, I think you called out 100 basis points this quarter, but how should we think about '25 sort of normalized? Is sort of 28% the right ballpark? Or how are you viewing that?

Yes. I mean, look, it was another really outstanding quarter operationally. We generated roughly 100 basis points of margin due to project closeouts. And from a year-to-date perspective, exiting the year at 29.4% on a year-to-date basis, this had about 125 basis points of project closeouts. So when we think about the sustainability and considering the margins that we see in backlog, we do anticipate a continuation of solid project execution through next year. And considering this margins in the upper twenties for the total year of fiscal 2026 are realistic.

Brett, I have a question about the LNG market. It's been around 9 to 10 months since the pause ended, and it seems some people expected that several LNG projects would have reached Final Investment Decision by now. Looking at those projects, are you surprised that some haven't reached that stage yet? Or is there something holding them back?

How to answer this question. It's very active. It has taken a little more time, to your point, Jon, to get back up to speed. I think, looking at the broader picture with each model, how they're going to market, where their cargoes are headed, and who they're signing production agreements with gives me a sense of why there have been some delays, but I'm not overly concerned. I still feel confident about the fundamentals of many projects. I didn’t provide much detail in my prepared comments about the space other than to say we maintain a positive outlook for the gas sector. I want to reiterate that we are seeing strong activity, and I believe our investment in offshore will be well-timed with the upcoming developments.

Okay. A couple of questions on the end markets. In the C&I segment, beyond data centers, what might be active in that area? And then also in the Traction area, orders were up significantly. What are you seeing there that's driving the business in Traction?

Yes, in the Commercial and Industrial segment, the primary driver is clearly data centers. As I mentioned earlier with John Franzreb, this area is very active, and we are witnessing considerable growth opportunities. The remaining portion consists of other industries where we have had a presence but have not actively pursued. Mining is a notable example. Occasionally, we observe activity in pulp and paper integrated facilities, which have significant power requirements and involve handling fluids and pulp slurries, leading to substantial medium voltage usage. The demand in that sector tends to fluctuate. We also occasionally identify other commercial activities emerging through engineering and construction firms or distributors. As we gain exposure to the distribution market, we are starting to notice broader industries coming into play that we may not have directly encountered through our Powell sales channel. The Traction piece is indeed an interesting narrative. I've always highlighted, and we’ve discussed it within the company, how much I appreciate Traction. I believe we excel in this area. On the DC side, we’ve been involved for nearly 30 years and we've honed our expertise. While many compete in this market, there are also others who disrupt it, particularly on the contracting side. This often complicates matters. The reason there are few players in the gear sector is that by the time projects reach companies like Powell, they often come with complicated terms that raise questions. After a lull over the past couple of years, projects are finally reaching the market again due to the complexities involved in government contracting. Now, there is a wider range of projects emerging, especially along the East Coast, from Ramada up to New York, over to Chicago, and even in Canada. Several projects are coinciding in their timelines, and we anticipate more opportunities continuing into next year.

No, Jon. I think you'll see leverage, especially when you compare it to what we reported in our fourth fiscal quarter with those unusuals. When you look at the year-to-date numbers, we reported 8.6% of revenues in the total year '25, that compares to 8.4%, 20 basis points, as I noted in the prepared comments, 24 basis points above where we ended 2024. So relatively flat, and that also has the acquisition cost. So yes, nothing crazy that we see going forward.

Got it. And I might have missed this in the prepared remarks, and I apologize. But how much of the backlog is deliverable in the coming 12 months?

About 60% is convertible in 2026.

Got it. Got it. And one last question, and again, this is just a point of clarification. Data center revenue, I mean, maybe for all of fiscal 2025 as a percentage basis? And how does that comp to like 2024? Just trying to contextualize it.

If you look at our backlog, our backlog for C&I is about 15%. Roughly half of that is data centers. That's probably 100 to 200 basis points higher than it was last year.

Mike, just a question on the incentive comp. Was that sort of a catch-up number in the fourth quarter?

Yes, it is, Jon. What we typically see is we will accrue based on our expected results as we progress through the year. And given the results of our results that we had this year, we did have a catch-up in the fourth fiscal.

Okay. Can you tell us how much the catch-up was?

Well, as I mentioned to John Franzreb a little earlier, the variable compensation of the $5 million year-over-year increase, variable compensation and compensation in general, which would include headcount adds and the like was about $3 million. And then the legal and valuation services related to the M&A activity was just under $2 million.

Thank you, Nick. As you've heard from Mike and I this morning, we are very pleased with the financial results for our total fiscal 2025 financial performance. And we are very proud of the Powell team that delivered for our shareholders. The markets we serve continue to support our belief that fiscal 2026 will be another strong year for Powell. I would like to welcome our new team members from Remsdaq Limited to Powell. I am very excited to write the next chapter on electrical automation and how Powell will help drive that future. 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.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.