Powell Industries, Inc. (POWL) Earnings

Management highlights

Overall Financial Performance - Record quarterly new orders of $934 million, nearly 3x the prior year level and nearly double the prior quarter's order total, driven by one $400+ million phase 1 mega data center order, a $75 million petrochemical fertilizer project award, and a $60 million LNG liquefaction facility award, with an additional $350 million of smaller orders balanced across end markets. - Total backlog reached a record $2.4 billion, up $967 million year-over-year and $619 million sequentially, with execution extending into fiscal 2028. The book-to-bill ratio was 3.0 for the quarter and 2.2 year-to-date. - Gross margin held steady at 30.6% year-over-year, up 90 basis points sequentially, with gross profit increasing $7 million to $95 million. - SG&A expense was $27 million, up $1.6 million year-over-year primarily due to higher compensation from the REMSDAQ acquisition, while SG&A as a percentage of revenue fell 20 basis points to 8.6% year-over-year. - Net income was $52.2 million ($1.42 diluted per share), up from $48.2 million ($1.32 diluted per share) in the prior year quarter. - Operating cash flow was $100 million, with total liquidity (cash, equivalents, short-term investments) of $634 million and no outstanding debt. Capacity Expansion Initiatives - Multiple capacity expansions are underway, growing total company footprint by over 20% by the end of fiscal 2026 compared to fiscal 2025 end. - A 30,000 square foot leased expansion near the Ohio facility will be further expanded via option exercise in response to accelerating order growth. - A 50,000 square foot leased manufacturing facility near Houston is operational, plus two new satellite engineering offices in the Houston area have been opened to add talent. - The 335,000 square foot Jacinto Port facility expansion, initially for LNG custom power control rooms with flexible long-term use across all markets, will be completed in 1-2 months and support over $100 million in incremental annualized revenue when fully utilized. - The board approved a new lease for a ~300,000 square foot manufacturing facility expected to be operational in late Q2 / early Q3 of fiscal 2027, supported by a previously announced $8 million equipment investment at the Mosley facility. - Management continues to plan for a potential greenfield owned 250,000-300,000 square foot facility requiring $70-$100 million in capital, with a final decision expected in the near term. Strategic Development - M&A pipeline is healthy, with a focus on complementary products and growing the services franchise, though activity is tempered by currently rich valuation levels across the sector. - The REMSDAQ acquisition is progressing well, with good integration and its next-generation product controller expected to launch in the next few quarters, and it has already supported new opportunities in the growing data center market.

Guidance

• Management reaffirmed confidence in sustained durable secular demand across all core end markets, driven by structural undersupply of power, growing U.S. LNG export demand, and rapidly rising data center investment, expecting continued momentum through the end of fiscal 2026 and into fiscal 2027. • Management expects Powell is well positioned to deliver strong financial performance in fiscal 2027 supported by a record backlog, stable pricing, disciplined execution, and a strong zero-debt liquidity position. • Approximately 54% of the current $2.4 billion backlog (just under $1.3 billion) is expected to convert to revenue over the next 12 months, with an average quarterly net book-and-burn of ~$75 million.

Segment performance

Total revenue for the third quarter of fiscal 2026 was $312 million, a 9% increase year-over-year from $286 million in the prior year quarter. Domestic revenue grew 12% ($26 million) year-over-year, while international revenue decreased 1% ($1 million) to $61 million due to softness in the Canadian market. By end market segment: 1) Commercial and other industrial: Revenue grew 54% ($27 million) year-over-year, and this segment accounts for 40% of the company's total $2.4 billion backlog. 2) Electric utility: Revenue grew 18% ($14 million) year-over-year, and this segment accounts for 24% of total backlog. 3) Core industrial (petrochemical and oil and gas): Combined, this segment accounts for 30% of total backlog. Within this segment, oil and gas revenue was flat year-over-year, while petrochemical revenue fell 49% year-over-year. Light rail traction power revenue was 7% lower year-over-year due to low relative volume.

Risks & headwinds

• Moderate inflation in core commodities (copper, aluminum, steel) and engineered components is creating a mild headwind, though hedging and commercial discipline are currently offsetting this impact. • Widening competition for craft labor across multiple U.S. regions is expected to become a challenge for capacity expansion in fiscal 2027 and 2028, though it has not impacted operations to date. • Project-based revenue results in inherent quarterly lumpiness, so year-over-year growth rates will vary quarter to quarter. • Longer term, industry capacity additions could eventually catch up to current high demand, which may put downward pressure on margins. • Near-term R&D resources have been partially diverted from long-term new product development to support short-term certification testing for large new projects.

Analyst Q&A

• Q: What is driving current strong gross margins, how competitive is pricing across end markets, and can Powell be more aggressive on pricing amid strong demand? /

  A: Pricing opportunities are greatest in the commercial/data center end market, where delivery speed is the primary customer value driver rather than pure price. The industrial market is more price sensitive, though current margins remain healthy. Margins are supported by favorable product mix, operating leverage from expanded capacity, and stable pricing that meets expectations. Moderate commodity inflation is a mild headwind, but hedging and commercial discipline offset this impact, and strong project execution continues to add incremental margin. Gross margins have not peaked, with higher-margin growth from automation and services expected to drive long-term improvement.

• Q: What is the thought process behind potential greenfield facility investment, and what are you seeing for labor availability as capacity expands? /

  A: Near-term backlog growth is being accommodated by capital-efficient leased facilities to meet immediate demand. A greenfield owned facility will be pursued to support long-term organic growth from the R&D pipeline and potential M&A activity. Craft labor markets are increasingly tight as large construction projects pull labor from across multiple U.S. regions, which is a different dynamic than past cycles. No immediate impact is expected over the next two quarters, but management expects it will become a challenge that requires creative solutions in 2027-2028.

• Q: What is the revenue conversion timeline for the $400 million mega data center project, and are other similar large projects in the pipeline? /

  A: The project will burn down over 2-2.5 years, similar to other large Powell projects, with work split across five North American facilities with limited design work required for the scope. Multiple future phases of this project are planned, and Powell expects to be selected for additional work if it executes successfully on phase one. While there are more $100-$200 million mega commercial projects in the pipeline than in prior years, there are no other $400+ million projects currently in the near-term pipeline outside of future phases of this award.

• Q: How might consumer pushback on data center development and the shift to higher voltage 800-volt designs benefit Powell? /

  A: Behind-the-meter self-generating data center projects like the $400 million award increase Powell's total addressable content, as these operate as power islands that require more switchgear, controls, and full-system services from Powell, compared to grid-connected facilities. Powell currently focuses on the outside-the-data-center electrical infrastructure, and is monitoring the shift to 800-volt DC designs for internal data center use. The company sees incremental midterm opportunities in this space and is evaluating potential product entry.

• Q: Will SG&A increase significantly to support capacity expansion plans? /

  A: There will be some transitional SG&A pressure as new facilities are stood up, since costs will be incurred before new facilities reach full productive capacity. Management is actively taking steps to mitigate any near-term margin impact from this transitional period.