Powell Industries Inc (POWL) 2005 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Powell Industries' second quarter 2005 earnings conference call. At this time all participants are in a listen-only mode. Following today's presentation, instructions will be given for the question-and-answer session. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded today, Wednesday, June 8th of 2005. I would like to turn the conference over to Karen Roan with DRG&E. Please go ahead.

Thank you, Mary. And good morning, everyone. We appreciate you joining us for Powell Industries' conference call today to review second quarter results. We would also like to welcome our Internet participants listening to the call simulcast live over the Internet.

Before I turn the call over to management, I have the normal items to cover. You could have received a fax or e-mail of the earnings release this morning. Sometimes there are technical difficulties, so if you did not get yours, please call our offices at DRG&E, that's 713-529-6600 and we will get one out to you. Also if you want to be on the permanent e-mail or fax list, please relay that information to us.

There will be a replay of today's call and it will be available by webcast by going to the Company's website at www.powellind.com, or a recorded replay will be available for the next seven days by calling 303-590-3000 and using passcode 11031346. Please note that information reported on this call speaks only as of today, June the 8th, 2005, and, therefore, you are advised that time-sensitive information may no longer be accurate as of the time of the replay.

As you know, this conference call includes certain statements, including statements relating to the Company's expectations of its future operating results that may be deemed to be forward-looking statements within the meaning of the Private Securities and 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 the forward-looking statements.

These risks and uncertainties include, but are not limited to, competition and competitive pressure; sensitivity to general economic and industry conditions; International, political, and economic risks; availability and price of raw materials; and execution of business strategies. For further information, please refer to the Company's filings with the Securities and Exchange Commission.

Now with me this morning are Tom Powell, the Company's President and Chief Executive Officer; Don Madison, Chief Financial Officer; and Mark Reid, Executive Vice President. Now I will turn the call over to Tom.

Thank you, Karen. And thank you for joining us this morning to review our second quarter of 2005. Revenues for the second quarter of 2005 were $58.9 million compared to revenues of 51.5 million for the second quarter of 2004. Our second quarter results were again impacted by competitive price levels and rapidly increasing commodity prices in our electrical products business segment. The Company reported a net loss for the second quarter of $295,000, about $0.03 per share, compared to a net income of $360,000 or $0.03 per share in the same period a year ago.

While we are not pleased with our earnings, I am happy to report that the bulk of our low-priced business has been shipped and we are extremely satisfied with our second quarter bookings of new business at $74 million. Bookings are up 23% over the first quarter and are at increased price levels.

Backlog is currently at $161 million, $30 million higher than at the end of the second quarter a year ago. Our new fabrication and finishing system at Powell Electric has been completed. It is running well and will help with this improved backlog. It is now a matter of staffing up on the manufacturing side of the business to handle the current volume.

Transdyn continues to perform very well with its existing contracts. Our Transdyn Intelligent Transit System, or ITS as we call it, is now operational on the Holland Tunnel portion of the Lincoln/Holland Tunnel project between New York and New Jersey. All available construction work at Holland Tunnel is substantially complete, and the operational acceptance test was completed earlier in the year. Construction work on the Lincoln Tunnel portion is underway and is scheduled for completion by the end of our fiscal year.

I am happy to report that this project was voted the ITS America Project of the Year for the State of New York for 2005. In fact, the award ceremony acknowledging the Port Authority of New York and Transdyn is being held tomorrow. Obviously, this project has gone very well and the Port Authority is very pleased with our performance.

And now I will turn this back over to Don Madison for a detailed review of our financial results and then I will come back for some additional comments. Don?

Thank you, Tom. Revenue for the second quarter of fiscal 2005 was $58.9 million, compared to last year's second quarter revenue of $51.5 million. Gross margin for the quarter was 14.3% compared to last year's first quarter of 16.7%. Competitive price levels and higher basic material prices have continued to adversely impact our gross margins. Material costs increased approximately $300,000 of the second quarter of 2004. Primarily due to higher prices for copper, aluminum and steel.

Selling, general and administrative expenses increased by $1.2 million to $9.4 million in the second quarter of fiscal 2005 compared to the same period last year. Research and development expenditures were $500,000 in the second quarter of 2005 compared to $900,000 in last year's second quarter. Commission expenses for manufacturing sales representation, as well as direct sales expenses increased by $300,000 in the second quarter of 2005 compared to the second quarter of 2004, primarily due to increases in business volume.

Accounting and auditing expenses increased by $200,000 primarily due to costs incurred for Sarbanes-Oxley compliance. Additionally, selling, general and administrative expenses for the second quarter of 2004 were reduced due to the collection of about $400,000 which had previously been written off as bad debt expense.

Earnings before interest and income taxes or EBIT for the second quarter was a loss of $911,000 compared to income of $432,000 a year ago. For the quarter, net interest income increased by $37,000 to $178,000. Our income tax provision was a benefit of $451,000. For the quarter, we recorded a net loss of $295,000 compared to net income of $360,000 for the second quarter of 2004. We reported a loss of $0.03 per share compared to earnings per diluted share of $0.03 in the same period last year.

Our backlog for the second quarter of 2005 was $161 million compared to $147 million in the previous quarter, and $131 million in the second quarter of fiscal 2004. The orders in the quarter were $73.6 million, compared to our previous quarter's result of $60.1 million. In the second quarter of fiscal 2004, new orders were $45 million. This is -- this is our strongest quarterly bookings level since 2002, except for the second quarter of 2003 when we were awarded a $38 million ITS contract for the Holland and Lincoln Tunnels.

We ended the quarter with $41.3 million in cash and marketable securities compared to $63.2 million at the end of fiscal 2004. This reduction in cash was used primarily to fund growth in inventories and working -- excuse me, inventories and accounts receivable. Working capital at the end of the first quarter was $99 million compared to $98 million at the end of the second quarter.

Turning to our business segments. The Electrical Power Products segment recorded revenues of $48.4 million compared to $44 million in the same period last year. Income before income taxes for Electrical Power Products was a loss of $1.5 million compared to income of $270,000 in last year's second quarter.

The Process Control Systems segment reported revenues of $10.5 million, versus $7.4 million in last year's second quarter. Income before income taxes for Process Control Systems was $785,000 compared to $303,000 a year ago.

Now looking ahead to our third quarter and the balance of the year. Based on our existing backlog and booking trends, we expect third quarter earnings to range between $0.10 and $0.15 per diluted share and full-year 2005 earnings to range between $0.15 and $0.25 per diluted share. Fiscal 2005 revenues expected to range between $220 million and $230 million.

With that, I will turn it back to Tom.

Thank you, Don. I will make a few more comments, and then we will be happy to take your questions. First of all, on behalf of everyone at Powell, I want to acknowledge that Gus Zeller, who after serving as President of Powell Electrical Manufacturing, our largest subsidiary for the past 15 years, has announced his retirement effective the end of October. We are very appreciative of his leadership and service to the Company, and we are pleased that he will remain here through October during the transition period. Gus has performed admirably through the years, and we wish him well in his retirement.

Mark Reid, our Executive Vice President has taken over the duties as President of Powell Electrical Systems, which includes our Electrical Manufacturing facilities in Houston and North Canton, as well as our Delta-Unibus division outside of Chicago.

Our third quarter started with a very strong month for orders. With the remodel [ph] order of 50 million-plus other business, May was the best bookings month for our Electrical Power Products segment in the history of the Company with new bookings approaching 75 million. So we do anticipate an excellent third quarter in bookings.

We have raised our prices, and they appear to be sticking. Overall, I am pleased to say that it appears that our industry is acting again rationally as far as pricing is concerned. I think pricing is more rational today than it has been in the last 18 months in our industry. And I hope they are listening.

I also want to comment on our Chevron, formally Chevron Texaco announcement that we sent out this morning. On February the 22nd, we announced a multi-year agreement with a major energy company, but we were bound by a confidentiality agreement and were unable to disclose the name of the company. We just now received permission from Chevron last evening to disclose their name and some information about this alliance.

We were designated as a preferred product supplier on a global scale for electrical offshore equipment modules and onshore electrical power control rooms for Chevron. Our primary role will be to interface with other equipment suppliers to package and fully integrate the various electrical equipment requirements and to fully assembled and functional power modules ready for shipment and installation. These products will go to production and refining facilities throughout the U.S., existing and emerging oil and gas production fields around the world, gas processing platforms and through L&G offloading terminals. These will go to locations in the Gulf of Mexico, off the coast of Angola, Nigeria, and in the Mideast.

We believe we obtained this alliance based on our engineering expertise, manufacturing capabilities, and our long-standing reputation in the industry as a prime supplier for equipment integration and packaging of complex projects with a diverse product mix.

Generally speaking, the opportunities we are seeing now are broad-based. We are seeing good prospects with all of our utility customers, a number of the IPP customers, and in oil production and refining. In the utility area, there is a lot of environmental work, such as electrical power for scrubbers for coal-fired generating stations, this is quite accurate. We just booked a large job in the IPP area that will be going to Dow Chemical down here and in Freeport, Texas. So, again, more IPP opportunities.

And certainly opportunities have picked up in the offshore area. We anticipate obtaining some very nice orders in the third quarter in that segment of our business. International work has been slow, but we are beginning to see some improved activity in that area.

Going forward, our opportunities are healthy, and we expect strong orders for third quarter and balance of the year. The size of the job we are seeing and the complexity of the opportunities certainly play well to our portfolio of products and expertise, and we surely hope to finish the year with a flourish in order activity, improved revenues and earnings. At this time, we'd be happy to answer any questions you might have.

Thank you. [OPERATOR INSTRUCTIONS] Our first question comes from Richard Leader, with Burnham Securities. Please go ahead.

Good morning.

Good morning, Richard.

Good morning, Richard.

Congratulations on the pickup on bookings and especially that Chevron order.

Thank you, sir.

In Mark's case, now that he's moving more into the operating side of the business, with the pickup in overall business trends, Tom, and with the drawdown in cash, should we perceive the Company as less -- less inclined to be in acquisition mode now?

No, you may not. We have -- we are actively looking and have been looking at several significant opportunities. One, unfortunately, we are disappointed with, but we still have several going forward.

Okay. Well, good luck to Mark and his new assignment. Don, on the cash, that is a pretty big drop in cash. Was that in line with sort of the budgeting process that your needs were?

When you are looking at the full-year expectations, right now we have put a little bit more into working capital than I would have liked to have seen, but when you start looking at it and analyzing it, it's going to start flowing back out in billings and receivables here between now and the end of the year. I have gone in and we've looked at where we stand, for example, in accounts receivable. Accounts receivables are up about $6 million between now and the end of the year, but when you start looking at what it is made up of, actually our DSOs have improved.

So while we have improved our operating performance, we have put about $6 million into accounts receivable. Looking at our inventories and our contracts in process, we are getting to the point now where we're reaching some billing milestones and that will help us level out the cash requirements between now and the end of the year.

One last thing. I'll let some other people jump in here. But, Tom, from time to time, you've mentioned how you would like to see an Energy Bill passed up in Washington. And it looks like we may be moving in that direction. Do you have any general comments, having just read the potential for what could pass? And is this in keeping with your previous positive view that an Energy Bill would help the Company. And I'll -- I'll just listen on hold.

Well, I certainly think an Energy Bill will help improve the outlook for the business. I am happy to say that some of the Environmental Bills that have passed in the recent past have certainly helped the business already as we are really powering up to put scrubbers in all these coal-fired generating stations. The -- there is a Transit Bill that is -- that passed by the Senate in May. It is a Transit Bill for 200 -- basically $300 billion over six years. There is still a little wrestling with that thing right now. They just issued a one-month continuation, Bill TEA-21, which expired May the 31st. I certainly believe we will have that passed in the next -- within the next couple of months -- if the monkeys up there quit wrestling with each other. It certainly will help our business going forward in the transit arena. So they are starting to get a few things done. Next question?

Our next question comes from John Franzreb with Sidoti & Company. Please go ahead.

Good morning, guys.

Good morning, John.

My first question actually is regarding the previously announced Washington Transit Authority Award. $51 million spread over four years. Should we view that as kind of a replacement for the Lincoln Tunnel contract based on the timing of that? And the operating margin contribution of this contract. Is it similar or higher than other contracts? Tom, I noticed in your commentary in the press release that it has more power products. So is that -- does that result in a higher profit contribution than we have seen in other PCS businesses?

It's -- that contract was taken at healthy margins. It's -- it is probably in line with other Electrical Power Product contracts that we've received. It's -- it doesn't have much of Transdyn's content in there. It has AC switchgear, which will be done in Houston. It has rectifiers, the dial rectifiers that will be done in Houston. It has DC switchgear, which will be done at our North Canton facility and has, of course, transformers, and has a number of -- a great deal of bus duct in it, which will be done at our Delta Unibus facility. We are very pleased to have that contract.

Okay. Should we kind of view that as, as one contract steps out, another one is going to kind of step in? Another large one, I guess, is what I'm --

If you are looking at the overall business, John, clearly we have a $50 million contract that is going to basically kick in and support us from a Company perspective into the beginning of 2006. But you need to recognize, this is in our Electrical Power Product business segment, not in the Process Control Systems.

Oh, I am sorry. I thought it would be in PCS. Actually this is all going to be in Electrical Power Products.

This is all Electrical.

Oh, okay, okay.

However, Transdyn has several opportunities that we are working on too.

Okay.

I don't know if it would completely replace the Lincoln/Holland Tunnel opportunity, but obviously a Transit Bill that passes will help their outlook going forward and we are having -- we're having some success with some bookings in that arena.

Okay. Yes, because I was kind of viewing it as, do we drop off that $45 million contract, we pick up the 51, but really it is two different sides of the business.

Yes, sir.

That's correct.

Okay. My second question is, regarding the guidance. If everything is seemingly doing so well as far as orders and bookings and the pricing model, why is it that you raise or tightened your revenue outlook, but lowered the top end of your EPS guidance. Can you kind of rectify that with me?

Again, what we were doing was just trying to tighten the guidance, looking at where we are today, what the performance was in the second quarter and how we anticipate it rolling out between now and the end of the year. We have ramped the factory up, and did that very well, and, therefore, we opened the revenue guidance up a little bit to be more realistic as to what the full-year number will likely be. Given the performance we had in the second quarter, and what we anticipate the balance of the year, I think it is going to be difficult for us to recover the second quarter results, and that's what you see reflected in the full-year guidance.

Okay. Fair enough. And one last question. Raw materials have been an issue in the past. How much did raw materials impact gross margins in the second quarter versus a year ago? Do you have that number down?

The second quarter impact was $300,000 compared to the second quarter of 2004. We are basically seeing what you would consider a relatively stable market compared to what we've seen the last 18 months in the metals market. There is some volatility in it, but it is not like what we were seeing this time last year.

Great. Thank you very much.

Thank you, John. Next?

Our next question comes from George Gaspar with Robert W. Baird. Please go ahead.

Yes, good morning to everyone.

Hello, George! Good to hear from you.

Nice to be on the call. And just want to wish you guys a lot of luck here in your continued rebuilding your business. It sounds -- it sounds pretty good. A few questions on -- for example, DD&A. There was a decline in DD&A in the quarter and relative to last quarter and the year before. I am assuming that that's due to the elimination of the operation in -- is it Greenville that was consolidated? Is that the cause for DD&A decline?

George, yes. We did close three facilities, two last year. That has definitely impacted our depreciation expense. And then I believe we had a little bit rolloff early this year in excess of what we are putting back into it at this point in time.

Okay. And your CapEx for the quarter is pretty low, about 0.5 million. Maybe you commented on that and I didn't catch it, but how do you view the quarter-to-quarter CapEx for this year total versus the previous year?

The guidance that we have given on this year, I believe, is around $6 million. At this point in time, I would say that we probably will not hit that number. It is probably going to be a little bit shy. We are very focused on getting our output up at this point in time. So we are not looking to begin any new capital projects in between now and the end of the year. So it is just wrapping up the projects in process.

One more and then I will requeue. On the Chevron award, that sounds good. Can you explain at all, Tom, if you are going to get the switchgear componentry in these units that you are going to be building over a period of time? Or will you get some and have other such gear come in from others? Or what kind of arrangement, if you can share that?

The Chevron has alliance with another electrical switch-gear supplier and a different medium-voltage and low-voltage motor control supplier. We have a contract for the modules and other certain electrical apparatus, bus duct and so forth. However, some of the Electrical Power Products required -- fit our scope much better than some of the competitors, and so one the orders that we have -- we have just received or are in the process of receiving will have our Electrical Power Products in it. So it's really -- it's really the customers' call. Obviously we would like to have that work. But we have committed to work with their alliance partners.

Okay. All right. Thank you.

Thank you. Our next question comes from Rob Longnecker with Barrington. Please go ahead.

Hey, guys. I just wanted to drill down a little bit more on gross margin. It looks like if you strip out the raw material cost, the margin was still only 14.8%, which kind of surprises me in the context of revenues up 14%. So I was wondering if you could just give us some more color on what's behind those numbers?

The biggest challenge that we are having is working off what we would consider relatively low-priced backlogs. So when you're looking at our project mix of what's flowing through the revenues during the quarter, a lot of those projects were business that were quoted and obtained during a period of time where the market was very soft. And that's what we are talking about. That's beginning to flush out of our backlog. We anticipate to see a noticeable improvement of that between now and the balance of the year.

So the business that is kind of flushing through now, when -- I mean on average, when do you guys think you were booking that?

Majority that was booked mid last year.

Okay. Got you. And then just moving down to the expense line. Can you just run through the breakdown on expenses again? I didn't quite catch them all.

Okay.

Direct sales expense I think you said was up 300,000?

Yes. Just give me second and I will get back to that section. Basically, when you are just running down through those variances between this year and last year, R&D is up about $400,000 quarter-to-quarter. Full year to full year, anticipate this year might even come in -- down slightly. So a lot of that is timing of projects. When you are looking at sales expense, it is up about $300,000 quarter-over-quarter. Most of that during the second quarter is volume-related.

And then the other two numbers that we talked about is accounting and auditing expenses are up about $200,000 quarter-over-quarter. Most of that has to do with our Sarbanes-Oxley compliance work. And then last year, we were able to recover about $400,000 in previously written-off bad debt expense. So, therefore, when you are trying to explain the delta of 1.2 million, you need to understand that.

So it sounds like it is almost flat if you normalize all that stuff.

It's -- we are flattening it out from what we have seen the last -- if you go sequentially, the last couple of quarters we are definitely flattening out.

Okay. And that R&D you said -- your full-year R&D you expect to be basically the same as last year. This is just a timing issue?

That's correct. When you look at full year of project expenses, I anticipate it to be relatively flat, maybe down slightly from what we incurred last year.

Okay. I will jump back in queue. Thank you.

Thank you. Our next question comes from Jerry Heffernin with Lord Abbott. Please go ahead.

Good morning, gentlemen, and congratulations for the big turn-up on activity here. I would like to focus on the gross margins a little bit also. And understanding that you had a period of time when the business you were able to book was at subpar pricing. Additionally, during that period, you also had pretty rapid raw material cost increases. I am trying -- I would like to better understand, Tom, your comment toward rational pricing or better pricing now in terms of -- is the absolute pricing going up? Is pricing holding flat? And that's a good thing because raw material prices are beginning to fall? Or a combination of both?

Raw material is relatively stable, at least for the moment. We've actually increased prices anywhere from 5% to double digits and little bit beyond. It depends on which -- what the product mix is and what the product commodity is. So price levels have -- have definitely come up, and that was the reason for the rationale comment about a more rational industry. I think we have all taken a bit of a bath in the last -- over the last 18 months.

Yes. Okay, sir. About a year ago you had made mention that you were getting to the point where you were really trying to push escalation clauses. In the new business that you are writing, after what we have just seen the last two years with raw materials, I am pretty sure no one has any idea where they go next. With the price increases, do you feel you are getting some better terms as far as the ability to, if anything, rapid happens in the raw material prices during the order period that you can get that through and any other aspects of the escalation clauses.

I will say that two large contracts we received lately have a form of escalation in there based on steel and commodity prices. And customers have also said if this -- if this situation gets out of hand going forward, we will be happy to sit down and talk with you again. But as a general rule, escalation is still sort of roborent (ph) for now. But we certainly are working on it at every opportunity.

Okay. And I would imagine by the way you phrase those two large contracts, that in the past, the larger the contract, the less willing they were to be reasonable with escalation clauses and things like that?

Well, those -- let's just say those contracts that are over a period of time of two, three years, and obviously, you've got to cover your bases. But a contract that is expected to -- that you accept that is expected to ship in six to eight months, escalation they feel is -- you should be able to cover that in your initial base bid. So it is the longer-term contracts.

Okay. Very good. Thank you.

Thank you, sir.

Our next question comes from Brad Evans with Heartland Advisors. Please go ahead.

Gentlemen, good morning.

Good morning, Brad.

Don, I have a question -- I've got a few questions, but first, help me reconcile the cash flow statement, because if I take net income and D&A and then back off CapEx that is basically a nil and your working capital sequentially is only up about $100,000. Did you pay down debt in the quarter? What is the cause of the cash burn?

A quick and dirty analysis is basically you will see accounts receivables going up. Again, we talked about that. They are going up about $6 million when you are looking at that compared back to the beginning of the year. But that is not necessarily in degradation and quality. The actual DSOs have dropped about five days from where we were late in the fourth quarter. You are going to see another $3 million to $4 million growth in inventory. And then you are going to see about $10 million net -- again, I am trying to reconcile here quickly in my mind, but it's going to be over $10 million growth in our excess in billings and on uncompleted contracts.

Oh, okay.

So we are looking at our POC (ph) and where we are with our milestones versus billing, which we've got to get -- to hit those milestones, get that into receivables and start flowing it back in through collections, and that's where I think you are going to see the activities between now and the balance of the year.

That is very helpful. Thank you. Can you -- do you mind -- can you disclose what the margin in backlog is?

No.

Okay. Fair enough. I guess the -- can you just talk about the utility IPP, the refining chemical in the upstream markets. Can you just rank order them from those that are strongest to weakest? And I had a follow-on question to that then.

At this -- I will let Tom respond a little bit more, but clearly what I am seeing in the revenues, what I am seeing in the orders, it is very broad-based. I don't see a noticeable difference over a period of time in the incoming orders between the growth that we've seen in the utility side versus the industrial side. So it -- I would -- would reiterate what Tom said earlier, we are seeing it in the traditional investor-owned utilities, we are seeing it in IPP business, and we are seeing it both in the oil and gas, as well as the refining and petrochemical areas. So it has been very broad-based.

Not too much in chemical I might add, but certainly in oil refining and offshore opportunities of that nature.

Capital construction projects, which really drive our business, has really opened up pretty much across the board in the last six to nine months.

Okay. That -- I appreciate that. And then I was just going to ask you relative to -- with the pacing of business, are you seeing more turns business in the quarter, book and ship without the orders ever making it into backlog. Are you seeing customers requesting shorter lead times?

We -- that type of business is relatively a small portion of our total business. We do have some parts and services and small orders that actually, during the summer, those typically are the lightest. They tend to pick up around the holidays towards the end of the calendar year.

Okay. Thanks very much. Congratulations on the improving outlook.

Thank you.

Thank you.

Thank you. Our next question comes from Tom Spiro with Spiro Capital. Please go ahead.

Good morning.

Good morning, sir.

I have two or three questions. Number one, on the Chevron contract, Tom, is -- are we expecting that contract to ramp up slowly in terms of real orders or has the customer suggested that we will see sizable orders in the near term?

We have -- we have already received some orders which are in backlog, but going forward, I know of at least five or six projects that are yet to be -- to be bid. In some cases, they may be a little slow, particular where L&G offloading terminals are concerned. They have to get all the various Federal approvals and so forth. But it -- I believe you will start seeing that ramp up, and you will start seeing some more opportunity -- well, some more business will be coming in in the third and the fourth quarter and beyond.

What's the term of the contract? How many years?

Five years.

Five years?

Yes, sir.

Okay. As I recall, in the last quarter, Tom, we had a host of sort of minor manufacturing challenges and learning curve issues which cumulatively added up to a significant number. Have we worked through most of those?

Yes, we have, both at the -- here at Powell Electric, that's where most of that occurred, but there was a fair amount in the -- in the bus duct segment, but we've worked our way through almost all of those issues now. I am pretty happy now with what I see going forward.

That's great. That's great. And then last question, if I may, I understand Mark Reid is in the room. Don't mean to put him on the spot, but he has been at Powell now for a number of months, I wonder if there are any observations that he would like to share with us as someone coming from the outside who has now been at the Company for a while.

Well, thank you for the question. I don't mind answering it. I would say my observation is, it is a good time to be here. I think the business is increasing. The -- most of the large CapEx projects are coming on line. We are -- we will see better efficiency out of our manufacturing plants. And the economy is supporting orders. So it's -- it is a good time to be here.

I understood, Mark, that when you joined the Company you were going to be wearing kind of a strategy hat and I gather from today's announcement that you're going to be moving more towards operations. Will you keep your strategy hat and have two hats or just one?

It is two hats for now. And I will continue to work on the strategy of the Company. And we have, as Tom mentioned earlier, several things in the works.

Well, thanks much, and good luck to you all.

Thank you, sir.

Thank you.

Thank you. [OPERATOR INSTRUCTIONS] Our next question is a follow up from George Gaspar. Please go ahead.

Thank you. A question on process control. Looking at what you still have mostly apparently for the Lincoln Tunnel site of the equation out in New York, what type of revenue stream are you looking for in the next couple of quarters relative to what you recorded in the last quarter? And what kind of profit margin might you be looking at? And when will you terminate your revenue stream on the full Holland/Lincoln Tunnel contract?

That's a lot of questions.

We have to pull out about four sheets of paper here for you, George.

You are going to see some tailing off in revenue recognition with the process control side between now and the end of the year. We have about a little over $10 million of revenue yet to recognize on the Lincoln and Holland Tunnel project that will hit fairly strong again in the third quarter, and that project will tail off in the fourth quarter from a revenue standpoint.

Looking at the profitability going forward, I don't see any significant change, but I really don't want to comment on specific quarters or specific margins, but they are backlogged and the projections remain to be positive on the profit side through the balance of the year.

Okay. And if I recall, there was a possibility of an ongoing order, potentially for the Lincoln/Holland Tunnel job. Is there any opportunity to get some additional work beyond which you've recorded and are doing currently?

George, they have gone real quiet on that. We certainly -- as well as we have done on the first segment, anticipated a second segment, which was anticipated initially to be about the same -- about the same magnitude. But it is a funding issue right now. So they've gone -- they have gone a little quiet on us there.

Okay. All right. And then back on the Chevron business, you have mentioned, Tom, that you had recorded some orders and you are in the process of maybe getting some more. Can you define -- are these more for offshore modules, upfront, or are these relative -- or are these for refinery, petrochemical, kind of installations. What exactly -- where are the orders going that you are getting on the front end here?

The initial orders went to some of their refining processes in Mississippi and in California. There now has been orders -- there has now just recently have been an order placed for an offshore production platform, and I believe one that is fairly -- could be secured here fairly soon on a gas processing platform, of course, which is different than a production platform. So it's -- it's in all segments of their business, George.

Okay. One last one on your facilities in Chicago and Canton. Now you have done some consolidating, other opportunities into those. What would you judge your operational percentage to be versus capacity, how flexible are you to increase your volumes in those plants at this point in time?

I think as far as physical space is concerned, we are probably at about 70% capacity. That's sort of a hip shot there. The constraint right now is on people getting new people in and getting them trained adequately. We have had the same thing here at Houston and we are probably at 70% capacity from a facility's standpoint. We've added about 200 -- 225 people in the last six -- four-to-six months, so it's a matter there of getting those folks trained and we will be adding additional people from a manufacturing viewpoint here.

That total, Tom, that 225, how will that break down between Houston and your other facilities?

Well, I think Powell -- I think here at Houston we are at about 850.

The vast majority of the increase has been in Houston, but there has been some incremental employment at each of the locations.

Okay. Thank you.

Thank you, George.

Thank you. Our next question is a follow-up from Rob Longnecker. Please go ahead.

Can you guys say how much of the Chevron business is in your current backlog?

About 15 million.

15 million.

It's about 15 -- 15 million at this point.

And how are those -- how is that kind of overall master contract structured in terms of margin and margin expectation? I mean, how is that set up?

I wasn't even supposed to say -- they pointed out to me a minute ago it was a five-year contract. Chevron didn't want me to say that. So I already split my pants a little bit. I am sure not going to get into the margin issue.

Okay.

But I -- it is certainly at reasonable margins.

Okay. And in terms of the Washington Transit Authority business you guys won.

Yes, sir.

Who were your competitors on that?

I think there were about four competitors. I wouldn't list them by name, but there were four -- I believe four other competitors.

Okay. Thank you.

Yes, sir.

Our next question comes from George Nissan with Merrill Lynch. Please go ahead.

Great, guys. Tom, I have a couple of questions for you. I am concerned with a few things. A lot of your competitors over the last year have recently been implementing some new strategic initiatives to reduce our sourcing cost for the raw materials and commodities by establishing a better line of communication with their suppliers and opening up more collaboration as well. I am interested if you can provide some color on what you guys plan to do in establishing a better line of communication with the suppliers and opening up more collaboration to reduce those raw materials and sourcing costs overall.

Mark? Now that Mark is responsible, it is nice to pass the ball. Mark, can you answer that question?

We want to throw all these questions your way since you've only been on board for --

Sure, that's all right. Well, the answer is, it is actually Powell has worked for years to have long-term relationships with our suppliers. This is nothing new for us. We have very deep, long-standing contracts and the like with our major suppliers. So I am not really sure how to answer that question.

I guess in best terms right now, are you guys running any type of scenarios or cost modeling to make sure for a particular allocation. You are running -- you are providing the right allocation to each vendor for a particular situation? Are you doing it to have a cost modeling?

Let me try to jump in here and see if I can add a little bit of understanding. A lot of our vendor relationships with the electrical components, which there are a limited number that meet the specifications for the type of projects that we work with. And that's what Mark is saying. We have very long-term relationships with these type of suppliers. And those relationships have been working very well and have not challenged us during these last 18 months. Nearly to the extent -- the issues we have had in the last 18 months is dealing with the base commodity metals market. And that is an area where we have good relationships as far as managing the fabrication cost and looking at the cost to produce the products that we need, but it's not one that we have been able to respond as quickly to the overall commodity market price variations as quickly as we would have liked to.

How are you guys going to manage your total cost ownership throughout your supply chain? Obviously, with steel prices just kind of all across the board, the metal prices as well, how are you guys managing that? Are you doing scorecarding your suppliers, running auctions? What are some things that you guys are doing?

Clearly, we are looking at the scorecarding approach as to the performance of the suppliers against the expectations that we set with them when we entered into our business. And that is our primary means of managing, whether we were maintaining where we needed to be or falling off the mark.

What is your supplier feedback? You guys have obviously had a great relationship over the past few years to bring some new initiatives to their plate. What has been their feedback?

Feedback has been that we have a good working relationship, and I think that the challenges that we put forward to them has been responded to as well. I really think that overall, our supplier relationships are solid. The challenges that we have had on commodity markets is where we have had material cost increases.

And are you guys running any type of auctions right now for those material price increases to make sure --?

We don't run auctions on commodity markets.

Okay. Thank you very much.

Thank you. Management, at this time, I will turn the call back over to you for any closing remarks you may have.

Thank you, ma'am. We appreciate you folks joining us today. We look forward to talking with you again next quarter. Have a good afternoon. Thank you.

Ladies and gentlemen, that concludes today's teleconference. Thank you for your participation. You may now disconnect.