Powell Industries Inc (POWL) 2005 Q3 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the Powell Industries third quarter conference call. [OPERATOR INSTRUCTIONS]. As a reminder this conference is being recorded Thursday, September 8, 2005. I would now like to turn the conference over to Ms. Karen Roan, Senior Vice President of DRG&E.

Thank you, Matt and good morning, everyone. We appreciate you joining us for Powell Industries conference call to review third 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 housekeeping details to cover.

You could have received a fax or e-mail of the earnings release this morning, occasionally there are technical difficulties experienced during the broadcast. If you did not get your release please call our offices at DRG&E 713-529-6600 and we will send one to you. Also, if you want to go on on the permanent e-mail distribution list 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 or a recorded replay will be available for the next seven days by calling 303-590-3000 and using pass code 11038422. Please note that information reported on this call speaks only as of today September 8, 2005, and therefore you are advised that time sensitive information may no longer be accurate as of the time of any 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 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 pressures, sensitivity to general economic and industry conditions, international political and economic risks, availability and price of raw materials and execution of business strategies. Further information please refer to the Company's filings with the Securities and Exchange Commission.

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

Thank you Karen, and good morning. Thanks to all of you for joining us this morning to review our third quarter of fiscal 2005. Revenues for the third quarter were $67 million, up 14% over the second quarter, net income improved to$ 2.1 million, or $0.19 a share, compared to a net loss of $295,000, or $0.03 a share in the last quarter. This increase in both revenues and earnings came primarily from improvements in our domestic businesses.

We're pleased with the third quarter bookings of new business of $135 million, up from $73 million in the second quarter. As I previously announced, our third quarter bookings include a $51 million contract award for remodeling. That's the Washington Metropolitan Area Transportation Authority. Other bookings, excluding the WMATA contract total $84 million, which is a 14% increase over our second quarter's results.

We have successfully implemented price increases. Although there are still a healthy number of opportunities, it appears we may have reached a plateau in our new order volume and current price levels. We have lost some domestic business where we have raised prices. There are other suppliers that have not followed us to the same level. It is still a very competitive environment and current order levels may not be sustainable.

Bookings going forward may hit a soft spot, at least domestically. We will keep an eye on this and respond to you accordingly. On the international front, business activities seems to be improving and we look forward to the benefits of our IEC product capabilities that were recently obtained with our acquisition of S&I. After only eight weeks the integration of S&I is proceeding very well. We're ready to begin. We're beginning to see benefits of having both an ANC and IEC product offering. In a moment, I will ask Mark Reid to make occasional comments on S&I, and the initial response from some of our customers.

For some time we've talked about the central artery tunnel project in Massachusetts. Believe it or not we were part of a joint venture that started working on this project back in 1994. The joint venture officially completed the installation portion of the work in June of 2003. I am at last pleased to report we have reached a settlement on our installation construction portion of the project.

We provided control systems for the Ted Williams Tunnel and adjacent roadways for the Massachusetts Turnpike Authority. The settlement was approximately 2 million for previously recognized costs associated with additional work that we had performed on the project. This settlement resolved all open claims including indemnity claims asserted by the follow-on contract or. Under a separate contract contract agreement we are continuing to provide on-site support for these important systems.

Before I discuss the business impact from Hurricane Katrina, I would simply like to say that our hearts go out to those people affected by this catastrophic event here in our backyard. The employees of Powell industries are contributing to a relief fund that the Company will match, dollar for dollar. We're also interviewing qualified individuals from that area for improvement.

Considering all of the damage to Louisiana, Mississippi and Alabama, it is far too early to estimate the impact on our business. However, we have a large number of industrial customers and a great deal of equipment in the affected region. We have people in the field now and are mobilizing additional service technicians to help assess the damage and assist with needed repairs and replacements.

As of this morning, we have booked several Switchgear jobs that we must ship in four weeks. We'll get the job done somehow. What we know is that there is significant damage to offshore platforms, ports, pumping stations, pipelines, chemical plants, refineries, utilities and other industrial commercial sites. Most all of those are important customers to Powell.

Many of these facilities are close to major waterways, in this area industrial sites typically install their electrical equipment up to 6 to 8-foot pilings but we have numerous reports that in many cases this was not high enough to avoid the flood waters. An issue they will -- customers will try to clean the existing electrical equipment, replacing parts as necessary to get the facilities back online quickly. But ultimately over the next several years, much of this equipment will need to be replaced because of the long-term damage created from corrosives and salt water.

Our business should experience a long-term positive effect as a result of what appears to be extensive damage as unfortunate as it is for those people of this region. It is also possible over the near term the storm could disrupt some of our revenues. We have a number of projects that have scheduled for shipment over the next 1 to 3 months that may have to be delayed as those customers are focused on reconstruction and deal with the effects of the hurricane. Some projects may be delayed or rescheduled until the customers can accept the equipment, but in the end the equipment will be shipped however it is possible we will see an adverse impact in the near term revenue due to the storm. Again, it is just a little too early to know.

At this point I will turn it over to Mark Reid to comment on our progress and opportunities with the recent acquisition S&I and Don Madison will give a detailed review of the financial results and I will come back with some additional comments. Thank you. Mark.

Thank you, Tom, as we discussed on our last call when we first spoke about the acquisition of S&I, the main synergy is our ability to serve both ANSI and IEC standards which allows us to fill our customer needs wherever their projects are located. We are now able to move with our customers in an increasingly global economy.

Shortly after our public announcement of the acquisition, we started to receive positive feedback from our customers. It is clear they are pleased with the news. Add to that the reaction of the S&I employees, they are happy to be part of Powell and understand that we consider Switchgear a core business. We are pleased to say that we have retained all of the employees post acquisition and they are looking forward to the growth and direction of the company.

But let me return to the customer reaction. S&I is a well respected company. Customers consider them in exactly the same market space as Powell, as a go-to company for big jobs where the risk is high and things go wrong. Although still early in the process, we are already seeing new opportunities due to having both types of equipment. We are working together to develop programs on how best to go to market.

In fact, we will have our first joint public event next week in Denver where we will be attending the IEEE Meeting for the petrochemical industry. About 1,000 key people attend. These are the engineers that work on global scale projects in both the IEC and ANSI countries. We will be highlighting our combined capabilities with these, our common core customers.

In summary, it is still early, but it is clear the integration of the companies is off to a good start. Customers are interested and there will be new opportunities ahead. At this point I will turn it over to Don to discuss our financial results.

Thank you, Mark. Revenues for the third quarter of fiscal 2005 was $66.9 million, compared to last year's third quarter revenues of $52.8 million. Gross profit for the quarter improved to $12.6 million, or 18.8% of revenues, compared to last year's third quarter results of $9.3 million, which was 17.6% of revenues. While gross profit is improving, higher basic material costs -- market price levels continue to be a challenge.

Selling general and administrative expenses increased by $1.1 million to $9.9 million in the third quarter of fiscal 2005 compared to approximately $8.8 million in the same period last year. Commission expenses for sales representation as well as direct sales expense increased by approximately $600,000 in the third quarter compared to the third quarter of 2004 due to a concerted effort to increase backlog and revenues. Accounting and professional fees have increased by approximately $300,000 due to costs incurred for Sarbanes Oxley compliance as well as for costs associated with acquisition activities.

These increases in selling, general and administrative expenses were offset by a decrease of approximately $500,000 as a result of our closing of our Elyria, Ohio facility in June, 2004. Additionally, research and development expenditures decreased to $600,000 in the third quarter of fiscal 2005 from approximately $800,000 in last year's third quarter.

Earnings before interest and income taxes or EBIT for the third quarter was $2.7 million compared to $468,000 a year ago. Interest expense was $130,000 in the third quarter of fiscal 2005, an increase of approximately $85,000 compared to the same period in fiscal 2004. This increase in interest expense is primarily due to additional debt obtained to partially finance the acquisition of S&I.

We earned $289,000 interest income in the third quarter compared to $235,000 in the same period the previous year. Interest income increased primarily due to higher market interest rates. Our income tax provision was an expense of $695,000. The provision reflects an effective tax rate on earnings before taxes of 24.5% in the third quarter of fiscal 2005. The overall effect this tax rate resulted from a favorable tax impact of approximately $800,000 of free tax deductions resulting from the reconciliation of our income tax provision to our 2004 income tax return, which is filed this quarter.

For the quarter we recorded net income of $2.1 million, or $0.19 per diluted share compared to $737,000 or $0.07 per diluted share for the third quarter of 2004. Our order backlog on July 31, 2005, was $251 million compared to $134 million at the end of fiscal 2004 and $121 million for at the end of the third quarter a year ago. New orders in the quarter were $135 million, compared to $73 million in the previous quarter. As Tom discussed earlier, third quarter bookings included a $51 million contract award for WMATA.

We have maintained a strong liquidity position. At quarter end, working capital was $97 million compared to $9 million at October 31, 2004. At quarter end we had $25.3 million in cash and marketable securities compared to $63.2 million at the end of fiscal 2004. The use of cash was primarily to fund growth in in inventory and accounts receivable as well as to partially fund our acquisition of S&I.

Now looking at our business segments, Electrical Power Products segment recorded revenues of $58.2 million compared to $43.3 million for the same period last year. Income before income taxes for Electrical Power Products was $994,000 compared to $185,000 in last year's third quarter. The operating results of S&I which was acquired on July 4, 2005, are included in our Electrical Power Products segment.

The process control system segment reported revenues of $8.7 million versus $9.5 million in last year's third quarter. Income before income taxes for Process Control Systems was $1.8 million compared to $473,000 a year ago.

Now looking ahead to the balance of the year, we expect fiscal 2005 revenues to range between $245 million and $250 million. And full year earnings to range between $0.15 and $0.20 per diluted share. Our outlook includes expected results -- operating results from S&I. With that I will turn it back to Tom.

Thank you, Don. Let me make a few more comments and we'll be happy to take your questions.

We've talked about an energy bill for some time, and now Congress has passed this legislation. The Energy Policy Act of 2005 was signed by the President on August 8th. The law makes important changes to improve reliability, promote investment in electric facilities, to promote fuel diversity and cleaner fuel sources and promote greater efficiency of electric generation delivery and usage.

I guess simply stated, the impact is this: It reduces the depreciable life for electrical transmission lines, natural gas pipe lines and it reduces the cost recovery period for pollution control equipment on power plants. This should encourage more investment in these areas and of course we supply equipment for all of those opportunities. It authorizes federal funding for clean coal power initiatives and coal based gasification technologies.

It also extends funding for wind energy and geothermal. The bill affords a longer time horizon than just a few months, and will encourage more investment, creating additional opportunities and expedite plans that heretofore have been on hold. It further provides incentive to increase production for areas already open to oil and gas production. There is more to the bill than that but those are the things we initially see that will have a positive impact on our business in the coming years.

Some utility companies in anticipation of legislation have already made investments but many of them are waiting on the bill's passage. Now they're going to be in a catch up mode. Another bill that passed which helps our business, this bill was passed July the 29th with a six year transportation funding bill for 286 billion, of which 52 billion is allocated for transit. a large portion of that for new rail systems and expansion of existing networks and infrastructure projects.

This should benefit both our Transdyn and our traction power businesses. All in all with the recovery in our markets new legislation, expected benefits from the S&I acquisition, and the potential need for equipment replacement due to Katrina, we expect to see continued improvement in our business as we go forward. At this point, we'll be happy to answer your questions.

[OPERATOR INSTRUCTIONS]. First question comes from John Franzreb. Please state your company name followed by your question.

Sidoti and Company. Good morning, everyone. Given one question I think the thing I would like to know the most right now is the contribution from S&I in the quarter, both be it in backlog sales and profitability. Can you strip that out for us and let us know what the organic profile looked like versus the acquisition?

Going forward, qualify first is that we don't plan on breaking out the business because overtime it will become more and more difficult to do so as we start integrating. To give you some color into where we started, we started with just over $20 million in backlog. When you're looking at the backlog change from period to period, our end of June backlog increase is a result of the acquisition by approximately I think it was just over $20.4 million.

When you're looking at the revenue, which I will comment too at this point is that it was in line with our expectations. As Tom noted, the vast majority of the increase was from our domestic businesses. The revenues from the S&I acquisition was approximately $3 million for the month of July from acquisition date through quarter end. The earnings contribution was as anticipated, but as we previously discussed, it was pretty much eliminated as a result of integration costs during the period. The bottom line was not negatively impacted by the net of the two.

Okay. All right. And with the one follow up I am allowed, I actually thought when I was typing in my numbers I transposed the segments. Significant contribution from PCS we haven't seen in a number of years. Could you talk a little bit about what's going on there and how sustainable that is.

Process Control Systems?

Yes.

We noted that were successful in reaching a settlement with the MTA in Boston, clearly that settlement had a cash value of about $2 million. It had incremental revenues of approximately 1.5, a significant portion of that did fall through to pre-tax income.

So the operating profit of 1.8 million includes 2 million --

Excuse me, the cash portion of the settlement was approximately 2.

Right.

Revenue impact was approximately 1.5.

1.5.

And there were costs associated with that, but a significant portion of it did drop through to pre-tax income.

So you still running probably between 3 and 5% on the out margin on PCS.

We had very favorable projects that are coming to an end, so we had some very positive results from multiple projects, clearly your assessment it is in line with the past is reasonable.

Okay. I will get back in queue. Thanks.

Thank you, sir. Our next question comes from Richard Leader. Please state your company name followed by your question.

Burnham Securities. Good morning, everybody.

Hello, Richard.

Tom, it seemed like there was a bit of undue caution on your part and some comments you made about reservations about the some delays in shipments or a soft spot. Can you resolve that for me? It seems to me with the excellent results which were ahead of your forecast, and with seemed like business that you're having to rush out the door, to meet the demands of people as a result of Katrina, with the energy bill and transportation bills that you elaborated upon that the future looks very bright, and yet you talk about a potential soft spot and shipment delays or things of that nature. Can you help me resolve the dichotomy between those two?

Richard, there are certainly opportunities which we've already capitalized on and more opportunities coming forward, but the at the same time I have several projects, large projects, on the floor for power control rooms with all the associated electrical apparatus, these are sizable. And I have several more scheduled over the next three months.

All of which go into the affected area, so until we know if they're able -- if we can even get there, and they're ready to accept them and off load them, generally speaking by now they're building piers and pilings to sit this equipment on. They may not be able to do that right now. How do you pour cement, when you're under water. I suspect several million dollars if not more to be delayed several months.

You have not actually heard anybody say they're expecting to delay it.

No. If God love our customers. They will let us finish it and then they will tell it us. They will expedite until that point and say by the way, hold it for three months. We can't invoice it.

Is this the same as the reference to the soft spot ahead that you made in your opening remarks?

Yes.

Is there another soft spot we need to be aware of?

What I have said is we have raised prices and we seem to have reached a plateau where I didn't know we could sustain bookings at the same level unless we reduce prices and I am not ready to do that. We are not ready to do that.

So we just have to wait and see and measure it day-to-day, month by month, Richard. I think the opportunities are still there. Let me express that. The opportunities are there. It is a matter how far we're willing to go on price levels.

Seems like it even the Wall Street Journal talks about some equipment shortages including Switchgear in this morning's paper.

Yes.

Don, on your outlook, three months ago when you were estimating for the year $0.15 to $0.25, was that with S&I?

No, sir. That was at the end of our second quarter.

So you have actually for the second quarter brought your estimate for the year down a tad?

What we -- if you look at the guidance we've putting out at the end of the third quarter versus the second quarter, you'll see an increase in revenues, the increase in revenues is a related to the acquisition of S&I because that will impact the top line and it did in the month of July, and will going forward. The results that we have for our U.S. or domestic operations is consistent with where we thought we would be at the end of the second quarter.

What we have not -- because it is too early to tell what the impact may be as a result of the issues that Tom was just discussing, those have not been factored into revenues just because we wouldn't know how to do so. When you're looking at the earnings, we have tightened guidance. Previously we had a $0.10 range and we have put together a tightened range, yes, it is on the lower end of the previous guidance, but it is consistent with what we thought was happening at that point in time and again we have not included any expectations for S&I as far as bottom line improvement in the balance of the year due to integration costs.

But correct me if I'm wrong, but you beat the quarter currently, the trailing quarter by let's call it a nickel, but you lowered the guidance for the year by a nickel.

We lowered the top end of the range by a nickel, yes, sir. In our four-year expectations, we had anticipated reaching the settlement that we talked about, but it was anticipated not to hit in the third quarter.

Okay. All right. Thank you.

Thank you, sir. Next question comes from George Gaspar. Please state your company name followed by your question.

Gaspar. Robert Baird. Congratulations on the ongoing improvement. Just want to dig a little deeper on this Boston settlement. The quarter was actually influenced by something less than a $1.5 million at the bottom line?

Pre-tax.

Pre-tax line. Excuse me. So the return on the operating flow is still substandard relative to the improvement in your revenue run rate?

Yes, sir. The operating margins of businesses still are improving, but there is still more improvement anticipated as we continue to turn our backlog.

Okay. So this would imply you were running through business at a pretty narrow margin yet and brings to mind that the although the third quarter -- the fourth quarter earnings estimate is lighter than your third quarter actual because of the extraordinary in there, the settlement, you're actually looking for an improved operating margin on your flow through business; correct?

That is correct.

Okay. Now, where is the transition point here in really getting these margins back up to a historical perspective, more into the 6, 7.5% range from where you are, and I am asking that because considering what Tom has said and what we all are sensing about Katrina, it would appear that the excess capacity that has existed in the industry is going to go away real quick and that there should be opportunities here to really escalate your operating margins as a result of this whole situation, regardless of what comes in your door versus what comes in other doors. Can you comment on all of this?

George, let me start with that, and then I will let Tom or Mark add to it. I think in a philosophical standpoint I would agree with everything you said, but understanding how much of an impact is going to be in the near term from the capacity changes, how the pricing will be from a competitive standpoint, and whether it is -- judging the magnitude and the timing of the reconstruction effort, at this point in time we just don't know how to gauge that.

Those impacts, potentially positive from a reconstruction standpoint, potentially negative from a equipment that is in our backlog and scheduled to ship in the fourth quarter, is somewhat been not been factored in into our guidance and outlook. Clearly there are opportunities in in my opinion to go both ways with the fourth quarter depending on the reconstruction and depending on the shipments. Does that help with your questions, George? I am sorry.

All right. Just ongoing with that margin opportunity, do you see an opportunity here considering your backlog and this has to be a record backlog that you have. Tell me if I am wrong about that. It is pretty healthy.

This is a very healthy backlog, not double checked where we peaked in 2001, 2002, but, yes, we are approaching that, but again remember that $51 million of it is for one specific project which goes out a little over three years. I think it is nearly four years that it will be shipped over.

I mean, we could we should be able to see Powell be able to raise its margins quite sizably going forward; right?

Go ahead.

As Tom stated earlier, we can only raise our prices to the extent that the market accepts them. Tom stated earlier we are our success with the higher prices is becoming more challenging, so we cannot control the market price levels. We are actively working on our costs and our efficiencies from that perspective, but even there while we are seeing a moderation in the raw materials costs, the impact of the fuel from a transportation in, transportation out, as well as the materials cost that is now rolling into the components that we purchased, are still challenges we're dealing with.

Copper has done a quantum leap here in the last two months, George, and everything we have, that's all your conducting material. That's also having an impact that's not covered by escalation, et cetera, so we still have challenges,. Yes, we are aggressively looking at cost out in ways of improving operations, and we will do everything we can to improve the bottom line and I anticipate we'll get that done.

Thank you for your questions, sir. Next question comes from Ken Grossman. Please go ahead with your question and state your company name.

Good morning, guys. SG Capital Management. Good quarter. I may be repeating another question, but I want to be sure that I understand this. Tom, your reticence is factored into the guidance you guys provided for the fourth quarter; is that correct.

I would say that's somewhat true, yes, sir. I am a rather conservative fellow.

So we can look at the guidance and in fact and the uncertainty surrounding the Katrina and all the aftermath of that is all factored into the guidance; is that correct.

Not entirely.

Ken, again, just to try to clarify is that at this point in time, we fully anticipate there will be opportunities. We do have some opportunities that have already been presented to us, but they are relatively small relative to the dollars in our backlog that is already scheduled to ship in the fourth quarter, and just too early to know the extent of the damage, the timing of the reconstruction, and what impact it will have on our backlog to give you as high a degree of comfort as I would like to regarding what is going to ship out of our facilities in the next 90 days.

I was looking at it as the glass being half full -- half empty rather than half full, and you had mentioned that there are several projects that you're involved in right now that you can't ship.

We don't know that absolutely, but we do know a couple of the plants have substantial water problems right now and I think it will delay some projects that are currently about half to three quarter completed out here on the floor, and I have to believe they will be have to go out back and be stored.

Okay. And those projects that may be delayed are already factored into your guidance; is that correct?

The delay is not factored into our guidance.

Okay.

We simply haven't had a chance to do that. This storm was only ten days ago. We still can't get into some of those plants. We can't find a place to stay. We sent service people down there.

We have bought campers and house trailers to house people in and they're out on job sites now, those that they can get in. We have really not had a chance to assess what the impact will be and so we have not factored it in at this point. It is still too early.

On S&I, you were factoring in zero earnings for the next quarter?

That's correct, sir.

And with respect to the last question I have is with respect to the lower margin business that has been on the books historically, has that been all washed through yet or anything left on that?

That's a difficult question to answer for the reason being is that margins moved up at a progressive rate, so that if you look over the last six months at what we were bringing in as far as new bookings, there was a stair-step type climb so that we'll see that same stair-step type climb that would go into the revenue gross profits and gross margins. You're talking about the floor, the worst of what we had in the bottom, the backlog, looking back overtime, that has substantially been completed and shipped.

Okay. Great. Thanks, guys. Appreciate it. Good quarter.

Thank you, Ken.

Thank you, sir. Next question comes from [Robert Longnecker.] Please state your company name followed by your question.

Rob Longnecker Barrington. I wanted to make sure I understood S&I correctly. You gave the impact in the backlog of 20 million from S&I, is that right.

That is the beginning backlog assumed at the date of acquisition.

Okay. Is there an S&I number in the new orders number of 135 million?

The actual orders booked during the month of July are included in with the aggregate total in the electrical power products segment.

How much was that?

It was consistent with the business volumes that we talked about in the past, but again you have to remember it is just one month of data.

Got you. And on the call of the acquisition you guys I think I asked a question about margins, how they compared and you said you were waiting to see the U.S. GAAP numbers. Can you comment on that now?

Based on one month activity plus the work that we are doing to prepare the pro forma data that will follow in our 10-Q, that is coming out consistent with what we told you earlier and consistent with what our expectations were, that you look at over time in an aggregate number of orders, because they do fluctuate, there are margins they receive in their businesses is consistent with what we see in the domestic markets as well.

Okay. And can you guys comment as much as you can on the margins on the Washington Metropolitan contract, are they better than they have been historically, are there escalators, and just give us color on that?

Pretty much fixed pricing and obviously $51 million would make it a competitively priced I wouldn't say it is better, but we're happy with the contract.

Competitively priced to the conditions you have seen over the last couple of months or the conditions when they were worse six months ago? Like you say, that is a May '05 contract.

It will be a profitable job. I don't know how else to answer it.

Okay.

Again, you have to look at the competitive nature of the business at the time it was quoted. It was a public bid. Therefore it was a competitive price, but it will add, contribute to the bottom line and it will add as much as with any other contract that we would have in that same dollar volume at that period of time.

Now, obviously this is a bit of an open ended question. I haven't gone back to my notes. When did you guys on your call start to say things are getting better, pricing is getting better, when did the kind of worm start to turn?

Probably we said that in the second quarter announcement that we were seeing an up kick in opportunities and we were and had been raising prices.

Okay. Thank you.

Thank you, sir. The next question comes from Tom Spiro. Please state your company name followed by the question.

Tom Spiro, Spiro Capital. Nice quarter. Congratulations. It sounds to me like perhaps over the coming quarters you may begin to bump up against capacity constraints if we do see some business coming down the road. Have you begun to think through whether we have adequate capacity?

I still believe we have adequate capacity. We only have a second shift, just started a third shift. Those are not a full compliment of people. It is a matter of bringing in employees.

Right now we have a number of contract employees in and we're hiring as we speak and trying to bring some people. We are interviewing people coming out of this gulf coast area that's been devastated by the storm, but it will be a matter of -- employees. Physical capacity is there. Just a matter of employees. I think I certainly believe we can get that handled.

And over on the S&I side, are the various market segments that it addresses reasonably robust, how do they appear?

The bulk of their market share is international in the Mideast and other areas of that nature, and right now that's really showing signs of improvement.

And lastly, acquisition opportunities, are you still focused on that or do you feel like you have enough on your plate right now?

We certainly are still looking at several opportunities. The gestation period there is a long time, though.

Looking for domestically or overseas?

More domestically.

Thanks much. Good luck.

Thank you, sir.

Thank you. Next question is a follow-up question from John Franzreb. Please go ahead with your question, sir.

You tax rate in the quarter was low, Don, you kind of gave same color as to why. I am wondering what kind of tax right are you assuming in the fourth quarter and what kind of tax rate we should be looking for for maybe next year?

Base odd the best information I have right now, I would expect our fourth quarter effective tax rate as a standalone period to be probably in the low 40's, probably 43, 44% with where we are working and the shipments going from a state standpoint. At this point in time I would use something in the 40 to 45% effective tax rate for the near term.

Okay. Next year?

Again, at this point in time I don't have any reason to know it is going to change in the near term. Going out into next year I would continue to model the same numbers.

Okay. And the expensing of options, what kind of impact would that have on you next year?

Nominal. I take it back. It will have an impact. It is a single digit number. I have been through it. To be honest with you, John, I don't recall the exact number we were estimating. Plus or minus $0.05 to give you an order of magnitude.

One last question. Tom, when we look at the orders and just listen to everything you said and the pricing may not stick, are we seeing maybe a peaking in near term operating profitability in the electrical segment, and may drift down a little bit? I am trying to reconcile that with when you say you have several Switchgear jobs to be delivered in four weeks and I'm thinking that has to be a a very profitable business and I am trying to kind of balance the two out. Looking to the end of year, how do you see things playing out?

John, before this hurricane it appeared that opportunities had stabilized. They were not increasing. Apparently on the domestic scene. Some increase in international opportunity. Competition is very -- it's still there. We've raised these prices to a level at this point that we're not closing as much business, now we can always lower the prices. I am not anxious to do that.

The impact of Katrina is a totally different issue we have not completely factored in, and while that business certainly will be when you have to jump through hoops to do something in four to six weeks, it will certainly be more profitable at the same time these are very, very important customers, long-term customers of the Company and I am sure not going to -- I am not going to get at them too bad there.

Fair enough. You said that there was a significant number of customers in the affected regions.. Do you have a best guess how much of your backlog is in the affected region?

Have not factored it in at this point. I'd have to believe easily $10 million or so.

Okay.

Again, that's a guess.

Okay. Thank you very much.

John, before you go, let me follow up on my previous comment. If you go back and look at the 10-K file last year and look at the pro forma outlooks on the options it would have had an impact of $0.07 a share.

I wondered if you were use options less next year --

I would assume that no change in our options program.

Okay. Great. Thank you, Don.

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

Okay. Thank you. Tom, just a couple things here. First this answer that you just indicated, 10 million backlog in affected regions.

It is an estimate, George. Don't hang me how to dry. I will get after you.

10 million, does this mean 10 million of your existing backlog or are you saying that there is 10 million that's come in from affected areas recently.

10 million is my estimate for existing backlog that could potentially be delayed. We don't know that for sure.

Okay. All right. That's not very much business.

I have to watch your questions, you know.

That's not very much business. I understand that you have to be concerned about it on the line. Can you tell us in the backlog or can you highlight maybe some of the things that are going on in terms of your support of the offshore or the oil area in general that's taking place at the channel in your facility.

You have this master contract with Chevron. Can you talk a little bit about what the throughput is in the last quarter at that situation and how that looks near term either for offshore production platforms or other.

I don't have it at my fingertips here, George. I know that we have been building backlog and we've been adding personnel to get those projects accomplished, but having just returned from vacation, I don't have all of that at my finger tips.

And then this integration you were talking about with S&I, on the two electrical standards, your ability to maybe get more aggressive on the international side for business that's always been a thorn, actually having not had that international electrical standard available to you, it would seem again that you are in a catbird seat here to really take advantage of the opportunity in the Middle East, North Sea, which seems to be getting revival on lease sale recently, the Faulkland Island area and of course Australia.

Your master contract that you signed with Chevron, they have authorized $5 million development of an LNG facility in Australia alone. Is it not possible that this acquisition you have made can really take off in terms of revenue stream from the 45, 50 million range that was the acquired rate?

George, you know how conservative I am. I am not going to jump up and say we're fixing to increase 20 or 30%. Certainly we will make every effort to improve that business and raise margins. As far as Australia, South Africa and some of those areas, they manufacture most of their equipment right there in those areas and those are very difficult areas.

Mideast is another situation certainly there are opportunities there and Kazakhstan and that area of the world. We will do all we can to capitalize on it. I don't think I would step out on this diving board and tell you how much that would be.

And then one last thing, on the light rail, you referred to the transportation bill and pretty large authorization, more coming down the track for light rail. What's your experience and I have forgetting outside of the DC situation, what are you experiencing in here? I know there was a contract that was pending for Dallas/Fort Worth airport to go to Fort Worth, I believe, and that was seemingly put on the side a couple years ago. Do you see this lighting up at all for you guys?

Well, certainly the fact of this bill is going to help. A number of those -- since there was not a bill passed earlier, a lot of these projects have been kicked back a year to several years, but it is true that the activity is picking up and not just domestically, certainly some international opportunities in transit as well and we're looking at those opportunities as we speak.

Okay. All right. Thank you.

Yes, sir.

Thank you, sir. Our next question comes from Brad Evans. Please state your company name followed by your question.

Heartland. Good morning, gentlemen.

Hello, Brad, how are you.

Doing well, thank you how about yourself.

Doing fine for an old man.

I have a number of questions I guess. Can you quantify the amount of -- I guess the work that you have taken in-house so far associated with the Katrina impact, that's obviously short term turns work that won't flow through the backlog; is that correct?

Four to six weeks --

It will be in and out in the current quarter, you're correct.

Can you quantify how much work you have booked on that basis so far through today?

Not really. As I said earlier, it was as of this morning, in visiting with the service folks and sales group, they just said they had booked several Switchgear orders for immediate turn around and I did not ask the volume, whether we would like it to be large but if it is small we will put the same effort into taking care of our customers. At this point how much it is.

In my earlier remark I said they will try in most cases once they get the water out of those facilities, they will go in there and try to dry that equipment out, replace pieces that need to be replaced, lubricate, do the things they need to do and put it back online as soon as possible. It is over the long-term that they're going to have to go in and replace that because you just can't get all of the corrosives and salt water out and they will begin to have other corrosive issues and wiring problems. You can't soak that wire and expect it to hold up for a long time. The opportunities for big volumes will probably be like I say, out a year or so.

Okay. That's very helpful. So the -- Tom, just to kind of understand what you're commenting on, I think your comments about bookings plateauing, obviously adjusting for the large one-time order, the bookings of 84 million, you still had a book-to-bill ratio of 1.26 to 1. So the book-to-bill ratio is still well above one. That's in line with the last three quarters. Your current guidance for the fourth quarter will put you roughly 75 million. So are you saying that with your current pricing structure bookings should continue to run the 80 to 90 million range, is that how we should interpret your comments?

I don't know that it would run quite that high. Again, we raised prices and it remains to be seen. I just take the low road instead of the high road. That's just my very basic nature.

Okay. So just to understand the price environment, you have not seen in the last I know it is very short term, but when do you think you might start to see a change in the pricing dynamics of the industry based on potential large increases in demand based on the events of Katrina?

Well, I certainly believe that with all the residential housing, commercial buildings and so forth, those areas are generally supplied by competitors like GE, Cutler, Hammer and Siemens, even Square D or [Snydaire]. They're going to see a very strong positive impact from having to replace that equipment. I think hopefully that will leave us a little more room to focus on the industrial customers that we support and others.

Okay. Don, can you quantify the integration costs you're expecting in the fourth quarter?

No, sir. If I do that then basically I am start to go break out S&I, and even as we are speaking and looking at how we're doing marketing, the costs are going to become more and more blurred, and I don't want to get into the pattern of breaking out S&I top line, bottom line and contribution margins.

Integration costs we expect S&I over the next quarter to be --

S&I will contribute to our -- we gave guidance at the acquisition time of basically saying in the first twelve months we would expect to see a $0.14 to $0.19 earnings contribution to our business. There is nothing that we have --

Over what period?

Twelve months. There is nothing we have learned or identified or come to light in the last eight or nine weeks that changes those estimates. Those statements are consistent with the operating results before integration costs in the short term that we have had the business and that is the basis for the projection for the fourth quarter.

Okay. Just two other book keeping items. Thanks for that, Don. When do you think you might be prepared to give '06 guidance? I think that's really pretty important I think that's an important number for us to have at some point.

Traditionally we have started talking about the upcoming year at the end of the fiscal year. At this point in time I would anticipate that we would be talking about 2006 at our fourth quarter particularly in light of the recent events we have all been talking about in this call. I think we're going to need every bit of that time to really accurately gauge the impact on 2006.

Okay. How much of the existing backlog excluding the Washington Metro contract that you booked, how much of that will roll off in the next twelve months?

Well, you did the math, about $75 million is forecasted to ship in the fourth quarter, so I haven't done the math to roll it forward. The balance of it would be going into future periods.

Okay. Fair enough. And then just as a point of my [noosh], I guess, Tom, I think a couple conference calls ago one of your last comments is you made a comment about an ecolanding and a large contract. Was that the Washington Metro contract or something else out there or was that the Chevron contract you were referring to?

I believe that was the Chevron contract. We had been negotiating and working on that for a long, long time and we were certainly happy to see that land. They're a good customer and there's a lot of opportunities offshore, so we were very pleased with that, and have a very good working reges relationship with those folks.

Have you anything demonstrable from that contract from -- anything that's noteworthy from an impact perspective, from a traction perspective?

From traction?

Are you seeing any benefit from that contract although this point.

Actually there is more available business than we initially anticipated. There is a great deal of activity out there in the Gulf and in other parts of the world. Yes, I think that contract ultimately logical there will be more revenue and opportunity than we anticipated. We're quite pleased.

Good luck going forward.

Thank you, sir.

Thank you. Mr. Powell, there are no further questions at this time. Please continue with any additional comments.

Well, I appreciate very much you joining us today and we look forward to talking to you again the next quarter. Have a good day. Any other questions, give Don a call. Have a nice day.

Thank you, sir. Ladies and gentlemen, this concludes the Powell Industries third quarter conference call. If you would like to listen to a replay of today's teleconference, you may do so by dialing 303-590-3000 and entering access code 11038422. Again, the dial in number for replay will be 303-590-3000 and access code 11038422. Thank you all for your participation. You may now disconnect.