Powell Industries Inc (POWL) 2005 Q4 法說會逐字稿

Good morning. My name is Trinicia and I will be your conference facilitator today. At this time I would like to welcome everyone to the Powell Industries fourth-quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS) As a reminder, ladies and gentlemen, this conference is being recorded today, Wednesday, December 14, 2005. Thank you.

At this time, I would like to introduce Karen Roan, Senior Vice President of DRG&E.

Good morning everyone. We appreciate you joining us for Powell Industries conference call today to review fourth-quarter and year-end results. We would 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 details to cover. You should have received a fax or an e-mail of the earnings release this morning. Occasionally there are technical difficulties (technical difficulty) during these broadcasts, so if you did not get your release, please call our offices at DRG&E, at 713-529-6600 and we will get one out to you.

Also if you want to be on the permanent e-mail distribution list or fax list, please relay that information as well. 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 until December 21 by calling the number 706-645-9291 and using pass code 293-5975. Please note that information reported on this call speaks only as of today, December 14, 2005. Therefore you are advised that time sensitive information may no longer be accurate as of the time of replay.

As you know, this conference call includes certain statements including statements relating to the Company's expectations and operating results that may be deemed to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Listeners are cautioned that such forward-looking statements involve risks, uncertainty, 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 risk; availability and price of raw materials; and execution of business strategy. 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; Mark Reid, Executive Vice President; and Don Madison, Chief Financial Officer. I will now turn the call over to Tom.

Thank you, Karen. Good morning and thanks to all of you for joining us this morning to review our fourth quarter and fiscal 2005 results. We're pleased to report that our results for the fourth quarter of '05 were much improved over the fourth quarter of --. Revenues were 83 million versus 49 million in the fourth quarter of '04. Earnings were 1.8 million versus a loss of 175,000 for a year ago. Bookings were 91 million versus 62 million in the (technical difficulty) quarter of '04 and our year-end backlog increased to $259 million compared to the 134 million backlog at the same time last year.

Looking forward, we're very pleased to report that our business opportunities remain robust with projects that fit our strengths very well. In fact at the moment we are covered up with inquiries. Price levels are more reasonable. Consolidations are behind us, thank goodness. Facility and equipment upgrades are completed. We have shipped the bulk of our lower, more competitively priced backlog. We have successfully adjusted our prices to reflect the higher priced metals and components that hurt our performance in (technical difficulty) late 2005.

We are working hard to increase our factory staffing. In fact have increased headcount by over 260 in the past 10 to 12 months in response to increased demands for our products. We have our main challenge going forward is not in securing new business but to increase our factory output by recruiting and training new personnel and improving our execution of business. All in all a far better outlook for the last couple of years.

At this point, I will turn it over to Don Madison to give you a detailed review of our financial results and then I will come back with some comments. Thank you.

Thank you, Tom. As Tom noted, revenues for the fourth fiscal quarter of 2005 were $83.1 million compared to last year's fourth quarter results of $48.6 million. Fourth quarter of fiscal 2005 includes revenues of $16.8 million related to the business operations of our recent acquisition. Gross margins for the quarter were 19.1% compared to 17.4% of last year's fourth.

Selling, general and administrative expenses for the quarter were $13.1 million compared to $9.8 million same period last year. (technical difficulty) $2 million, this increase is related to the operational activity for acquisitions. Additionally we incurred $600,000 related to the amortization of intangibles for the same acquisition.

Accounting and professional fees increased by nearly $300,000 primarily due to costs incurred for Sarbanes-Oxley compliance, costs associated with various acquisition related activity. (indiscernible) expenses or sales representation as well as direct sales expenses increased by approximately $200,000. Income before interest, taxes, and minority interest was $3.9 million in the fourth quarter of 2005 compared to a loss of $1.3 million in the fourth quarter of 2004. In fiscal 2005, our fourth quarter earnings included a $1.1 million gain on the sale of land and buildings.

Interest expense increased by $347,000 to $375,000 in the fourth quarter from a year ago, increase that related to our recent acquisition. Interest income was relatively unchanged. Interest income was $224,000 compared to $278,000 a year ago.

Our income tax provision was an expense of $1.8 million in the fourth quarter of fiscal 2005, compared to a benefit of $849,000 in the fourth quarter of 2004. Net income in the fourth quarter of fiscal 2005 was $1.8 million, compared to a net loss of $175,000 in the fourth quarter of 2004.

Earnings per diluted share were $0.17, compared to a loss of $0.02 per share a year ago. As of fiscal year end, our order backlog was $259 million compared to $251 million in the previous quarter and $134 million in the fourth quarter of fiscal 2004. New orders continue to strengthen. Orders in the fourth quarter totaled $91.5 million compared to $61.5 million a year ago.

Now looking at our business segments, Electrical Power Products segment reported revenues of $73.8 million compared to $40.1 million in the same period last year. The fourth quarter of fiscal 2005 includes revenues of $16.8 million related to the business operation of our recent acquisition. Net income before taxes for the Electoral Power Products segment, $2.7 million compared to a loss of $1.5 million last year. Fourth quarter income includes $1.1 million gain on the sale of land and buildings.

Process Control Systems segment reported revenues of $9.4 million compared to $8.6 million in last year's fourth quarter. Income before taxes for Process Control Systems, $1 million compared to $426,000 a year ago. This increase in income is primarily the results of improved job performance and a number projects (technical difficulty) completion.

Now for our full year results. Revenues for fiscal year 2005 were $256.6 million, compared to $206.1 million in fiscal 2004. 2005 includes revenues of $19.9 million related to business operations of our acquisition.

Selling, general and administrative expenses for fiscal 2005, $41.8 million compared to $35.4 million last year. Approximately $2.1 million of this increase is related to the operational activities of our acquisition. Additionally we incurred $600,000 for the amortization of intangibles related to this acquisition. (indiscernible) expenses, the sales representation, direct sales expense increased approximately $1.7 million as a result of our efforts to increase backlog and revenue. Accounting and professional fees increased by nearly $1.5 million due to costs incurred for Sarbanes-Oxley compliance, in addition to costs associated with various acquisition-related activities.

Interest expense increased $721,000, a $585,000 increase over 2004 as a result of debt incurred related to our recent acquisition. Interest income increased to $1.1 million in fiscal 2005 compared to interest income of $880,000 a year ago primarily due to higher interest rates. Our provision for income taxes was an expense of $1.1 million for fiscal 2005 compared to a benefit of $282,000 in 2004. Our effective tax rate for fiscal 2005 was 33%. Untaxable interest income as well as a favorable tax provision adjustment resulting from the reconciliation of the income tax provision to the 2004 income tax return lowered this year's effective tax rate. Going forward, we anticipate our effective tax rate will be approximately 40% (ph).

Net income for fiscal 2005 was $2.3 million or $0.21 per diluted share compared to $1.7 million or $0.15 per diluted share last year. Net income for 2005 includes a gain of $1.1 million on the sale of land and buildings which is partially offset by a charge of a $600,000 amortization of intangibles related to our acquisition.

Full year Electrical Power Products revenues of $220.1 million compared to $173.5 million in 2004. Again, fiscal 2005 revenues include $19.5 million related to the business operations of our acquisition. This segment reported a loss before taxes of $438,000 compared to a loss of $87,000 last year.

Process Control Systems revenue for the year were $36.5 million compared to $32.7 million a year ago. Income before taxes for Process Control Systems was $3.9 million, compared to $1.5 million in 2004. This increase in income is a result of improved job performance on a number of jobs nearing completion as well as the recovery of previously recognized costs, Central Arteries Tunnel Project (ph).

We ended the year with $33 million in cash and marketable securities compared to $63.2 million at the end of fiscal 2004. Here in 2005, cash used in operating activities was approximately $18 million. This reduction in cash was principally used to fund growth in accounts receivable, inventories, and costs on related to uncompleted contracts. This investment was needed to report business volume growth. Additionally we invested $6 million in capital improvements during 2005.

Looking ahead at fiscal 2006, as previously announced we will change our fiscal year end to September 30 in 2006, which will result in an 11-month year. By moving our year end to September, our quarterly reporting will be aligned with the calendar quarters and will reduce the impact that holidays have on reporting timeline. New accounting and auditing requirements have increased the extent of work required at year end and at the same time they accelerated our 10-K filing deadline, allowing fewer calendar days to complete additional procedures.

Accordingly our outlook for fiscal 2006 consists of 11 months results compared to 12 months as you would normally expect. We will maintain our quarterly reporting schedule for the first three quarters of fiscal year 2006; however, our fourth quarter will be comprised of only two months.

For fiscal 2006, we expect full-year revenues to range between $300 million and $325 million. Full-year earnings are expected to be between $0.45 and $0.55 per diluted share, which includes the impact of the new requirement to begin expensing stock options; the amortization of intangibles related to our 2005 acquisition; and incremental costs that we will incur for the implementation planned of a new ERP system.

We expect first-quarter earnings to range between $0.06 and $0.11 per diluted share.

At this point, I will turn it back to Tom.

Thank you, sir. Let me make a few more comments and then I will be happy to (technical difficulty) questions. A question was posed to me recently whether I was happy with our performance over the last couple of years? Quite less than polite terms, I expressed absolutely not; certainly not Electrical Power Products segment of our business. While the Process Control Systems group has performed exceptionally well, our Electrical group has suffered through a rather dramatic downturn in our markets.

I have witnessed this cyclical nature of the electrical industry for over 50 years and we deal with it. I don't think ever before have I see such a radical swing in business activity as in the last several years, but we dealt with it in consolidating some of our facilities, in reducing the work force -- painful as necessary as it was. Now thankfully our business activity has improved and we will deal with that as well.

Currently as costly in a downturn, also costly in an up cycle. At the same time, the strain is attracting, hiring and training new personnel, particularly in the Gulf Coast region after Hurricanes Katrina and Rita. It's not easy to get these new people in here, but we will certainly manage. Customers depend on us to meet their needs and we will do it. The activity in all our major markets has improved, petrochemical, exploration and production, (indiscernible), and as (technical difficulty) higher producers and government infrastructure. We're seeing an uptake in mining playing time.

Facility upgrades and expansions driven by capacity constraints, the environment, safety concerns are quite brisk. New grassroots facilities, mining and power generation, air support industries are certainly on the radar screen. A number of project estimates going on right now. Budgetary estimates.

The exploration and production of new energy source is certainly accelerating. Green power is very active. International activity is increasing, but still highly competitive. With the renewal of the U.S. Surface Transportation Act -- thank goodness -- agencies are gradually finalizing their plans to lower (ph) their term capital improvements. We are experiencing increased activity in the prequalification stages of these projects both in the intelligence transportation and the (technical difficulty). Currently the opportunities are there. We're working hard to meet the challenges.

No doubt the outlook for '06 and beyond is much more favorable than the past two years. Fundamentals certainly point to a solid outlook for industrial capital equipment spending. We're optimistic that our markets will remain strong next several years.

At this point (technical difficulty) happy to take questions.

(OPERATOR INSTRUCTIONS) John Franzreb.

Tom, the guidance that you gave out, it looks like the revenues are picking up nicely and the backlog is certainly going in the right direction. I am kind of surprised that the profit level wasn't what I was originally looking for. Could you talk a little bit about what you're getting in terms of profitability and the bids and the jobs out there?

As always, I'm somewhat of a conservative, John, as we look forward. You could say we shipped the bulk of the lower-priced work and we've pretty much got the new orders, got a handle on this increases in material that we (technical difficulty) past year. I am approaching it a little conservative at this moment. We have some productivity issues in the primary plant here in Houston. Ramp up with these -- the new people, training (technical difficulty) so I guess I have approached a little bit conservatively. I do believe that I think it will peak. I think (technical difficulty) peak gross margin from where we are today we should probably make up about half of that.

When do you think you'll get there?

It's difficult but probably by the end of the second, third quarter. It's hard to say, John.

I'll get back in the queue. I know I'm allowed only one question. Thanks.

Richard Leder.

Tom, would you comment on -- any of your management comment on the acquisition, give us a little flavor for a how it has been integrated? And it is inside Electrical Power Products, but are you providing any numbers on that operation by itself and when and if -- or not if -- but when it's going to be contributing to earning?

It is contending currently to earnings. I don't like breaking it out for competitive reasons but it is contributing to earnings. My trip was several months back, very pleased with what I see. It's a great bunch of people over there. Tough markets that they are dealing in but tough markets are all over (technical difficulty). Don Madison just returned here a couple of weeks ago so I'll let him comment on it.

All in all, things have gone very smoothly. We have gone through most of what you would consider the administrative consolidation issue from an accounting, treasury and banking type issues. Those are all well behind us and we're dealing today primarily with business issues. We have had a lot of joint meetings with customers and our sales groups going both ways; our groups from here going to the UK as well as individuals coming out of England to here visiting with customers; helping our customer base understand the new company and our capability.

So all in all I think that considering that the acquisition is only now four to five months behind us, I am very pleased with the way things are going.

And a kind of quick follow-up considering how smoothly it has gone and so forth, does this whet your appetite? Are you considering anything else or is this going to be it for awhile?

Kind of nosey, aren't you, Richard? Yes, we have some ongoing issues that we are looking into. Yes, sir. I don't know that whets my appetite but we are damn sure looking. (multiple speakers)

By the way, we had our marketing man from S&I over here this past week, made a number of presentations to major E&C firms. I thought the reception went exceptionally well.

Good. Glad to see things getting better.

George Gaspar.

I just want to pursue this, the UK situation. So you lost on the sub in the quarter. Was it 438,000? Or did I miscue on what that represented?

What was the number that you quoted again, George?

438.

438. It would be the full year less the power 5 was a loss of 426 -- 438,000. Full year number.

Okay. If I recall when the acquisition was made there was a comment that it was going to contribute I believe it was $0.15 and $0.18 over a time period that would lend itself to the end of this next fiscal year or maybe it was next summer. How do you feel about making that original marker that you talked about with this new subsidiary?

George, I believe the data that we shared and again going from memory was about 45 to $50 million in revenues that we anticipated in the first twelve months of operation, which would generate $0.14 to $0.19 to bottom line earnings impact. At this point in time, there's no indications or nothing that comes to light that would change our opinion of what we expect the first 12 months to perform.

Okay, so effectively having lugged the loss into the end of the fiscal year on the front end of this, then that would suggest that on a net basis you are going to contribute -- the sub will contribute more than $0.14 to $0.19 in order to get to $0.14 to $0.19 on that full period?

I would -- $438,000 loss was -- occurred in the first half of this year prior to the acquisition. The second half, the third and fourth quarters of 2005, we had positive contribution form Electrical Power Products both to quarters. We had a positive contribution from S&I last four months of the year; the period of time that they were consolidated into our financial statement. I think that what you would expect to see is that there would be some improvement going forward because of the integration costs. Integration costs did not offset the earnings contribution here in the first four months.

Okay, and then one additional thing on this sub. Can you break out the backlog that that represents out of your total backlog? Maybe you mentioned it, but I missed that.

Basically at the time of acquisition, we acquired $20 million of backlog and their backlog has rolled forward roughly equivalent with the revenues and has not materially changed at this point in time.

Okay, thanks. I will requeue.

Robert Longnecker (ph).

Just sticking with backlog, it looks to me that this is the first quarter in a long time you guys haven't seen huge growth in your backlog, which I think is understandable given how strong it has been. But is this a kind of a slowdown we're seeing right now or kind of a moderation?

Certainly, we have (ph) activity there. We have raised prices (technical difficulty). Certainly can't take in more than you can digest. I look at it to sort of flatten out from where it is right now, although November was a very, very nice month.

But when you say can't take in more than you digest, can I conclude then that you are kind of having some sort of -- I don't know if growing pains is the right word -- but you're talking about staffing up your facilities and that is kind of constraining your ability to expand the backlog right now?

Well sure. We're certainly being selective with what we do and yes, there are some training issues with personnel (technical difficulty). Each one is built special to order. It creates an issue (technical difficulty) as quickly as we can we have three shifts going at the primary plant, tapping up on all three of those shifts, so ramping up very quickly.

But you would say that new business activity kind of remains as strong or as strong or stronger than it was a quarter ago?

Yes, sir.

Great. Just on the expense side of the business, can you guys just break out a little bit more -- I might have missed it -- but what the integration costs were and maybe what a good view of what are run rate should be for SG&A going forward?

Run rate for SG&A -- let's just go back. For the current year we're going to end up a little over 16, 16.5% of revenue on our SG&A expense. What we anticipate going forward is that that number will moderate some and we will be running probably around plus or minus 16% of revenues in 2006. While the percentage is not a significant change, you do need to keep in mind that the go forward rate does have in it the costs for expensing stock options which is anticipated to be in excess of $1 million as well as the amortization of intangibles, which is estimated to be approximately 600,000 pretax, as well as implementation costs associated with the new ERP system.

How much is that going to be?

At this point in time the direct cost that we anticipate to expense in 2006 is expected to be between $0.75 million and $1 million for the ERP system.

And in the latest Q you talk about integration costs -- can you put some numbers around that?

I do not have a summary of where we are on from an integration costs standpoint in the historical numbers in front of me. It has been relatively modest amount for what we have tried to accomplish but it has been again off of my head say 250 to $500,000.

Tom Spiro. Your line is open.

Go onto the next one.

Gary Hefferman (ph).

A couple questions here. The Lincoln Holland tunnel project that you have been part of for a while there, you have completed phase one. Do you have any indications about phase two of this project?

I would say overall we're at about 90% of completion. That should be -- (technical difficulty)

John Franzreb.

We are having a tough time hearing you, at least I am.

We're having some thunderstorms down here. I don't know if that's it or not.

You touched on the gross margin expectations before. I was just looking back at years past. You talked about peak profitability. At the current revenue rate, what kind of Op margin expectations do you have? I know you have some costs to absorb in the near term, but just look forward a year from now. Could you come close to the -- did about 9.5% in 2002 that might not be achievable. Could you come to the 7, 8% you did maybe in '01? Would that be something that the business mix could achieve?

John, let me give you a little bit of insight at least of what we think is going on in the business. Look at just step back and look at the big picture. Prices and capacity always tend to maximize at the peak of the business cycle. Our last peak business cycle was I believe in around 2002, of which we generated roughly gross margin percentages in the neighborhood of 22%. With what we have done with our internal overhead structures of reducing facilities and increasing our capabilities with the new machinery and equipment, we fully would expect that at the peak of the next business cycle that we would be performing at or if not greater than where we were at the last business cycle. So clearly when the business cycle peaks, I would expect us to be at 22% if not greater.

Of where we are at today is looking at probably closing about half the gap of where we were last year versus where we were at the last peak. But all of this is based on what's going to happen with the market price level. That is something when you're trying to predict what's going to happen from the market standpoint, you can look at the indicators and the dynamics, but it is a competitive situation and anticipating what the competitors are going to do in any given situation is somewhat risky.

The other issue that we are still dealing with is the cost increases that we have had in our base commodity prices which is rolled into our component costs as well as at this point in time fuel costs had a significant hit as far as increased transportation costs. And we're looking at all those and what we think is going to happen in the short term and giving you our guidance, as Tom says, that we think that we're giving you a conservative outlook for what we anticipate happening in 2006.

How rational has the competition been with pricing?

Could you repeat the question, John?

How rational has the competition been in the pricing front?

Some of them have been rational. Some I think had a ways to go. They will become rational when they are at capacity. So I guess some of them are in a catch-up mode still.

Thank you very much. You have been very helpful.

A follow-up from Gary Hefferman, Lord Abbett & Company.

Can you hear me this time? The first question I had asked, I didn't know if you had heard it. You were completing the first phase of the Lincoln Holland Tunnel Project at Transdyn and I wanted to know if you had any thoughts on the phase 2 effort.

I thought I answered that. We're about 90% complete on phase 2. Oh you mean -- that contract has not been left. They claim to have put that off for two to three, maybe even four years pending tax revenue, etc., etc., which is disappointing. They love our work. They're very happy with our performance. Our people have done an outstanding job on that project and I know they would like to have us back, but we have to wait and see.

I apologize for asking again. I was not able to hear anything. In the summertime, we had discussed a price increase of I believe it was one of the second or third price increase and you indicated at that time that you saw the orders plateau for a little bit while people digested the price increase information that you provided them. I was wondering have we had any further price increase activity?

We work at it every day.

Heavy done anything as far as an across the board letter to your customers or anything like that?

No, we have gone back to some of our alliance partners.

Okay. Is it worth me reading into the plateauing of orders or backlog here as to perhaps your efforts to put through more price increases particularly given the comment you made of you can only put as much in that you can actually digest?

Gary, let me make a comment here. Clearly there is a lot of opportunity in the marketplace today. We have worked hard to raise our price levels and in doing so being selective with the business that we take and put into our factories so that we can perform for our customers. If we wanted to increase business activity, it is out there. But we wanted to make sure the business activity that we take is at the margins that will contribute to the bottom line of the business from an overall perspective. Does that help a little bit? We are being selective but the markets remain robust.

Yes, that is very good. And, Don, if I could continue with you, accounts receivable and accounts payable, these are two areas that we had discussed in the past that are areas of concentration for yourself. Can you talk to us a little bit about that and how your efforts are going?

Clearly cash management is an area that we are working to put more and more attention into. From a receivables standpoint we're still running in the 70 day range and working to bring that down. One of the areas that we spend a lot of time working in this past year and we hope to see more benefits of it as the contracts come in through the future is progress payments and milestone payments. So that we are working on towards getting the cash in the front end of the project at a higher rate as opposed to the back end of the project.

In a competitive market situation we are in, this is a challenge but we have made progress in the last several months.

Okay, and just lastly -- I have in the press release a current assets number of 164. Could you tell me what the cash part of that number is?

Cash and marketable security as of year end was $33 million.

Great. Thank you very much. I will get back in queue.

A follow-up from George Gaspar.

A question on -- you are almost through two months of your first quarter. Can you give us a sense of what your order rate trend is for the quarter relative to what you saw in the fourth quarter?

Currently November was a very good month. It's a little early at this point in December. December is generally a slow month due to holidays and so forth. So I would expect that December will be down from the norm.

What is your thought on how you might land for the quarter versus fourth quarter in order rates?

I believe that our first quarter will be better than our (technical difficulty)

Better than the fourth quarter?

That is my belief. Yes, sir.

Okay. Can you break down in that backlog that you are seeing from the fourth quarter in the Electrical Power Products area, what were the pluses and minuses of things that were coming in the door to you? And where do you sense you have got some real opportunity here to build further your Electrical Power Products activity going forward?

Are you asking me by sector?

Yes, by -- with sector, division within the Power -- Electrical Power Products area. For example, did power control (indiscernible) contribute? Did General Switchgear? Was it something to do with light rail? Or where is the business coming from?

Third quarter of last year we had a $50-something million opportunity in the Washington Metropolitan Area Transit (technical difficulty) there are other rail opportunities going forward, but the bulk of it is related to petrochemical activity and a good deal of it, environmental issues with utilities for scrubbers. We are also now seeing the refiners in petrochemical companies paying a lot more attention to environmental. They're also increasing capacity so I don't know how to break it down any. That's just in general terms.

Tom, additional, is there anything that we talk about R&D occasionally asking if you've got anything really coming on out that can crystallize into some decent volume? I know that over the last couple years you've tested various Switchgear, maybe some larger sizes and whatever, some refinement. Is there anything there that is giving you an edge over competition or an opportunity to expand your business going forward?

Not saying that has been introduced as of late. Earlier last year we came up with a heart (ph) resistance electrical power product and some new designs on amplifiers for the Transdyn. I would say that's about (technical difficulty).

Okay, and one last thing on the sub back in the UK. What is the thrust going to be here? As you have had a few months now to take a look at this thing, it gives you the international electrical standard. How aggressive are you going to try to be here to take this thing to a much higher level in terms of revenue and earnings stream? Are you going to get more aggressive in the Middle East? There's just absolutely a ton the business there and can this sub really do it?

George, our initial thought at this point in time -- let me just make a comment there that we see a lot of opportunity that we have not been able to capitalize on in the past, but it is not going to have an immediate impact. Talking about moving into new projects, these are long cycle projects and the benefit of the long cycle project will be probably a year to two downstream. But clearly we see benefits of having a much broader productline, being able to work with the (technical difficulty) and contracting firms as well as the oil and gas industry on all of their projects is a major advantage. (technical difficulty) a long-term growth (technical difficulty).

We are going to be a more aggressive, George, never fear. But it is a tough environment over there right now. While there are plenty of opportunities I'm not sure that some of the Europeans have come to their senses on pricing.

Okay. All right, thank you.

A follow-up from Robert Longnecker, Barrington (ph).

I just wanted to drill down a little bit more on the SG&A. I was just kind of looking back at the last couple of quarters, you guys have been running at 15 to 16% of revenues there and I understand you talk about some of the incremental expenses that are coming into your projection. But I guess I would expect to see as you are ramping up revenues into the 300, $350,000 range next year, I would expect to see like some more economies of scale there rather than just the expenses tracking up with revenues. I wonder if you could give me a little more color on that?

A big part of the incremental costs that you are going to see is variable costs related to sales expense. A significant portion of our sales expense is variable with the order activity and business activity. So that is one of the reasons you're going to see expenses vary higher and lower with the business volume that you might see in some other businesses you continue to watch.

The other thing I don't want to overlook the fact that when you're looking forward into 2006, we are going to have well over $1 million of incremental costs related to the expensing of options. We're going to have approaching $1 million incremental costs that will hit SG&A as a result of the ERP implementation; that the amortization of intangibles is going to run a little over $600,000 a year; as well as that we will continue to have incremental costs as a result of our compliance with Sarbanes-Oxley.

This year we basically have done our historical businesses but because of the recent acquisition it will be excluded from a lot of the work that we did. That will have to be done next year first time through for our UK acquisition. In addition that a lot of the work that we did documenting our control structure this year was with the old ERP system. Clearly that work -- some of that work will be incremental next year with the implementation of the new ERP system.

So you look at all that in consideration and take into consideration the variable sales costs, the fixed portion of our SG&A is relatively constant with the exception of those items I just highlighted.

All those items you're talking about is less than 1% of revenue, right? You're talking about going from being a 250 run rate business to somewhere with 300, 350. I guess it surprises me that there isn't more upside there in terms of profits up -- down the bottom line.

The biggest item -- again, looking at it from another business you might be monitoring and watching is the percentage of variable compensation -- or commissions expense that we have in our sales (technical difficulty).

What percentage of your SG&A do you think that is?

I don't have the number in front of me. I'm sorry.

I would like to say that a higher -- we handle Texas and the Gulf Coast directly with our salespeople. The further you get away from the Gulf Coast where we use representation -- on the East Coast, in the Northeast, and West Coast, the cost does increase there. So that certainly is some of it but I don't have the number. I'm happy to get back to you and take a look at it.

I'd love to have a follow-on conversation about this. Thank you.

Tom Spiro, Spiro Capital.

Can you hear me? I am having difficulty with the phone lines here, so if I lose you, my apologies. I'm sorry if this question has already been asked, but Tom, in discussing the electrical power side of the house, I thought I understood you to be saying that basically we have plenty of demand right now and it's our challenge to process that demand efficiently.

Yes, sir.

And I was kind of curious, Tom, whether it's your hunch that our competitors are in the same boat or whether they've still got plenty of capacity to fill up?

I happen to know a couple that are adding people as well. A lot of them -- a lot of business related to construction and as a result of the hurricanes, so I know several of them are adding personnel. I can't tell you about some of the other independents.

Also I remember I think from the last call, Tom, when you were discussing the possible impacts of the hurricanes that your preliminary thought was that it might actually be a little disruptive to us in the fourth quarter, but have some opportunities down the road. I wondered if you still held that point of view or have you changed it?

It was a little disruptive in the fourth quarter. We had to move some jobs back and insert some emergency projects in here for some of our good customers. But our other customers were quite reasonable and allowed us to do that. We are still seeing work from the impact of that storm and as I said earlier, I think that will go on for two to three years.

These folks will pull this equipment out and they will spray it down with water or dry ice. Dry ice of course just evaporates and they will spray this stuff down to get a lot of the corrosives and so forth out of there. Then put a lot of this equipment back on line. But in the long term, you cannot get all the corrosives and saltwater out of there, soy you'll start having trouble with bearings and various parts. So I believe that we will be seeing a lot of opportunity going forward in the next several years to replace that equipment. And in some cases we see them putting it on higher ground, which will also take a lot of refurbishment.

Last question. In your outlook for the new fiscal year, what are you assuming about copper prices? Will they keep going up or will they come down or what?

Right now it looks like its steady but it's volatile. I don't know how to guess. We met with the folks recently and they think it's going to stabilize and certainly now the mines are getting more active to bring in more raw material. It is going to remain high. I don't it's going to go down, but I don't think you're going to see another radical upswing.

Thanks a lot and good luck.

Larry Callahan, (indiscernible) Securities.

I pray that Tom might come in better. You guys were cutting out about every third word. Is that happening to others?

It's happening sporadically.

Do you think that will be better on the replay?

I do what the issue is so I can't answer the question. Hopefully the replay will be coming through clear.

Thank you.

A follow-up from John Franzreb, Sidoti & Co.

Just to clarify, what is the tax rate assumption for the coming fiscal year and what's the CapEx budget look like?

The effective tax rate we anticipate in 2006 is going to be around 40%. Our OpEx spending I would expect it to be in the 5 to $6 million range again in 2006.

And just D&A?

You're going to get some nominal accrete in that D&A but I don't have that number here in front of me. This year we ended up with about a little over $5 million. I would expect it to range in the 5 to $6 million.

Thanks a lot.

I've got some customers in here. I'm going have to excuse myself shortly. Are there any other questions?

Robert Longnecker.

It's already been answered, thank you.

Folks, we appreciate you joining us today and look forward to talking to you again in the next quarter. I'd like to wish all of you a Merry Christmas and a happy and a very safe holiday. Thank you very much. We will talk to you again.

Ladies and gentlemen, we have reached the allotted time for question and answers.