Powell Industries Inc (POWL) 2006 Q3 法說會逐字稿

Good morning, ladies and gentlemen, thank you for standing by. Welcome to the Powell Industries third quarter conference call.

[OPERATOR INSTRUCTIONS].

I would now like to turn the conference to Ms. Karen Roan. Please go ahead.

Thank you, Michael, and good morning everyone. We appreciate you joining us for Powell Industries conference call today to review fiscal 2006 third quarter results. We would also like to welcome our internet participants listening to the call 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 e-mail of the news release this morning, occasionally there are technical difficulties experienced 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 to you. Also if you want to be 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 at www.powellind.com, or a recorded replay will be available until September 14th, and that information is in today's press release. Please note that information reported on this call speaks only as of today, September 7th, 2006, 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 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. 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, Vice President and Chief Financial Officer, and Mark Reid, Executive Vice President. I will now turn the call over to Tom.

Thank you, Karen. Good morning. Thank you for joining us this morning to review our third quarter results for fiscal '06. We're pleased with the strong revenue growth in the past quarter and we're pleased that we continue to show solid bookings and backlog, however, I do admit we are disappointed with the earnings result of $0.16 per share.

There were several items that impacted the quarter, which I would like to discuss. First, earnings were negatively impacted by approximately $1.1 million or $0.10 a share for our one-time adjustment due to the changes in non-cash stock option expenses and certain other non-operating cost. In July, the compensation committee of the Board of Directors modified the vesting requirements for stock options upon retirement. This change in vesting resulted in a one-time non-cash expense of approximately $0.05 per share. Other non-operating costs incurred during the quarter include professional and legal fees related to efforts to defend our claim with the City of San Francisco, and also an unfavorable settlement following a state sales tax audit.

Second, our business is based on flexibility and meeting the customer's needs, which means our business can be unpredictable on a quarterly basis. On most of our projects, timing is critical to our success. On our large complex projects, which can take as long as 24 months to complete, we work with the customer to incorporate his directed changes during the construction process. However, we cannot book the revenue and profits until we receive the formal change order with pricing from the customer. So, in most cases, we proceed with directed change orders and incur the costs before we can book the revenues.

In the third quarter, we had some large projects where we incorporated customer-directed changes, and incurred costs for which we have not yet booked the revenues and the profits. This amount, which impacted our earnings per share by $0.04 to $0.05, should be recovered in future periods upon receipt of the formal change orders.

Finally, revenues and profits from our service business, which operate with almost no backlog, can vary significantly from quarter to quarter. If you recall during our last teleconference we discussed a softening in our service business. Unfortunately service business volume fell even below our expectations. However, I'm happy to report the business activity significantly improved in August. This temporary dip in business activity negatively impacted our quarter by $0.03 to $0.04 a share.

On a more positive note, our markets remain quite strong. New orders in the quarter were up 50% over orders placed in the second quarter of this year, and margins are continuing to improve. We're also pleased to report that in early August we were awarded a $32 million contract to provide equipment on a large liquid natural gas project. Year to date, the orders are up, the revenues are up, the earnings are up, and our backlog remains very strong.

At this point I'll turn it over to Don to give you some detailed review of the financial results and then I'll come back with some final comments. Don?

Thank you, Tom.

Revenue for the third fiscal quarter increased $37.1 million to $104 million compared to last year's third quarter results of $66.9 million. Revenues have increased as the result of general market recovery in our Electrical Power Products market, concerted sales efforts in 2005 strengthening our backlog and the acquisition in July 2005 of S&I which added revenue of $13.8 million in the quarter compared to adding $3 million in last year's third quarter.

Gross margin for the quarter was 18.3%, compared to 18.8% in last year's third quarter. However as you may recall in last year's third quarter we recorded additional revenue and profit of $1.5 million from the settlement of a claim related to the Central Artery/Tunnel projects. Without this settlement, our gross margin would have been 16.5% in the third quarter of last year. So without last year's settlement, our gross margin improved from 16.5% in the third quarter of 2005, to 18.3% this quarter.

Material costs continue to be a challenge. In the third quarter our material costs increased by approximately $1.6 million, compared to the same period a year ago, primarily due to volatility in raw material costs, in particular copper. Elevated margins on new business due to improved pricing and better operating efficiencies derived from increased volumes benefited the quarter. In addition we are benefiting from capital investments and process improvements made over the past couple of years.

Selling, general, and administrative expenses increased to 15.1% of revenue in the third quarter compared to 18-- excuse me 14.8% of revenues in the same period last year. SG&A expenses totaled $15.7 million, an increase of $5.8 million over the third quarter of 2005, of which the operating activities of S&I accounted for $1.7 million of the increase.

In the first quarter of fiscal 2006, we adopted SFAS 123-R share-based payment, which requires us to expense the estimated compensation related to stock option. In July 2006, our Board of Directors voted to accelerate vesting on stock options of employees of retirement age. This accelerated vesting resulted in the recognition of an additional $900,000 of non-cash compensation expense in accordance with SFAS 123-R. The non-cash compensation expense and the vesting modification related to stock option increased SG&A expenses by approximately $1.1 million in the third quarter of fiscal 2006, compared to the third quarter of 2005.

In addition, we recorded additional sales tax expense of $350,000 due to an unfavorable outcome from a state audit. The remainder of this increase is primarily attributable to the increased sales commissions, professional fees and salaries which are consistent with the growth in revenues. Interest expense increased by $346,000 to $476,000 in the third quarter compared to a year ago, primarily due to increased debt related to our S&I acquisition. Interest income was $197,000, compared to $289,000 a year ago. Our provision for income taxes reflects an effective tax rate on earnings before income taxes of 43.3% in the third quarter of fiscal 2006, compared to 24% in the third quarter of 2005.

In the third quarter of 2005, our overall effective tax rate was reduced as the result of a favorable adjustment resulting from the reconciliation of our income tax provision to the prior year income tax return. Net income in the third quarter was $1.7 million, or $0.16 per diluted share, compared to $2.1 million or $0.19 per diluted share the third quarter of '05. As of July 31st, 2006, our order backlogs was $287 million, a 14% increase, compared to $251 million a year ago.

New orders continue to strengthen. Orders in the third quarter totalled $122 million, compared to $135 million in third quarter 2005. In the third quarter of 2005, you may recall we were awarded a $51 million contract from WMATA, the Washington Metropolitan Area Transit Authority.

Now turning to our business segment. The Electrical Power Products segment reported revenues of $96.9 million, which includes revenues of $13.8 million from the acquisition of S&I compared to $58.2 million for the same period last year. During the quarter revenues in all of our major markets strengthened compared to the same period a year ago. Revenues from industrial customers totaled $55 million, an increase of approximately $26 million. Revenues from Utility customers totaled $28.1 million compared to $27.9 million in the third quarter of 2005. Municipal and transit projects generated revenues of around $14 million, compared to $2 million a year ago.

Income before income taxes for Electrical Power Products was $2.9 million, compared to $1 million last year. The Process Control Systems segment reported revenues of $7.1 million, compared to $8.7 million in last year's third quarter. Income before income taxes for Process Control Systems was $167,000, compared to $1.8 million a year ago. Now we're in the third quarter of 2005, we recorded additional revenue and profits of $1.5 million from the favorable settlement of a claim related to the Central Artery/Tunnel projects.

We ended the third quarter with $28 million in cash and marketable securities, compared to $33 million at the end of fiscal 2005. During the quarter, cash provided by operating activities was approximately $15 million. This increase in cash was principally provided from lower levels of costs related to uncompleted projects, which were not billed and increase in accounts payable. Additionally we invested $1.5 million in capital improvements during the quarter.

Looking ahead at the balance of the year. As previously announced, we will change our fiscal year end to September 30th from October 31st, effective September 30th, 2006, which will result in an 11-month year. Accordingly, our outlook for fiscal 2006 consists of two months for the fourth quarter and 11 months for the full year. Based on our current level of backlog and product mix, we expect full year revenues to range between $325 million and $350 million. Full year earnings are expected to be between $0.75 and $0.80 per diluted share. Fourth quarter earnings are expected to range from $0.12 to $0.17 per diluted share for the two months.

At this point I'll turn it back to Tom.

All right. Thank you, Don. Let me make just a few more comments and then we will be happy to take your questions. First the August acquisition of GE's power back product line and a commercial alliance with GE sales force is going well.

It's a very big positive for our Company. GE has a tremendous global sales force, a superb install base, name recognition everywhere. This will open up new market opportunities for our existing products, such as 38-KV Switchgear, Arc Resistant Switchgear products, IEC Switchgear, power control rooms and power control modules, mobile capacitor banks for the utility industry, distribution switches, bust-up and certainly offer us additional service opportunities.

Looking at our markets, the oil and gas market is very strong. We're seeing a very high number of refinery expansions and even some grass roots refineries. Due to the increased activity for offshore power control modules we are proceeding with plans to double the length of our bulkhead at our ship channel facility. This will give us a total of 600-foot of bulkhead as well as expanded lay-down yard space. This will enable us to handle additional work at our offshore operations more efficiently. The bulk head addition is expected to be operational early this coming year. The utility market is highly active in both transmission distribution and power generation.

Light rail transit is exceptionally active all over the country, and we continue to be successful in closing a large portion of this work. Transdown, our process control business, has a firm commitment for up to $11 million of additional work on Boston's Big Dig project. Our contract is based on time and materials pricing, and will be released incrementally over the next three years, therefore it does not currently show in the backlog.

In conclusion, we have accomplished a great deal over the last 12 months. We successfully integrated the S&I acquisition into our Powell operations and are pleased to report they continue to perform very well. We have increased our service presence in the Gulf Coast region with the acquisition of utility metering specialists in Louisiana. This acquisition provides us with an additional 15 service technicians in this strategic region. We successfully completed the acquisition of the Medium-Voltage Switchgear product line from General Electric.

Compared to last year we increased our revenues for the first nine months of 2006 by over $100 million, while increasing income generated from operations by almost $13 million. During this period of growth we maintained our strong balance sheet and continue to focus on cash flow. We have a number of opportunities and challenges ahead with our recent acquisition from GE. I certainly believe we have a team in place that's committed to making the integration a success. So, while third quarter earnings were not up to our expectations, we have seen some very positive momentum in the first nine months of 2006 and we look forward to this coming year and the fourth quarter.

At this point, we'd be happy to take your questions. Thank you.

All right. Thank you, sir. Ladies and gentlemen, at this time we will begin the question and answer session.

[OPERATOR INSTRUCTIONS]. John Franzreb with Sidoti & Company, please go ahead.

Good morning, guys.

Hello, John.

Hello, John.

First could you provide color me what you meant by the soft services business, Tom? Is that exclusively Transdyn or is there more than that? Can you just tell me what that is all about.

No, actually-- the soft services business?

Yeah.

No. That's-- that's obviously-- we had a great pick up cue to Katrina this past year for electrical power products and services, replacing switch gear, replacing modules, the whole nine yards and that seemed to have soft ended temporarily, but it is picking up again now and always generally does toward the end of the year when they want everybody in the plants around Thanksgiving and Christmas so it's back on the increase again.

Kind of maintenance repair work for your existing customers is that-- do I understand that properly?

That's correct.

And could you give me an update on how much you are adding staff? I know you have been pretty aggressively adding personnel. What is the total head count like, and how do that compare to maybe a year ago?

We're just shy of 1800 please now in the operation. In addition to 1800 please we probably have between 200, 250 of temporary and contract employees supplementing our permanent staffing. At the end of last year we had approximately 1500 employees, and probably had another 150 or so temporaries at that point in time.

Okay. Are you done adding personnel, do you think at this point or--

No with the General Electric acquisition has this takes place we're going to add somewhere in the neighborhood of 300 people. Unfortunately at a time like this a lot of skilled labor has moved into the Mississippi, Louisiana Gulf Coast for a lot of that rebuild, so we're having to bring in young people and get them trained. It's not an easy chore, but we're working hard at it.

This labor inefficiency right now that you are going to have to incur for the next-- I don't know, you tell me how long.

You-- you're looking at the integration o moving the product line here to Houston, there will clearly be another 300, 350 employees that we will be added to the organization. It will be a controlled ramp-up, much like we have done over the past year where we're supplementing some of our current employees moving over to new product lines and managing the training process, so that not all of the new employees are in any one area. Clearly there will be some inefficiencies but those have been factored into the outlook we have given regarding the acquisition of the GE power guide product line which basically stated we do not expect it to be dilutive in the first year.

Okay.

That generally takes anywhere from 3 to 6, 8 months to get these people up to speed.

Okay. One last question, regarding the fourth quarter estimate, at least on the revenue sides, if I did my math right it looks like you are running roughly $20 million a month to $32 million a month. That's significant-- significantly below what you did in the July quarter. What is going on-- what is the big variance that's going on in that top line?

John, let me double check the math, but you-- I mean you did look at it from a two-month quarter in the fourth quarter.

Right. You are saying you are doing 325 to 350 for the full year and you already booked 286. How come everything looks little slower in the coming period?

Well we're looking at our fourth quarter outlook that-- okay. You are looking at the-- at the midpoint of the range. At this point in time, that probably is a very conservative outlook. When you are looking at, if you look to the high end of the range, you are going to be looking in the low 30s.

Exactly the high end puts you around 32-- 32 per month--

Averaged in the low 30s per month in the fourth quarter.

So the low end is what you are calling conservative outlook, so there's no more projects that Tom referenced earlier that might be-- you know that might be delays in your ability to-- to book on them? That's not kind of baked into the outlook? Or is that being baked into the outlook?

Clearly, we have baked into our outlook what we can foresee with some reasonable estimates. As we talked about it we typically operate with less than a 30-day backlog.

Yes.

So we can look at what we have seen through the early part of August and what we anticipate happening on into September. Talking about the ability to book change orders that is our best estimate based on where we are in the negotiation process and getting those orders finalized, and yes, we have included some but not all of it in our fourth quarter guidance.

Is there one customer base that's causing a problem or is it-- that's the question is there one customer base causing a problem?

Regarding the change orders?

Yeah.

No basically the change orders just relate to some very large complex projects which clearly are in the oil and gas projects. It's not a customer-related issue. It's a project-related issue of working through the changes, getting in price and negotiating the price and getting the formal purchase order.

Thank you very much, Don.

All right. Thank you sir. Richard Leader with First Houston Capital, please go ahead with your question.

Good morning, everyone.

Hello Richard.

Good morning, Richard.

Good morning. On the service business, I-- I suspect it's fair to say that-- that the loss of-- of revenues from expectations there are not something you expect to get caught up on? I mean, you had a difficult comparison with it-- with high hurricane damage last year, it looks like we are going to have so far next to nothing this year in that area, so that is something that may well continue into the current quarter as well as the shortfall for the July quarter; is that correct?

The way which I would characterize it is, is the exceptionally high volume we had in the second quarter will not be repeated. We dipped below our expectations in the third quarter. We definitely see improves coming into the fourth quarter, but you are correct, we do not see them returning to the levels we saw on n the second quarter.

But the-- the other-- other-- or temporary loss of revenues is because of high costs and-- and changes and the loss of $0.04 or $0.05 this quarter is just a matter of being deferred sometime near the future.

That is correct. We fully expect the change order process will complete itself and the revenues and the profits associated with those change orders is a timing issues. Some of that will probably fall into the fourth quarter, and we have included that into our outlook. Some of it given-- it is only a two-month quarter is likely to fall into next year.

Do you have any comments on next year? You have only got two months to go in the current fiscal year, do you have any ballpark expectations on revenues and earnings per share for the next fiscal year, '07?

Not at this time, Richard. We'll be talking to that in more-- in detail at our next conference call.

All right. And I can't remember but if you done other LNG projects before and can you spend a minute on this $32 million project and far as complexity and timing is concerned and I'll just-- I'll just--

Yes, Richard we have done L&G projects before. This is the largest. $32 million, that's a large multi-story module, complete with arc-resistant switchgear, medium voltage motor control, Low voltage motor control, UPS systems, et cetera. But we're not free to say who the customer is, they don't let you do that without their approval, and they normally don't grant that hello?

Anything further? No.

That's all. Thanks.

Thank you. Michael Christodolou with Inwood Capital Management. Please go ahead with your question.

Morning gentlemen, a couple of questions about the change order, I am new to your company. Have there been any issues where the change order comes through and you actually don't get an agreed upon revenue and profit level, or does it ever show up in the allowance for doubtful accounts?

It would not show up in allowance for doubtful accounts because we never book the revenue until we get a formal change order. Clearly, you are accurate in saying that as you go through the negotiation process on change orders, there's a general I understanding as you go into them but clearly there is a negotiation process as to the scope of the change, relative to the specifications and the appropriate pricing of the change. So that is a negotiation process that is-- does vary as to the final outcome, and that's why we have a range there in the-- in the discussion as to what the benefit of that would be going forward and the benefit we lost this time, $0.03 or $0.04 is that-- until you finally get to the final negotiation and pricing, the exact impact is an estimate.

That's basically 100% cost with zero profit.

That is correct. We take a very conservative approach. We do not record claims that basically we record the cost associated with directed changes, and then we record the revenues and profits once we have a formal purchase order in hand.

And in your history of working on these large projects with these types of customers, have you ever had-- typically speaking is the profit margin on a change order same as, higher than, or lower than the normal corporate gross margin when you first bid the project.

Generally in the bid process you let them know about how you price change orders, so I think the safe thing to say is it's a same level.

None of this would know up as an offset to the billings in excess of costs and estimated earnings on uncompleted contracts.

Well the cost will be in the cost in excess of-- billing.

So it will be a detriment for what you showed in the April-- for example, in the April Q.

Would you repeat the question.

You are showing on your April 30th, 10-Q you have 18 million of billings and excess of cost and that number will clearly change for the quarter's results and then you would have a lower amount of billings in excess of costs, given that you have had some higher costs.

Actually you will have a higher cost because of the incremental cost--

I think we're saying the same thing.

Yes.

Fair enough.

Now, with the cash that we've-- from operations that we received this time, you'll actually see that our cost in excess of billings is actually coming down from the levels that we saw on the previous quarters because we have been able to improve our billing milestones and actually convert much of that to actual accounts receivable and actually on into cash.

Okay. And my last question my sense is these all are pretty good credits you are working with these aren't independent power producers from four years ago, when I look at you having $83 million of receivables, again this is as of April, I don't know where receivables are now given the summary balance sheet, but it looks like you only have an 0.8% allowance for doubtful accounts is that kind of indicative of your estimation of the quality of these customers and their ability to pay you for these change orders.

That is correct. We're dealing with major investor-owned utilities. We're dealing with the majority of our business today is with the oil and gas industry. You are dealing with major reputable firms that yes, in the past we-- we have had to watch some accounts closely with the independent power producers, but that's not a substantial part of our business today.

Great. Thank you gentlemen.

Thank you, sir. John Franzreb, please go ahead with your follow on.

Yes, you mentioned the bulk head job, how much does that change your CapEx budget for this year and next year?

The CapEx budget we have given for this year I believe-- I'm going from memory, John-- I think it was about 6 to $7 million.

Right.

Which I don't think that we'll actually fully spend this year, would include the amount we would spend in our-- for this portion of this expenditure. This expenditure is about $2.5 million. Looking at the total build next year-- excuse me-- we're still looking at our capital plan for next year.

Yes.

And we'll let you know where we are as far as the final outcome on the CapEx for 2007 at the next call. I would expect it to be up nominally from this year, but predominantly as the result of the capital expenditures to support the transfer of product from GE.

Okay. Regarding the change in the vesting requirements for the options, how does that change your FAS 123 expense on a quarterly basis?

Going forward on a quarterly basis, it will be consistent with what you have seen in previous quarters. This is a one time adjustment from the change in the vesting schedule, which accelerated expenses into the current period. Previously we have looked at around, I believe, the $300,000 a period. That could-- it will be nominally smaller, but it would still range in the 2 to $300,000 going forward on a full three-month quarter.

Okay. Is there any leakage of these professional and legal fees in-- in the-- in the July quarter and the state audit fees, would that carry over into the current quarter?

No, basically the-- the-- the sales and use tax audit was completed late in July. We have a final outcome on that and that was fully reserved for in the current quarter.

Right.

Regarding the-- our claim in defense of the-- with the city of San Francisco, there is a risk that that could change. It changed this time because of change in trial dates that was delayed by approximately two to three months to-- and we have incurred additional diligence efforts in support of that claim.

Yes.

Our assumption is at this point in time that will be not moved any further from where we currently see it. And therefore there would not be current-- additional costs. If that were to move, then there could be additional cost in that sense.

In summary if I look at that $0.17 and one time items that you kind of stripped out there, $0.17 and $0.19 and one time items, by and large none of them should be carrying forward, there shouldn't be anything that should sneak up on us in coming periods? Is that a correct assessment given what you guys just said?

That is a correct assessment, the only qualification I would state is we do have a number of very large complex projects, and the timeliness in-- of-- of processing change orders, and recognizing profits and revenues of that could impact the timing in any one period.

Okay.

So-- I mean, just the scope-- when you are dealing with $30 million projects that risk is higher than when you are dealing with $3 million.

Certainly. Thank you.

Thank you, sir. Tom Spiro of Spiro Capital Management, please go ahead.

Good morning.

Hello, Tom.

Hi, I had a couple of questions, number one, Tom, I believe from the last quarterly call you had expressed a little bit of concern that some of our customers might not be able to take timely delivery of some of our work, and the whole process might slow down a little bit, and I wondered if any of that occurred in Q3 or we should continue to worry about that in Q4.

That's more of a first quarter concern.

Yes.

Tom, basically in the-- what we have seen to date has not been an issue. I-- we were talking about at the last call is a concern that we're looking at late this calendar year, which would be more of an impact on our first quarter of 2007 is that there's just a lot of activity going on out there, and we're getting noise out there that projects that are currently scheduled for installation in late in the November/December time period, are-- some of them may be questionable and get pushed into the first period of-- I mean, our second quarter of 2007. Does that answer your question, Tom?

Sure. Sure it does. Okay. I guess that's still a little bit of a concern on the horizon.

It's a timing concern that we will have a better handle on here in another few weeks.

Okay. Secondly, I know we have been working hard over any last few quarters about improving prices and also terms and conditions of our contract, and I was kind of wondering if you might give us a little update in those two areas of how much success we may or may not be having?

We certainly are working hard to get escalation. We still get burned once in a while, due to the volatility of-- of commodity pricing, particularly copper is hard to control. We're working hard to get escalation in a number of these contracts, but unfortunately we have lost several large contracts because we held firm on that-- on that subject matter.

Are the terms and conditions for some of these big jobs a little more favorable, for example, progress payments a little sooner, that kind of thing?

Yes, Tom, we are continuing to push to improve our cash position when it comes to financing projects. And that's-- one of the key reasons that we were able to-- you are seeing some of that benefit now to roll into our results with the third quarter when we had $15 million positive cash flow from operations. Most of that came from shrinking working capital. All of that came from shrinking working capital.

I guess we reached the one-year anniversary of our acquisition of S&I and I wonder if you could give us some of our thoughts on what you hope to see in the following year.

Clearly I think overall the S&I acquisition has been a tremendous success . The integration while we did have bumps along the way over all went very, very smoothly. We have given guidance as to the financial performance of the business. They have met our expectations and have contributed to our bottom line results, as well as top-line results. The benefits from the going forward is coming more from a marketing expansion. I'm going to pass the ball to Mark Ried on this one. Let him talk more about what we're seeing in the international marketplace.

Yes, hi, Tom. Clearly the-- the international market we participate in with S&I is affected by the investment in the oil and gas sector. That market right now globally is very active, and-- excuse me-- and-- and the inquiry rate is very high at S&I. We're also looking forward to our association with the GE global sales force and expecting quite a bit of inquiry activity from them in the-- and the-- the midpart and later part of next year. It's going to take some time to get that going. We're not going to just turn it on like a light bulb. We're going to try to invest in-- in working with those people slowly but surely, and-- and we-- we see a lot of activity increasing next year for S&I.

How large is the GE sales force?

The GE sales force internationally that we will be working with is about 200 people.

Does S&I have its own sales force? I'm kind of curious how much of an increase the 200 people represents to us.

It's quite-- it's step change.

I see. I see. Last question the EERP system--

The ERP system I have been following for the company. It's going along nominally. We have the folks in North Canton Ohio, fully up and active. The team is now in Houston conducting training. Houston will go live during the first quarter of 2007. Our first fiscal quarter of 2007, and then we'll be moving to the final locations in Chicago and overseas at S&I.

Well, thanks, much, and good luck.

Thanks, Tom.

Thank you, sir. [Gabriel Lowenberg of Valco Capital,] please go ahead with your question.

Thank you very much. First of all congratulations on your 122 million of orders. It shows a lot-- it shows a lot of confidence in the future. I just wanted to clarify my math. In-- in the third quarter in July, you guys reported 104 million, and if you divide that by three of revenue it's about 30 million a month or 34 million a month, so what I'm confused about is that the GE acquisition was 75 to 85 million of projected revenue at the time, and it looks like there's no addition to the two-month period when you take $34 million a month multiply by two and add in, 20 million month-- $20 million for a three-month period for a two-month quarter.

You are absolutely correct. When we were looking at the outlook that we have given you, it's basically for our historical business. It does not include the acquisition of the power advantage product line. We did not anticipate any significant changes in the immediate term, and our ability to estimate those are-- are relatively weak when it comes to timing at this point in time. We do not expect any major negatives from an earnings standpoint early on.

We are looking at the timing of the integration next year. We will have to look at it more on a quarter by quarter basis to give you a better outlook as to the impact. And you will see some revenues in the last two months of the year. Those have not been factored into our guidelines.

Just to repeat, the $65 million projections you have given includes no revenue for GE, but costs; is is that correct?

Its includes no revenue and it includes no earnings impact.

But when you purchased the GE business-- I thought I understood that there was a backlog associated with that book of business.

There is a backlog associated with that book of business; you are correct. We were focused more on the bottom line, but you are correct that there should have been something added to the time line. Although as of right now I don't have a time line. Although as of right now I don't have a good handle on exactly what that revenue would be off of the top of my head.

Okay. So the reason you have include no revenue from GE is--

It is as much an oversight as it is intentional.

Okay. Fair enough. Okay. I sort of-- okay. I just would like to go through the-- the list of costs that sort of-- someone previously talked about being 17 to $0.19 I don't know if that is pre-tax, post-tax. Maybe if you could just give us the lis t of one time amounts-- I have $900,000 for the vesting of the stock options.

$900,000 vesting of the stock options is the pre-tax expense.

Okay.

When you are looking at the combined amount of the sales and use tax plus the legal fees, that is another $900,000 plus or minus.

Okay.

When we're looking-- okay. When we're looking at the impact of the profits on the shifting of business whether it be the change orders or the revenues, I actually do not have that number here in front of me because that is actually--

Someone mentioned three or $0.04. Should I assume that's about $500,000 pre-tax?

That would be a fair estimate, yes.

And what about the city of San Francisco charge?

That's included in the 900,000 I talked about with this between the legal fees and professional fees and the sales and use tax audit combined that totaled to about $900,000.

The change order was call it $500,000 and what about GE acquisition costs included in the July quarter.

There were none in the July acquisition quarter was the acquisition took place post month. It occurred on August 7.

Would be no due diligence cost or legal costs that you incurred in July.

The due diligence costs will be on the balance sheet with the transaction. Now, clearly, we have incurred some travel. We have incurred some incidental cost that were not be capitalizable to be amortized, but those have not significantly impacted the quarter. Not relative to your guidance for sure.

Okay. So if we add up it's 2.5 to $3 million; is that correct of impact in the July quarter?

If you are looking at lost profits and will costs; you are correct.

And you are not expecting-- you-- you are truly not expecting that to be a continuing thing?

That is correct.

Thank you. [OPERATOR INSTRUCTIONS]. John Franzreb please go ahead with your follow-up.

Follow-up on the last person's question. Your guidance includes the costs incurred from the GE acquisition but no revenues associated with it?

It-- it has the fundamental assumption that there will be no earnings impact in the-- the fourth quarter as the result of the operating activities of this product line. That the integration costs and the profits that we would derive from this business volume would be neutral.

Be neutral. And then one other thing I thought that was mentioned in the prepared remarks was $0.03to $0.04 of the services business that you did not just mention in the previous question. That's where I got that 17 from.

You basically have the-- and after-tax scenario, you have the $1.1 million that we talked about-- that Tom talked about earlier, and we had two other business issues, which are really timing issues. One is a $0.04 to $0.05 timing issue to profits related to change orders yet to come.

Yes.

And the other is the 3 to $0.04 in severs revenues which we had a dip below expectations in the third quarter, which are not necessarily expected to be recovered in the immediate near future.

Okay. Okay. This is-- actually wasn't why I asked-- I just wanted to know a little bit about what your thoughts were on the competitive landscape pricing environment, and your ability to pass through higher commodity costs now versus, say, three months ago.

I mean, the competitive landscape is there and will always always be there. Is there an awareness across the industry and an overall industry standpoint where you are talking about switch gear transformers or other products that our customers are buying. There is a realization that manufacturers cannot absorb these cost increase and have to pass them on. So from that perspective there is an understanding with the customers and there is a general incentive by all of the manufacturers to stay in business and to recover their cost of operation, but at the end of the day, it still becomes a negotiating between two suppliers with a client that does have a competitive element it to that will vary from order to order.

Thank you. Tom Harenburg with Carl Henning Investments, please go ahead with your question.

Sorry, fellows but my question was addressed regarding the San Francisco litigation.

Thank you. Michael Christodolou, go ahead with your follow-up, please.

Yes, I think I'm still unclear about the guidance with respect to the business acquired from GE. Are the monthly revenues of 6 to 7 to 8 million per month included in the revenues over the next two months of guidance?

No, that are not.

Okay. But the due diligence costs and the integration costs are.

The expectations are that those costs would be neutral when compared to the earnings contribution from this business.

Okay. But there can be no earnings contribution from this business if there's no revenues, right?

I would say in your guidance when you are looking at the top line. We looked at our base Powell businesses in detail like we have historically. Then we looked at the new business which we'll be adding it into here in the next two months, and we focused more on the bottom line impact and we overlooked the fact there would be an impact on the top line going forward even though we did not project a bottom line impact in the month of August or September.

Okay. Got you. Did you-- how about the interest expense on the 8.5 million that you have already paid? Or did you say it came out of cash? In other words is there any interest expense for the acquisition included in the guidance.

Basically that came out of cash, and that came out of our historical Powell businesses that was properly reflected in the forecast.

Could you refresh me on the remaining $25 million of purchase price or go so that you need to pay GE over the next forty months, what is the timing on that?

Over the next 40 months I believe it's in 10-month increments and the amounts do vary. I don't have it here in front of me, but it's between $5.5 million and $6.25 on each of the incremental payments.

Okay. My last question on the expansion of the bulk head, again, I'll relatively new to this story, could you refresh me as to the history of the thinking as to why you decided to do that? Was it what you thought were impending increases in international or lease business that you needed to ship by water, and if I recall correctly this was before the GE acquisition. And lastly, I would like to try to get a sense for the increase in business that the increased bulk head at the port there would allow you to do. And I don't know if you measure that in cubic units or modules or power switch banks or revenues.

Obviously the existing space that we have right now is-- is full up, and with the addition of this $32 million LNG project we absolutely had to have this additional space, but I have never seen in the offshore oil and gas industry so actively as we see right now. We will certainly have the finest facility on the waterfront anywhere in-- in North America to handle this work, and-- and we desperately needed to do this to be able to handle additional opportunities and the current backlog.

What kind of revenues right now would you say on a trailing 12-month basis has been handled out of that port.

If you just talk about the module itself without the-- the switchgear included, you are looking at n the neighborhood of 35 to $40 million a year in the module. Now, the switch gear, motor controls, et cetera, that-- that would go within that structure would probably be another 30% of that volume.

Okay. So another 10. So you have been running 45 to 50 million out of that location?

No, we have not been.

Okay. Sorry.

We are now, but it was actually slow in '04 and started ramping up in '05, and right now I'm not going to see we're full up, but there's no question we need this addition.

Could you do-- once the addition is in place could you do 2 or three or four more $30 million LNG projects?

I would say-- I would like to say it will get us up to somewhere in the neighborhood of $40 million a year out of that ship-channel area. Again, it is a matter of timing. Labor right now is a bit of an issue as I said earlier. A lot of the experienced labor moved into Mississippi for the hurricanes and our biggest issue now is bringing in and training new folks for that work.

Thank you very much, good luck.

Thank you. Gabriel Lowenberg, please go ahead with your follow-up question.

Just a couple of housekeeping items. The-- even though you haven't included GE's re knew or potential revenue from the acquisition in your September guidance will you be including their backlog in your backlog when you report your September numbers?

When we report the year end numbers. Which would include the two-month activity for August and September, we will include the transaction and record that properly in the balance sheet, which would include the opening backlog as well as any business activity that incurs during that two-month period.

Okay. To SO just to clarify the 287 million of backlog does not include any of the GE backlog obviously and does not include the recent LNG contract; is that correct.

That is correct.

Just a couple of housekeeping items, when will you file your 10-Q?

The 10-Q is due on Monday. We may be fortunate now have have it filed tomorrow.

Okay. So the costs incurred on uncompleted projects those numbers-- you don't happen to have them nearby do you?

No, sir, I do not.

Okay. And as the embedded margin in the backlog has has gone up from 14% five or six quarters ago, to 18 or 19%, did it continue to increase in the July quarter as you turned away business that was low profitability or is it stabilized?

Clearly, we are continuing to raise the-- our price levels and our efficiencies and the margins in our backlog are improving when you are looking on an order to order basis. I do not have an aggregate number I would report to you.

The aggregate number is obviously affected by the product mix and as he said we don't have the aggregate number in our hands right now. We do anticipate and we are being more aggressively more selective in the business that we're taking.

How many shifts a day are you currently running?

Depends on the facility, but currently we're running two full shifts here at the primary plant for Electrical Power Products.

When the GE acquisition is sort of fully integrated in sort of six or nine months, will you be at 3 shifts at that facility?

No plans at this time for 3 shifts. I would rather have two fully-- fully staffed shifts. Again, bringing in labor is-- is difficult.

Thank you very much.

Thank you. Management, there are no further questions at this point. Please continue with any closing comments.

Thank you very much for joining us today. We look forward to talking to you again two months from now at the end of the fourth quarter. Again, thank you. Have a good day.

Okay. Thank you for your participation, ladies and gentlemen. This does conclude Powell Industries third quarter conference call. You may now disconnect. Thank you for using ACT conferencing. Have a very pleasant day.