Powell Industries Inc (POWL) 2007 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Powell Industries second quarter conference call. (OPERATOR INSTRUCTIONS) This conference is being recorded today, Wednesday, May 30, of 2007.

I would now like to turn our conference over to Karen Roan from DRG&E. Please go ahead, ma'am.

Thank you, and good morning, everyone. We appreciate you joining us for Powell Industries conference call today to review fiscal 2007 second quarter results. We would also like to welcome our Internet participants listening to the call simulcast live over the Internet. Before I turn the call over the management I have the normal details to cover. You could 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 relay on today's call and will it be available by webcast by going to the Company's website at www.powellind.com, or a recorded replay will be available until June 6, and that information is in today's press release. Please note that information reported on this call speaks only as of today May 30, 2007, 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 contains 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 & Exchange Commission. Now with me this morning are Tom Powell, the Company's Chief Executive Officer; Pat McDonald, President and Chief Operating Officer; and Don Madison, Executive Vice President and Chief Financial Officer. I will now turn the call over to Tom.

Thank you, Karen. Good morning, folks. Thank you for joining us today to review our fiscal '07 second quarter results. We generated strong year-over-year revenue growth of 44% in the second quarter. Approximately 59% of this revenue increase is attributable to our acquisition of the Power/Vac product line. With our ongoing businesses showing a solid increase of 18% over last year's second quarter. Bookings in the quarter reached another record more than doubling from last year, to $168 million. We ended the quarter with a backlog of 408 million, an all-time record for the Company and up 8% from the prior quarter. While we are disappointed with the two operational issues that adversely impacted earnings in the quarter, we continue to be excited about the opportunities in our markets, and the future performance of the Company.

I would now like to introduce Pat McDonald. This past February Pat stepped into his new role as President and Chief Operating Officer of Powell. Pat joined us early in 2006 with over 23 years of experience in the electrical business including 22 years with Square D which is now part of Schneider Electric. At Square D Pat held numerous leadership positions in the area of operations, finance, and product marketing, and served as Vice President of both the international and services division. We're extremely pleased to have Pat in this leadership role at Powell and I'm now going to turn the call over to Pat.

Thank you for that introduction, Tom. I'm very pleased to be a part of the leadership team here at Powell. I believe we have excellent prospects ahead and look forward to the opportunities and challenges yet to come. I will now discuss some of the operational highlights of the quarter. We are in the process of moving the entire Power/Vac line which has been designed and manufactured in Burlington, Iowa for more than 24 years to Houston. This transition process has proven to be more complex and time consuming than we anticipated. We are carrying out this process including engineering, manufacturing, and assembly in conjunction with personnel and resources from the Burlington facility.

This transaction is occurring during extremely robust market conditions with peek demand for production volumes across all Powell products and solutions, making the integration even more demanding. Finding personnel with the appropriate level of skills as we manage this rate of production continues to be challenging. And has resulted in more extensive recruiting and training requirements. Additionally, remember the commitment we made from the start. We would make the transition of the product line from Burlington to Houston as transparent and seamless as possible to the end customer. Doing the transition right and keeping the customer base satisfied is key to the long-term success of this acquisition.

Now for an update of where we are in this process. The circuit breaker is a critical component to all of the Power/Vac products and we have successfully completed our move of the circuit breaker final assembly and test process to Houston. We have also completed the move of the outdoor distribution breaker assembly. The metal clad switch gear transition is in its early stages and is driven by a highly complex learning curve regarding size and configuration, both of which effect mechanical assembly and electrical wiring in the production flow. Some of the reasons for this complexity are--the supply of parts and components coming from Burlington must match production schedules established in Houston. We have had to complete the setup of all necessary infrastructure, including engineering, design, quality, and technical standards compliance. We also had to establish the commercial function, including quotation, pricing, negotiation, and project management. I am very pleased to report that our commercial operation is in place, and will be fully operational effective in early June.

Regarding our new ERP system the conversion to Oracle is progressing well and at present more than 50% of the backlog in the Houston facility has been transferred from our legacy system to the new one. Our two largest domestic operations are now up and running in Oracle and the implementation team is work hard to complete and respond to every issue. Currently, we are going through the normal process of aligning the system and our business processes. There are many advantages from this alignment to the overall management and oversight of every aspect of our business from inquiries through collections. We are in the process of transitioning from implementation towards managing the business with the new system in the two locations, while concurrently implementing it at other locations. When complete, this standardization of business processes throughout our system will assist us in maintaining consistent management and accounting procedures at every location. Also, the business intelligence module of the system gives us the ability to evaluate the business as a whole, as well as analyze our business activity in a real-time environment. Now, I would like to turn the call over to our CFO, Don Madison, to review the financial results.

Thank you, Pat. First, let me remind everyone again that we changed our fiscal year end from October 31, to October 30, effective September 30, 2006. We have not restated prior year financial statements to conform to the new fiscal year as we do not believe the results would be materially different. Therefore, our consolidated operating results for the three months ended March 31, 2007, the second quarter of fiscal 2007, are compared to the operating results for the three months ended April 30, 2006 the second quarter of fiscal 2006.

Now I would like to provide an update on our internal review and our restatement process. The Company has completed the review of accounting errors discovered at one of our domestic divisions. Based on conclusion of our review, we have prepared and filed restated financial statements. The restatements reduced net income for the fiscal years 2005, 2006, and the first quarter of fiscal 2007 by approximately $0.4 million, $1.4 million, and $0.9 million respectively. And diluted earnings per share for the respective periods was reduced by approximately $0.04, $0.13 and $0.08.

Now for the financial results of the second quarter. Revenues increased $43.5 million to $141.9 million in the second quarter of 2007, compared to $98.4 million in the second quarter of 2006. Revenues increased due to the ongoing strength in our primary markets, concerted sales efforts aimed at strengthening our backlog, and the acquisition in August 2006 of the Power/Vac product line from GE. The acquisition of the Power/Vac product line added revenues of $26.1 million in the second quarter of fiscal 2007. Due to lower than anticipated operating performance at two divisions, gross margin for the quarter was 16%, compared to 20.5% in last year's second quarter.

Overall we continue to experience strong demand for our products and services and pricing in our markets has improved along with an overall increase in business activity. However, the complexity, time, and cost associated with the relocation and start-up of the acquired Power/Vac line to Houston has been greater than anticipated. Also at a second division, the Company experienced lower than anticipated margins due to understated product costs on current projects. Excluding the operating performance of these two decisions, the overall gross margin of the Company would have been approximately 20.6%.

Selling, general, and administrative expenses decreased to 13% of revenue in the second quarter of 2007, compared to 14.1% of revenues in the second quarter of 2006. SG&A expenses were $18.5 million. An increase of $4.6 million over the second quarter of 2006. SG&A expenses increased primarily due to amortization expense increased administrative costs related to the integration of the Power/Vac product line and related operations, and increased payroll and recruiting costs, which are consistent with the increase in business volume.

Interest expense increased by $593,000 to $919,000 in the second quarter of 200, compared to the second quarter of 2006. The increase in interest expense is primarily due to interest expense imputed on the discounted purchase price for the acquisition of the Power/Vac product line. Interest income was $120,000, compared to $237,000 in the second quarter of 2006. The decrease resulted from a reduction in our cash available for new investments. Our provision for income taxes reflect an effective tax rate on earnings before income taxes of 34.4% in the second quarter of 2007.

Net income in the second quarter was $2.3 million or $0.20 per diluted share. Compared to $3.8 million or $0.34 per diluted share in the second quarter of 2006. Excluding the operating performance at the two visions discussed earlier, the overall results of the Company would have been approximately $0.42 per diluted share, and $0.08 or 24% improvement. As of March 31, 2007, our order of backlog was $408 million compared to $269 million at the end of last year's second quarter. New orders continue to strengthen, orders in the second quarter totaled $168 million, compared to $81 million in the second quarter of 2006, and to $148 million in the prior quarter.

Turning to our business segments, Electrical Power Products reported revenues of $136 million in the second quarter of 2007, compared to $91.9 million in the second quarter of fiscal 2006. The second quarter 2007 revenues include $26.1 million related to the business operations of our acquisition. Income before income taxes for Electrical Power Products was $3.1 million, compared to $5.9 million last year.

The Process Control Systems segment reported revenues of $5.9 million compared to $6.6 million in last year's second quarter. Income before income taxes for Process Control Systems was $400,000 compared to $365,000 a year ago. We ended the second quarter with $3 million in cash, compared to $10 million at the end of fiscal 2006. As we increased the business activity in our manufacturing operations, additional working capital has been required to support the higher levels of business volume. During the quarter, cash provided from operating activities was approximately $5.1 million and we invested $4.2 million in capital improvements.

Looking ahead. We now expect full-year fiscal 2007 revenues to range between $525 million and $550 million and full-year earnings to range between $0.75 and $0.85 per diluted share. This decrease in earnings guidance for the current fiscal year is due to the following reasons. First, revised expectations for the earnings performance at the division that experienced product costing issues have reduced the earnings outlook by approximately $3.5 million or $0.30 per diluted share. Second, the complexity, time and cost associated with the relocation and start-up of the Power/Vac product line, has been greater than anticipated and are expected to dilute earnings by approximately $4.5 million or $0.40 per diluted share. Post integration we continue to expect this accusation to meet previous guidance and generate incremental annual EBITDA of 7 to $8 million. The balance of our operations continues to perform at or above our expectations for the current fiscal year. At this point, I'll turn it back to Tom.

Thank you, Don. Let me make a few comments, and then we'll be happy to take your questions. Our markets are still exceptionally strong, and our bookings are very good. All divisions are performing beyond initial expectations, except for the two. I'm not going to tap dance around the issues, and I don't like the words should have, would have, or could have, except, the fact we is didn't perform in the final analysis and our results are disappointing and aggravating. We're addressing these problem areas.

There have been management process and accounting changes at the underperforming division. The issues involving the acquisition of Power/Vac are being addressed, both internally and externally with the seller. Unfortunately we're six or more months away from cleaning up these two backlogs. Now looking forward, our markets, as I say are exceptionally strong. We have an excellent sales group that's performing very well. And I'm confident we have the right management staff to get us back on track. At this point we'll be happy to answer any of your questions.

Thank you. (OPERATOR INSTRUCTIONS) Our first question comes from Craig Bell from SMH Capital. Please go ahead.

Good morning. Just wanted to clarify one of the things you said in your comments. Did you say that demand was so strong that that was further complicating the transition of the Power/Vac line?

No, we did not say the demand was so strong that it complicated the transition of the Power/Vac line. We do have overall demand, but just the process of making the transition with the engineering and all of the infrastructure that we had to put in place is a very complex transition, and as we said we underestimated what those costs were going to be.

Okay. In terms of the integration costs, are they going to be pretty consistent until the integration is complete, or do you expect it to sort of diminish over time as you get closer to the full integration? I mean, in other words, are you going to steadily see sort of margin improvement there? Or are we suddenly going to have a jump-up once you get there?

We are projecting the integration to still take us through approximately February of next year. We expect to see some of the same performance that we are seeing right now, and once we get through these integration costs that we are looking at, then as Don mentioned we do expect that we will be starting to perform at the EBITDA levels that we had talked about earlier?

Okay. And then lastly on the division that had the accounting issue, is that going to -- is that going to be permanently reduced margin at that location, or is that something that you feel like you can get back up to where it should be?

Clearly, what we're looking at there, Craig -- this is Don Madison -- is that we had an $0.08 impact in the first quarter, and roughly the same impact in the second quarter. The impact on the second quarter came from the understating of our cost, and how these costs were used to estimate and predict the performance of the existing orders in the factory, and the -- we anticipate that the impact of the information being used in the prior periods during the quotation processes will impact the business through the balance of the backlog turn. The backlog turn will predominantly effect the business over the balance of this fiscal year and probably the first quarter of 2008.

Okay. Great. Thank you. I'll get back in queue.

Thank you. Our next question comes from John Franzreb from Sidoti & Company.

Good morning, everybody and Patrick, nice to have you on line.

Thank you very much.

My first question is regarding the backlog. X what is happening in North Canton, is the margin on the backlog consistent with other peak margins you had in the cycles?

First off, we did not identify the subsidiary, it was not necessarily North Canton, so I'm not trying to throw anybody under the bus, but that's not the case.

As the peak periods in margin, I can't specifically speak to peak margins. I can tell you that the way we price our margins and what we are seeing in our margin activity has been on a steady incline as Don pointed out in our financial numbers, and we believe that that's going to continue for some time here as we continue to understand our costs and the way that we create our revenues into the marketplace.

Okay. I'll rephrase, the 20.6% gross margin that Don alluded to, you are saying that has room for growth?

Yes, we still have room to grow in our margin area overall.

Okay. And the -- once you cycle through the underperforming facility, is there any reason not to expect that unit to perform at margins similar to Powell's overall gross electrical margins?

Yes. I mean, we do look at the margins of every one of our divisions and our product lines and we are setting expectation levels of how each of those divisions are going to achieve those margin expectation levels.

Okay. And lastly you maintained your EBITDA expectations for the Power/Vac business. Is it fair to say, then, that having looked at it a little closely, maybe the staffing issues you might have -- are temporary and there's nothing to expect it to be a -- maybe a fundamentally less profitable business than you thought of when you first purchased the business?

I don't believe we expect it to be a fundamentally different business than what we purchased. Again, as we went through this transition, and we see all of the things that had to happen and some of the overlapping costs that we do have during that transition, has impacted us, and we believe that the business is still going to be fundamentally what we purchased.

Okay. Patrick what is the biggest issue singly surrounding Power/Vac?

Right now it's the transition. The single biggest issue here for us is the transition. It is also, then, included also in the backlog of what we are seeing and how we are improving that backlog. It's working through those issues, this is a large move, a very complex move, and working through every one of those issues and understanding the business the way General Electric transacts their business which is very different from the way Powell has typically transacted their business.

If it's part of the backlog does that mean that the GE sales force that was a big part of the acquisition has to be reeducated on how to sell the products?

I think both teams have to be reeducated on selling the product and we are working diligently with both their sales organization and our people to make sure that we do that.

Okay. That's all for me. Thank you.

Thank you. Our next question comes from the George Gaspar from Robert W. Baird. Please go ahead.

Yes, good morning.

Hi, George.

Good morning. Good morning. I would like to just delve a little bit deeper on the transition out of Iowa. Exactly what is happening on the price side relative to what you experienced at the time of the purchase? Was it a problem of where GE was pricing the product and you transitionalized it at the same pricing as -- levels and that's a cause for some of this upfront cost that you are incurring with the transition that's taking place? Can you delve into that a little bit? What are you experiencing on this cost structure that you are seeing in your new plan versus the cost structure that was -- existed in Iowa?

George, as you know we did acquire the business and the backlog, and so we did have to go through the backlog, and there are inflationary costs for the backlog that General Electric had sold at particular price levels. We have been working with them very closely to increase price levels, and showing them where we can increase those price levels, and have been seeing very good success in increasing those price levels. We believe that our backlog will be consistently getting better as we work off the backlog that we acquired and we insert that with the new backlog with the new business that we are now accepting and taking.

Okay. In the -- talking about backlog -- in that backlog, 408 million, what is represented in that backlog of backlog that's there, yet, from the point of acquisition versus what your overall backlog represents now from the acquisition? Can you get at that?

In absolute dollars, we acquired approximately $50 million at the time of acquisition. To date, we have a backlog that is nominally greater than the amount acquired. The exact turn of that backlog -- because much of the order activity that's taken place since the acquisition has -- is -- their backlog timing is different than ours. They did not have a full backlog -- 100% out. It has been scheduled out -- that backlog as acquired will I believe turn substantially at or around the end of our fiscal year. So therefore, the majority of the business that was in the backlog at the date of acquisition should be shipped on or about September 30, of this year.

Okay. And then in the current backlog, how much is represented, again?

The backlog has continued to grow slightly since acquisition. But the exact mix of what was in there at the time we acquired the business versus what has been added since then, I don't have in front of me.

Okay. All right. Thank you. I'll get back in queue.

Thank you. Our next question comes from Michael Christodolou with Inwood Capital.

Good morning, gentlemen. A few questions. First of all, Don, what were the costs of the accounting review that you took in the second quarter and will any spill over in to the third quarter?

The cost of performing the review?

Yes.

Most of the cost for performing the review was internal cost with the exception of our external audit firm. We believe that the cost associated with their additional efforts was included in our second quarter results.

And it's just not material -- I mean is it a penny or two or is it just not worth talking about?

I mean it was -- I can't have the exact number in front of me, but yes it would be in that magnitude at the max side.

Okay. Tom, you had mentioned you were six months away from cleaning up the two backlog issues in your prepared statements, and I was trying to get sense for that, is one of those clearly the GE integration and the backlog you inherited? And is the second with respect to this division that had the cost accounting problem?

That's correct. Both backlogs have been underpriced and I think we can work our way through that, the bulk of that, within the next six months.

Right. And my last question, you mentioned there was really no change to your expectations for the potential of the GE business and just to quantify that qualitative statement, are you still feeling like that business could produce the 7 to 8 million of forward EBITDA following, EBITDA accretion following the integration process?

I certainly believe so, yes.

Thank you, gentlemen.

Thank you. Our next question comes from Gerry Heffernan from Lord Abbett.

Good morning, gentlemen. I would like to review a couple of things. I'm not sure that I am clear as what the answer is. A question was asked about what is the single biggest issue regarding the Power/Vac issues. And I don't know that a clear answer was given there so if we could readdress that?

Let me try to answer that. Number one, I believe the backlog was underpriced that we acquired, and we may not have changed -- addressed the pricing issues early enough. I think that's the biggest piece of it. However, the transition cost with the addition of new labor, the recruiting costs, et cetera, and having, essentially two work forces putting together product is another certainly important piece of that.

Right, but the two work forces was a known quantity going in to that so that should have been accounted for in our previous guidance.

It was accounted for in essence, but it has been more difficult to hire people at this particular economic period than was anticipated, so the recruiting costs and so forth have been pretty heavy and the training costs.

Which brings up another question. When you hear that recruiting is more difficult, that can be taken to mean several things. One, it can mean just finding flesh and blood is difficult. Or two finding people who can work at the salary I had expected to pay them is proving to be difficult. Where are we on the -- in those two divisions?

When you look at the hiring that we have been doing, we are very close to being fully staffed on our professional people. We are continuing to hire on our hourly work force. Back to the projection we are hiring people at the rates we expected. I think as we have talked about on almost every conference call since I have been with the Company. The Houston area is a very low unemployment area, and finding the people, we're searching everywhere that we can to find the rest of the people that we need.

Some of the professional people come from out of state so you are working through recruiters and there are moving costs, et cetera, associated with that.

On the professional staff, which we just said, we are fully staffed. So we have found the people, and perhaps more of them were from outside of the area and involved one-time moving costs, or whatever costs that you wanted -- however you want to term it -- to get them from point A to Houston?

Yes.

That's correct?

Yes.

And then with the hourly people, what about the wage that they are -- that is being required to pay for them to work for you? Is it according to plan.

Again, as I mentioned, it's according to plan.

Okay. And I understand that Houston is a -- has had a low -- has had a strong economy, though. However, there was that large influx from the hurricane issue, which is going back two years now, and my thought was that there were still a lot of people misplaced and looking for homes looking for jobs from that. Have you not be successful in tapping that?

One thing when people come in we don't ask this they are a hurricane Katrina displaced person. Again, we draw circles around the Houston area and our Mosely facility people will drive so far with the rate of gas that we have, at the prices that everybody has nowadays. So we continue to look for other avenues to find people inside that geographical area. I can't say that we picked up any real influx of hurricane Katrina people.

A high percentage of these folks in the plant are young and have little business experience in the past so there's a lot of training classes that are going on. That's another issue.

Okay. Someone asked about the acquired backlog, and we indicated it was approximately 50 million, and it's modestly above 50 at this point, and that we expected that the 50 million that was purchased would be worked through by September -- by the September fiscal year end. However, Tom, you also said that -- in discussing the issues with Power/Vac, the pricing of the product wasn't addressed soon enough, which leads me to wonder if the initial 50 million that you purchased was mispriced. That also indicates that some additional product that went in to the backlog was also mispriced. Which brings back the question when will we will through all of the Power/Vac backlog that is mispriced?

I think the best answer is again, as Tom said. At this point in time looking at our business and analyzing what we anticipate the impact to be, we think that we can work through the backlog that's in question within the next six months. So--.

Okay. I apologize -- because I took that -- I heard that statement, but I thought that was referring to the legacy Powell division that had mispriced backlog.

It is intended to be applied to both.

Okay. So we have a six-month number that the answer to both the backlog of Power/Vac and the as yet unnamed division of Powell?

That's correct. And we should see the vast majority of that around the end of our fiscal year end with a modest amount bleeding in to the early part of the first quarter fiscally, our October through December time period.

And guys what is the big deal about labeling which division it was where the problem was?

The issue is both an internal and an external issue. The external issue is the competitive situation with our competition and the products and the markets that we serve as relatively small, and we feel it would disadvantage us to talk about it openly.

Thank you. Our next question comes from Tom Spiro from Spiro Capital.

Good morning.

Hello, Mr. Spiro.

Hello. A couple of questions. First, on the accounting front, Don, have you had an opportunity to look at the other divisions to be sure that we don't have a similar issue lurking elsewhere in the Company?

Clearly, that has been an issue, but when you understand the issue that occurred, it occurred on a legacy system, and as that legacy system is unique to this location, that the exact nature of this same issue rolling over to another location is not probable. But, yes, we have looked at our reconciliation process regarding inventory and accounts payable across the Company, and believe that we're in good shape.

I think, Tom, or perhaps Patrick mentioned that generally, our -- our end markets are robust, I was going to drill down a little bit there, the end markets served by the division with the accounting problem, are its end markets strong?

Yes.

And the end markets that Power/Vac is serving with the underpriced business early on here, are the Power/Vac end markets strong?

I think generally speaking, I would say yes. Any time that you deal in more than the market segments that Powell has traditionally done, which is where the Power/Vac line has been you are going to see some other fluctuations, but overall it still is a strong market out there both in commercial and light industrial.

Sticking with Power/Vac for a moment, Patrick you had mentioned that one of the highest priorities in this transition period was to make it seamless to the customer, so the customer experience no difficulties. Have we accomplished that so far; that is to say is the customer seeing smooth service?

I would say if you rate our satisfaction on that, I would say I'm somewhat satisfied. I'm not very satisfied. We have had some interruption, but I think we have -- both teams have done a good job to minimize that for the most part. And I look forward more to the successes that we have by us working together on certain things that make us a stronger organization altogether.

Tom, you mentioned in your opening comments that the bookings were strong, the backlogs at a historic level on the one hand and on the other we have challenges internally. I'm wondering if you think Powell will ever back off on seeking new business and slow things down for a while or are you still out there trying to grow the top line.

Certainly, we're not passing up any opportunities if it will provide the margins that we're looking for. But I've got some very good horses here. It's hard to turn them off, all we can do in some cases is raise the price levels.

Generally speaking are the markets accommodative of increasing prices?

For the most part yes, we have got very loyal customers particularly in the oil and gas area and certain areas of utility. They know the services we provide. They know our response times, and they are very happy with what we do.

Has the ship channel expansion been completed?

Yes, sir.

Are we using the expanded area, do we need it near term or was that more of a longer-term planning matter.

It's full.

It's full? I'm sorry?

It is basically full.

That is good to hear, and lastly the tail on the dog here. Process Controls I know is the smaller of the two divisions, but could you give us an update on the outlook for that side of the Company?

The bookings in the past six months have not been as robust as we would have liked, but we have had some -- a few distractions with a particular case on the West Coast. I think that is now -- has been resolved, or will be resolved shortly. And there's more attention now paid to bookings and opportunities are prevalent, and I believe we'll have a great deal of success in the coming six months.

Thanks very much.

Thank you, and we have a follow-up question from Craig Bell please go ahead.

Yes, I was just wondering, on your backlog as you look at it or just even from inquiries, are you seeing any difference in demand between utilities and just general industrials or it is about the same?

I would say -- I would say it's certainly the same.

All right. So just strong across the board then?

Yes, sir.

We still continue to see extreme strength in the petrochemical side of the business and with a lot of major projects out there.

Okay.

Utilities -- there needs to be more generating capacity. There are a number of things planned. Even some conversation about nuclear, wind energy and several of those others are moving along quite well. Traction power for rail is very, very active also.

Great. Then as regards to S&I, where are you at on a capacity basis there? Can you handle much more business without expansion?

Yes, we can handle more business, as with all of our business it's how well we handle and manage the through-put will dictate our capacity. We continue to work with S&I and I'll be traveling there this weekend again to continue to improve our through-put basis so that we can get projects on the floor, off the floor to the customer and free up the floor space to start the next project.

Thanks.

We have a follow-up question from George Gaspar. Please go ahead.

Yes, again, back on the Iowa situation, can you give us a comparison of what was in place there on personnel side on your assembly lines and then staff? And how you see that? What you see for totals in the new Houston facility?

The number, if I remember right in total was about 325, 340 people in Iowa. We have been shooting at and projecting to be at the exact same levels with some exceptions, minor exceptions, some of the hard tooling that was done inside, we will not be doing here in Houston so that will be outsourced. So we're on a ramp plan that's going to put us in the same basic area.

How far along are you target-wise in Houston to reach that Iowa level?

Again, as far as the professional people we are on plan and almost fully staffed there. On the production people we are on our ramp and and I think we're within about 100 or so of finalizing that number.

Okay. All right. And then on some of these under cost situations that you have experienced, and I know that there's been a historical perspective of having to go back and make claims for change orders and whatever else, on any of the product that's in completion or recently delivered that had an aspect on first and second quarters of this year -- influence -- are there any claims out on cost overruns with customers that could be -- that -- where you have cost it out, but you maybe had an opportunity to recover?

I would say nothing other than what would be on a normal run rate of our business. I mean, we constantly have change orders out there and going forward, if you are looking for any type of abnormality, no, we do not have any abnormalities.

Okay. And question on Process Control segment. What is the outlook here? I think on occasion there has been some question about whether you stay with that operation or not. And it looks like it was a little more profitable in the quarter on lesser volume, but is there anything new that's going on in that particular segment, or how are you going to try to get this thing to operate at better margins if possible? Or how are you going to handle this business?

George, what we have experienced with our Process Control Systems business, you are aware that the vast majority of this business is public funding. We have gone through a period here of about 18 months, 24 months where public funding for these type projects just hasn't been available. It's the cyclical nature of the business. What we're looking at now, the inquiry backlog is building. It appears to be several projects that will be funded between now and the end of the calendar year, and we are very positive on that we have turned the corner, and that the inquiries are turning up, and we'll start seeing increased level of bookings, which will drive revenues into 2008 and 2009.

Okay. Are you total now on process control as far as any claims that you have had out, where cost overruns or moneys claimed on equipment that may have been higher than expected? Are you complete on getting any claims accomplished? I'm thinking in Boston, for example?

Basically -- the one you are referring to was the large one which we've had that took us several years to complete the process up in Boston. There's nothing else that we have anywhere near that magnitude as Pat mentioned a new minutes ago, we are in the normal process of closing projects and negotiating any final adjustments that need to take place at the end of the project, but there's nothing I would say that would be a significant amount that would impact us in the near future.

Okay. And then one last -- if I would beg one last question here. On the ship canal -- or ship channel area, Tom was answering a question on that. Are you experiencing any -- where is the business coming from? Is there a change in the business environment that you are being able to now accomplish more there? Is it L&G related, is it just form processing related? Can you give us a little color on that?

Well, the color on that is -- two things that the ship channel, the bulkhead expansion gave us. First off it's more lay-down area for us to actually run our big projects out there with. Secondarily, is the ability to actually use larger PCRs, our power control rooms that we typically do in our Mosely facility we can actually do out there in more of a single unit as opposed to a multiple split here. So we are seeing a little bit of a change in that that we can actually run more of that business through the shift channel and do it in less splits than what we would have done in our Mosely facility.

Okay. All right. Thank you.

Thank you. We have a follow-up question from Michael Christodolou. Please go ahead.

Yes, gentlemen, I'm just curious, is there any repricing potential at all available to you on the GE backlog that you inherited? In other words is there a copper surcharge or something that could be applied as opposed to a two labor force surcharge which would probably be harder to put through?

No. No. I think this business you price, you take orders, you perform. What we're doing right now is pricing for what makes sense for the future.

And the repricing initiative, is that -- is that as simple as just faxing the legacy Powell sales force a new pricing page and faxing the same page to the GE sales force, which will still be selling this product line? Or is it more of a longer-term cultural shift?

No, this is -- again, this is -- you can kind of mix a little bit in there of the Powell salesforce versus the GE salesforce. The Power/Vac line is sold through the GE sales organization. It is really looking at and putting the inflationary costs, materials and things like that that typically have been in a lag position put in to more of a lead position as we price into the market place for the Power/Vac line.

And you mentioned--?

But it is our focus at branded products that do the pricing now. All pricing.

Yes. Yes. As Tom just alluded to. We have now taken over the pricing of all of the Power/Vac product line here with our organization. Again, we are putting our controls in place to assure the pricing is where we want it.

Earlier you had made the comment that the market generally speaking was conducive to price increases. Have you gotten any specific push back from customers or sales force that -- some of the inflationary costs you are trying to get ahead of the curve on on the GE backlog are excessive.

Any time you try to raise prices you are going to get some push back, but again, we are seeing success there, so the success are the customers and the projects that we want.

My last question -- I understand you don't want to be more specific about the legacy existing business, where you may have gotten some incorrect cost accounting, and I'm also, with the benefit of three cups of coffee just going to guess that it wasn't like you sold 0.5 million units of something and you were off be a little bit on a large amount of units. I'm going to maybe just surmise without you confirming or denying that it was maybe more one of these big, 2, 3, 5, 6, $8 million offshore modules, and again, you don't have to talk about that, but I'm just curious--?

Have another cup of coffee.

Yes, sir. Okay. But with respect to that I'm just trying to get a sense, could you just remind us on these big modules, where you clearly do have a very strong presence, where you do have the ship channel capacity, what is that business -- is that fixed price or is that cost plus, and just remind us what are the remedies and mechanisms by which on a big, big project 0.5 million to $10 million, just to use a broad brush range, what are your mechanisms and remedies for getting a competitive margin there?

Well, again, we always try to look for inflationary clauses if we can get them, which are typically small. Most customers don't want to give you an inflationary clause in your pricing agreement. So what we have to do is look at our raw material prices forward of when we think we're going to deliver that. Understand where our costs are going to be, and make our margin on that and then manage to that level, and that's what we do.

Generally it's fixed prices on those large modules up to a certain time frame.

Okay.

If these large, large projects do change, often and are delayed on the part of the customer and the end user. In that case if it goes beyond a certain time frame, there are generally some provisions for escalation.

Very good. Thank you, gentlemen.

Thank you.

Thank you. We have a follow-up question from Tom Spiro.

Staying on the subject of demand, is S&I experiencing the same robust levels of demand that we are here in the U.S.?

They have a good demand. I wouldn't say its as robust as we see here. It's the international market and when you are dealing in the IEC environment, there's a lot more competitors out there that they are going up against and for the projects that they are looking at in their key area, which is the petrochemical area.

Are they--?

But it's not as robust.

I see, and are there a couple of three projects now that S&I has won that it would not have won but for its new relationship with Powell?

We have had a real good success story here, as we took one of our people and moved them over to S&I for a while to learn about IEC products, and as a result of that we have focused on our key decision makers here in the Houston area who are now acquiring IEC products and we have acquired one good project as a result of that and have another -- I think two that we're looking at that we can potentially close on fairly soon.

Pat, you talked about the Oracle roll-out. When do you think it will be complete?

Now, I'm going to get out my crystal ball. We're going to be into fiscal year 2008. There's no doubt about that, again, we're doing it right. We have to do it right, because it controls our entire business. As I did say and mentioned, I think the most important thing right now is not necessarily completely the time, but the fact that we are starting to change to managing through Oracle and get information that we as a team and all of our people can look at that is consistent and leads us in the right direction to make day-to-day decisions.

When do you think you'll be in the position to start getting some of those benefits.

We're going to be in a position fairly soon to start getting some of those benefits. I have been looking at some of the test modules of this business intelligence right now, and it's very good real-time information.

Lastly, Don, on the subject of free cash flow, I understood you generated, I think you said 5.1 million of operating cash flow in Q2, what is your expectation for the balance of the year?

The balance of the year I still -- we expected from the beginning that we would actually have a use of cash during the year. I think at the end result we are slight use through six months, we will continue to use a modest amount of cash to support the business growth between now and the end of the year.

And the CapEx through the end of the year?

We have been projecting a 10 to $12 million. Pat and I have been looking at that and there are some projects that we have previously looked at that -- in early next year that we might consider moving in to late this year, so we'll have to relook at that as we get into the fourth quarter.

Are those expansion projects or efficiency projects or MIS or what?

Expansion.

Thanks much and good luck.

Thank you. Our final question is a follow-up from George Gaspar.

Yes, thank you. Question on cash side you mentioned 3 million. That's as low as I can recall for a long term, but I understand, also, you explained that it was due to the rising level of business. What credit lines are in place? And is it likely that you are going to have to call on them short-term here to keep up with the volume you are doing?

Clearly, we are using our line of credit to manage the day-to-day cash flow needs of the Company. Domestically we have a $42 million line of credit that we use for this. As of the end of the quarter, I believe, we had around 3 or $4 million drawn against this in actual borrowings, that's about where we are today. The biggest -- one of the largest issues that we have had short-term is actually -- this line is also used to support letters of credit, which is also needed as the business grows particularly with international projects. Clearly when we are looking at our line of credit, what we're going to need to support the business, we are in communications with our lending institution, and we'll continue to monitor that. Where we will end up or need to do between now and the end of the year, I do not see any issues that would hinder the growth of the business.

Okay. Thank you.

Thank you. I would now like to turn it back to management for concluding comments.

If there are no other questions we appreciate you joining us today and look forward to talking to you again next quarter. Thank you for being with us. Good day.

Thank you. Ladies and gentlemen, this does conclude the Powell Industries second quarter conference call. You may now disconnect. Thank you for your participation, and have a pleasant day.