Powell Industries Inc (POWL) 2007 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Powell Industries third quarter conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions.) This conference is being recorded today, Wednesday, August 8, of 2007.

I would now like to turn the conference over to Karen Roan of DRG&E. Please go ahead.

Thank you, Marcia, and good morning, everyone. We appreciate your joining us the for Powell Industries conference call today to review fiscal 2007 third quarter results. We would also like to welcome our Internet participants listening to the call simulcast live over the Internet.

Before I turn the call over to management, I have the normal 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 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 August 15, and information on how to access that replay is in today's press release.

Please note that information reported on this call speaks only as of today, August 8, 2007, and therefore you are advised that time-sensitive information may no longer be accurate as of the time of any replay. As you know, this conference call includes certain statements, including statements relating to the Company's expectations of its future operating results that may be deemed to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements involve risks and uncertainties and that actual results may differ materially from those projected in the forward-looking statements. These risks and uncertainties include, but are not limited to, competition and competitive pressures, sensitivity to general economic and industry conditions, international political and economic risks, availability and price of raw materials, and execution of business strategies. 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 Chief Executive Officer; Pat McDonald, President and Chief Operating Officer; and Don Madison, Executive Vice President and Chief Financial and Administrative Officer. I will now turn the call over to Tom.

Thank you much, Karen. Good morning. Thank you for joining us today to review this year's third quarter results. I'll make only a few comments about the quarter and our markets, and then I'll turn the call over to Pat and Don for a more detailed discussion. I'm happy to report that our end quarter levels and general activity remain very high, with all electrical equipment suppliers operating at or near full capacity. As one of the most responsive suppliers in this industry, we continue to push all areas of our business to improve our productive capacity and our cycle times.

Investments in infrastructure by our customers is a multi-year commitment and involves projects that are much greater in size than we have seen traditionally. For that reason, I believe we will continue to see the current level of activity for some time to come. Projects that we're seeing, both in the planning and the bidding stages, are mega-projects--very large and very complex. And I'm happy to say that Powell is very well suited to respond to these mega-projects and the needs of our customers. Our bookings remain healthy at $151 million for the third quarter, and our backlog remains at a record high $411 million.

Year-over-year revenue growth was strong and our ongoing base business improved over the previous quarter. This is due in large part to the hard work and dedication of our employees in all areas of the business. All in all, we're pleased with the opportunities before us and are excited about the prospects for this coming year.

I will now turn the call over to our President and Chief Operating Officer, Pat McDonald.

Thank you, Tom. We generated solid financial results, with year-over-year revenue growth of 43% in the third quarter. Approximately 42% of that revenue increase was attributable to our acquisition of the Power/Vac product line, with our ongoing businesses showing solid growth of 25% over last year's third quarter, and increasing versus the second quarter. We could not obtain this volume of business without the dedication and drive of the Powell people.

Let me explain why I say that. Powell is in engineering for the customer solution provider. We engineer to order, manufacture and assemble to order, and these are very specialized and complex systems. Most electrical manufacturers stop there. Powell incorporates our products into power control rooms and modules and then delivers it to the jobsite. Increases in volume, including the Power/Vac product move, require skilled, well-trained, and dedicated people to get the job done.

Now to net income. Net income and earnings per share doubled from year-ago levels. With a volume increase of 43%, this shows that we are keeping our costs in line and leveraging the volume into superior performance.

Regarding the integration and transition of the acquired Power/Vac product line, we still face challenges but have achieved some successes as well. As of July 31, all sales bid and pricing is being done out of Houston. We are on schedule to work through the initial order backlog by end of October. All final assembly of Power/Vac products will be in place in Houston by the end of our fiscal fourth quarter, and all finished products are expected to ship from Houston by the end of calendar year '07. We are confident that, as previously announced, we will complete the integration by the end of the second fiscal quarter of '08, which includes fabrication of all the parts and pieces.

Costs continue to be a challenge, although commodity prices have flattened on average. Our single biggest cost challenge is the hiring and training of labor. As Houston has ramped up to take on the business flow, we have not been able to ramp down the Burlington facility. This is due to the complexity of jobs being built in Burlington and the need of parts inventory to ship from Burlington. The jobs remaining to be assembled in the Burlington facility are extremely complex, requiring their most talented employees to finish. This has caused us to keep excessive redundant employees, which will not correct itself until the end of our fiscal year. We are spending considerable time, money, and effort to secure and train the human resources required to be successful. Our business does require highly trained people to interpret customer specifications, translate into engineering drawings, and perform assembly and wiring in accordance with those drawings.

As a result of our volume, hiring has been across all divisions. Today more than one-third of our domestic electrical power product employees have less than one year of service with Powell.

The balance of our operations are performing very well, and I'm glad to say that the division that we spoke of last quarter is on track and ahead of their plan to improve their performance, which also contributed to our performance levels in the third quarter.

Now I will turn the call over to the Chief Financial Officer, Don Madison, to review the financial results.

Thank you, Pat. First, let me remind everyone again that we have changed our fiscal year from October 31 to September 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 June 30, 2007, the third quarter of fiscal 2007, are compared to the operating results for the three months ended July 31, 2006, the third quarter of fiscal 2006.

Now for the financial results. Revenues increased $45.1 million to $149.1 million in the third quarter, compared to $104 million in the third quarter of 2006. Revenues increased due to the ongoing strength in our primary markets, a strengthening 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 $19.3 million in the third quarter of fiscal 2007.

Gross margin for the third quarter was 18.4% compared to 18% in last year's third quarter. Excluding the direct impact of the acquired Power/Vac product line, gross margin for the quarter would have been 22%.

Overall, we continue to experience strong demand for our products and services, and pricing in our key markets has improved along with the overall increase in business activity.

Selling, general, and administrative expenses decreased to 14.6% of revenue in the third quarter, compared to 15.1% of revenue in the third quarter of fiscal 2006. SG&A expenses were $21.8 million, an increase of $6 million over the third 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 volume.

Interest expense increased by $446,000 to $922,000 in the third quarter compared to the third quarter of 2006. The increase in interest expense is primarily due to interest expense computed on the discounted purchase price of the acquisition of the Power/Vac product line. Interest income decreased to $110,000 from $197,000 in the third quarter of 2006 as a result of lower levels of cash available for investment.

Our provision for income taxes reflects an effective tax rate on earnings before income taxes of 35.4%. Net income in the third quarter was $3.2 million, or $0.28 per diluted share, compared to $1.6 million, or $0.14 per diluted share, in the third quarter of 2006.

As of June 30, 2007, our order backlog was $411 million, compared to $287 million at the end of last year's third quarter. New orders remain strong. Orders for the third quarter totaled $151 million, compared to $122 million in the third quarter of 2006 and $168 million in the prior quarter.

Turning to our business segments. The Electrical Power Products segment reported revenues of $143.1 million in the third quarter of 2007, compared to $96.9 million in the third quarter of 2006. The third quarter of 2007 includes revenues of $19.3 million related to the business operations of our acquisition. Income before income taxes for Electrical Power Products was $4.8 million compared to $2.6 million last year.

The Process Control Systems segment reported revenues of $6.1 million compared to $7.1 million in last year's third quarter. Income before income taxes for Process Control Systems was $95,000, compared to $167,000 a year ago.

We ended the third quarter with $3.9 million in cash compared to $10.5 million at the end of fiscal 2006. As we increased the business activities in our manufacturing operations, additional working capital has been required to force higher levels of business volume. During the quarter, cash used in operating activities was approximately $7.9 million, and we invested $1.4 million in capital improvements.

Looking ahead, we now expect full year fiscal 2007 revenue to range between $550 million and $575 million, and full year earnings to range between $0.83 and $0.88 per diluted share.

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

Thank you, Don. I would make a few more comments, and then we'll be happy to take your questions. As I reported earlier, opportunities are abundant, especially in the mega-project range. That's projects in the $10 billion and greater size. We're well positioned for those large and complex projects. We're seeing heavy activity from power generation market, primarily due to new plant construction as well as environmental upgrade requirements. The U.S. is still under-invested in terms of electrical generating capacity and is still behind the long-term electrical demand curve.

With the difficulty in obtaining permits to construct new refineries, the oil refining market is committed to very large refinery expansions and upgrades. We have booked and continue to book a great deal of this new business in this area.

Wind power investment continues at a strong pace. We have completed a number of substation projects thus far, with many more to come. There are projects that are already permitted that extend out several years, and the latest legislative chatter would indicate that there are more on the horizon.

We see numerous opportunities for international and offshore oil and gas production facilities, LNG-related facilities and pipelines to move the oil from production to refineries. Our international business is strong, and our ability to work with our domestic customers on their international projects continues to pay dividends.

We're working hard to respond to the great number of opportunities we see in our traction power business. Investment in light rail continues, and we continue to be a major player in the electrical power portion of those projects.

In our Process Control Systems segment, bookings and opportunities are up. For some time we've acknowledged the lagging investment in the electrical power infrastructure, and we now see the same situation in the aging infrastructure of our highways, tunnels, bridges, and water and wastewater systems. New technologies such as real-time stress monitoring and intelligent transportation systems are likely to play a part in legislative-driven investment in these areas.

As we have noted, the volume of business is high, and Powell employees of all business units are working very hard to continue to deliver the high level of service our customers have grown to expect. I appreciate the efforts of all of our employees and hope to acknowledge their dedication and hard work.

We continue to be excited about the opportunities in our markets and about the future performance of the Company. At this point, we'll be happy to try to answer your questions. Thank you.

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions.) Please ask one question and one follow-up and re-queue for additional questions. (Operator Instructions.) Our first question is from John Franzreb with Sidoti & Company. Please go ahead.

Good morning, everybody. My first question is about the guidance, I guess. Why weren't you comfortable giving out stronger guidance in light of the fact that bookings seems to be good and backlog seems to be good? I just thought you would have been more aggressive in the guidance for the fourth quarter.

This is Pat. I think in the guidances, we're looking for--first off, we've got to remember we came off an extremely strong quarter. Our third quarter was extremely good, and as Don pointed out, with the margin levels, excluding the branded products, were approaching our 22%, the Power/Vac products were approaching 22%. As we look forward into the fourth quarter, as I pointed out, we continue to see some of the issues that we have in our integration still impacting us, and so we want to make sure that we put out the proper guidance out there for where we're seeing our business at this point in time.

So kind of it's more of an issue of just being conservative than anything material that's looming?

I think we're realistic about our values, especially again with our transition costs. We're going into the biggest piece period of this transition as we finalize all the assembly coming to Houston at this point in time.

Okay. And my follow-up question is, I think a lot of people are interested in your collective assessments of the overall power generation transmission and distribution market, where we are in the cycle. Could you kind of give us some color what you think, or what you're hearing your customers say out there, and previously it's been over a three-year cycle. What year are we in, and how many years do you expect it to last?

From what we gather from the some of the E&Cs and some of the utilities that we visit with--and we have customers in here almost every day inspecting projects and going through engineering drawings-- they think in general that this cycle's going to last anywhere from five to ten years. I don't know how accurate that is, but that's certainly what they believe in.

And what year do you think we're into?

I'd say five years in.

No, what part you're in right now?

I think we're only in about the third year of it, so I think we've got it under--you know, anywhere from five to seven years to go.

Okay.

I think the real question also is, is there more piece to come, or are we looking at a flattening out of the cycle, but yet it's still going to remain strong over the next, you know, five to ten years. And I think that's where we see it is. I don't know how much more piece there is to it, but there's definitely going to be strong available business for the next five to ten years.

Great. Thanks a lot, Pat. I'll get back into queue.

Thank you. Our next question is from Ned Borland with Next Generation Equity Research. Please go ahead.

Good morning, guys. Just wanted to talk about the orders. Here, it looks like they were about 10% lower than the last quarter. Are there any timing issues there or are they different projects? If you could just help me out with that?

There's always timing issues with it, as Tom has pointed out. We're seeing more and more mega-projects, so those timing issues, we're working a high quotation level. It's just a matter of when those projects finally issue a purchase order to us and we recognize the order coming in.

You can continue to see large swings in that area due to the large magnitude of these projects.

Okay. So some of the quoting activity has not necessarily--?

Quoting activity has not diminished. It's just the timing and the placement of order.

Got it. Okay. And then the follow-up would be, on the organic growth and the 25%, could you sort of segment that out between industrial versus utilities?

If you're looking at year-over-year growth, the growth rate has been roughly the same in both market segments. When you're looking at year-to-date information through the nine-month period, we have now reached about $133 million of utility business, and the industrial piece is around $239 million of the total. The balance would be traction power, municipal, and project.

Okay. Thanks.

Thank you. Our next question is from Arnie Ursaner with CJS Securities. Please go ahead.

Hi. A couple of real quick financial questions from Don. Don, can you give us international as a percent of total, please?

International, year to date, we're up to around 35% compared to 30% last year, and you're looking at the quarter, we reached 38%. So we're definitely seeing growth in that area of the business.

Okay. And just for modeling purposes, Power/Vac you acquired kind of in the middle of the quarter last year. As we think about the September quarter, can you just give us the revenue contribution from Power/Vac in last year's September quarter?

Last year's September quarter? Let me look for a minute. I've got the information, and we'll come back to that in a second.

Perfect. Wanted to kind of focus a little bit more on the business for a minute. You mentioned in your prepared remarks that excluding Power/Vac, you had a 22% gross margin, which I think is either at or pretty close to previous peak levels. Was there any non-recurring items that caused that? And as I look out over the next six to eight quarters--again, excluding Power/Vac issues--from the core business, is that kind of gross margin now sustainable, or in fact are we looking at higher peaks than we've seen in previous periods?

Our position has been that to outperform the last market cycle. The last market cycle, we did see around 22%. With the size and the lumpiness of the order of business volume that's going through the organization, to say that we can sustain quarter-over-quarter growth, I don't think is realistic. To say that we have reached our peak performance, I don't think we've reached our peak performance, either.

Okay. And again, a mechanical question. In your last press release, you went out of your way to quantify the negative impact of Power/Vac and the negative impact from this other business that had been somewhat problematic. Can you in fact quantify both of those items for us, please?

At this point in time, what--we're trying at this time to reconcile the major change in our guidance. Looking at where we are today, the changing guidance is roughly the same as we talked about it last quarter. The one business that Pat alluded to is actually a little bit ahead of where we thought they might have been based on the actions they've implemented in the third quarter. With looking at the redundant labor that we anticipate in the fourth quarter, the Power/Vac product line could be slightly worse. But in total, that delta to our previous guidance is still a good number.

Look forward to seeing you and Pat next week, and I'll jump back in queue. Thank you.

Great.

Thank you. Our next question is from Richard Leader with First Houston Capital. Please go ahead.

Good morning, everyone. Say, Tom, looking back a few years at the last boom in electrical equipment, 2000 and 2001, and other booms that you've experienced in your career, what would you say right now strikes you as most different? And I was following up the original question from Sidoti that you sort of see a super-cycle this time. Can you go into a little bit more detail of just what is different in your opinion this time?

Well, going back in history to 2001 and so forth, both of the increases, the major panic to put peak power, generating power units online, and the quicker, the better. So the margins, of course, were healthy in that regard. But other utilities weren't doing that much, and oil and gas was not sluggish, but it certainly wasn't as robust as it is today. Today we're seeing much greater activity in all aspects of the business--traction, power, utilities, industrial, green energy. So I think overall this is just a much healthier market.

Okay. Thanks a lot. Can you comment, someone, on the capital expenditures this year and if you have a forecast of expected capital expenditures for next fiscal year?

Richard, at this point in time, we're still working on our plan for next year. This year through the nine months, we are approximately $11 million of CapEx. We are pretty much at the end of what we had planned on spending or implementing for the current fiscal year. We are looking at some of the projects that we need to support the growth that previously were thought, first and second quarter, that we might try to pull into the fourth quarter if we can actually get it executed, just to help support the ongoing business growth.

Next year, this year we've been talking about $10 million to $12 million as our CapEx plan. Next year I think you will see that we will not be exceeding that and very likely could be something less.

Okay. Thanks, Don.

Thank you. Our next question is from Craig Bell with SMH Capital. Please go ahead.

Good morning. Just want to ask you about sort of the visibility into the marketplace. You've talked about mega-projects, and obviously that's going to be longer term, and then with the industry sort of operating at or near capacity, are your customers approaching you earlier than they have historically, and so even if you're not getting orders into backlog, do you feel like you have greater visibility than you have had in the past?

I wouldn't say that we've necessarily seen that we've had greater visibility. Again, you've got to remember Powell has always worked very close with its alliance partners and their customers from their early stages. I think there may be a little bit more heightened awareness now at this point in time from some of our customers that they need to be as quick as possible to secure productive areas, but I don't think that we see any greater visibility than we've ever seen before.

Okay, and then one more question related to your CapEx spending for what you've done this year and then sort of projects that you're thinking about. Are most of those geared towards just increasing the throughput at your facilities, or are they--?

Yes, yes.

New capacity?

No. We've just, we're adding, increasing the capability in our steel fabrication. That's a great deal of it. We have completed some additions down at the ship channel for additional bulkhead space to handle that volume. We've added on to several of the facilities, but the bulk right now would be focused on improved fabricating of equipment.

Great. Thank you.

Yes, sir.

Thank you. Our next question is from John Reilly with ACK Asset Partners. Please go ahead.

Good morning. Focusing on the large order backlog opportunity, were there any of those in your existing backlog? Did you land any of those $10 million-plus orders in the quarter?

Oh, yes.

Okay. I'm just trying to get a sense of how many of those versus your current mix of what the past six months was.

I would say, and again, I don't have the exact facts in front of me, but I have not seen a tremendous mix change from what we had been incurring in our order input. If you go back compared to a year ago, of course, as we're saying, the size of these orders are much larger than what they were a year ago. But in our quarter-to-quarter splits right now, we're seeing pretty much the same type of flow going on.

Got it. So just based on your commentary, you're saying that there is a significant opportunity to accelerate in these large orders of what we're going to see over the next six to 12 months.

We are going to continue to work hard to achieve the success on these large orders, yes.

Great. And then just focusing on the commentary relative to the Burlington facility, have we peaked or seen the peak of the duplicative expenses, and when do you think we expect to see those?

We expect to see the peak of that here in our fiscal fourth quarter.

Got it. So, obviously, it looks like you did a better job this quarter than it was in the March quarter.

I wouldn't say it's any better of a job. It is just the way the transition has transpired.

Got it. So we can expect, so there won't, so the material falloff won't come until Q1 and Q2?

Yes. Correct.

Okay. Great. Thanks, guys.

Yes, sir.

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

Good morning. I have two or three questions. First, Tom or Pat, in the commentary from one of you guys, you mentioned that approximately one-third of the domestic workforce, I think in the electrical segment, it has under one year's experience, and I was kind of curious how long you think it takes a person to reach efficiency? Reach standard efficiency?

Well, yes, we are less than one year. And it depends on the exact job that they're performing for us. But we try to target average, but then we hire, start training. If they're going to reach peak performance, it's going to be in the sixth month or slightly more time frame.

How are your variance, your manufacturing variances running?

Our manufacturing variances are running fairly well. Again, we are a job cost system, so we don't measure efficiency in a traditional manufacturing environment cycle. So what you see in efficiencies, or any efficiencies as you might look, is also predicated right into our markets.

Are you running much overtime?

Oh, yes.

Are you still hiring?

Oh, yes.

Shifting overseas for a moment to S&I, is it experiencing the same kind of robust demand that we are here in the States?

They see, because again, S&I, the acquisition itself, their market segments were very close to Powell's anyhow. They are seeing and experiencing a growth in opportunity. Remember again, in the IEC environment, they are competing in a much different environment with a lot of major players and those players also being very local in the marketplaces out there. So their opportunities for the robust growth that we see, that we've been experiencing here domestically, is not quite as large because of their competitive environment they're in.

I see. The division that has the accounting problem, does it still have much of the mispriced business to work through, and when do you think it will complete that business?

Looking at the flow of the backlog, it has not materially changed from what we talked about last quarter. We looked at, see most of that backlog shifting early into the first fiscal quarter of 2008.

So, Don, when you mentioned earlier, I think, in response to another question, is that division, in the quarter just ended, was slightly ahead of where you folks had thought it might have been. I gather it's still behind where you hoped it will be.

That is correct.

Okay. And lastly, at Process Controls, it seems to be lagging a little bit. I was just kind of curious if Tom or Pat perhaps, if you could just give us a little bit of a sense of what the outlook there is for bookings and business?

Go ahead, Pat. That's yours.

Again, as we've looked at it, a lot of this has been lagging because of the commitment in the freeing up of government money to go after some of these things. We all kind of believe that that's going to start to accelerate now. And we think we're going to see good quotation activities, and we believe we're going to again secure our fair share of that business out there as money becomes available.

Are there now concrete opportunities that you're referring to, that you're looking at?

The quotation backlog has grown this year, and we fully expect to see backlog growth in the fourth quarter of some of the projects that we had targeted to actually close between now and the end of September, look like might not close now until our first fiscal quarter, but the opportunities will continue to grow.

Thanks much.

Thank you. Our next question is from Michael Christodolou with Inwood Capital. Please go ahead.

Good morning, gentlemen. Don, a question on the gross margins. So the reported gross margin was 18.4, but you mentioned backing out the kind of one-time Power/Vac integration matters gets you to 22. Is there also an additional potential kind of pro forma add-back for this mispriced business segment?

When you're looking at the balance of the ongoing operation, as we spoke earlier, we have some, we still have a mix across the Company. We have some businesses that have opportunity. We have other businesses that have extremely good performance in the third quarter. On aggregate, if you look at where we are today and where we could be, I still think and believe we agree that we have additional opportunities. But to say that we're going to see sequential growth each and every quarter, given the lumpiness and the size of the projects, I would be cautious in projecting in that manner.

I understand. But in the second quarter, you reported 16% and I think you gave the comment back in May that that 16% was really 20% if you gave an add-back for Power/Vac and an add-back for this mispriced business backlog. And this quarter, we're given the 22%, so two points of sequential improvement quarter over quarter, and yet there's only one add-back. So is it, is it, this mispriced business is not an additional add-back?

Well, I mean, it is not reaching the performance that we anticipated being able to reach. That is correct.

Got it. Okay. Fair enough. And Pat, just in terms of the duplicative costs, I mean, you're paying up a little bit for labor, but you're not dramatically roiling the labor market, correct? Because the last thing you'd want to do, right, is kind of raise the labor costs up for all your existing people as well. And you kind of talked through the--I mean, it sounds like you're being very conservative, and you sure don't want to be penny-wise and pound-foolish, which is effective transition out of West Burlington too quickly, but then raise your labor costs perpetually, as we have the next three to seven years of this up cycle?

No, again, this is on the base wage rates that we look at and the duplicity is of the number of people that we have. We are not raising our overall base wage rates. We continue to go to get our people in the areas that we see are necessary to perform the business level. But you're right in your comment. We are not going to be penny-wise and pound-foolish and try to make the move too quick that either affects the customer with a delivery, and especially on these very extreme, complex jobs that are remaining in Burlington, Iowa.

Excellent quarter. Thanks, gentlemen.

Thank you.

Thank you. Our next question is from Thomas Hanes with Empirical Capital. Please go ahead.

Hey, most of my questions have been answered, although I think I missed the guidance on where you expected the Powell integration to finish up, what time frame?

The integration, as I mentioned in my commentary, was that we expect to have all assembly in place here by the end of our fourth quarter. We expect to be shipping all product out of Houston by the end of the calendar year, and we still expect to have the entire transition wrapped up somewhere in our second fiscal quarter '08.

Okay, that's great. (Inaudible), and thank you.

Thank you. (Operator Instructions.) Our next question is from Arnie Ursaner. Please go ahead with your follow-up question.

So one of the questions we've been asked by a lot of clients who would appreciate your answer to it relates to this backlog that you're building. You've had some issues with underbidding in the past. It sounds like you're bringing the bidding process back more under control at headquarters. Given that this backlog is stretching out quite a while in a pretty inflationary environment, can you walk us through the process of how you're trying to make sure that these are, in fact, bid correctly, and perhaps maybe expand on the types of margins you're targeting on some of these key projects, particularly since you mentioned you're going after some even more sizable mega-projects going forward?

Arnie, you're right. We are being very selective. We are trying to do selective pricing. I think, and we have talked in the past, that the way we do quote is we do try to look forward at where we think commodity pricing is going to be at the time of delivery and make sure that we make proper decisions in our price and price structure as it relates to those commodities at the time of delivery. We also are still trying--not always successful--but we are trying in a lot of the very long-term contracts to put escalation clauses into those contracts. So we really have a three-pronged approach in trying to make sure that we measure and continue to improve our margin and the deliverability of that margin out into the future. As to what margin levels we're targeting, I don't think we're going to be talking about that.

Well, again, just more in the way of clarification. Can you, can you perhaps hedge if you know you're using certain raw materials and you know you have a contract in a certain time frame, could you hedge these raw materials to prevent some of the escalation you're looking at? You mentioned the biggest one is labor.

We do not hedge, but we do on occasion forward-buy contracts on known contracts that we have.

Just a follow-up, Don. I think you were going to try to get me last year's revenue from Power/Vac.

If you look at last year's revenue from the Power/Vac product line, it was just over, a little over $15 million.

In the September quarter?

In the September quarter.

Got it. Thanks.

Thank you. Our next question is from Tom Harenburg with Carl M. Hennig. Please go ahead

Yes, fellows. A quarter ago, or maybe it was longer, you had talked about the DART light rail system. Has that ever been awarded?

Yes, it has.

And was, were you a participant?

We were a participant in the quote. We were not a participant in the award.

Okay. That's all. Thank you.

You're welcome.

Thank you. The next question is from Tom Spiro. Please go ahead with your follow-up question.

Now, the division that had the accounting problem which led to the mispriced business--as I recall, you were hopeful of adjusting your prices, raising your prices in that division. Has the market accepted the adjusted prices?

Yes, we've seen some acceptance in the market level for an increase in the prices in that product area. But it does fluctuate back and forth, and we continue to work on that.

And you've mentioned the proliferation of the mega-jobs. Generally speaking, does a mega-job have a margin that's greater or less than a more run-of-the-mill smaller kind of a job?

Typically, the size of a job does not drive margin. What drives margin is complexity. Clearly, with most of the mega-projects, they tend to be the most complex projects, but not necessarily in all cases.

And lastly, are you turning business away, or are you still capable of handling what comes your way?

We--I would say Powell never really wants to turn business away, but we are selective. We are trying to work with all of our customers and make sure that we secure their needs and what they want, but we are being selective.

Well, thanks much, and good luck.

Thank you.

Thank you. And our next question is from George Gaspar with Robert W. Baird. Please go ahead.

Good morning to everyone. Congratulations on a great quarter, or an improving quarter, and we know you're going to do better. A quick question on, and maybe you did answer this and I didn't make it along the way. The power, the electrical switch gear complexity that you're producing for the wind turbine market--can you be specific on the sales contribution in the quarter? And can you speak specific on what that represents in terms of your backlog, and how do you do that business?

I don't believe, George, that I'd like to really break that out, but suffice it to say we do well in that market, and most of those projects are quick-turn projects, so we are quite successful at closing that business, and it is at a decent margin. But I don't have the information in front of me, and I don't know that I would spell that out specifically. Sorry about that, buddy.

Okay. And secondly, I know in the past years you've had some business going down the well in some kind of a battery pack or some kind of power pack, if you can highlight that for me. But I'm wondering if, do you have any additional things that are going on associated with the drilling side of the market?

George, I think you're confusing us with somebody. We're really not in the exploration side of the business. We do get some business there. We're more on the production side. And no, we've not had anything with downhole production power requirements.

Okay. All right. Thank you.

Yes, sir.

Thank you. Our next question is from John Franzreb. Please go ahead with your follow-up question.

I was wondering if you could update us on the success or where we are on the process of the GE sales force selling your products to their customer list. How does that stand right now?

We have a, what GE would call a new product introduction that was done the second calendar quarter of this year, if I remember right. That is a slow roll-out. We have had a lot of quotation activity. We have had some success in turning quotations into orders. Again, this is a long-term process that we'll be going through between Powell and GE to make sure that we educate everybody on where is the sweet spot and what is it that we're trying to go after, how do we actually quote that and turn that into an order? I would say we're on track with what our expectations would be in the activity. And we're looking forward to seeing greater success in the next year on that.

So it's fair to say you've hardly tapped the GE sales force with Powell products, that there certainly seems to be some up side there in the next year or so as they become acclimated to selling your stuff properly? Is that a fair assessment?

I think there is up side, that is for sure. To say that we've hardly tapped it--again, we've had significant quotation activity. As we've talked about it, how do you make sure that it's the right quotation activity for the right customer, the right customer base that allows us to be very successful in that area.

Okay. And as I also recall, some of the GE business that came on board--how do I phrase this?--that the, just the margins on some of the business was probably below what you would have expected going into the acquisition. Is that business completely cycled through, or is that still pressuring some margin contribution from the GE business?

That book of orders is anticipated to turn probably in the mid of the fourth calendar quarter. It will continue to be impacting the business for the next three to five months.

Okay. And Don, I guess everything that they're pricing now is probably, is it fair to assume it's up to what your expectations would be on margin contribution?

Everything that is being priced to date is being priced by Powell.

Great. Thank you very much, guys. Good luck.

Thank you.

Thank you. And (inaudible) there are no further questions at this time. Please continue with any closing remarks you may have.

All right. Thank you. We appreciate you joining us today. We look forward to talking to you again in the next quarter. Thank you and have a great day. We'll see you.

Thank you. Ladies and gentlemen, this concludes the Powell Industries third quarter conference call. We thank you for your patience and you may now disconnect.