Powell Industries Inc (POWL) 2008 Q4 法說會逐字稿

od morning ladies and gentleman. Thank you so much for standing by and welcome to the Powell Industries fourth quarter earnings conference call. During today's presentation all parties will be in a listen-only mode. Following the presentation, the call will be opened for questions. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded today, on Wednesday the 10th of December, 2008.

I'll now turn the conference over to Ms. Karen Roan with DRG&E. Please go ahead.

Thank you, Michael and good morning everyone. We appreciate your joining us for Powell Industries conference call today to review fiscal 2008 fourth 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 should have received a fax or e-mail of the news release the morning.

Occasionally there are technical difficulties experienced during these broadcasts so if you did not get yours, please call our offices at DRG&E that is 713-529-6600, and we will get one to you. Also, if you would like to be on the permanent e-mail distribution 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 by available Or a recorded replay will be available until December 17th, 2008. And information on how to access the replay was provided in today's news release.

Please note that information report on this call speaks only as of today, December 10th, 2008, 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 related 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 these forward-looking statements.

The 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 Pat McDonald, President and Chief Executive Officer, and Don Madison, Executive Vice President and Chief Financial and Administrative Officer.

I will now turn the call over to Pat.

Thank you, Karen. And good morning, everyone. Thank you for joining us today to review our fourth quarter and fiscal 2008 results.

Since our last conference call, there have been a number of significant events, both local and global, that deserve comment. In September, Houston was hit by hurricane Ike. Our facilities and our people weathered the storm, and the physical impact to our facilities was minimal. We lost a number of production days due to storm preparation, post-storm power outages, and work restart. Our disaster planning and communication systems worked well, although we are taking this opportunity to review the processes and determine how we might even better be prepared for any similar emergency in the future.

On a more global scale, 90 days ago I don't think any of us could have imagined the impact of the financial market's turmoil, the resulting stock market declines, and the dramatic decline in oil prices. The question most often asked is, what impact do these events have on Powell and our operations? Powell participates in project that are, for the most part, very large, complex capital-intensive investments. These projects are in the planning and execution stages for years and generally are not affected by short-term market volatility.

We have seen oil prices fall from $150 to below $50 per barrel. Just as we all believed that $150 was not supply/demand driven, neither is $50. And we think some where in between is a true supply/demand driven price. The same holds true for the timing and return on investments by companies producing oil, refining oil, and oil byproducts. In the short term a few of our customers, in the oil and gas segment, are delaying projects as they attempt to better determine where the price of oil and the associated construction costs will stabilize. The long-term outlook for the oil and gas industry will be greater demand and higher prices. What is not predictable is how fast or slow the price and demand will increase.

It is clear that long-term demand for fossil fuels will grow and the ability to supply it will be more challenging. This country wants to become more independent of foreign oil and oil products. To achieve this goal, the US must invest domestically in oil production and refining capacity since we are unable to meet current domestic demand. Powell has the solutions that are well suited to meet these challenges as they unfold.

On the utility side of our business, there's greater interest in alternative sources of energy, including nuclear, wind, and clean coal technologies. More efficient use of energy is also a key element in the plans of most utility companies. Despite the current global economic downturn, the US will be consuming ever increasing amounts of electrical energy in the future, and the supply, especially from alternative generation methods, is not yet in place to meet future needs. To meet these demands, more investment must be made in generation of all types and in electrical distribution networks.

Powell's engineered solutions are well suited to fulfill the current and future needs of our utility market customers. The elections did demonstrate a growing desire from the public to invest in mass transportation systems as voters approved billions of dollars for mass transit projects. These projects are among those being discussed in Washington as politicians talk of infrastructure investments. Powell is the leader in power systems for light rail and intelligent transportation systems will benefit from this activity as well.

No doubt there is current economic turmoil. Short-term forecasting and timing of projects are not under our control. As opposed to some other sectors, we believe that the markets and demand for our products have long-term sustainable growth potential, and we are well positioned to deliver these engineered products, solutions, and systems to our customers. To date, we have seen no cancellations, our backlog for fiscal 2009 is strong, and quotation activity is good. While we cannot be sure what the future holds, our current outlook is definitely positive.

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

Thank you, Pat. Revenues in the fourth quarter were $167.1 million, compared to $150.5 million in the fourth quarter of fiscal 2007. Hurricane Ike reduced fourth quarter revenues, primarily due to the loss of electrical power at some of our facilities. Lost revenues due to hurricane preparation, loss of electrical power, and start-up are estimated at $6 to $9 million.

Gross margin was 20.4% in the fourth quarter, compared to 16.8% in last year's fourth quarter. Excluding the results of the acquired Power/Vac product line gross margin for the quarter was 21.8%, compared to 20% a year ago. Selling, general, and administrative expenses decreased as a percentage of revenues, from 13.8% a year ago to 12.7% in the fourth quarter due to higher levels of business activity. SG&A expenses were $21.2 million, compared to $20.8 million in last year's fourth quarter. Interest expense was $559,000 in the fourth quarter, a decrease of $413,000 from a year ago. Interest income was $95,000, compared to $148,000 in the fourth quarter of 2007.

Net income in the fourth quarter of fiscal 2008 was $8.3 million, or $0.72 per diluted share, compared to $2.5 million, or $0.22 per diluted share in the fourth quarter of fiscal 2007. Lower revenues and incremental costs related to hurricane Ike activities reduced fourth quarter earnings by an estimated $0.05 to $0.08 per diluted share. For the year ended September 30th, 2008, revenues were a record $638.7 million, an increase of $74.4 million or 13.2% over fiscal 2007. Revenues have increased as we improve throughput across the company by investing in our people and processes and responding to a strong backlog.

Gross margin was 19.8% for the 12-month period compared to 16.9% a year ago. Excluding the results of the acquired Power/Vac product line, gross margin for the fiscal year was 21.8% compared to 20% last year. Selling, general, and administrative expenses were 13.2% of revenues, compared to 13.7% of revenues for fiscal 2007. For the year, SG&A expenses totaled $84 million compared to $77.2 million a year ago. Our provision for income taxes reflect an effective tax rate on earnings before income taxes of 35.3% compared to 35.5% for fiscal 2007. For the 12 months ended September 30th, 2008, net income was a record $25.8 million, or $2.26 per diluted share. Compared to $9.9 million, or $0.88 per diluted share a year ago.

As of September 30th, 2008, our order backlog was $518.6 million, compared to $464.5 million at September 30th, 2007. New orders for the year totaled $705.4 million compared to $667.1 million for fiscal 2007. For fiscal 2008, cash used by operating activities was $5.2 million. Cash flow from operations is primarily influenced by demand for our products and services and is negatively impacted as our progress payment terms on projects with our customers typically extend beyond the payment terms with suppliers.

Investments in property, plant, and equipment during fiscal 2008 totaled approximately $3.4 million compared to $14.3 million during fiscal 2007. At September 30th, 2008, we had cash and cash equivalents of $10.1 million compared to $5.3 million at September 30th, 2007. Long-term debt, capital lease obligations, including current maturities, totaled $41.8 million at September 30th, 2008, compared to $35.8 million at September 30th, 2007.

Looking ahead, we expect full-year fiscal 2009 revenues to range between $700 million and $725 million. And full-year earnings to range between $2.60 and $2.85, per diluted share.

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

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

Powell is in a projects related business. Due to the nature of that business, short-term quarter to quarter results may not be the best indicator of our business results. We know that the long-term outlook for our business is solid. The world will need more, not less, energy from oil and gas in the future. The world will need more electrical energy to keep pace with demand. The world will search and find alternatives to supplant supply and find ways to operate more efficiently. In all of these cases, Powell engineered solutions will play a significant role.

At this point, we'll be happy to answer any questions that you might have. Thank you.

Thank you, sir. Ladies and gentlemen, at this time we will begin our question-and-answer session. (OPERATOR INSTRUCTIONS) Please ask one question and one follow-up, then requeue for any additional questions. Our first question is from the line of Fred Buonocore with CJS Securities. Please go ahead.

Yes, good morning gentleman. Nice quarter in the face of some challenges.

Thank you, Fred.

My first question relates to your '09 guidance. Assuming SG&A remains roughly similar, tax rate roughly similar, all things being equal in that regard. Your guidance appears to imply fairly minimal gross margin improvement relative to the second half of '08, even given higher volumes, what I expect may be lower raw material costs and what one would hope would be efficiency improvements at Power/Vac. Can you kind of reconcile that fours, please?

Well, that's a long reconciliation question, Fred. As we have talked about on various conference calls, we have been improving all throughout the year, and as we have always given our guidance that says we were trying to get back to the best period of our peak before. We are getting pretty close to that. I don't know that we are going to see the step function changes that we have seen in the past other the quarters as it relates to operating efficiencies and productivity. I think we will continue to see improvement, but it is not going to be the size that we saw in this last fiscal year.

Incrementally, we will continue to show improvement as we go forward. Again as we have talked about it, quarter to quarter performance will vary based on the projects that are actually shipped during the period. But the rate of improvement will become more and more challenging as we go forward.

Got it. And then my follow-up relates to the sequential bookings decline. Should we take that to indicate maybe a slowing in demand from the oil and gas sector, realizing that your quote activity is still good, or is this kind of just quarter to quarter lumpiness?

Fred, again, as we've always talked about, we do have a lot of quarter to quarter lumpiness, especially with some of the size of the projects that we have. I think we would be remiss to say there is not some issues as it relates to the timing of jobs going forward in the future. We do believe that our order input in the fourth quarter was impacted by the hurricane, because not only were we down, but our customers were down and not placing orders at the same time. And I think right now we can probably say that our first quarter order input will exceed our fourth quarter order input.

Got it. Any way to quantify the impact of the hurricane on orders?

No, that one is almost impossible.

Got it. Makes sense. Thank you.

Alright, thank you. Our next question is from the line of John Franzreb with Sidoti & Company. Please go ahead.

Good morning, guys.

Hi, John.

I was wondering, on a historical perspective, do you have a sense of what kind of a threshold price on oil that your customers are more apt to go forward with projects and what kind of threshold price on oil is when they start to pull back on the orders?

John, I mean, we don't have anything quantified. The only thing I can allude to, there's been a lot of articles written, and some of our customers have stated; they never made a single investment decision based on $150 a barrel oil. So I think the only thing that I can quantify that we have read was as it related to the tar sands projects where they were looking at $45 to $55 to $60 a barrel made that economical, but nothing else that we have tangible that relates to where people are making their investment decisions.

Well Pat, remind me, you don't participate in much tar sands work, do you?

Oh, sure, I mean we have a number of projects that we have supplied into the tar sands area, the pipelines and coming back into the US.

Okay. I was not aware of that. Okay. And just my follow-up, if you will, then I'll get back into queue, remind me, did you expand your North Canton facility to kind of capitalize on transportation-related projects?

We are in the process of expanding that right now, and that should be completed in our fiscal second quarter.

Okay. Can you just review that decision process and do you think it's a good one, a bad one, in light of municipal spending, and also, if you will, potential infrastructure spending on new administration? I guess there's a put and take kind of there with that decision.

I don't think I'd second-guess the decision. I think we need the space in high bay area, whether it's transportation or it's utility or it's oil-based. Our deal is to supply solutions to the customers and we need that type of overhead high bay crane space with to do that with.

Okay, thanks a lot. I'll get back in queue.

Alright, thank you. Ned Borland with Next Generation Equity Research. Please go ahead with your question.

Hi guys. Good quarter. Just another question on the orders question. I know it's not a completely linear relationship with where oil is, but I mean is there some sort of lag in terms of where you see a precipitous drop in oil prices to when those translate into a lower absolute level of orders? I mean is there any kind of relationship there?

Ned, I don't have any graphs or statistics to give that. Again, when we look at projects, they're typically three to five-year projects. I think a lot of our customers, and I don't want to speak for them, but I think they are going to look to see that this is a spike down and there's going to be a movement back up. I do believe that we have seen probably in the chemical area more of a immediate reaction in order input for what the chemical companies are seeing. Because of who they supply their product to. But I think in the oils area you are still talking three to five years on refining and production areas.

Okay. And is there any granularity you can give us on the utility business here? Any types of products or projects that may be coming down the pipe that may or may not get delayed because of credit financing or anything else?

We don't have any in that area that we know of that are being delayed due to credit financing. Not to say that there aren't some out there, but we have not seen any delayed as a result of credit financing.

Okay, thank you.

Alright, thank you. Our next question is from the line of Craig Bell with S M H Capital. Please go ahead.

Yes, good morning. I just wanted to follow up on earlier question with regard to sort of some of the productivity there. In past quarters you have talked about how many people you have been hiring and the ramp-up there. Number one, are you still hiring at pretty good rate? And then number two, I mean given the hiring that you have done over the past 12, 18 months, is that productivity starting to kick in with those newer workers?

Craig, if you are looking at what we're doing today, our overall employment is remaining relatively flat over the last few months. That the hiring today is predominantly in replacement of individuals that lease so our aggregate is basically flat. That number is decreasing as well because we have talked in the past, our highest risk period with new hires is the first six months or so. Actually the highest risk is the first probably six weeks, but after about six to nine months, we do a great job of converting new employees into long-term employees.

Clearly we have seen productivity improvements. In a project business it's hard to develop the same metrics you do in repetitive manufacturing. But I think across the board that we're very comfortable that stability in the workforce is improving and the benefits of that are beginning to be seen in our overall operating costs.

Okay, great. Then just sort of taking a little bit longer term view. As you look at your business and in terms of your growth prospect looking forward, do you think that it's equally weighted among your industrial and utility side, or is it going to be more getting greater penetration on the utility side while growing industrials a little slower?

I would say that's probably a pretty good statement at tend. We definitely want to increase our penetration into the utility market space, and still continue to grow our industrial.

Okay. Great. And then just real quickly, did you say what your CapEx plans are for 2009?

No, we didn't, but we would expect to the kind of rebound back to our average of $8 to $10 million in CapEx spending in 2009.

Great. Thanks a lot, guys.

Thank you.

Alright, thank you. Brent Thielman of D.A. Davidson. Please go ahead.

Good morning. Congratulations on the quarter.

Thank you.

Good morning, Brent. Don, I was hoping maybe you could quantify the revenues for electric power products just from your industrial, utilities and then traction power customers.

Sure. Give me a second. Flip to the right page here. Okay, when you are looking at our full-year fiscal 2008 utilities -- utility market basically totaled around $172 million.

Okay.

In total revenues. Our industrial segment, market segment, is around $400 million, and traction power was just under $40 million for basically electrical power products of the $611.5 million. And then the balance, process control at $27.2, which is, again, municipal market.

Okay. Thank you. And then I guess just relative to the Power/Vac business, maybe could you guys talk about what you are seeing there just given its exposure to general manufacturing and commercial construction sectors?

I would say if we had any area that we are seeing some volatility in the market, it would probably be the commercial market segment served by that area. But we continue to work with our partners over there and new opportunities and quotations in market segments that are still positive. And we're working hard to identify those and go capture those.

Okay. And then just one more, if I may. Were there any particular project close-out benefits during the quarter somewhat similar to what you saw in Q3?

Nothing that was in the same magnitude as Q3.

Okay, perfect. Thanks a lot, guys.

Thank you.

Alright, thank you. George Gaspar with Robert W. Baird, please go ahead with your question.

Yes. good morning, Pat, Don.

Good morning, George.

Very good quarter. Congratulations.

Thank you.

First question on process control segment. Sales were up $2 million in the quarter to 7.3, but recorded a loss of $560,000 versus $42,000 profit a year ago. Can you just highlight what was responsible for the loss and how do you view that segment going forward?

The biggest impact that occurred in the fourth quarter is basically our costs related to the claim we have with the City and County of San Francisco. The cost basically of that unusual item continues to impact the results of the segment.

Okay. Do you anticipate that you have got additional cost structure that you are going to have to swing through there on that particular issue?

At this point in time, we have a judge ruling that is in our favor. What is in front of us is going through any appeals process that we anticipate. That could impact a big part of -- I mean from a timetable standpoint, could impact throughout fiscal 2009, but should not be to the same magnitude as we saw in 2008.

okay. If I could follow up on a backlog question, can you break out domestic versus international in your backlog, and can you highlight anything particular about your UK business progress?

I do not have the breakout in front of me, but basically the international participation relative to last year is probably, my understanding, or recollection, is about flat. Most of the backlog improvement we've seen in fiscal 2008 was due to strong domestic spending predominantly in domestic refining. When you are looking at -- again, we don't break out individual businesses, but I can report that our acquisition in the UK continues to perform very well. We're very pleased with that acquisition.

Okay, thank you.

Alright, thank you. Our next question is from the line of Tom Spiro at Spiro Capital. Please go ahead.

Good morning.

Hi, Tom.

Good morning, Tom.

Just a question about the backlog. As a contractual matter, what are the circumstances in which a customer can either delay or cancel a project?

Delay. Typically, if the job is already on the floor, Tom, delays are in construction delays, and we work with the customer all the time in those types of delays. If the job is not on the floor and we have not started that job, delays or deferrals or cancellations would be subject to cancellation clauses.

I mean, those clauses typically provide severe financial penalties or rather modest financial penalties? And I guess related is the pragmatic business question of when a significant customer asks to cancel, how do you respond?

Yes. Most of our cancellation policies would be to make us whole. And that's also another reason why we do progress billings, especially if we are already into the project. We've done progress billings to try to make sure that we are capturing the cash in a flow related to the cost of that project.

When you say make whole, you mean reimburse you for costs expended or also for the [profit of] opportunity now lost?

For the cost expended.

And to the extent a project has not yet begun, I would image the costs expended are modest, not zero, but not particularly large.

Fairly modest, yes. Engineering mostly. Again, remember we -- as soon as we get a project we start our engineering and then production may start sometime after that.

Thanks much.

Thank you.

Alright, thank you. (OPERATOR INSTRUCTIONS) John Franzreb, please go ahead with your follow-up question.

Yes, how much of your backlog is in the oil and gas sector?

John, we really don't have that statistic. And again, it comes back to the standpoint we get orders directly from the end client. We get orders, purchase orders that actually come through E&C firms, and so even if you were to look into our -- our backlog and tried to run a report, it's not easily ascertained.

But when you are looking at overall aggregate, it would be -- I would expect it to be similar to what we have seen in the revenue side. And as we've talked in the past, probably anywhere from 60 to 80%, depending on the year, of our industrial segment comes from the oil and gas and oil and gas related projects, depending on how you want to characterize and -- the oil and gas segment.

okay. And I might have missed this, and I apologize if I did. Based on the -- what you characterize as the lumpiness in the Power/Vac business, how long do you think it achieves company-like margin distribution?

We've always said our two to four quarters. We're still into 2009 where we thought we were going to get. We have gotten faster than what we had anticipated. There's no doubt about that. I think we are within a couple quarters of being at a rate that is where we expected it to be when we acquired that Power/Vac product line. But the ramp is not nearly what it was a year ago.

The only thing I will add to that, John, basically when we look at that business, we look at comparable margins for comparable product in comparable markets. Not all markets, not all projects and all products have the exact same margin. But we are approaching that comparability, as Pat was saying here, we're weeks away from it. We're not quarters away from it.

Okay. Now, given the retrenchment in the oil market, has the bidding process become more competitive out there, or are you not seeing any of that?

First comment, I don't know that we've seen a retrenchment in the oil market yet. We've seen lumpiness in orders.

And I would say all of our project are competitive. I mean, we have to make sure that we understand what the customer wants and who is quoting it each time, and I would say that when we see the quotations, when we see the bids coming out with names of capable bidders, those names are growing in scope.

So, Pat, you would say that the competition has been solid on pricing, recently, at least?

Again, our competition, the number of people who are bidding on jobs is growing. To date, we have not seen any change in the way people are bidding these jobs.

John, keep in mind that we've talked about in the past is that the electrical industry from a producer standpoint is relatively small. Each manufacturer typically has a sweet spot. If that manufacturer had a sweet spot in the commercial market, and the commercial market softens, they look for opportunities elsewhere. And as we have spoke at the last call, is that many of them are moving into the oil segment because they see the strength of the oil segment.

Right. Okay, thanks a lot, Don. Thanks, Pat.

Thank you.

Alright, thank you. [Tim Shatard] with Sterling Capital. Please go ahead with your question.

Hi. Your guidance for the next fiscal year implies an operating margin for the full year of roughly 7%. Is there any -- can you kind of help me? Is there any seasonality related to that as you move through the quarters of the '09 fiscal year?

There's no seasonality from a market standpoint. There are continuous improvement projects that we've had in the integration as well as the integration of the Power/Vac product line so that I would typically expect to see, and we expect to see improvements in the second half over the first half. But it's from internal activities as opposed to the external market forces.

Okay. So a better second half operating margin-weighs than the first half, such that would it average out to about 7%?

The 7%, I can't necessarily comment to but it's probably not far off from what our guidance would imply.

And commodity prices, steel, copper, wire, aluminum, et cetera, are they going to, looking into the fiscal year '09, are they going to help or hurt gross margin?

I think considering in the direction that they have been going, we anticipate some modest improvement in our overall results as a result of commodity pricing.

What do you anticipate getting the most benefit from, which particular item would you say is going to be easier for you to negotiate next year?

Well, again, we've always talked about that our single biggest buy is in the copper area. So that is -- that is the one that we he will continue to watch very closely and monitor and has the greatest amount of leverage for us.

Okay. On steel, are you seeing any real decline in your steel buys in terms of prices right now?

We have seen some declines, but nothing to the extent of what copper has done here recently.

Thank you.

Alright, thank you. George Gaspar, please go ahead with your follow-up question.

Yes. Thank you. On the revenue loss in the quarter that was fall-out from the hurricane Ike, can you outline if that revenue volume comes through in the first quarter here, or was it -- was there a basic loss that would not be recoverable? And did you experience any further fall-out in October, which would be the first month of your new quarter here?

George, again, remember our business with the stack-up of products and projects that we have, there's no doubt the projects that impacted the fourth quarter are flowing through into the first quarter. What still happens, though, are the projects that we're expecting those jobs to come off the floor now got delayed and pushed out a little bit. So it is going to probably take at least four months for us to get all of that flow back into the entire works to where we're back to where we think we're on top of the business again.

I got you. Then on new activity, are there any particular areas that are creating a new opportunity for you that you haven't been associated with in the past from a standpoint of R&D or innovation, that's just domestic or international, in terms of project profile that's giving us opportunity that you haven't seen before?

George, we always talk about we will continue to invest in our R&D, and we continue to invest in our R&D, even today, and we will continue to invest higher than what other people are investing. We have none that are, I would say, job specific, but we have a number of projects that we are working on right now that will be helping us in the future.

Okay. All right. And then one last one on the Power/Vac. The transfer out of Iowa, in terms of -- I know you've made some comments about it, is that pretty much at a full operational point in Houston now, relative to what GE was experiencing in Iowa? How does that compare at this point in time?

George, basically we completed moving all of the operations out of the GE facility around the end of February. Since the end of February what we have basically been doing is fine-tuning and refining the our own internal processes. That's what we're working on today. And as we spoke earlier, I think that we will have accomplished what we anticipated and set forth with the acquisition no later than the second quarter, which is at this point in time weeks away.

Our next question is from the line of J.D. Padgett with Boston Company. Please go ahead with your question.

Yes, a couple of quick ones. The tax rate that you're assuming for next year would be what?

At this point in time, I would expect it to be no material change from the last couple of years which has basically been around 35.5%.

Okay. And then the other question I had was related to some of the discussion, the San Francisco thing that was impacting process control. Could you just remind me what that's about?

Basically we had a project with the City of San Francisco that ran into some delays as a result of early on issues that -- our position came from delays in -- it was due to the City itself as opposed to our operations. That project is on-line. It has been successful. The client is very happy with the project.

In fact, it's been operational now for about two years. So basically there was withholding of monies from that contract by the City, and we had to go into the -- we weren't successful in a mediation. We had to end up going to court to basically obtain the monies that we felt were due to us. And that's where we are at this point in time.

So there's just some legal fees and so forth which are impacting the margins there?

Legal fees that have impact the margin, that is correct.

And when could we see some resolution there?

Basically the -- we have had a ruling from the court. That ruling took place about -- it was late in the second quarter. What we've been dealing with since then, it will continue into early part of next year, is the appeals process.

And what's the potential recovery if you are successful?

The potential recovery would be at this point in time in excess of our book value of $1.9 million.

Okay. And just finally, the hurricane impact through the rest of the P&L, I know you called out the revenue and EPS impact. Fair to assume probably that there was some depressing effects on gross margin, if for no other reason than just lower throughput?

Basically I would say that 99% of the impact was in the gross margin area, as opposed to anything in the operating or SG&A area.

So not a lot of expenses and operating expenses for cleanup and hurricane preparation, all that kind of stuff?

Basically most of that was done by hourly personnel and resulted in manufacturing costs. That's where the work was done and that's where the costs were incurred.

Okay. Very nice quarter considering the head wind there.

Thank you.

Alright, thank you. Fred Buonocore, please go ahead with your follow-up question.

Yes, just a few follow-ups. As it relates to orders, as we have been talking about, you had seen an impact in the September quarter from the storm, but more relevant to the current economic situation can you just give us a sense for trends in October and November with orders?

Again, Fred, I think we're reasonably safe to say that orders for the first quarter of this fiscal year will exceed our fourth quarter of last fiscal year. So I think we're seeing a good trend.

Got it. And then you talked a little bit about the opportunity in mass transit as it relates to the new administration and approval of billions of dollars for projects. Can you quantify what the opportunity is for Powell in traction power and process controls, I guess?

Well we tracked a five-year view of projects, and those projects are ones that have been on the docket and looked at and ones that potential have federal funding. I think what we tried to address in our comments is the overwhelming push by the public to say we want mass transit, and we want you, government, to fund this, state governments to go fund this.

I think, again, what I believe is the strength that we see over the five-year horizon says we're going to get our good, fair share of that business because people really want to see funding done for mass transit project. I can't tell you how much that is, but I think it's going to be a very strong number for us.

Got it. So is it safe to assume that maybe traction power becomes a greater overall portion of your EPP mix?

Clearly as we go forward I would expect the opportunity to grow in the municipal markets both transit as well as municipal markets for our intelligent transportation systems. Your looking at opportunities that could easily exceed several hundred thousand dollars a year. While, I think that it is a competitive market but we think we're well positioned to get our fair share.

Got it. And then finally, on working capital, I mean how should we think about this as it relates to, you continue to have strong orders, you are continuing to sort of finance these projects for your customers. At what point do you think things catch up to where your cash flow from operations is a source of cash as oppose to use?

At this point in time, I think that the full year 2009 will result in a source of cash. When you are looking at our first quarter, at the first quarter, will likely continue to be a use. But at this point in time, I think that we will turn the corner and start seeing positive cash flows, predominantly coming from reductions in working capital relative to revenue around midyear.

Very good. Well thank you. We look forward to seeing you at our conference in a few weeks.

Thank you.

Alright, thank you. Our next question is from the line of Stefan Mykytiuk with Pike Place Capital. Please go ahead.

Yes, hi, good morning. Just a follow-up on Fred's question about the orders. I guess given what's going on in the world, it seems like a lot of refiners and chemical companies have been cutting back their CapEx, so where are you seeing the strength in this December quarter for orders? Would kind of end markets are still strong?

The orders activity that we've seen thus far in the first quarter continue to be representative of our historical markets. It continues to have a strong impact from the oil and gas segment, both domestically as well as international. So that comes back to -- from the beginning, we really have not seen any what I would call noticeable change in activity in the marketplace from an order activity standpoint.

Okay. Thank you.

All right, thank you. And a follow-up from Brent Thielman. Please go ahead.

Yes, just one quick one. Can you just give us a quick update on the Motiva contract and what's remaining in backlog?

I mean the project is going well. What's remaining in backlog, I don't have that number in front of me, but I would think it's still a fairly substantial number that's out there yet to go.

Okay. And then just relative to the offshore market, any sort of update there? Are you still seeing good activity in that particular oil and gas area?

We're see going activity in it and good dialogue and discussions with our customers. And I think that's going to be, the again, another strong point in the future, as we look at pipelines and offshore platforms. As people look to find this -- energy sources from other areas, the offshore plays a big role for us in the future, because it is a less costly extraction process than other things like the tar sands. So by the Congress allowing more offshore drilling to begin, I think that's going to bode well for us in the future.

Okay. Great, thanks a lot.

Alright, thank you. Craig Bell, please go ahead with your follow-up.

Yes, I just wanted to circle back on the backlog and the new orders. And just wondering, between like the hurricane and obviously you guys were shut down, you couldn't take orders. I'm assuming many of your clients were also impacted. Do you think that that had a significant impact on new orders and backlog in the quarter or is it more just regular lumpiness?

There was some impact. There's no way we can quantify it. Again, we were down, we were not able to take orders, and we know that all of our customers, especially in the oil area around Houston, were working to get their facilities back up on line.

Okay. And then did you see any -- have you seen any business that's come out of the impact from the hurricane? I mean, just sort of repair work that needed to be done?

We have seen some in our service business. There's no doubt about that. I think every time there's a hurricane, just as we talked about how we prepare, our customers are doing a better job to prepare themselves, and especially in the oil and gas. They are putting all their substations up in the air. Our facilities, our power control rooms and things are lifted up into the air. So they're getting a lot smaller about that storm surge to make sure that they aren't cut down in their electrical area as a result of storms.

Great. Thanks a lot.

And a follow-up from Tom Spiro. Please go ahead.

It's been asked and answered. Thanks anyway.

Thank you, Tom.

Alright, thank you. And gentlemen, there are no further questions at this time. Please continue with any closing comments.

Again, thank you for joining us today, and I would like to thank you for your interest in Powell. I would also like to take this opportunity to thank our customers and our people for making a successful year for Powell. We look forward to talking with you again next quarter.

Alright, thank you. Ladies and gentlemen, this does conclude the Powell Industries fourth quarter earnings conference call. If you would like to listen to a replay of today's conference,you can do so by dialing 303-590-3000, input the access code 11122993. Those numbers again, 303-590-3000, input the access code, 11122993. ACT would like to thank you very much for your participation. You may now disconnect. Have a very pleasant rest of your day.