Powell Industries Inc (POWL) 2009 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Powell Industries fourth quarter earnings conference call. Following the presentation, the conference will be opened for questions. (Operator Instructions) This conference is being recorded today, Wednesday, December 16, 2009. I would now like to turn the conference over to Karen Roan with DRG&E. Please go ahead, ma'am.

Thank you, Brandy. And good morning, everyone. We appreciate your joining us for Powell Industries' conference call today to review its fiscal 2009 fourth quarter and year end results. We would also like to welcome our Internet participants listening to the call as it is simulcast live over the Internet. Before I turn the call over to management, I have the normal details to cover. If you did not receive an email of the news release issued this morning and the earnings release issued on December 9, please call our offices at DRG&E and we will get those to you. That number is 713-529-6600. Also, if you want to be on the permanent email distribution list for Powell news releases, please relay that information to us as well.

There will be a replay of today's call and it will be available by going to the Company's Website at www.powellind.com or a recorded replay will be available until December 23, 2009. And information on how to access the replay was provided in today's news release and the earnings release. Please note, that information reported on this call speaks only as of today, December 16, 2009. And therefore, you are advised that time sensitive information may no longer be accurate as of the time of the replay. As you know, this conference call includes certain statements including statements, relating to the Company's expectations of its future operating results, that may be deemed to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Investors are cautioned that such forward-looking statements involve risks and uncertainties and that actual results may differ materially from those projected in the forward-looking statements. These risks and uncertainties include but are not limited to competition and competitive pressures, sensitivity to general economic and industry conditions, international, political and economic risks, availability and price of raw materials, and execution of business strategies. For further information, please refer to the Company's filings with the Securities & 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 over the call to Pat.

Thank you, Karen. And good morning, everyone. Thank you for joining us today to review our fiscal 2009 fourth quarter and year end results. Following my initial comments on this quarter, year and current market environment, Don will cover the financial details of the quarter. Then, I will return with some final remarks, which will include a discussion on our acquisition of PowerComm, which closed yesterday.

We are pleased with our operating performance in the fourth quarter. While revenues were relatively the same as the fourth quarter a year ago, we generated solid double-digit earnings growth of 18%. We are clearly coming off of a great year, a record year in terms of revenues, earnings and cash flow. And this was achieved as the result of our strong backlog of projects at the beginning of the year. The dedication and hard work of all of our employees working on these projects resulted in improvements in our processes and our productivity. 2010 will be a more challenging year, as the economic conditions of 2009 greatly impacted our incoming order rates, especially in the second half of 2009.

In the oil and gas markets, a number of opportunities exist and the projects are ready to begin. However, the current regulatory and tax uncertainties, in conjunction with weaker demand, are preventing these projects from converting to orders. The price of oil is relatively stable and these projects are certainly viable at $60 to $80 per barrel oil but there is definitely a hesitancy to commit capital to these large projects. Other heavy industries that require large amounts of energy and power to operate are also being affected by these same economic uncertainties. The utility business is largely demand driven and we believe that the world will need more, not less, electricity over the long-term. We were really behind the curve regarding adequate generation capacity a couple of years ago but this current drop in demand, we've been given some time. Nonetheless, the tax, regulatory and carbon emission issues apply to utilities as well.

In summary, there are many dynamic variables impacting our markets, which make predicting results almost impossible. However, we are not simply waiting for signals that the markets are improving as we are moving forward to be able to capitalize on whatever opportunities appear. Whether it is an acquisition like PowerComm, providing new markets and customers, or increasing our efforts to refine our internal processes, or to effectively increase the value of our offerings to our customers. Also, we are continually investing in our employees, identifying training needs and making organizational changes that will help us reach our long-term potential. I will now turn over the call to our Chief Financial Officer, Don Madison, to review our financial performance for the fourth quarter. Then, I will make some final remarks.

Thank you, Pat. Revenues were $165.3 million in the fourth quarter of fiscal 2009, compared to $167.1 million in the fourth quarter of fiscal 2008. Gross profit increased by approximately $1.6 million to $35.6 million. Gross profit, as a percentage of revenues, increased to 21.5%, compared to 20.4% in last year's fourth quarter. Selling, general and administrative expenses were $21.2 million, unchanged from a year ago. Interest expense, net of interest income, was $139,000 in the fourth quarter, a decrease of $325,000 from a year ago. In the fourth quarter of fiscal 2009, we generated net income of $9.9 million or $0.85 per diluted share, compared to $8.3 million or $0.72 per diluted share in the fourth quarter of fiscal 2008.

Looking at the full year, for fiscal 2009, revenues were a record $665.9 million, compared to $638.7 million in fiscal 2008. Gross profit increased by $18.6 million to $145 million. As a percentage of revenues, gross profit increased to 21.8%, compared to 19.8% last year. For the year, selling, general and administrative expenses decreased to 12.5% of revenues, compared to 13.2% of revenues for fiscal 2008. SG&A expenses were $83.4 million, compared to $84 million last year. Interest expense, net of interest income for fiscal 2009, decreased by $1.6 million to $976,000 compared to fiscal 2008.

Our effective tax rate was 34.2% for fiscal 2009, compared to 35.3% in fiscal 2008. This decrease in the effective tax rate resulted primarily from the agreement reached with the taxing authorities in the United Kingdom related to foreign tax credits from previous years. Net income for fiscal 2009 was a record $39.7 million or $3.43 per diluted share, compared to $25.8 million or $2.26 per diluted share in fiscal 2008. As of September 30, 2009, our order backlog was $365.8 million, compared to $518.6 million a year ago. New orders were $100 million in the fourth quarter, compared to $103 million in the previous quarter and to $136 million in the fourth quarter of fiscal 2008. For fiscal 2009, cash provided by operating activities totaled a record $127 million.

Working capital, excluding cash, decreased by $72.1 million over the past 12 months. Investments in property, plant and equipment during fiscal 2009 totaled $8.1 million, compared to $3.4 million in 2008. At September 30, 2009, we had cash and cash equivalents of $97.4 million, an increase of $87.3 million compared to the balance a year ago. Long-term debt and capital lease obligations, including current maturities, totaled $9.5 million, compared to $41.8 million at September 30, 2008.

Looking ahead, given the uncertainty surrounding capital spending and the project driven environment of our primary markets, it's difficult to provide guidance for this coming fiscal year. Based on our existing backlog and current business conditions, as well as the acquisition of PowerComm, we expect full year fiscal 2010 revenues to range between $550 million and $600 million. And full year earnings to range between $1.50 and $2 per diluted share. We continue to maintain a strong balance sheet and expect to continue to generate solid cash flow in fiscal 2010. We believe we are well positioned to meet the current uncertainties in the marketplace and to take advantage of opportunities as they arise. At this point, I'll turn it back to Pat.

Thanks, Don. Let me make a few more comments and then, we'll be happy to take your questions. As most of you know, on October 21, we announced the acquisition of the assets and certain liabilities of PowerComm Inc. based in Alberta Canada. PowerComm is a leading provider of electrical and instrumentation construction and maintenance services, as well as a manufacturer of switchgear and related products, primarily serving the oil and gas industry in western Canada. We are excited about the acquisition of this fine company and look forward to the opportunities that we see before us as we work together to serve the Canadian market.

We believe the oil and gas market in western Canada offers great potential and serving that market has been a long-term objective of Powell. To supply the world's need for oil and gas in the future, Canada must play a significant role. Canada has some of the largest proven reserves in North America and we expect there will be ongoing oil and gas activity there for the foreseeable future. This acquisition will allow us to participate, along with our existing customers, with whom we have long-term relationships, as they develop projects in that region. Powell has always been strong in the oil and gas industry and we want to beware our customers have interests and where our future customers have activities.

Like the S&I acquisition in the UK, this gives us another opportunity to work with our customer base wherever they go internationally. We are also enthusiastic about the prospect of building new relationships and leveraging the strength already demonstrated by the PowerComm organization. PowerComm's primary business is electrical and instrumentation service and maintenance, where they provide maintenance services and monitoring and testing of electrical and instrumentation infrastructure for industrial facilities. Mainly for the oil and gas markets, such as pipelines, drilling rigs, the well head, and industrial applications such as refining and upgraders. They also have manufacturing operations, which include medium voltage switchgear and motor control centers and related equipment. And they produce custom built equipment for use in industrial and commercial facilities.

In addition, they have a joint venture providing long-term field service in Kazakhstan on the Caspian Sea. Powercomm operates out of 14 facilities in Alberta Canada, employs about 350 people and has its electrical and instrumentation technicians in the field continuously. It is a vibrant organization and we are happy to have the PowerComm employees join Powell. We are pleased that Wayne Rutherford will take on the new role as President of Powell Canada, which will provide continuity going forward. There are many synergies with this acquisition, both on the service and the manufacturing side of the business.

Like Powell, PowerComm manufacturers arc resistant switchgear. And Powell has been a leader in arc resistant technology for many years and having arc resistant switchgear and other products manufactured in Canada, for the Canadian market, is in our future plans. In addition, the Canadian region provides an comment platform for substation automation activities and we believe our ability to deliver high value solutions will make Powell the supplier of choice. The high service content is a critical element and providing service, along with products and solutions, will be a key element to the business model of the future.

Finally, we view the current economic situation as an opportunity. We use times such as these to strengthen our organization, our internal processes and our people to stay prepared for the next phase of growth. We are continually looking at how we should invest for the future of Powell and this acquisition is an example of that process. This expands the scope and geographic reach of our existing operations as the leading supplier of engineered products, solutions and services, as well as strengthens our strategic position in the electrical power products business.

I would remind everyone that, for over 60 years, Powell has operated in a project driven, capital intensive business. And we remain confident about our future because the world will need more energy. No matter where the decision settles regarding the energy source, Powell will be able to work with customers to build efficient and cost effective electrical power solutions for the future. At this point, we'll be more than happy to answer your questions.

(Operator Instructions) And our first question is from the line of John Franzreb with Sidoti & Company. Please go ahead.

Good morning, Pat and Don.

Hi, John.

The first question is, given the operating environment you enter in, have you thought about what kind of cost savings initiatives you might have to put in place or are you going to kind of keep the operating structure at the status quo and kind of weather the storm?

John, as you know, as we've talked about all throughout the year, we continually look for cost saving opportunities that we've been working on. And we will continue that here into this year. Our first element is definitely trying to keep our people costs in line with where we see the business activity but also keeping our investments in our people, especially our project management and engineering areas, because we're a people driven business with our customers. So, we will continue to do that. We are looking at where we might have potential excess engineering resources. We're dedicating them to projects for cost reductions that maybe we wouldn't have been able to have gotten to in our higher volume days. So, we're looking at every opportunity we can take.

Okay but nothing is concrete, on the board yet?

Well, again, nothing concrete that I'd like to completely divulge and talk about but there are a number of initiatives ongoing in the business, just like we had in 2009.

Okay. And when I look at the incoming order rate for the past two quarters, it's kind of hovered around $100 million. Should I be thinking as a potential quarter in the future where revenues would be about $100 million?

There is no doubt that there is a lead and lag time period to that business. Remember, again, our orders are always period for the total project and that revenue stream flows over a longer period of time. I would say, in a clear answer to your question, if orders kept on that pace for a sustained period of time, there's a reasonable expectation that, at some point in time in the future, you could look at that. But at the same time, we're looking for other opportunities and other market segments and with other customers to see how we can shore that up. And we are definitely in a great position to take any type of short lead time potential orders that might be coming our way.

John, keep in mind that the order flow that you've seen historically does not include PowerComm. So, when you're looking at the quarters revenues going forward, there will be not only the historical business but there will be an incremental revenue stream coming from the Powercomm organization.

Okay. And since you mentioned it, Don. Powercomm, you're assuming roughly 10 months of revenue incrementally in your revenue forecast or is it -- or am I assuming wrong?

9.5% but -- so you can either round it up or down.

Okay, all right, thanks a lot, guys. I'll let somebody else ask a question.

Thank you. And our next question comes from the line of Brent Thielman with D.A. Davidson & Company. Please go ahead.

Yes, hi, good morning, guys.

Good morning.

Yes, just relative to the guidance for fiscal 2010, you're obviously implying you expect margins to compress in here. And I'm just wondering, how much of that is related to sort of profitability that's built into the new awards you're getting right now, maybe versus less volume through your facilities, less operating leverage? And maybe, could you just talk about the bidding environment in general, how competitive it's gotten, just some commentary around there?

Well, the bidding environment in general, again, we've talked about on the last couple of quarters, every manufacturer is bidding every project. There is no doubt about that. So, you have to be as sharp as you can possibly be. We still do not see anybody in the marketplace making any wild fluctuations by diving prices in order to take volumes. So, I think it is a competitive nature but there's no craziness into the marketplace at this moment in time. As it relates to the compression, I don't know that I can tell you exactly how much. We're looking at 1 to 3 points potential compression next year. There's no doubt we will continue to try to match our costs to what our production stream is. And we continue to price accordingly to the marketplace to try to keep our profitability as high as possible.

There's basically three elements in that compression, though. There's one, there's the marketplace levels. There is the business volume level. And then, there's also the integration efforts of the Powercomm acquisition. But in total, the compression that we're expecting is in the 1% to 3% range for next year.

Right. Okay. Thanks. And then, on the orders that you are getting, the $100 million in orders, is there a particular sort of pocket of strength that that's coming from? Anything that sort of stands out to you?

I don't think that I'd say anything that's a stand out strength. Again, if I say there's one marketplace that has ongoing strength, it is in the traction side of things. But again, those orders come in big lumps and then they tail off again until the municipality, another municipality gets ready to let an order. But if I would look at the general market, there's no doubt that the continued requirement for light rail transit and things like that still seems to be relatively strong in our backlog of quotations that we have.

Okay. And then just lastly, you mentioned some of the large oil and gas projects that are kind of sitting out there and ready to go. Are those North America or are those international projects?

Both. The domestic ones, one of the big ones that we were tracking very much, for our international business, was the ConocoPhillips one and [Wilhamshaub] in Germany, that one got totally postponed. So, they're in both areas.

Okay, thanks, guys.

Thank you. And our next question comes from the line of Fred Buonocore with CJS Securities Inc. Please go ahead.

Yes, good morning, gentlemen.

Hi, Fred.

So, we've been talking a bit about orders and kind of that hovering around that $100 million level. Just to be clear, so since 9/30, the end of your fourth quarter, have you seen any change in these order trends? Have you seen things that look like these quotation activity that you've been seeing for months and months and months might be closer to actually becoming orders? Are you maybe seeing a quarter where we could start to see a pickup in orders or are we aways off from that in your view?

Fred, I'm slightly gun shy. There's no doubt because when we talk to our sales people and they're looking at they're orders and they think something is imminent, there's no doubt that in the last two quarters, we have been blissfully wrong in a lot of instances, in both directions. I would say this, though. We're looking at where quotes are and what is happening. And I think there's also a reality that we have to understand that as we finish a year on September and predominantly, most everybody else finishes their year in December, we think that there will be some level pickup of activity in the first part of 2010.

Because there's no doubt, in 2009, not only did we see the tail off of projects but we also saw the tail off of a lot of maintenance in the service area. That affected both Powercomm and our domestic business here because people just weren't spending it at all. That will cease at some point in time where people have got to start respending, especially in the maintenance area, to keep their facilities ongoing. So, we are seeing some pickup in activity but I'm very hesitant to say when we think that that will convert into an order.

Great. That's helpful. Thank you. And then, in terms of thinking about revenue trends as we go through the year, is it logical to conclude as we chew through that backlog and before it gets rebuilt with new orders that you kind of see kind of descending revenue patterns through the year or not necessarily so? I know there's a bit of seasonality in your business but color on that would be helpful.

Fred, there's really not a seasonality on our business. But it's very logical to understand that since most projects we take, again, have that duration up to that six-month area, other than the traction business, which can go longer than that. We can make a correlation that the weakness in our order book in the second half of 2009 will no doubt start to have an impact in our revenues in the second half of 2010. So, we're going to see probably a stronger first half and then, we're going to see some trough in there.

Got it.

The second half of the year is going to be much more dependent upon short cycle opportunities relative to the first half. The other thing to keep in mind, I will keep reminding everyone, is that the first quarter will have virtually no impact from the acquisition. We'll start getting that pickup, layered on top of the historical business, beginning in our second quarter.

Very helpful. Thank you. And then finally, I noted in your 10-K that there was quite a bit of revenue pickup year-over-year in the Asia region. This one large project or a couple of very large projects, are we seeing a trend here that we should look towards? And if you could talk about that and just your international business in general.

We had basically two large projects there. One, which came from our IEC side of the business and one, which came from our offshore side of our business. That's where the bulk of that was in those two big projects. I don't see a major trend happening in that.

Again, it's oil and gas projects. We follow the projects where they go.

Got it. Very good. Thank you very much. And we'll look forward to seeing you at our conference in a few weeks.

Thank you. And our next question comes from the line of Ned Borland with Next Generation Equity Research. Please go ahead.

Good morning, guys.

Good morning.

Just a follow-up on some cost issues here. SG&A, I would imagine, is going to be pretty heavy in the December quarter because of all the activity about Powercomm and that closing. But what is sort of the level of SG&A we should be thinking about over the year versus previous years?

If you look at the last two years, we've been $83 million, $84 million. Next year, the historical business will be down but when you layer in the acquisition on top of that, you're going to see probably $1 million to $3 million difference year-over-year. We're going to be, I'm guessing, somewhere in the $81 million, $82 million, $83 million as SG&A. Part of that variable is looking at and making sure that we standardize our approach from accounting with the acquisition to Powell, as well as the integration costs. Some of the integration costs will ultimately end up hitting SG&A. Some of it will ultimately hit gross profit. And as we work through the year, that will be the big variable that we're dealing with.

Okay. So, basically, we can assume somewhere between $81 million and $84 million or so?

Modestly down from the current year.

Okay. And then, back to the transit market, you had that large airport project earlier this year. I was just wondering if there's anything out there on the books that's connected with any kind of funding that we're seeing or are municipalities just sort of holding back here?

Again, we're still seeing the municipalities releasing and we're bidding. We had a couple more in the Northeast come into our order book in the fourth quarter. So, we're really excited about that. We're in the middle of the Houston bid right now. So, that still is ongoing. I don't see a major change in that but municipalities will release it as they feel that they are capable to get there, based on whether they've to acquire rights right away, what the project is doing and what their funding looks like at that point in time. And some of them are direct and some of them are indirect. So, you've got to deal with all of the EPC's and everybody else that are in the middle of it.

Okay. And then, just one final question, more of a kind of a philosophical one. With the energy prices where they are and the number of projects that are still out there, what really has to happen that will trigger some of these things to go forward? Is it a regulatory improvement or what's your thinking on that?

I think there's a lot of different aspects to it. I would say first off, there's no doubt a regulatory side of this. This whole cap and trade thing has got to get to some resolution level for people to understand what their investment return could potentially be. I think there has got to be a movement where our customers are going to see a continued increase in demand again. So, that is going to be tied to the real economic recovery, not what everybody believes it is but a real economic recovery where demand is going up. So, I think those two things have really got to happen before our customers are really going to start investing. And then, the question is going to come to them again is; Is their investment viewpoint going to be better to invest in North America or in other parts of the world? And we're going to have to prepare to support them where they decide to go make that investment.

Okay. Thank you, Pat.

Thank you. Our next question comes from the line of Craig Bell with Madison Williams. Please go ahead.

Good morning. Over the past couple of years, as business was certainly expanding for you, you guys had talked about how you wanted to exceed margins on the upside versus what you did in the past cycle. And then, hopefully, position yourself for when the downturn came to have -- when your trough margins would again be better than the last time. Do you still feel comfortable that you're heading there this time?

Well, we hit 21.8 and in my rounding days, that's 22 and our last high was 22. So, I score that one as we won on that one. And we kept our SG&A in check to the thing. I think as we've talked about, though, again because we have an investment that we keep in the business in our people, that's going to be tough in that compression in the future. But again, as we've talked about, as the trough goes down, our goal is to stay better than where we were in the last trough.

Okay. And then, Don, just to clarify on the earlier SG&A question, when you're talking about down slightly this year, is that -- that's inclusive of the Powercomm?

That is correct.

Okay. And then just lastly, looking at the financials at Powercomm, it looks like their gross margin has been running below where Powell has been historically. Is that something you guys think you can get up to match the Powell margins or is there something slightly different about that business that's going to keep them a little bit lower?

Again, it's probably too early to analyze that to an Nth degree. When you're looking at the various pockets of business they have, I think the pockets that are comparable will generate comparable margins. And as we go forward, I think that they are on a track record of improving their margins over the last few quarters and I think that trend will continue as well.

Okay. Great. Thanks, guys.

Thank you. And our next question comes from the line of John Braatz with Kansas City Capital. Please go ahead.

Good morning, gentlemen.

Good morning.

Don, in your release, you talk about the EBITDA contribution from Powell Canada of $4.8 million to $6.7 million. Of course, there's going to be some integration costs, there might be synergy savings. But on net, are there -- will there be net synergy savings and cost savings from this acquisition this year that will positively contribute to the EBITDA assumption that you're making?

At this point in time, we're expecting there to be modest contribution at the earnings per share line. So, yes, when you're looking at the EBITDA because of the depreciation and amortization of the business, there will be some incremental contribution.

Okay. And will that build meaningfully, just from the cost savings aspect, as we move into the out years, let's say next year?

Clearly, when you have a public company that sheds those public company costs, there's some obvious savings that will be generated long-term. I think that the synergies of becoming part of a $600 million business versus a $70 million business will also give incremental synergies that will benefit them. The exact evaluation of that is something that will play out over time.

Okay. This is more of a longer term question. This week, Exxon made a rather bold statement with the acquisition of XTO. And you can -- one might conclude that there's going to be an increased investment, globally, in the natural gas area. And again, this is long-term, but does it matter to you in terms of relative revenues and profitability, whether you're working on a natural gas project versus an oil project? Does it matter to you?

Well, there's two aspects to that. When you look at oil, of course, the first thing you've got to do is refine that. And we've had a substantial amount of business in the refining side of oil to get it to convert it to gasoline and usable environment to get it into the chemical side of it. Where I see the natural gas coming into play is more on the energy generating side where more turbines could be used and powered by natural gas, which would help this base generation that we've been talking about that hasn't been happening. And again, there, we believe that's a good play for us. We'd be prepared to go capture part of that. But the replacement of natural gas versus oil in the electrical generating, that's not much. Again, the big issue in generation is; How much of base generation is still in coal? So, if natural gas is going to replace coal, we're going to be happy. That's business for us.

Okay, all right, very good. Thank you.

Thank you. And our next question comes from the line of Brian Rafn with Morgan Dempsey Capital Management. Please go ahead.

Good morning, guys.

Good morning.

Give me a sense from a 30,000 foot view. You talked a little bit about the base generation deficit on the electric grid. Interest rates are low. I would imagine that the lead times to putting up, even natural gas-fired, electric utilities is probably several years. It's not a nuke plant. But is cap and trade in the investment internal rates return and the Co2 issues with the EP, is that the only sticking point? Or is it waiting to look at the nuclear mix and how that plays out? Give me a sense of -- you talked about the demand being down and now we're given this -- we're given some release on the pressure there. But at some point, I would think that if you have long lead times and financing is low, that X-cap and trade, you'd have you to go forward with some type of generation.

Brian, we agree with you. This is a short-term lull. As the economy recovers and people start consuming power again to the levels that they were before, if we move more towards plug-in vehicles and things like that, that's going to put more pressure on the grid and everything else. Something has to give. Base generation has got to start. And you're right, a nuclear plant still is, in the best dreams, nine years and the reality you're talking 12 years. So, I don't think anybody is sitting and waiting on the fence of whether it's going to be a mix of nuclear. I think everybody is still sitting on the fence that says I believe, don't quote me completely, but almost 2/3 of our energy generated in this country is still on coal. And what are you going to do about that? And is that going to be largely impeded as a result of carbon dioxide emissions?

Yes, okay, all right. You talked about kind of a reflation or resurrection of the maintenance spending. Can you look at some of your end markets, oil and gas, petrochemical, pulp and paper, mining, the transit area; are there any end market segments where you might see a reflation quicker, sooner, in maintenance spending versus the actual recovery of project spending?

Let me speak a little bit to what we saw in Canada and working with Powercomm and the acquisition. I'd say, where they see the rebound, especially coming in in some of the upgraders and the infrastructure that they have in Canada right now. So, it's more an oil and gas related. Personally we don't -- in the most recent past, we haven't done a lot in the pulp and paper. I really don't see that happening real quickly. But I think in the higher industrial area and even in some of the mining area, I think you're going to see some of the that going, again, in Canada. The potash mining is kind of a hot spot right now, both for new and maintenance. So, I think we're going to see some of that coming, as people need fertilizers and everything else to grow fuels for biofuels. So, I don't see it in any one area, other than still in our core markets, where refining and petrochemical have held back on their maintenance spend in this last 2009 year.

Okay. Give me a sense and certainly relative to the Transportation Highway Bill Safety lull, how much does the -- I think the last bill took 26 or 28 months to get through. How much leverage in delays, fundings, is your transit side, commuter rails, the vehicular transit stations, that type of thing. How much does not having a bill, a six year funding authority in, how much does that affect the growth of that business?

I'm not sure it really does. When you looked at the bill, the bill was more geared towards shovel-ready type projects, which were more on the highway infrastructure, bridges and things like that, which really doesn't gain Powell a whole lot.

Yes.

The big mass transit light rail area, that was always a matter of government funding 50% and municipal funding 50%. The government -- the federal side of that has been available for quite some time. What was being delayed was the local spending, where people were willing to put up bonds and things like that and affect their tax base for it. That is what has been happening here recently as part of the mandates in the last election and I think that will continue. But I really don't see the stimulus money hitting a lot of those projects. Could be wrong but I don't see a lot of that happening there because those are not the "shovel-ready" type projects.

Right. You talked a little, Pat, about the cost structure in savings. What are you guys running shift-wise now? And certainly, the availability of having engineers and not reducing head count, what can you guys do with flexible shifts, vacation extensions, furlongs? What -- give me a sense as to how you can keep your staff, as well as mitigating some of those SG&A costs?

Well, first off, I'd say on a shift basis, it ranges across all of our divisions but we're probably in the 1.5 average right now, 1.5 shifts across the Company. Some running a little bit more than that because of our production volumes that we have. Again, as engineers are engineers, whether they're doing application engineering or they're doing a cost reduction activity, it's somewhat the same, it's just a little different twist in their thinking at that moment in time. So, we will continue to look at where we have excess engineers, we will go concentrate on cost reduction activity.

At the same time, we have put in place a lot in the project management in this last year. We will continue to work hard to refine that and improve that process because we believe, over the long-term, that's where we're going to gain a lot in our predictability of our results. But more importantly, in the way we work with our customers to flow the project faster, better and deliver it on time and on cost budget. And we will continue to devote resources to that.

Thank you. And our next question is from the line of William Bremer with Maxim Group. Please go ahead.

Good morning, gentlemen.

Good morning.

Could you provide a little bit of color on your ratio mix between short cycle versus long cycle business?

Again, it's how you define the two. If you look at it in the two extremes of the service parts, less than a 30-day -- less than a 90 day cycle versus those that are a year, you're probably looking at 80%, 85% of our business would be considered long cycle. We have very little business that would actually be booked and shipped in the current month. Modest amounts beyond service in the current quarter.

And again, we'll see some small shift in that as a result of Powercomm because more of their business, although they may look at a contract with a person that is a longer term because that is a time and material bill, that ends up being recorded as a book and bill in a period. It's not recorded as a long-term contract.

That's good. My numbers were based on the historical count.

Right, right. Okay. So, now blending in Powercomm, does it become a 70/30 split?

I don't know that we can answer that yet. There's going to be movement, again, to more of it being a shorter cycle or a book and bill type deal. But I wouldn't be able to guess what that percentage would be right now.

And you categorize --?

It's one that we could possibly talk about in the future.

Right. And you categorize long cycle being, what's your --?

There is a mid gap there in the middle, which I kind of overlooked and it could fall in either direction, short cycle or long cycle. And that is the six month projects. There are definitely historically and we continue to see projects that come to us, we quote, we bid and we can deliver in a six month time window. That's what we see the opportunity for the second half of this coming year, is continuing to focus on and make sure that we capture as many of those short cycle projects as we can.

Okay, gentlemen, thank you.

Thank you. (Operator Instructions) Our next question comes from the line of Brian Rafn with Morgan Dempsey Capital Management. Please go ahead.

Yes, just a follow-up question, guys. The Powercomm, I think you guys talked about kind of a staging scalability servicing the western oil and gas fields in western Canada. If we throw the current clowns out of Washington and we get some drilling in the Arctic reserve or start looking at some of the Arctic drilling in the Arctic circle like the Russians are looking at, can Powercomm service some of that demand?

There's no doubt about it. We'd talked about it. We really didn't concentrate on any of the dialogue in it but they went to Kazakhstan.

Okay.

So, there's no fear there. And again we didn't really hone in on the synergies but our IEC business, our S&I business has done a number of projects into the Kazakhstan Azerbaijan area. And one of our shortfalls is we have not had service related people there to ongoingly service that. That's a nice synergy for Powell to now have a Kazakhstan operation there that can do that.

Okay. And then, just getting your CapEx budget for 2010?

We're projecting somewhere around the $6 million to $8 million mark.

Okay. And then, maintenance would be what percentage of that?

If you look at maintenance spending, historically, it's been in the $3 million to $5 million range. It varies from year to year.

Okay, thanks, guys. Good job.

Thank you.

And our next question is a follow-up question from the line of Fred Buonocore with CJS Securities Incorporated. Please go ahead.

I just wanted to follow up on your discussion around William's question, with the intermediate cycle you were talking about. Just to clarify, so, you're saying that book and ship within six months, that's kind of midcycle project timeline that falls into that kind of 80% of your business group right now? Is that right?

It would not be what we would typically call a short cycle business. That is correct.

Got it. But this is where you see the opportunity, potentially, this year that could kind of change the dynamics of your guidance, is that right?

That is an upside opportunity. Part of the reason of the window of the guidance.

And Fred, also understand as factories get full, you always kind of look at what your lead time is and what you're telling your customer your lead time is. So, when you look at short cycle, you basically say, that's something less than what your published lead time is at that point in time. So, as our factories lighten up a little bit, our lead times are going to come down. So, even to what Don said there, shorter than lead time may be even less than what we're looking at today. So, it's how you can react to a customer's requirement in less than what your published lead times are.

Got it. And that kind of answers my next question. So, it's not necessarily different types of projects. It's not, say, different end markets or different kinds of work that you'd be doing. It's really just that you've got capacity now to accelerate projects. Or are there other kinds of projects that you haven't typically been focused on that you might put more emphasis on now that you have the opportunity to do so? I'm just kind of trying to get a sense for how we can track if there are more of these short cycle opportunities out there for you to capture.

Yes, you are right. Part of it is the project itself is not really different. The scope of the project changes. It gets smaller. But there are new customer market segments -- I wouldn't say new customer. There are market segments that Powell has typically only been in at different times. And we're going to have to make concerted efforts to get into those. And one of them would be more in the municipal area. We are in some of the utility markets. We're not in all of the utility markets. So, we will be looking harder at opportunities in market segments that we haven't participated in to the extent that we've participated in our industrial side of the things.

Got it. That's helpful. Thank you.

Thank you. And our next question comes from the line of John Braatz with Kansas City Capital. Please go ahead.

Just a follow-up question. Given your revenue expectation for this year, do you think it's fair to assume that maybe you can take another $20 million, $25 million out of working capital?

There will be incremental improvements in working capital as the business shrinks, in addition to our process improvements. We clearly expect to see positive cash flows but the impact, combined with the acquisition, is a little bit hard for me to want to gauge of that at this point in time.

When you say positive cash flow, my definition of cash flow, I throw the cost of the acquisition in there. Including the acquisition, would you expect positive cash flow?

If you're looking at it beyond and including the purchase price.

Yes.

At this point in time, it's too hard to say.

Okay, all right. I appreciate the candor.

It's not going to be a -- if you were looking at it with the purchase price, don't look for tremendous upside opportunities above and beyond that.

Right. All right, I appreciate the candor. Thank you very much.

Thank you. And at this time, there are no further questions. I'd like to turn the call back over to management for any closing remarks.

Again, thank you for joining us today. We appreciate the questions, the dialogue, the discussion. We greatly appreciate your interest in Powell. And at this time of the year, I'd also like to say for everybody have a great holidays, enjoy your families, your time, be safe. And come back and join us again next quarter. Thank you very much.

Ladies and gentlemen, this concludes the Powell Industries fourth quarter earnings conference call. If you'd like to listen to a replay of today's conference, please dial 303-590-3030. Followed by passcode of 4185563. ACT would like to thank you for your participation. You may now disconnect.