Powell Industries Inc (POWL) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Powell Industries Second Quarter Earnings call. (Operator Instructions) This conference is being recorded today, Wednesday, May 5, 2010. I would now like to turn the conference over to Karen Roan of DRG&E. Please go ahead.

Thank you, Luke, and good morning, everyone. We appreciate your joining us for the Powell Industries conference call today to review fiscal 2010 second quarter results. We would also like to welcome our Internet participants listening to the call simulcast live over the Internet.

Before I turn over the call to management, I have the normal details to cover. If you did not receive an e-mail of the news release issued this morning, please call our offices at DRG&E, and we will get one to you. That number is 713-529-6600. Also, if you want to be on the permanent e-mail distribution list for Powell news releases, 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 May 12, 2010, and information on how to access the replay was provided in today's news release. Please note that information reported on this call speaks only as of today, May 5, 2010, 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 pressure, sensitivity to general economic and industry conditions, international political and economic risks, availability and price of raw materials, and execution of business strategy. 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 over the call to Pat.

Thank you, Karen, and good morning, everyone. Thank you for joining us today to review our fiscal 2010 second quarter results. Following my initial comments on the quarter and current market environment, Don will cover the financial details of the quarter. Then I will return with some final remarks.

Our performance in the second quarter was better than anticipated and followed the excellent start we posted last quarter. Our margins slipped back from the levels posted in the first quarter, and the second quarter continued the trend of positive closeouts on our projects, favorable change orders, in addition to overall performance improvements that had been our focus for some time. I will caution that these margin levels are unsustainable moving forward. We foresee our margins returning to more traditional levels as a result of the competitive environment, inflation in copper and other commodities, and the reduced volumes in our business.

In order to maximize readiness, we have elected to keep our engineering and project management resources in place. Inquiry and order rates continue at a steady pace, but well below the levels posted the last two years. We expect to see further erosion in our backlog until global economic climate improves.

The oil and gas industry continues to struggle due to slow demand, the absorption of increased refining capacity, and the current competitive environment. We anticipate the next oil and gas industry projects are likely to be on the upstream side with many involving platforms scheduled for the Gulf of Mexico. The timing of these projects is dependent on the rate of economic recovery and the actions taken by Washington in tax and regulatory policy, and is now unfortunately also impacted by the problems associated with the Transocean/BP difficulties in the Gulf of Mexico. While the full impact of this event is not clear, there is the likelihood that it could delay the start of many projects for an unknown period.

Consumer spending appears to be showing modest improvement which, if it continues, will result in an increased demand for electrical power. This will spur the utility companies to again go forward with plans for capacity expansion and new power plant construction. There is no doubt that these actions are necessary, but the appropriate timing for execution by our customers is still uncertain.

We continue to see a modest improvement in the maintenance and service portion of our business. This is consistent with past cycles, and we expect to see that activity continue as companies choose to maintain, upgrade and increase the lifecycle of existing infrastructure. In this area time is our ally, as equipment maintenance cannot be delayed indefinitely. We know the long-term prospects of our primary markets are good and that the world will need more oil and more electrical power rather than less. It is only the timing of the activity that is in question.

We are working vigorously on things over which we have control, such as improvement in processes, skill building and customer relationship management. However, we have no control over many things that drive our business and markets. Short-term business results are unpredictable, but we are very confident in the long-term outlook. We continue to use this time wisely and prepare our organization to be able to capitalize on opportunities as they arise.

Now, I will turn the call over to Chief Financial Officer Don Madison, to review our financial performance for the second quarter, and then I will make some final comments. Don?

Thank you, Pat. Revenues were $142.1 million in the second quarter of fiscal 2010, a decrease of $22 million compared to the second quarter of fiscal 2009. Gross profit increased by approximately $2.7 million to $36.5 million as a result of favorable mix projects, cost reduction activities, and negotiated change orders for additional product and services.

Gross profit as a percentage of revenue increased to 25.7% compared to 20.6% in last year's second quarter. As Pat discussed, we do not anticipate that gross margins will continue at this level given the overall mix of projects currently in our backlog.

Selling, general and administrative expenses were $21.2 million, an increase of approximately $834,000 compared to the second quarter of fiscal 2009. This increase primarily relates to our acquisition of Powell Canada.

Interest expense net of interest income was $113,000 in the second quarter, a decrease of $146,000 from a year ago. In the second quarter of fiscal 2010 we generated net income of $9.9 million, or $0.85 per diluted share, compared to $8.9 million, or $0.77 per diluted share in the second quarter of fiscal 2009.

For the six months ended March 31, 2010, revenues were $278.1 million compared to $334.6 million in the same period a year ago. Gross margin was 26.7% for the six-month period compared to 20.4% a year ago.

Selling, general and administrative expense was $43.8 million compared to $41.9 million for the first six months of 2009. This increase primarily relates to the acquisition of Powell Canada. In addition to the ongoing operation we incurred one-time fees and costs of $2.1 million for the acquisition during the first half of fiscal 2010.

Interest expense net of interest income for the six months ended March 31, 2010 decreased by $421,000 to $253,000 compared to the same period in 2009. Year-to-date our provision for income taxes reflects an effective tax rate on earnings before income taxes of 35.2%. This compares to 34.2% for fiscal 2009, and 35.3% for fiscal 2008.

For the six months ended March 31, 2010, net income was $19.5 million, or $1.68 per diluted share compared to $16.7 million or $1.45 per diluted share a year ago.

As of March 31, 2010, our order backlog was $313 million compared to $486 million a year ago. New orders were $113 million in the second quarter compared to $108 million in the previous quarter, and $154 million in the second quarter of fiscal 2009.

Year-to-date, cash provided to operating activities totaled $46 million. Investments in property, plant and equipment totaled $1.5 million. At March 31, 2010, we had cash and cash equivalents of $113.6 million compared to $97.4 million at the end of fiscal 2009. Long-term debt and capital lease obligations including current maturities totaled $22.4 million compared to $9.5 million at September 30, 2009.

Looking ahead. Given the uncertainty surrounding capital spending in our primary markets, it remains difficult to provide guidance for the current fiscal year. Based on strong first half, current business conditions and our existing backlog, we now expect full year fiscal 2010 revenues to range between $550 million and $575 million, and full year earnings to range between $2.10 and $2.35 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 will turn it back to Pat.

Thank you, Don. Let me make just a few more comments and then we will be happy to take your questions. Our current focus is one of preparedness. Market factors that drive our business are largely beyond our control. While we have seen some stability return to the economic cycle, current events can dramatically affect the market. Near term it appears that the brightest prospects for our business are outside of the US.

Powell Canada transition is going well. It is clear that customers in the Canadian market perceive the acquisition as one that enhances possibilities, and we are working to take advantage of those additional opportunities as they arise. Integration teams are making good progress on aligning Powell Canada with the balance of the organization, and overall acceptance is very good from customers and employees alike.

This past quarter we launched and received our first purchase order for an expanded switchgear product into the IEC market, the PowlVac 100. This joint product development with teams in both the US and the UK was the first of its kind for our Company. Additionally, the first order for this newest member of the Powell Switchgear product line includes both our UK operation and the offshore operation located here in Houston. This is an excellent example of the way in which Powell can bring its resources together to offer a unique solution for our customers.

We remain focused on our customers and our people know that the business results will follow. Powell will continue to work with customers now and in the future to build value-driven solutions. At this point we will be happy to answer your questions.

(Operator Instructions) Our first question comes from Fred Buonocore with CJS Securities. Please go ahead.

Morning, Pat and Don, how are you?

Just fine, Fred, how about you?

Great, thank you. Just wanted to quickly touch on the gross margin, which you explained well, but just to clarify, was there any relationship between the strength in Q2 and what you saw in Q1? I mean, were these some of the same projects or projects overlapping into two quarters, where you were realizing stronger profits? How should we think about that?

Well, Fred, there is no doubt, again, as we have talked about our project management working with our customers, understanding what we are doing especially towards the end of the projects and how that affects change order, change order possibility and delivery. That continues to grow and work favorably for us and with our customers. I would say again, as you look at the gross margin as Don and I have alluded to, there is no doubt that the larger projects that we took in the last two years, that as they came in to closeouts with some of the favorable variances that we have had and the change orders, those, as we will continue change orders in the future, because they will be on smaller project size, the dollar implication of those change orders and closeouts will be much smaller. So, that will have an overall impact on our margin calculations.

Okay, that's helpful. Thank you. And then my follow-up relates to bookings. Realizing that the end market demand is certainly challenging, bookings did improve sequentially for the second conservative quarters, so should we read anything into that, that maybe there is a little bit of strengthening or is it just timing, or how would we think about that?

Fred, I wouldn't read anything into it. I think the best thing that we could look at is we've been fairly consistent for about four quarters in what our order input has been, but every day a new challenge comes up such as the one in the Gulf of Mexico, and I just don't think we are ready to read anything into any of these changes or a quarter-to-quarter dynamic changes we've always cautioned against.

Okay, thank you.

Our next question comes from the line of John Franzreb with Sidoti & Company. Please go ahead.

Good morning, Pat and Don. Pat, I just want to follow-up with some of your closing prepared comments. I just got off the Foster Wheeler conference call and you kind of reiterated the fact that maybe some of the best opportunities are in overseas markets, and that is kind of what they are out there saying. Could you talk a little bit about maybe if there is a change in your order bookings in overseas markets, or talk a little bit about the opportunities and your ability to capture it in light of how weak orders are generally across-the-board?

Again, John, when we talk about international that also includes Canada. We see great opportunities coming to us more so than we did in the past in Canada, and I'll even give you an example, not in one of the other areas. There is a light rail project in Calgary that we have gone after that, until we acquired our PowerComm business, now Powell Canada, we probably wouldn't have seen it and we wouldn't have bid and quoted on it. So, we see great opportunities in that area.

I think as we look around the world and as oil companies try to decide where they are going to place their investments, as I mentioned with our new product offering in the IEC market making us with some unique features, but also competitiveness in the market, and still our ability to marry that with a module here in the US, provides unique solutions to customers that a lot of people can't match. They still do it in various different ways and we still offer something to our customers that gives them a complete turnkey solution that they like and they can come to one spot to handle that. I think we are going to start trying to really work to capitalize on those as we talk to our EPC companies and our oil companies around the world.

Okay, and Pat, last quarter -- and I guess you kind of changed your view, maybe, I'm not sure. But you were kind of concerned about the flow of transit projects given some of the constraints at the municipal level. Has your view changed on that or can you just update us on what the transit environment looks like in general?

I am still cautiously optimistic about it. We are still tracking a lot of projects. I would tell you just like we have seen in some of our oil business, in the past, when we got down and we had a bid going out and it was, let's say, the final bid in a municipal offer, we could typically look at 30, maybe 45 days and there was probably going to be an order if we were the winning person. That seems to be stretching out now, too, the same as we saw with our petrochemical business. I think people are -- as unfortunately in the US, as states become poorer and municipalities become poorer, they are going to be looking at where their best spend of their dollars are.

Okay, that's helpful. Thank you.

Our next question comes from the line of Rick Hoss with Roth Capital Partners. Please go ahead.

Good morning, gentlemen. Gross margin, Don, can you break out ETP versus PCS?

Don't have that here in front of me. We will be following the queue here shortly, but if it is not materially different from our recollection in the process control business, most all of the changes that we have seen in the last two quarters have come in the electrical power products.

Okay. And are you still thinking that the third quarter for 2010 is still going to be the low point for the year?

I don't know if it's going to be the third quarter, fourth quarter or some future quarter. Clearly, the second half of the year we are projecting to be at a lower rate from an earnings perspective, which translates into lower gross margins. Our revenue outlook that we have given would indicate that revenues are going to be more consistent of what we have seen the last couple of quarters.

Okay, thank you.

Our next question comes from the line of Brent Thielman with D.A. Davidson. Please go ahead.

Hi. Good morning, guys. Just a couple of housekeeping questions, and I apologize ahead of time if I missed it. But, Don, did you provide a cash balance for the end of the quarter?

Yes. Cash balance for the end of the quarter was $113 million.

Okay. And then respect to PowerComm, I think you guys had an additional payment based on performance. Did you guys already pay that out or do you expect to pay that out?

At this point in time, we expect nominal payment, if any. It is based on the financial results through March 31, of which we are still in the process of calculating. The big variable there is the joint venture in Kazakhstan. The numbers are being audited currently. That probably will not take place until late in our third quarter, the June time period.

Gotcha, gotcha. And then I guess just with respect to what you see in terms of just overall quotation activity, I mean, I think you guys have always said that has been pretty good. But are you seeing an influx of new projects or is it more sort of the same types of projects that customers are coming back to you and just asking for?

Brent, we are getting a combination of those. I would tell you we have had our teams out looking in areas that traditionally Powell might not have gone and looked in, and we have had definitely some successes there. Nothing that I would say would ever come to any value level as what our petroleum business does for us. But we are seeing a steady amount of request for quote, varied market segments. The one key that I would say is consistent along the board is these are all much smaller sized projects than what we saw over the last two years.

Okay. And then, lastly, Pat, I think you made some comments with respect to sort of higher commodity prices. I think you are referring to steel and copper, if I'm not mistaken. Can you just kind of talk about the impact there? Are you able to pass that through at this point?

Well, again, we are always reevaluating our pricing scenario as commodities come in. I would say right now the one that concerns me the most is copper, which has now almost, with all of our, you know, look at it, has crept up closer to the $4 level again, and that one consistently worries me. But the dollar impact, we try to mitigate and take care of in our pricing scheme, so we will continue to work that and watch that, but we need to understand that those are going to be very fluctuating here over the next year or so.

Sure. Okay, thanks a lot, guys.

Our next question comes from the line of Ned Borland with Hudson Securities. Please go ahead.

Good morning, guys. Last quarter we talked -- you guys mentioned that your customers were starting to get their capital budgets in order in regard to maintenance spending. I just want to know if those budgets from your customers come in as you expected? Has there been any kind of upward pressure on maintenance that you have seen sequentially?

I haven't seen an upward pressure sequentially. I think if anything I would say, even though they got their budgets, the business activity has probably been a little slower to come than I would have anticipated it to have been. So, we are just going to have to watch it and see where it goes in this next quarter. No doubt we are out trying to work on everyone that we can and try to get with our customers to say how can we add some more value to you and what can we do, especially on our system side of things with our Powell Tech and our Powell Tech/Transdyn type solutions and substation automation. So, every place that we can try to find an opportunity with our customers, we are trying to explore right now.

And is that type of business, is that more quicker turn? I mean, is the duration of the maintenance project shorter than some of these larger projects that you have been working on?

Yes, most assuredly. I mean, those are -- if you would think about it as more of a classic book and bill than a long-term project that we look at in one of our big solution projects.

Okay, thank you.

And our next question comes from the line of Beth Lilly with Gabelli & Company. Please go ahead.

Good morning, Pat and Don. I have one qualitative question and one quantitative, so let's start with the quantitative. You said that the gross margins are unsustainable from this quarter's level as well, I guess, even for the six months. So, can you talk about -- you mentioned three factors -- one, mix, cost reductions and change orders, right, that they were the contributing factors for the gross margin?

That is correct.

Okay. Can you break that down in terms of the third mix, a third cost reduction, a third change orders, or how would you break those down in terms of what's the contribution?

I will put it this way, I cannot break it down in total because we don't have that level of analytics within -- across the Company. I can tell you the most dramatic impact has been from the two orders approaching the end of their cycle where we are able to eliminate contingencies and release cost expectations and allow those profits to flow to the P&L, as well as negotiated change orders that are coming late in the cycle for work that was done in previous periods. That is the most dramatic impact relative to the margins that we saw in prior years, or prior year. When you are looking at the operating efficiencies, the cost reduction, it is continuing on on the process, and the relative change quarter-over-quarter will be more indicative of what we were seeing in prior periods.

The second question is, on the past couple of calls you have talked about client sentiment and clients just not having a lot of visibility and uncertainty. So, if you go out and talk to all the different industries that you serve, would you say that overall there is a better feeling about just the economy and maybe the willingness to spend, or is there just that feeling of there is very little visibility and so they don't know what the (inaudible) is going to be like.

Beth, my opinion would be they are still holding everything close to the vest. I don't see that there is any real movement for people to say we are definitely going ahead and plan for these types of things. We were having some, I think, relatively good discussion, as we mentioned in the text, about the upstream on the offshore side of things. Again, I think the events in the Gulf, we don't know what that is going to mean.

So, have any impact or it will have a material impact or not.

Yes, yes, okay. That's great. All right, thanks so much.

Our next question comes from the line of Brian Rafn with Morgan Dempsey Capital Management. Please go ahead.

Good morning, guys. Give us a sense, we have owned Granite Construction for about 14 years, one of the largest road builders. They have talked about the transit side and the heavy-duty design build, heavy civil area has been pretty good relative to bookings. And I am wondering, you guys talked about being prepared, business preparation, not laying off engineering staff and that. Would the passage of the second generation SAFETEA-LU, which is a bill that talked about being north of $500 billion relative to $289 billion for the first one, would that give you some benefit relative to transit? Would that be a positive certainly, to certainly order bookings and that from your side?

Brian, again, not knowing the company that you follow or had a position in, let me break the transit down for you the way we view it. If it has to do with road construction, just straight road construction, Powell doesn't participate at all other than oil that might be used for asphalt and how that is going to affect things overall. But we really don't participate in that. When we look at our transit business from our SCADA systems, if those road constructions now require signage and HOV lane changes and all those types of things that we do with our Transdyn business, we can see and potentially get some impact for that, but that is definitely a smaller subset of that total package that might let out.

Where our bulk of our big business is in the transit is in the light rail transit type stuff, which those bills really have not done that much because those are not what I would consider shovel-ready bills or projects. These are more planned out projects over a big period of time and they are around major municipal areas. And I'll give you another example of one. The Houston project here, unfortunately we were not able to secure that project. That was a real go-ahead project and now there still seems to be some questioning now about what the future really is of that project with all the things that are going on in the Houston area. So, that is where I talk about there is uncertainty even in the light rail transit projects for the future.

Yes, but from the standpoint of the transit portfolio that would be railroads, subway, light rail, that would be something as it applies to the overall SAFETEA-LU. That would be something that would be beneficial to your backlog?

Anything that comes into the light rail transit-type area where there are substations required and DC voltage, that definitely can affect us and work on us.

Or the infrastructure.

Or the infrastructure.

Infrastructure and (inaudible) management.

Yes, sure, sure. You look at kind of a 30,000-foot view, the Army Corps of Engineers comes out and talks about grades, the US infrastructure, about a $2.2 trillion problem. The widow and orphan is always the electric grid, and that's -- I have heard numbers as high as $1.3 trillion, $1.4 trillion. What from the standpoint do you guys see -- you guys have talked about maintenance and obsolescence. What do you see relative to generating capacity, the aptitude of public utilities to put in new electrical capacity? Is it stuff that is still at the edges? Is it still maintenance? Because I would think a $1.2 trillion on a problem is a pretty big problem.

You're very astute. That is where we have been looking at for quite some time. Two things that I will say -- one, the uncertainty still of what the utilities can use as a fuel source to create new generation, that still puts them on the sidelines; two, who is going to accept the utility rate increase to provide for the capital structure for that $1.2 trillion that is required? So far, nobody has wanted to pony up for that. Again, I will use the example of Florida, where FP&L put in for a rate increase of almost 30%. That was rejected, they took $1.2 billion worth of infrastructure off the table.

Yes, yes, okay. Okay, okay. Is it something that you are sensing -- again, we had the bridge collapse in Minneapolis, those types of things are really -- then it becomes an emergency. Do you have to see more brownouts across the country or -- which is somewhat of a weather-related thing, where it just becomes mission critical? And I guess I am looking for your sense as to how long can you continue to limp along if you have an electric grid that has this kind of problem?

That's a great question. People smarter than me are going to have to answer that one. Where we sit and what we look at, we think we are getting to mission critical points on the grid system. As I said, if the economy starts to come back or demand starts to grow, or we have another really hot summer where air conditioning loads go up, or another cold winter where we had peak demands in Florida, I think you're going to see starting some brownouts on some of this stuff. We can't keep having base generation go down offline, nuclear plants going offline at end of lifecycle and not replace this with the consumption the way this country likes to consume electricity.

Yes, yes. No, I would agree with you certainly. Let me ask you relative to different -- and I asked you on the transit side -- if you're starting to look at solar, wind turbine, even the nuclear side, how much of your business away from the standard kind of oil and gas, coal-fired utility plants, how much of your business would be sensitive to that?

We can definitely participate in the wind turbine area. Definitely smaller than a base generation would be, because these farms are big, wide, and they still don't come up to the megawatt power of base generation. Solar, again, solar has been fairly small on the economic scale. Nobody so far has put in a major megawatt producing solar location because of all the issues that they keep running into it and what that is going to mean. If that happens, we should be able to participate to some extent as the power comes off of that solar collection system and would get put up onto the grid from the switchgear to the step-up transformer side of things.

Nuclear, nuclear is just a fuel source. It's like any other base generation. So, whatever that fuel source is, if they go ahead with nuclear, we can participate to the one extent that that has always required 1E qualification on that regulatory type deal. And there still is a lot of questions out there of what is going to be the requirement 1E regulations on electrical equipment and new nuclear facilities.

(Operator Instructions) Our next question comes from the line of Rick Hoss with Roth Capital Partners. Please go ahead.

Hi. Just a couple more granular type. Don, any one time costs in SG&A this quarter? I know there were a couple last quarter.

Nothing of any material nature, no.

Okay. And then remind me, is Powell Canada, I know it is a 90% service business; do they carry a backlog?

Very modest backlog, yes. It is predominantly service, so their backlog typically turns much like our other services businesses, anywhere from 30 to 90 days.

Okay. So, in future revenue periods, then we should expect the backlog versus revenue relationship to be a little bit skewed compared to (inaudible) basis?

That is correct. It will be modestly shifted to -- we should be able to generate more revenues relative to the size of the backlog.

Okay, perfect. Thanks, guys.

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

Yes. You referred to the competitive environment and the potential impact there on margins earlier. Can you elaborate a little bit more on the competitive environment than the kinds of players that you are seeing on various projects, particularly given the size of these projects, the smaller -- are you seeing more kind of mom-and-pop type competitors, or the same guys as usual?

I would never call anybody in the electrical business a mom-and-pop player. We see the same level of competitors as we always do, of the types and the names of those competitors that are out there. But as we have always said here in the last couple of quarters, when the pie is only so big, everybody wants to eat on the pie. So, you've got to be competitive at all times, understanding what your capability is, how do you deliver value to that customer and what positions you with that customer. And where you can't show perceived value, then you've got to be price-competitive. And, again, as we have always talked about, we still do not see any irrational behavior of anybody out there trying to buy backlog.

Great, that's good to hear. Thanks.

Our next question is a follow-up question from the line of Brian Rafn with Morgan Dempsey Capital Management. Please go ahead.

Yes, I just wanted to ask relative to the public utility side, how disruptive is the regulatory environment with thoughts of cap and trade?

I don't sit in their board rooms or anything else, but from what we hear, it is still disruptive because, again, they don't know (a) what is fair of how I can return an investment -- if they are a public utility, how I can return an investment to my shareholders, and what is that going to mean in my rate structure? So, I think that still looms over everybody's head both in the petrochemical business and the utility business.

Okay. And then just one housekeeping. What CapEx budget for this year?

CapEx budget was originally set to be around $6 million to $8 million through six months. We spent 1.5 million, I think we are going to come in at the low end of that range.

Okay, thanks guys. Good job.

Thank you.

And our next question is a follow-up question from the line of John Franzreb with Sidoti & Company. Please go ahead.

Pat, similar to your last question, could you just remind me what the tax and regulatory issues are for work in the Gulf of Mexico?

Tax and regulatory issues, what --

You referenced them earlier.

I don't think the -- the regulatory issues in the Gulf of Mexico, all we referenced there is the unfortunate incident with Transocean and BP. And let's face it, our government reacted very quickly to say no future drilling until this whole thing is clarified and understood. We don't know what that is going to mean to us long-term as it relates to offshore production platforms. Remember, we do not participate in drilling platforms, and this was a drilling platform that went down. We participate in the production platforms, and typically in the Gulf, there are many wells that have already been drilled and capped awaiting time for the company to put those into production. So, new drilling would impact us farther down in the long-term future, but we just don't know what this whole spill situation is going to mean to the offshore business.

Okay, I probably misunderstood. Thanks a lot.

And there are no further questions in the queue. Please proceed.

And thank you again today for joining us. We still very much appreciate your interest in Powell, and we look forward to talking to you again next quarter.

Ladies and gentlemen, this concludes the Powell Industries Second Quarter Earnings Call. If you would like to listen to our replay of today's conference, please dial 303-590-3030 with the access code 4285994. Those numbers again are 303-590-3030 with the access code 4285994. ACT would like to thank you for your participation. You may now disconnect.