May 8, 2013
Executives
Karen Roan – IR Mike Lucas – President and CEO Don Madison – Chief Administrative Officer and CFO
Analysts
Jon Tanwanteng – CJS Securities Brent Thielman – DA Davidson John Franzreb – Sidoti & Company Noelle Dilts – Stifel Nicolaus Jon Braatz – Kansas City Capital Julian Allen – Spitfire Capital Beth Lilly – GAMCO Industries
Operator
Good day, ladies and gentlemen. Thank you for standing by.
Welcome to Powell Industries Second Quarter Earnings Call. During today’s presentation, all parties will be in a listen-only mode.
Following the presentation, the conference will be opened for questions. (Operator Instructions).
This conference is being recorded today, May 8, 2013. I would now like to turn the conference over to Ms.
Karen Roan with Dennard Lascar Associates. Please go ahead.
Karen Roan
Thank you Ian, and good morning, everyone. We appreciate your joining us for Powell Industries’ conference call today to review the fiscal 2013 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 yesterday afternoon and would like one, please call our offices at Dennard Lascar Associates and we will get one to you. That number is 713-529-6600.
Also if you would like 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 powellind.com or a recorded replay will be available until May 15, 2013, and information on how to access the replay was provided in yesterday’s earnings release.
Please note that information reported on this call speaks only as of today, May 8, 2013, and therefore, you are advised that time-sensitive information may no longer be accurate as of the time of any replay listening. As you know, this conference call includes certain statements, including statements relating to the company’s expectation of its future operating results that may be deemed to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
Investors are cautioned that such forward-looking statements involve risks and uncertainties and that actual results may differ materially from those projected in the forward-looking statements. These risks and uncertainties include, but are not limited to, competition and competitive pressures, sensitivity to general economic and industry conditions, international political and economic risks, availability and price of raw materials, and execution of business strategies.
For further information, please refer to the company’s filings with the Securities and Exchange Commission. Now, with me this morning are Mike Lucas, 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 Mike.
Mike Lucas
Thank you, Karen. Good morning, everyone.
Thank you for joining us today to review our fiscal 2013’s second quarter results. I’ll make a few opening comments, and then I’ll turn the call over to Don to review the financial details.
And when Don has finished, we’ll go directly to your questions. Revenue for the quarter was consistent with our first quarter and in line with our expectations.
Orders for the quarter were a modest $124 million, following our record setting first quarter bookings level. Orders for the first half of 2013 remain healthy and are slightly ahead of last year’s levels.
Outside of North America competitive pressures are growing. Economic conditions in Europe and in other parts of the world make a portion of our international projects, especially those projects that specify IEC products, make them challenging for our UK-based business, resulting in fewer projects and very competitive price levels.
In North America, forecasting and scheduling our projects continues to be a challenge, due to customer resource constraints across the industry, especially in the areas of project management, engineering and construction trades. Some projects planned for fourth quarter production have some risk, which is considered in our updated revenue guidance, and may push some revenue out of the fourth quarter and into 2014.
Quotation activity remains very strong for the US and Canada. The strength in the US and Canadian oil and gas market is still the major contributor to our current business activity.
Along with continued strong investment in production and pipeline construction, the next significant phase of capital investment in the oil and gas segment is expected to be in petrochemical facilities. We should begin to see this inquiry activity later this year, which will translate into orders in 2014.
Overall, for the entire business, order activity should remain strong through the balance of this year and into 2014. As you’ll recall, we are making significant investments in our operational footprint for the expected future growth over the next few years.
Our facility expansion projects both here in Houston and in Edmonton, Canada are well on their way towards completion. We’re on schedule to complete construction and begin startup in our fiscal fourth quarter.
Significant time and effort are going into the equipment relocation and startup of these facilities to ensure that these transitions have no impact to our customers’ schedules, deliveries or promises. With that, I’ll now turn the call over to Don to discuss the financial details.
Don?
Don Madison
Thank you, Mike. Revenues were $153.9 million in the second quarter of fiscal 2013, compared to $181.5 million in the second quarter of fiscal 2012.
This decrease in revenues is the result of project timing. Overall, our backlog has strengthened year-over-year, but the project timing is depended upon our client’s construction schedules.
Gross profit as a percentage of revenue was 21% in the second quarter of fiscal 2013, compared to 19% in the second quarter of fiscal 2012. This increase in gross profit is a result of favorable operational execution across the company, as well as improvements in Canada, which also contributed to higher gross profits.
Selling, general and administrative expenses were $24 million compared to $21.5 million a year ago. This increase is primarily related to higher personnel cost, sales commissions associated with orders received, as well as long-term incentive compensation resulting from higher levels of operating performance over the three-year performance period.
These increases were partially offset by lower depreciation cost in the current year. Amortization expense was $413,000, a decrease of $291,000 compared to the second quarter of fiscal 2012.
In March 2013, we received a settlement from the previous owners of our Canadian business in the amount of $1.7 million, which is recorded as other income. We reported net income of $6.8 million or $0.57 per diluted share for the second quarter of fiscal 2013 compared to $7.4 million or $0.63 per share in the second quarter of fiscal 2012.
For the six months ended March 31, 2013, revenues were $308 million compared to $339 million in the same period a year ago. Domestic revenues decreased by $13 million to $109 million in the first half of fiscal 2013.
And international revenues decreased by $18 million, primarily due to the completion of several complex domestic and international oil and gas projects that were in process during fiscal 2012. Gross profit as a percentage of revenues was 21% for the six-month period compared to 16% a year ago.
Year-over-year operating improvements from our Canadian operations, as well as general operational improvements across the company, contributed to this increase in gross profit. Selling, general and administrative expenses were $46.4 million, compared to $41.3 million for the first six months of fiscal 2012.
The details pertaining to year-to-date increases were similar to the second quarter, increased personnel cost, sales commissions, and long-term incentive compensation expense, partially offset by lower depreciation cost in the current year. For the six months of fiscal 2013, amortization expense was $828,000 compared to $1.4 million in the first half of fiscal 2012.
As noted earlier, a $1.7 million settlement was recorded as other income. Our provision for income taxes reflects an effective tax rate of 29% for the first six months of fiscal 2013.
This rate is a low statutory rate, primarily due to the availability of federal research and development tax credits in fiscal 2013 and the utilization of loss carry-forwards on Canadian income. For the six months ended March 31, 2013, net income was $14.2 million or $1.18 per diluted share, compared to $5.7 million or $0.48 per diluted share a year ago.
As of March 31, 2012, our order backlog was $522 million compared to $554 million as of December 31, 2012, and $497 million a year ago. New orders were $124 million in the second quarter compared to a record $272 million in the first quarter and $203 million in the second quarter of fiscal 2012.
New orders placed in the first half of fiscal 2013 totaled $396 million, compared to $392 million last year. For the six months ended March 31, 2013, cash provided by operating activates totaled $57 million.
Investments in property, plant and equipment totaled approximately $33 million, which includes a $27 million investment in our new facility. At March 31, 2013, we had cash of $114 million compared to $90 million at September 30, 2012.
Long-term debt in capital lease obligations, including current maturities, totaled $4 million. Looking ahead.
Based on our backlog, current business conditions, as well as possible customer schedule changes, we have reduced our expected full-year fiscal 2013 revenues to range between $675 million and $700 million and we have raised our expected full-year earnings to range between $2.30 and $2.55 per diluted share. Included in our earnings outlook is an estimate of $0.25 per diluted share for one-time cost related to the startup of the two new manufacturing facilities later this year.
Now, at this point in time, Mike and I will be happy to answer your questions.
Karen Roan
Operator?
Operator
Sorry, my line was muted. (Operator Instructions).
We do ask that you please limit yourself to one question and one follow-up and then re-queue for additional questions. And our first question is from the line of Jon Tanwanteng with CJS Securities, please go ahead.
Jon Tanwanteng – CJS Securities
Hey, guys, good morning.
Don Madison
Morning John.
Mike Lucas
Morning John.
Jon Tanwanteng – CJS Securities
Gross margins were very good again, last time you reported, I think you expected them to be under 20% in the quarter and then rebounding to maybe a 21% or 22% again in Q3. What drove the outperformance there, do you expect Q3 to actually be higher now?
Mike Lucas
I mean, clearly, when you’re looking at the current quarter, we – the mix of projects clearly impacts the quarter and that we relative to – we were able to maintain a 20% plus gross margin in the quarter. When you’re looking at the balance of the year, we’re still optimistic.
We still view opportunities to improve gross margins and we remain confident that we’re going to be above 20% and hopefully we’ll see first half – or excuse me, an improvement over the first half.
Jon Tanwanteng – CJS Securities
Okay. Got it.
And then, I guess on the petrochemical opportunities there, how many plants do you think are really out there and what is the revenue margin opportunity for each one, maybe an average project?
Mike Lucas
Well, when you’re looking at the petrochem, this is new relative to recent history. There are a lot of projects, the number are probably north of 10 that we know of, that are in the engineering firms.
How many of these will come out of the preliminary engineering analysis and will go forward in the near term remains a big question. When you’re looking at our opportunity, the size of these projects are significant.
I would view the opportunity of each of these projects to be what we would consider a large project. From our perspective, it’s something that’s going to be north of $35 million.
Jon Tanwanteng – CJS Securities
Okay. Great.
Thank you. And then, can you talk a little bit more about the pressures on the IEC market, what’s going on there?
Are your competitors taking a hit on the margin and what percent of your revenue is that actually?
Mike Lucas
Yeah, the IEC business product line, which is mainly manufactured and managed out of our UK business. There was a couple of orders we had in the plan for the first half that did not materialize.
We see some slowing in the activity and a little more competitive price pressures. So, we’re taking down our outlook for the IEC product line for the rest of the year.
That product line is still probably less than 10% of our revenue.
Jon Tanwanteng – CJS Securities
Okay. And then, I guess given the reduction in your revenue guidance, which portion was attributable to IEC and what’s more just projects being pushed down to other businesses?
Mike Lucas
It’s roughly about two-thirds attributed to the IEC product line and about a third in customer push-outs.
Jon Tanwanteng – CJS Securities
Okay. Great.
And, then one last one, how have orders trended through April? Have you gotten any read yet?
Mike Lucas
For April, no, no outlook yet. We’ll have that at the end of the week.
Jon Tanwanteng – CJS Securities
Okay. Great.
Thank you very much, guys.
Operator
Thank you. Our next question is from the line of Brent Thielman with DA Davidson.
Please go ahead.
Brent Thielman – DA Davidson
Hey. Good morning.
Don Madison
Good morning, Brent.
Brent Thielman – DA Davidson
Question just on construction cost, can you give us a number of how much you’ve absorbed here year-to-date?
Don Madison
I’m sorry, are you talking about the new facilities?
Brent Thielman – DA Davidson
That’s right. Yeah.
Don Madison
The new facilities year-to-date, we have spent about $27 million. Project to date we spent just under $40 million.
Brent Thielman – DA Davidson
Okay. Great.
And then, can you talk a little bit about what you’re seeing, I guess, on the order front or enquiry front on the offshore side of the business?
Don Madison
It’s been very healthy right now and we’re expecting it to actually continue to get stronger into 2014. It’s healthy now.
Brent Thielman – DA Davidson
Okay. And, then just one last one, if I could sneak it in.
On the SG&A side, I mean, decent year-over-year growth. Don would you expect that to accelerate from here, can you kind of give us a sense of just the trends you’re seeing?
Obviously, some help there would be....
Don Madison
No. At this point in time, our best view on what the balance of the year holds is probably relatively flat to what we recorded in our second quarter.
This year, we are seeing a much heavier mix of projects that are coming in through channels that would that support third party sales commissions are – in addition to our internal cost, we have looked at how we’re wanting to be growing the business in 2014 and beyond, and we adding people into the sales sides of the business, and we’re still looking to hire a couple of more between now and the end of the year. And that – the third item that’s impacting the year-over-year changes are incentives competition cost, which, in our company, the long-term is over three-year period, and we’ve got to be doing estimates not only for the current year, but future years that do impact those accruals.
But the bottom line is, I would look at the balance of the year being roughly flat with the second quarter.
Operator
Thank you. Our next question is from the line of John Franzreb with Sidoti & Company.
Please go ahead.
John Franzreb – Sidoti & Company
Good morning, Mike and Don.
Mike Lucas
Good morning.
John Franzreb – Sidoti & Company
Could you talk a little bit about the variability in the incoming order book from quarter to quarter and what’s driving that?
Mike Lucas
I think what you saw in the first half, as you know, we had record levels in the first quarter, including a very large project in those numbers that was north of $50 million. It’s kind of the lumpiness of the project business and some timing that came in the first quarter that we’d anticipated in the second quarter.
So, the second quarter was pretty modest, but it’s up over last year and we’re expecting the second half to be stronger than the first half.
John Franzreb – Sidoti & Company
Mike, what do you define as strong order activity?
Mike Lucas
For the second half?
John Franzreb – Sidoti & Company
In general. In the press release, you mentioned you’re confident in strong order activity.
Now, what would you consider a strong order book from quarter to quarter?
Mike Lucas
Well. It will still continue to grow in the second half.
Like I said, I think the second half – the second half orders will be stronger than the – than this – this quarter obviously was a low watermark, but the quotation activity is very healthy. The funnel, when you look at the number of opportunities coming in and the number of quotes we’re doing, has been running very steady for about four, five, six months now and we’re expecting those orders to pop in the second half.
John Franzreb – Sidoti & Company
Okay. And could you just talk a little bit about last quarter, you said there were orders being pushed from Q2 into Q3.
Is that – are we still looking at a bulge in the revenue picture in the June quarter or has there been a shift again in the timing of deliveries?
Mike Lucas
Sorry, maybe I wasn’t clear on that. When I talked about the timing shift, it was actually Q2 orders that we pulled into Q1.
That was a part of setting that record level volume in Q1, though it was really timing, Q2 orders coming in slightly earlier than we’d anticipated to set that record in Q1.
John Franzreb – Sidoti & Company
As far as revenue?
Mike Lucas
No, I thought you said orders?
John Franzreb – Sidoti & Company
No, I meant revenue.
Don Madison
When you’re looking at revenues, we still view our third quarter as a – probably could end up being the strongest quarter of the year.
John Franzreb – Sidoti & Company
Okay.
Don Madison
Third quarter is still – the scheduling it, it appears to be firming up. The schedule shifts that we’ve alluded to and the – are basically projects that we had anticipated being active on in the fourth quarter and now, it appears that they’re slipping and probably won’t get started until the first quarter of our fiscal 2014.
John Franzreb – Sidoti & Company
Okay. And one last question, of that $0.25 of cost associated to new facilities, how much have we absorbed so far?
Don Madison
Year-to-date, we have incurred a few hundred thousand dollars. The exact number, I don’t have.
But I would say it’s in the plus or minus $400,000 year-to-date. The vast majority of that will be incurred in our fourth quarter.
Some we’ll probably could hit early into the – late in the third, but the vast majority of that’s going to be a fourth quarter occurrence.
John Franzreb – Sidoti & Company
Okay. Great.
Thank you very much, Don.
Operator
Thank you. Our next question is from the line of Noelle Dilts with Stifel Nicolaus.
Please go ahead.
Noelle Dilts – Stifel Nicolaus
Thanks. Good morning.
Could you comment on the trends that you’re seeing in the utility market? Are you starting to see any sort of acceleration in that piece of the business?
Mike Lucas
Well, I mean, it’s really remaining pretty flat. What we do see now is a lot of peaker plant addition to – just for the spike in capacity loads.
But right now, we’re still looking at that as generally flat through this year and probably into 2014, we’re not seeing it yet.
Noelle Dilts – Stifel Nicolaus
Okay. And then on the pipeline side, you mentioned pipelines as a strength.
Could you just go into little bit more detail on where you see that opportunity, talk a little bit about that type of opportunity you see from pump stations and then, how much exposure do you have to that type of work right today?
Mike Lucas
It’s a growing piece of the business. If you look at the industry numbers that are published, pipeline construction has about tripled this year over the past couple of years in capital spending pipelines.
We think that’s going to remain healthy at those levels for the next few quarters, so I can’t give you a percentage of our total business that’s pipeline construction, but we are seeing very healthy activity in that level and will continue for a few more quarters.
Noelle Dilts – Stifel Nicolaus
Okay. Great.
Thanks.
Operator
Thank you. Our next question is from the line of Jon Braatz with Kansas City Capital.
Please go ahead.
Jon Braatz – Kansas City Capital
Morning, gentlemen. A couple of questions, or at least one question.
You talk about the resource constraints across the industry and yet at the same time, the order flow is very strong. When you look ahead at some of these petrochemical plans are released for bid and business continues to be pretty good elsewhere, how will that manifest itself?
Can that manifest itself in your margins and – or more project delays? What kind of impact can these resource constraints have on your business, as you look ahead over the next year or so?
Mike Lucas
The most challenging part of it right now is trying to – is trying to predict the month-to-month and quarter-to-quarter revenues on it. When you lay out schedules, there seems to be milestones missed along the way.
The main impact we’re seeing is the predictability of when the milestones will occur and thus, the revenues occur. Some of these projects are also getting more complex, because they’re pulling in international engineering firms to do some of the work, so the chain of communication and coordination and approvals is more complex.
Sometimes, that’s adding delays to the schedule. But the most significant impact we see is timing of the revenue.
Jon Braatz – Kansas City Capital
So, really not necessarily an impact on the margins?
Mike Lucas
No. Not that I can see directly, no.
Jon Braatz – Kansas City Capital
Okay.
Don Madison
Jon, let me qualify that. When you’re looking at the actual project margins, I would agree with what Mike says.
But when you’re dealing with shift and schedules at our factories, there is the risk of inefficiencies, which do put downward pressures on our margins. Overall, I think Powell is very good at managing that and minimizing it, but that downward pressure is real and is a risk.
Jon Braatz – Kansas City Capital
All right. Thank you, Don.
Operator
Thank you. (Operator Instructions).
Our next question is from the line of Julian Allen with Spitfire Capital. Please go ahead.
Julian Allen – Spitfire Capital
Hi, good morning. I just have a quick follow-up on the $0.25 charge for later this year.
To what extent does that reflect unabsorbed overhead in the new facilities you ramp up utilization versus below the gross margin line expenses incurred as you complete the facility?
Don Madison
I don’t have a good split on that. But, a portion of it is the hiring and the training of people that will have to be ahead of the actual production.
So if you want to call that advanced hiring and training of personnel under absorption, that portion of – is a significant amount of the $0.25. So, you will see a sizable amount of that in depressed margins, particularly in the fourth quarter, as we push hard to ramp up the personnel and we’ll be focusing on bringing in many of them.
So that’s where the tailings will be in the – late in the third quarter as that effort actually gets started. But that’s – the people side of it is the bigger piece as opposed to the physical moving of equipment.
Julian Allen – Spitfire Capital
And, Don, how do you trade off the additional capacity that the new facility gives you versus the speed at which you think you can fill that? And which segments out there do you think will help you get that utilization up to a level that you hope to achieve in the next year or so?
Thank you.
Don Madison
Well, clearly, the hottest market and the area where we think we will be able to reach what you would consider a practical or planned capacity is going to be in Edmonton, the Canadian facility. The market up there is very strong, that we are having to backfill production with work out of Houston, and we’re having to outsource more activities than we would like to.
All of those will allow us to bring business in, part of it to increase top line, but also part of it will be to improve margins because of bringing that into a more cost-effective environment. So that when you’re looking at the revenue dollars in Canada today versus tomorrow, they will not grow as rapidly as what we hope to see in the bottom line because of the displacement of outsourced operations and the displacement of having to do work.
Basically today, all sheet metal parts are being manufactured here in Houston and we having to shift them 2,000 miles to 3,000 miles north for virtually every project that we’re manufacturing today. Those cost eliminations are a big part of our short-term strategy.
When you’re looking at the Houston facility that we’re expanding here, clearly that probably has a slightly longer time horizon before we would reach a level that we would hope in that facility. Again, a big part of that from a timing perspective is going to be what we see on the Gulf Coast, a lot of that’s going to be there to support a petrochem spin.
Julian Allen – Spitfire Capital
Got it. Thanks very much.
Operator
Thank you. (Operator Instructions).
We do have a follow-up from John Franzreb with Sidoti & Company. Please go ahead.
John Franzreb – Sidoti & Company
Don, you may have addressed some of this in most of your recent comments, but I was wondering a little bit about capacity utilization companywide, how much flexibility do you have in moving projects around to satisfy the current order book, are you essentially maxed out?
Don Madison
Well, today we’re running at a slightly lower level where you were last year. When you were looking at our peak mid last year, we were extremely compressed and the flexibility that we had was relatively limited.
The knowledge of that what’s coming in front of us is what one of the key reasons that we said that it’s time to expand our footprint, because we can’t continue to have – to support organic growth with our current footprint. When you’re looking at what we’ve done the first six months of this year, our footprint has not been the key constraint.
We have been able to support all the projects. We’ve been able to bring in the engineering project management resources we need, that we have not hindered our revenue growth.
Our revenue growth this year is year-over-year change is strictly driven to the customer timing of projects.
John Franzreb – Sidoti & Company
Okay. And can you give us a quick update on the settlement gain or potential that you had from Powell Canada, that project?
Is there any update on that?
Don Madison
Well, I mean, about the only thing I can say is that we had a asset purchase agreement to acquire the business. There were various reps and warranties in that asset purchase agreement, which we pursued.
The most obvious are going to be some bad debts, some excess and obsolete, some other financial evaluations that were provided that we used. In our analysis at the end of the day, some of them were very easy and clear-cut bad debt.
Some of them were a little more difficult to document in detail, but basically, we were able to sit down with the prior owners, and we had a settlement where, as you would expect, in most all situation, we both walked away feeling that we were disadvantaged. But at the end of the day it was the right thing to do to cut our costs from a legal and project perspective and settle that.
We settled it for approximately $1.7 million gross. When you’re looking at the cost in the current year, we’ve probably incurred about $200,000 of cost in the current year to pursue this claim.
So, the net impact is on the year is in the order of magnitude of plus or minus $1.5 million.
John Franzreb – Sidoti & Company
Don, just to clarify, I guess what I was asking about was the project settlement from the job you were doing just over a year ago, I guess, now.
Don Madison
Okay. You’re talking about the project settlement, that is still ongoing.
John Franzreb – Sidoti & Company
That’s what I was asking about.
Don Madison
You’re looking at the project that created the hole for us in the first half of last year.
John Franzreb – Sidoti & Company
Correct.
Don Madison
That project, excuse me, that claim is still ongoing. We have had active dialogue with the – our client and trying to settle this before going to arbitration.
But we are still pursuing the legal recourse as well. Currently, if things go to the end, we have a binding arbitration that is currently scheduled for November of this year.
But we’re still reasonably – look at it this way. We’re still pursuing every opportunity we can to reach a fair and equitable settlement without having to go to the November arbitration.
John Franzreb – Sidoti & Company
Okay. Thank you very much, Don.
Operator
Thank you. Our next question is a follow-up, actually, our next question is from the line of Beth Lilly with GAMCO Industries, please go ahead.
Beth Lilly – GAMCO Industries
Good morning.
Don Madison
Good morning, Beth.
Beth Lilly – GAMCO Industries
I wanted to just spend a minute and talk about – in your prepared comments, you talked about your gross margin at 20% and your – and you believe that there is room to expand that. Would you talk a little bit more about where you’re seeing the opportunities in the gross margin line?
Mike Lucas
There’s probably two pieces to that. One is just operational improvements, and that is a key internal focus area for us.
That’s kind of the typical levers, material containment actions, cost reduction programs, productivity improvement. We’re working a lot of levers on the operational improvement and a little bit on price, mainly making sure we get the inflationary cost to pass through properly, and there’s no leakage on that.
Those would be the two gross margin improvements.
Beth Lilly – GAMCO Industries
And do you see those flowing through in the next year or so or is – is this going to be something that we’ll start to see two years from now and then the second question is, are you willing to talk about where you think you can drive them to?
Mike Lucas
Yeah, it’s a little too early to talk that far out. I think you see a little bit of that even in today’s results.
But it’ll continue to improve quarter-over-quarter over the next few quarters. It’s not two years out, it’s kind of incremental improvement quarter-over-quarter.
And I think you’re even seeing a little bit of that today.
Beth Lilly – GAMCO Industries
Okay. Great.
Okay. Perfect.
And then, I just wanted to follow up on that that contract of a year ago. So you’re negotiating, but eventually, it may go to arbitration in November.
Is that what I need to understand?
Don Madison
That is correct. I mean we’re still in dialogue or have been in dialogue with our clients.
We’ve had meetings that’s taken place in the last 90 days unsuccessful to date. But at the end of the day, we are pursuing further terms of the contract, binding arbitration, which is currently scheduled for November.
Beth Lilly – GAMCO Industries
Okay. And, Don, would you remind us, so you’ve collected on the money that – for the project itself, but there’s cost overruns and things like that are still owed to you?
Is that the situation?
Don Madison
There’s two issues there. First off, the contracts had multiple change orders that were approved, and then towards the latter part of the project, we got directed changes that never got priced, and therefore, never got an approved purchase order or change order to support the extra work that we were directed to do.
In addition to the directed scope change, clearly, there were a lot of impact changes as a result of, we were dependent upon material from the client, we were dependent upon engineering drawings from the client, we were dependent upon a lot of information to complete our activities, and those activities did not occur in a timely manner as one would expect in the execution of a project. So therefore, we had inefficiencies and incremental costs associated with that.
So there are – there’s two issues there. One is the directed change orders of scope change, the other is the impact of the information and materials being provided by the client.
From a collection standpoint, we have collected what has been invoiced, but there was a retention element. The retention element is still on the balance sheet, Beth, I think we noted in our filings at approximately $1.4 million.
Beth Lilly – GAMCO Industries
Okay. And they still obviously owe you more money.
Don Madison
That is correct. That’s our viewpoint, yes.
Beth Lilly – GAMCO Industries
Okay. So, I just want to be clear.
So you’ve collected what you’ve invoiced?
Don Madison
Less the retention.
Beth Lilly – GAMCO Industries
Except for all the change orders and that’s – and in essence, that and the materials is the essence of the dispute?
Don Madison
That’s the – the major issue is the value of the scope change and the impact associated with our execution of the project that was created by the client and/or other subs, outside of our control.
Beth Lilly – GAMCO Industries
Okay, great, very, very helpful. Thank you very much.
Those are all my questions.
Don Madison
Thank you, Beth.
Operator
Thank you. Your next question is a follow-up from the line of Noelle Dilts with Stifel Nicolaus.
Please go ahead.
Noelle Dilts – Stifel Nicolaus
Thanks. Just a quick question.
I was wondering if you could tell us year-to-date, what percentage of your sales have come from the offshore market?
Don Madison
Honey, we don’t have that specifically, but when you’re looking at – that is a market that is growing. In the order of magnitude, in a good year, it can reach around 10% of our business.
This year, it could actually be slightly over 10%.
Noelle Dilts – Stifel Nicolaus
Okay. Great.
Thanks. That’s helpful.
Operator
Thank you. And we have no further questions at this time.
I’ll turn it back to management for any closing remarks.
Mike Lucas
Well. I just want to thank you all, again, for joining us today.
As always, we very much appreciate your interest in Powell Industries and we’ll talk to you next quarter. Bye, bye.
Operator
And ladies and gentlemen, this concludes Powell Industries’ second quarter earnings call. If you’d like to listen to a replay of today’s conference, please dial 303-590-3030, with the access code of 4614375.
ACT would like to thank you for your participation. You may now disconnect.