Dec 16, 2009
Executives
Karen Roan – Investor Relations DRG&E Patrick L. McDonald – President, Chief Executive Officer Don R.
Madison – Executive Vice President, Chief Financial Office, Chief Administrative Officer
Analysts
John Franzreb – Sidoti & Co. Brent Thielman – D.
A. Davison & Co.
Fred Buonocore – CJS Securities Ned Borland – Next Generation Equity Research Craig Bell – Madison Williams Jonathan Bratz – Kansas City Capital [Brian Raffin – Morgan Keegan Capital Management] [William Breemer – Maxim Group]
Operator
Welcome to the Powell Industries Incorporation fourth quarter 2009 earnings conference call. (Operator Instructions) I would now like to turn the conference over to Karen Roan with DRG&E.
Karen Roan
Good morning everyone. We appreciate your joining us for Powell Industries conference call today to review 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 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 R.
Madison, Executive Vice President and Chief Financial and Administrative Officer. I will now turn over the call to Pat.
Patrick L. McDonald
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 a 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 with 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 R.
Madison to review our financial performance for the fourth quarter. Then, I will make some final remarks.
Don R. Madison
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 an 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 and property, plant and equipment during fiscal 2009 totaled $1.8 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 $2.00 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.
Patrick L. McDonald
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 switch gear 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 for 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 be where our customers have interests and where our future customers have activities.
Like the S&I acquisition in the U.K., 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 up graders. They also have manufacturing operations which include medium voltage switch gear 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 also 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 manufactures arc resistant switch gear, and Powell has been a leader in arc resistant technology for many years and having an arc resistant switch gear and other products manufactured in Canada for the Canadian market is in our future plans.
In addition, the Canadian region provides an excellent platform for substation automation activities and we believe our ability to delivery high value solutions will make Powell the supplier of choice. The high service content is a critical element in 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 a 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 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
(Operator Instructions) Your first question comes from John Franzreb – Sidoti & Co.
John Franzreb – Sidoti & Co.
Given the operating environment you’re entering, have you thought about what kind of cost savings initiatives you might have to put in place or even trying to keep the operating structure at the status quo?
Patrick L. McDonald
John you know as we’ve talked about 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 and 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.
John Franzreb – Sidoti & Co.
But nothing is concrete on the board yet?
Patrick L. McDonald
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.
John Franzreb – Sidoti & Co.
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 of a potential quarter in the future where revenues would be about $100 million?
Patrick L. McDonald
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 the revenue stream flows over a longer period of time, I would say and the clear answer to your question, if orders kept on that pace for a sustained period of time, there’s a reasonable expectation 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.
Don R. Madison
Keep in mind that the order flow that you’ve seen historically does not include PowerComm, so when you’re looking at the quarter’s revenues going forward, there will be not only the historical business, but there will be an incremental revenue stream coming from the PowerComm organization.
John Franzreb – Sidoti & Co.
And since you mentioned it, Power Comm, you’re assuming roughly 10 months of revenue incrementally in your revenue forecast or am I assuming wrong?
Don R. Madison
Not in the half, but you can round it up or down.
Operator
Your next question comes from Brent Thielman – D. A.
Davison & Co.
Brent Thielman – D. A. Davison & Co.
Relative to the guidance for fiscal 2010, I mean you’re obviously implying that you expect margins to compress in here and I’m just wondering how much of that is related to profitability built into the new awards that you’re getting right now maybe versus the volume through your facilities less operating leverage and maybe could you talk about the bidding environment in general, how competitive its gotten, just some commentary around there.
Patrick L. McDonald
The bidding environment in general is again, as we talked about on the last couple of quarters, every manufacturer is bidding every project. There’s 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 volume, so I think it is a competitive nature, but there is no craziness in 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 one to three 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.
Don R. Madison
There are three elements in that compression though. There is the market price levels, there is the business volume level and 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.
Brent Thielman – D. A. Davison & Co.
On the orders that you are getting, the $100 million in orders, is there a particular pocket of strength that that’s coming from, anything that sort of stands out to you?
Patrick L. McDonald
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 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.
Brent Thielman – D. A. Davison & Co.
You mentioned some of the larger oil and gas projects that are sitting out there and ready to go. Are those North America or are those international projects?
Patrick L. McDonald
Both. The domestic ones, one of the big ones that we were tracking very much for our international business was the Conoco Phillips one in Germany.
That one got totally postponed. So they’re in both areas.
Operator
Your next question comes from Fred Buonocore – CJS Securities.
Fred Buonocore – CJS Securities
We’ve been talking a bit about back orders and hovering around that $100 million level. Just to be clear, since the end of your fourth quarter, have you seen any change in these order trends?
Have you seen things that look like this quotation activity that you’ve been seeing for months and months might be closer to actually becoming orders? Have you seen a quarter where we could start to see a pick up in orders or are we a ways off from that?
Patrick L. McDonald
You know, I’m slightly gun shy. There’s no doubt when we talk to our sales people, and they’re looking at their orders and they think something is imminent, there’s no doubt that in the last two quarters, we have been woefully wrong in a lot of instances in both directions.
I would say this though, we’re looking at quotes are and what is happening, and I think there’s also reality that we have to understand that as we finish a year in September, and predominantly most everybody else finishes their year in December, we think that there will be some level pick up 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 serve area. That affected both PowerComm and our domestic business here because people just weren’t spending at all.
That will cease at some point in time where people have got to start re-spending, especially in the maintenance area to keep their facilities ongoing. So we are seeing some pick up in activity, but I’m very hesitant to say when we think that that will convert into an order.
Fred Buonocore – CJS Securities
In terms of thinking about revenue trends as we go through the year, is it logical to conclude that as you chew through that backlog and before it gets rebuilt with new orders that you kind of see a descending revenue pattern through the year or not necessarily so? I know there’s a bit of seasonality in your business, but some color on that would be helpful.
Patrick L. McDonald
There’s really not a seasonality in 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.
Don R. Madison
The second half of the year is going to much more dependant upon short cycle opportunities relative to the first half. The other thing to keep in mind, I’ll keep reminding everyone, is that the first quarter will have virtually have no impact from the acquisition.
We’ll start getting that pickup layered on top of the historical business beginning in our second quarter.
Fred Buonocore – CJS Securities
I noted in your 10-K that there was quite a bit of revenue pick up year over year in the Asia region. Was this one large project or a couple of very large projects?
Are we seeing a trend here that we should look towards? Can you talk about that and your international business in general?
Patrick L. McDonald
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.
Don R. Madison
Again, it’s oil and gas projects. We follow the projects where they go.
Operator
Your next question comes from Ned Borland – Next Generation Equity Research.
Ned Borland – Next Generation Equity Research
Just a follow up on some cost issues. 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 the level of SG&A we should be thinking about over the year versus previous years.
Don R. Madison
If you look at the last two years, we’ve been $83 million to $84 million. Next year, 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 somewhere I’m guessing in the $81 million to $83 million as SG&A. Part of that variable is looking at and making sure that we standardize our approach from accounting from the acquisition to Powell as well as to the integration costs.
Some of the integration costs will ultimately end up in 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.
Ned Borland – Next Generation Equity Research
So basically we can assume somewhere between $81 million and $84 million or so.
Don R. Madison
Obviously down from the current year.
Ned Borland – Next Generation Equity Research
Back in the transit market, you had that large airport project earlier this year, I was just wondering is 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?
Patrick L. McDonald
We’re still seeing the municipalities releasing and more 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 they are capable to get there based on whether they’ve got to acquire rights, right of way, what the project’s doing and what they’re funding looks like at that point in time.
Some of them are direct and some of them are indirect, so you’ve got to deal with all the EPC’s and everybody else that are in the middle of it.
Ned Borland – Next Generation Equity Research
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?
Patrick L. McDonald
I think there is a lot of different aspects to it. I would say first off, there’s no doubt that 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 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 be prepared to support them where they decide to go make that investment.
Operator
Your next question comes from Craig Bell – Madison Williams.
Craig Bell – Madison Williams
Over the past couple of years as business was expanding for you, you had talked about how you wanted to exceed margins on the upside versus what you did versus the past cycle and then hopefully position yourself for when the downturn came to Powell, when your trough margins would again be better than the last time. Do you still feel comfortable that you’re heading there this time?
Patrick L. McDonald
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 talked about though again, because we have an investment that we keep in the business and 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.
Craig Bell – Madison Williams
Just to clarify on the earlier SG&A question, you’re talking about down slightly this year, is that inclusive of the PowerComm?
Don R. Madison
That is correct.
Craig Bell – Madison Williams
Looking at the financials of PowerComm, it looks like their margins; their gross margins have been running below where Powell has been historically. Is that something that you 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?
Don R. Madison
It’s probably too early to analyze that. When you’re looking at the various pockets of business they have, I think the pockets that are comparable will generate comparable margins.
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.
Operator
Your next question comes from Jonathan Bratz – Kansas City Capital.
Jonathan Bratz – Kansas City Capital
In your release you talk about the EBITDA contribution from Powell Canada of 4.8% to 6.7%. Of course there’s going to some integration costs.
There might be some synergy savings, but on net, will there be net synergies savings and cost savings from this acquisition this year that will positively contribute to the EBITDA assumption that you’re making?
Don R. Madison
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.
Jonathan Bratz – Kansas City Capital
Will that build meaningfully just from the cost savings aspect as we move into the out years?
Don R. Madison
When you have a public company that sheds those public company costs, there is 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 an incremental synergy that will benefit.
The exact valuation of that is something that will play out over time.
Jonathan Bratz – Kansas City Capital
This is more of a longer term question. This week Exxon made a rather bold statement with the acquisition of XTO and I guess one might conclude that there’s going to be an increased investment globally in the natural gas area.
Does it matter, 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?
Patrick L. McDonald
There are 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 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 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.
Operator
Your next question comes from [Brian Raffin – Morgan Keegan Capital Management]
[Brian Raffin – Morgan Keegan Capital Management]
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 new plant, but is cap and trade in the investment internal rates of return and the CO2 issues with EP, is that the only sticking point is it waiting to look at the nuclear mix and how that plays out? Give me a sense of you talked about demand being down and now 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 to go forward with some type of generation.
Patrick L. McDonald
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’s got to give.
Base generation has got to start, and you’re right. A nuclear plant still is in the best dreams nine years and in 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 two-thirds 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.
[Brian Raffin – Morgan Keegan Capital Management]
You talked about a reflation or resurrection of the maintenance spending. Can you look at some of your end markets, oil and gas or chemical pulp and paper, mining, the transit area; are there any end market segments where you might see a re-flation quicker, sooner, in maintenance spending versus the actual recovery of project spending?
Patrick L. McDonald
Let me speak a little bit to what we saw in Canada in working with PowerComm in the acquisition where they see the rebound especially coming in in some of the up graders and infrastructure that they have in Canada right now. So it’s more in oil and gas related.
Personally, in the most recent past we haven’t done a lot on 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 that going.
Again, in Canada, the potash mining is kind of a hot spot right now both for new and for maintenance, so I think we’re going to see some of that coming as people need fertilizers and everything else to grow fuels for bio fuels. 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.
[Brian Raffin – Morgan Keegan Capital Management]
Give me a sense and certainly relative to the transportation highway bill safety, how much does the, I think the last bill took 26 or 28 months to get through. How much leverage in delays funding is your transit side, commuter rails, vehicular transit stations, that type of thing, how much does not having a six year funding authority, how much does that effect the growth of that business?
Patrick L. McDonald
I’m not sure it really does. When you look 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.
The big mass transit, light rail area that was always a matter of government funding 50% and the municipal funding 50%. 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 has been 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. I could be wrong, but I don’t see a lot of that happening there because those are not the “shovel ready” type projects.
[Brian Raffin – Morgan Keegan Capital Management]
You talked a little about cost structure in savings. What are you running shift wise now and certainly the availability of having engineers and not reducing head count, what can you do with flexible shifts, vacation extensions, furlongs?
Give me a sense as to how can you keep your staff as well as mitigating some of those SG&A costs?
Patrick L. McDonald
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 run at 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.
Operator
Your next question comes from [William Breemer – Maxim Group]
[William Breemer – Maxim Group]
Could you provide a little color on your ratio mix between short cycle versus long cycle business?
Don R. Madison
It’s how you define the two. You look at it in the two extremes of the service parts less than a 90 day cycle versus those that are a year, you’re probably looking at 80% to 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.
Patrick L. McDonald
And 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.
Don R. Madison
My numbers were based on historical fact.
[William Breemer – Maxim Group]
So blending in PowerComm, does it become a 70/30 split?
Patrick L. McDonald
I don’t know that we can answer that yet. There’s going to be movement to it being more of 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.
It’s one you could possibly talk about in the future.
[William Breemer – Maxim Group]
You categorize long cycle being?
Patrick L. McDonald
There’s 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’ll continue to see projects that come to us, we did, and can delivery in a six month time window.
That’s why 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 the short cycle projects as we can.
Operator
Your next question comes from [Brian Raffin – Morgan Keegan Capital Management]
[Brian Raffin – Morgan Keegan Capital Management]
The PowerComm, I think you 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?
Patrick L. McDonald
There’s no doubt about it. We talked about it.
We really didn’t concentrate on any of the dial on it, but they went to Kazakhstan. So there’s no, and again we really didn’t 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 the Kazakhstan operation there that can do that.
[Brian Raffin – Morgan Keegan Capital Management]
You CapEx budget for 2010?
Don R. Madison
We’re projecting somewhere around the $6 million to $8 million mark.
[Brian Raffin – Morgan Keegan Capital Management]
And then maintenance would be what percentage of that?
Don R. Madison
If you look at maintenance spending, historically it’s been in the $3 million to $5 million range. It varies year to year.
Operator
Your next question comes from Fred Buonocore – CJS Securities.
Fred Buonocore – CJS Securities
Just wanted to follow up on your discussion around William’s question with the intermediate cycle you were talking about. Just to clarify, you’re saying that six month, that book and ship within six months, that’s kind of mid cycle project time line that falls into that 80% of your business group right now?
Is that right?
Don R. Madison
It would not be what we would typically call a short cycle business that is correct.
Fred Buonocore – CJS Securities
But this is where you see the opportunity potentially this year that could kind of change the dynamics of your guidance. Is that right?
Don R. Madison
That is an upside opportunity, part of the reason of the window of the guidance.
Patrick L. McDonald
Understand also, 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, the shorter the 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.
Fred Buonocore – CJS Securities
So it’s not necessarily different types of projects. It’s not 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 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.
Patrick L. McDonald
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 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 and market segments that we haven’t participated in to the extent that we’ve participated in our industrial side of things.
Operator
Your next question comes from Jonathan Bratz – Kansas City Capital.
Jonathan Bratz – Kansas City Capital
Given your revenue expectation for this year, do you think it’s fair to assume that maybe you can take another $20 million to $25 million out of working capital?
Don R. Madison
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 at this point in time.
Jonathan Bratz – Kansas City Capital
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?
Don R. Madison
If you’re looking at it beyond and including the purchase price, at this point in time it’s too hard to say. If you’re looking at it with the purchase price, don’t look for tremendous upside opportunity above and beyond that.
Operator
At this time there are no further questions. I’d like to turn the call back over to management for any closing remarks.
Patrick L. McDonald
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 holiday. Enjoy your families, your time.
Be safe, and come back and join us again next quarter. Thank you very much.