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PowerSecure International, Inc. (NYSE:POWR)

Q3 2010 Earnings Call

November 04, 2010 5:30 pm ET

Executives

Chris Hutter - CFO

Sidney Hinton - CEO

Analysts

Rick Hoss - Roth Capital Partners

Eric Stine - Northland Capital

Rob Brown - Craig-Hallum

William Bremer - Maxim Group

Amit Dayal - Rodman & Renshaw

Michael Legg - Merriman Capital

Dick Ryan - Dougherty

Operator

Good day, ladies and gentlemen, and welcome to the third quarter 2010 PowerSecure International Inc. earnings conference call. My name is Amanda and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will facilitate a question-and-answer session towards the end of today’s conference. (Operator Instructions)

All forward-looking statements in this discussion are made under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are all statements other statements of historical facts including but not limited to statements concerning future financial performance and the outlook for the company.

Forward-looking statements are not guarantees of future performance or events and are subject to a number of known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from those expressed, projected or implied in this discussion. Important risks, uncertainties and other factors include, but are not limited to, those factors identified in the company's most recent annual report on Form 10-K as well as subsequent reports on Forms 10-Q and 8-K.

Accordingly, there can be no assurance that the results expressed, subjected or implied by any future looking statements will be achieved and listeners are cautioned not to place undue reliance on any forward-looking statements. The forward-looking statement in this discussion are only as of the date hereof and the company assumes no duty or obligation to update or revise any forward-looking statements contained in this discussion.

I'd now like to turn the call over to your host for today, Mr. Chris Hutter, Chief Financial Officer. Please proceed, sir.

Chris Hutter

Thank you and welcome everyone to the PowerSecure International, Inc. third quarter 2010 earnings conference call. Thanks everybody for your time and interest in our company. With me here today I have Sidney Hinton, our Chief Executive Officer. And our agenda would be that Sidney will provide an overview of our third quarter performance and also the strategic business discussion about each of our businesses. I will then provide more detail on our third quarter financial results, our balance sheet, and our backlog.

Overall, again this quarter we're going to try to have a more efficient call and really finish the call in about an hour and also one additional feature regarded a near live real life transcript on Thomson Street Events that hopefully will help those of you to subscribe to that service, digest the information a little more efficiently and so those of you have access to it can let me know how this new feature works. We'll open up the line for Q&A after Sidney and I make our comments, and then Sidney will wrap up with a few closing remarks.

And with that, I will turn it to Sidney.

Sidney Hinton

Thanks, Chris. Good afternoon. Like to acknowledge our customers and utility partners that have logged in, we appreciate your interest and your support, and also acknowledge our investors who dialed in, we appreciate your support and interest.

As always, when we start this call, we like to summarize our key messages and we have four major headlines that I'm going to summarize for you upfront and then I'll dive a little deeper. The four major headlines today are first that we are very pleased with the third quarter results. We finished higher than we anticipated. In the third quarter our revenue starting 31.4 million and our earnings per share were $0.03.

We are very happy with the results of each of our business units including the strong year-over-year gains in our Distributed Generation unit, which was up 29%; our Utility Infrastructure, which was up 38%; and our Southern Flow business, which was up 23%. The only business we which didn’t save the prior year was EfficientLights business, and they had a difficult comps with the third quarter of last year just due to a surge in orders we had at the same time last year. But as we'll talk about the minute the groundwork we've laid this year has resulted in several retailers budgeting significant dollars for EfficienLlight installations in 2011. And we are excited about those opportunities and we're anticipating 2011 being a strong year for EfficientLights.

So the first message is Q3 was strong, we liked it. The second message is our backlog is at all-time high, $138 million which is a full $48 million higher than this time last year. We made terrific progress in our sales for 2011 and our backlog is well balanced with a combination of near term and long term revenues.

Additionally, and significantly, I'll go a little deeper. Each of our businesses has a nice foundation of revenues in the backlog which combined with the opportunities in their pipeline are either proposals we have out and we're working that we've not signed yet, that put us in a really nice position looking out for 2011 and beyond.

Third, our investments that we're making in each of our businesses are bearing fruit and they provide us with a terrific set of growth catalysts and specifically in our Distributed Generation, our Energy Efficiency and our Utility Infrastructure businesses. Each one of those businesses, and I am going to dive deeper on this bullet, probably the deepest of all in this one in just of couple of minutes. But we are very excited about the technology and product development investments that we've made over the last several quarters and we're excited about the position and the order of magnitude of the opportunities that we're in position to pursue and critically harvest.

The fourth message is we're particularly excited to report next that our cash position has continued to grow, as we anticipated. The investments we made in working capital to support our growth earlier in the year are now turning into positive cash flow. In fact we finished the quarter with 14.7 million in cash and 7.5 million on our revolver. Since then we’ve repaid another 2.5 million, down to a $5 million balance on the revolver.

We have a track record of making investments in working capital as a growth enabler, in each of our businesses and as Chris will discuss in a moment, we expect our cash position to continue to grow as we move through the rest of the year. So those are the four key messages. One, strong key three; two, the backlogs at all-time high; three, we're in great position on the growth callus; and four, cash position has grown, and we anticipate to continue growing.

Now let me dive deeper on the third quarter results, the first message. First our DG business; Distributed Generation grew 29%, continuing what had been a great year for our DG, which has grown substantially in each quarter in 2010. I’ll remind you that in the first quarter our growth was 42% in DG, in the second quarter it was 55%. Our success has being driven by broadening, deepening penetration of key customer targeted categories including a wide range of manufacturers, datacenters, hospitals, municipal installations and military installations.

Additionally, our recurring revenue base of business for the DG was $1.8 million and our backlog for recurring now stands at $61 million. Both of these recurring revenue results, the quarter’s revenue and the backlog, are new house as we continue to build a base of long-term recurring revenue into our business.

The foundation for the growth and success of our DG business is our expanding utility relationships and how our unique approach is increasingly being embraced by the utilities because of our strong value proposition and our technical capabilities. Additionally, the outstanding work of our PowerSecure team has enabled us to develop significant innovations in the areas of generation system technology switch gear design and monitoring systems and I will dive a little deeper into this and I will go through the third bullet which is the growth catalyst and how we are so well positioned. And because of the innovations in our proprietary DG systems when your prime investors are encouraging you to just make a note of that as that’s a hook to put on the back of your door to hang because we are asking the hang value there. We've been making investments and we really like where we're at. But their key ingredients to our success today even more so looking out in the future.

Our DG team, with the success we have had, actually building brand recognition in the market place and that we are seeing an increasing ability to leverage that across all of our business lines. Next move into our utility infrastructure business and then we’ll talk about the four business segments here. The Utility Infrastructure business grew 37.9% which was very close to the growth rate we posted in the second quarter and it continues to be driven by the success of our Utility Services team is having with several top utilities with construction and maintenance services.

Our Utility Services team is quite busy. They are running wide up and their terrific execution for our utility partners is leading to even more opportunities both with those utilities and with additional large scale utilities. This includes provide an additional scope within utilities we are serving as well as the same services that we already provide to new utilities. We mentioned last quarter how pleased we are to avail the report the strong growth results I guess the overall soft environment for utility infrastructure spending.

Well even more encouraging is that based on the positive activity we are seeing in the pipeline we believe that that environment is improving the overall environment relative to utility spending on infrastructure. And we are optimistic that we could find the wind at our back in this business unit during 2011. Just add a little more color on this we are seeing an increasing number of our [accused] including some for very large infrastructure projects.

Moving on to our Energy Efficiency business, our revenues in this business were lower than last years third quarter by 24%. This was driven by $3 million of lower revenue from our EfficientLights LED lighting product which totaled $5.1 million in sales for the quarter and versus some difficult comps from the prior year due to a surge we had in the third quarter of 2009.

Our EfficientLights revenue this year has been more steady. With our EfficientLights team working against three major goals relative to development of their business. Those three major goals were one a strong execution on this years large retail installation program i.e. harvest the fruit that we have in hand and doing the way that makes us being more of that crop from those customers next time they order.

Two developing new LED lighting products to provide a full suite of in-store and outdoor lighting solutions for retailers and then three introducing, so two was developing these new products and three is introducing our lights to new retailers to drive new customer adoption of the technology. On each of these three goals our EfficientLights team has made very good progress this year.

Among other things we’ve done the execution of our large retail rollout programs is going extremely well. In every case we’ve experienced repeat buying by the retailers who have installed our lights, a true testament for the quality and efficiency of the product. Two, we have completed the development and introduced our new walk-in cooler and shelf lights to the retailers and those parts have been very well received. So we are expecting those products to generate a significant amount of revenue in the next six months. Now also, we are reintroducing our new parking lot light and have been ready for customer valuation sometime between this quarter and the first quarter and in fact we host to the customer today seeing the light and the initial feedback is very positive.

Based on the dollars and the feedback we are getting from our customers, we believe that 2011 is going to be a strong year for EfficientLights. In fact we believe that the products we already have in hand not including the parking lot light will generate 25 to 30 million of revenue for us in 2011. With an increased and one aspect of that we will represent an increasingly diverse base of customers and products. Not just one product, and more customers, more retail changes.

Again 25 to 30 million of revenue in 2011. Before we raised the energy efficiency area our new IES lighting business generated $1 million of revenue during the third quarter very much in line with what we were expecting and our IES team is focused on several multi-million dollar opportunities for 2011 including their new area light and so with several utilities and institutions have already purchased for evaluation including an international municipality and we have received very positive feedback based on the performance of the light. Continuing with IES they are also chasing some big opportunities with both electronic OEMs and large retailers to supply them with our power drivers with our LED we will talk about that a little bit more in a minute and as well as they develop several new lighting applications including overhead lining, special lighting both for OEMs and for products that are secured with sales directed to the market.

And the last business segment relative to the third quarter results is our energy services business and they had a terrific quarter both top and bottom line results. Southern Flows third quarter revenues of $5.1 million made it the second highest quarter in their history. Additionally, their operating income of $781,000 was up 75% versus the third quarter of 2009. We definitely want to recognize and thank our Southern Flow team for their great job they are doing in execution of their new growth strategy. Their revenue of profit was drawn sequentially all year long there is direct result from the focus and commitment of the self growth leadership thing and how they have embraced and executed their strategy to enhance their growth profile. We are very encouraged with about the consistent positive results of Southern Flow dispersing, we are optimistic that this trend will continue, as we completed 2010 and move into 2011.

Additionally we move in to WaterSecure our income from WaterSecure was $734,000 which result 37% due to increases in natural gas production in Colorado as well as the firming up ball prices.

Now lets move to the second major topic and for those of you watching you watch, this is going to move faster and that is that our backlog is at all-time high of $138 million, it’s a $48 million higher then this time last year. In a minute Chris will walk you through the backlog in detail but let me provide you three quick comments; the first comment is we have definitely seen an order flow pickup in the last 60 days after a variable pullback during the second quarter. We know there is a lot of discussion about a double debt in the recession.

Specifically, we saw retailers they seemed to be more impacted by this relative to capital expenditures which affected EfficientLights the most. The good news is we've seen a strong rebound from that in the last 60 days and we are all through a strong and promising start for 2011.

Last two comments about the backlog one quantitatively its healthier than ever. With a balance of both near term, long-term and recurring revenues, it provides a great foundation to build from. Qualitatively this also healthier it includes revenues from a diverse group of customers and a diverse group of projects that it stands across all of our business plans.

Importantly, they included orders for many of the items that I am going to discuss next about growth catalyst. I was getting orders for the things we're investing in that we believe will drive our growth in the future. That’s the discussion on the backlog.

Moving now to the third and this should be taking the majority of the time in the prepared comments. The investments that we are making are very improved and they provide us with a terrific set of growth catalyst and I am going to talk about those growth catalyst in each of the business segments, right quick specifically in the DG energy efficiency and utility infrastructure.

In the distribute generation we continue to make progress towards growing our DG programs with several top US retailers. Last quarter we announced a major retailer had awarded us a contract to deploy an initial group of DG systems, it was a recurring contract for $5 million with the significant opportunity to expand.

I am pleased to report they were already in discussions about our second wave of deployments for this retailer and we are optimistic that the second wave will be deployed in 2011. Additionally, we are in advanced discussions relative to implementing recurring the revenue programs for us with two other large retailers. So, we are very pleased with that progress around our strategy of retailers in our recurring revenues. That’s a growth catalyst right there, the retailers.

Moving on but staying in DG, one of the key enablers of the catalyst for this growth is our proprietary generated technology. Our generated technology than we have been developing, it gives us advantages in areas of performance, in areas of fuel efficiency, in the areas of cost and the areas of standardization and in the areas of speed to market. And we are in the process of developing additional proprietary technologies around these generator packages that provide us with additional significant advantages in the marketplace in 2011 and beyond.

In fact, the generator packages we opt today, not looking at the additional advantages we are building into for 2011. They’ve helped us grow in many of our categories, including data centers, hospitals, financial services and large manufacturers because of the performance spend and their standardize modulated design. The capabilities that have been provided by the technology have already positively impacted our sales and our backlog and this is an investment in technology that we believe will pay for itself 1,000 times over. This is a high point of leverage for us.

Staying into DG, but relative to accounts in a place for investment, that’s our utility relationships and the fact they’ve continue to grow, many of these relationships have been forced in the last 24 months and more and more we are finding that utility’s awareness of our brand and innovative approach are helping us reduce the sale cycle associated with establishing a productive utility relationship and productive mean fruit bearing or revenue generating. We are excited about the fact that our footprint now extends from coast to coast.

One last point on the DG and that is our international. We have been in discussion with international opportunities for deploying our DG systems and it continues to be an interesting growth catalyst. Our international pipeline is clearly developing and while its difficult to predict when we might see meaningful international revenue, we are very bullish on the potential for selling distributor generation in other parts of the world and we strongly believe that the international market will turn out to be a meaningful growth catalyst in our near versus long-term future. That’s the summary of the growth catalyst in the distributor generation.

Moving to our energy efficiency business; first, our EfficientLights, specifically there are new products, they are walking through the line and the shelf lighting. They’ve both been well received by customers and we expect them to generate significant revenues begin this quarter.

Let me just go back and pull that word back. We expect them to generate significant sales beginning this quarter with likely some revenues in the quarter but significant in 2011. I apologize if I created confusion with my choice of words there.

EfficientLights, breakthrough parking lot light. Those of you who have been investors for I guess about three years now, you’ll recall that when we entered the business for LED lights, we were doing it with what we counted as a breakthrough case light for freezer cases, and it turned out to be just that. When we first started looking at street lights, we did not tell to really to do a breakthrough light, rather we were using, just trying to combine together the best light in the market. We’ve (inaudible) on that strategy and it’s going back to do what we’ve proven to be good at, which is starting from scratch. And our folks at EfficientLights have done a great job developing a breakthrough parking lot light to serve those same retail customers that we always serve today. This light is out for evaluation now, they will be more readily available for evaluation on a broader basis in Q1, and we are expecting it generate revenue in 2011 due its superior lighting quality and a superior ROI as compared to anything else in the market.

So we expect this product, like our refrigerated case light to redefine the market with a very compelling value proposition. Perhaps the biggest catalyst of all is that our 2010 sell development efforts have laid the foundation or the ground work with several large retailers to allocate meaningful budget dollars toward investments in 2011 for EfficientLights product. That’s what gives us our confidence to estimate the EfficientLights revenue of 25 to 30 million for next year, not including parking lot lights.

The reality is that the market continues to be wide open and it appears that retailer’s appetites are stronger now as confidence is building that we will avoid a double dip in the recession. Complementing these fast related discussion on energy efficiency in our EfficientLights, now moving to IES, complement the catalyst or several large opportunity growth opportunity that IES brings to the table: first is our new eminent area light which is receiving great reviews from utilities for buying it right now and evaluating it; two, an international municipality has been evaluating and for their own words has selected our light and we will see that converted to dollars, but we are bullish on the opportunity for the use of the light internationally and the opportunities we are chasing there are very material. I mean it is very large.

And then additionally at IES, as we’ve talked about on several calls their driver technology and the fact they are market leaders in the driver technology and that they developed game changing opportunities for us relative to providing electronics OEMs and large retailers with power drivers for BEAR. The OEM and the retailers LED lighting applications. And to give you a sense of the opportunity, every LED light has to have a power driver and is a key component for achieving the efficiency and the quality of light that are targeted by the OEMs. And by efficiency, I am referring to energy efficiency, as well as efficacy for sustaining the light of the light itself.

And this is the case where literally our company has already built over a million of these drivers and it is taking it from using it only in their products to now supplying it on a broader basis, a great opportunity for growth. Additionally, IES has new overhead lights or street lights in addition to area lights, but street lights that are growth opportunity that we have, we’ve unveiled the prototypes and are now trying to scale up so we can start providing the initial solutions out to customers for evaluation, then we got the orders from some of evaluations and now we are trying to meet the time lines for getting those, I guess those would be beta products out as they’re moving into full scale production on the streetlights.

That summarizes the growth catalyst in our energy efficiency unit and now the last unit and that is utility infrastructure. The first growth catalyst is that our utility relationships continue to grow. And I say this for our investors and for our analysts who are on the phones, and also for our customers in utility partners but we are very close to establishing new regular ongoing relationship with two new major US utilities. In fact, both utilities have verbally told us they’re awarding us work and we’ve been selected and we’re now literally just waiting on that inflow or the actual contract suit to arrive.

And to give you some order of fill, a single utility because usually equate to I guess on the low end a couple of million dollars a year of revenue on the high end 20, $25 million of revenue. So there is a lot of potential and promise within the expansion. The second growth catalyst is to expand inside the utilities we are already serving for large infrastructures such as substations, transmission and distribution build-outs. And then the third growth catalyst and the one that we are excited about and we hope you’ve been able to pick up on this as we’ve talked about it over the past two or three quarters and that’s around our technology that we've invested in the Utility Infrastructure business, specifically our MicroGrid and SmartStation. As we have stated several times, we have sold several of the MicroGrid solutions and the feedback continues to be very bullish and very promising. They are very well received in the marketplace, and that’s for both domestic and international opportunities. And then we are pushing forward with our Fortune 100 partner, bringing that technology to market and marketing more broadly.

Our SmartStation product continues to progress. We are involved in discussions relative on selling our first SmartStation and we are bullish that we'll achieve our goal which is building our first SmartStation in 2011. As we marketed we continue to give validation that we have moved forward from the utilities perspective as compared to traditional solutions. That’s a growth catalyst and now the four point message, the cash in our balance sheet, Chris will talk more about it more in a minute, but what I wanted to just point out there that our cash continue to grow. And that when we make strategic decisions to invest working capital to support our businesses with both inventory and resources, and we're doing that in response to the opportunities that they are seeing. And we encourage our entrepreneurs to be prudent managers. That working capital is demonstrated by the flow. Its an area that we do well in.

With that, I will just summarize the four key messages. Again, we're pleased with the third quarter; second hand, our backlog is at all-time time, $48 million higher than this time last year; third, the investments we made in our business are bearing fruit, they provide us with a terrific set of growth catalysts therefore our balance sheet is in terrific shape.

With that I'm going to turn it over to Chris.

Chris Hutter

Great. Thanks Sidney. I am going to focus my comments on four areas and they are streamlined, again to try to meet our goal. The first thing is I am going to run down our revenue by business area so those of you that are modeling our business will have that after those purposes. Second, I am going to discuss your expectations regarding our gross margin and operating cost for the next few quarters. Third, I am going to break down our backlog, including breaking it down into the key components as I usually do so that you can get a feel for how our revenues are likely to be realized in the upcoming quarters. And fourth, I will hit our key balance sheet metrics, of course cash debt in capital expenditures.

So first, here are several metrics, revenue metrics for the quarter, and let me just kind of break it down. I'll start with DG. DG for the third quarter of 2010 was 13.7 million a year ago, that’s third quarter. It was 10.6 million, that’s up $3.1 million or 29.4%.

Our Energy Efficiency area, of course which is virtually all LEDs was LED lighting is 6.5 million for the third quarter of 2010. For the third quarter of 2009 it was 8.6 million, that’s down 2.1 million or 23.9%. Our Utility Infrastructure business was 6.1 million for the third quarter 2010 compares to 4.4 million for the third quarter of 2009, which is up 1.7 million or 37.9% our growth and then our Energy Services business was $5.1 million of revenue versus last year's $4.1 million of revenue, which is up 22.9%.

Next, let move down to gross margins which were a healthy 34.8%, basically right in line with our expectations and slightly higher than our second quarter. As we look forward, we expect our gross margins to be generally in that 33% to 35% range for the next few quarters, which is basically what we've been talking about really since the second quarter of this quarter. However, as we look out longer term we do expect our gross margins to increase, really driven by the combination of first a growing recurring revenue business which is highly accretive to our core margins. Second, the accretive investments we've made in technology and encoding our proprietary generating systems that Sidney discussed. Third, new products that we are bringing to market in each of our business areas where we think that we really developed some [sector] value proportions. And fourth, really a strong focus, and this is just what we do everyday. I think if you look at our history you consistently see positive gross margin results, which is a result of just blocking attack and a strong focus on continuously engineering cost out through smart designs, smart manufacturing, a focus on productivity and making sure that we really engineer our quality and so we get right the first time.

And with that, I'll move on to our operating cost. Our total operating costs for the quarter were $11.1 million, just almost exactly equal to our second quarter and $3.1 million over the last year. And as we went through this last quarter, that increase was really driven by the major initiatives we're investing and which include our proprietary generation technology on a new LED lighting products that Sidney reviewed, which of course of both the internally generated products but also incremental investment due to the fact that we purchased, we made the IES acquisition in April. Third, our MicroGrid and SmartStation products, that we've got folks developing. And fourth, our significant ramp up in our utility services business. And last engineering operations and sales to support each of these growth initiatives. So those are the big areas we are spending money on. And again I sort of detailed all that out our last quarter.

Looking forward, we do expect operating expense to be roughly in this $11 million range for the next few quarters. And lastly, I just hit the tax rates, usually we get a question or two about that and we still expect that tax rate to remain in right around that mid teens level.

Now let me change subjects. I'm going to turn to our backlog and break it down for everyone. $138 million is our total revenue backlog. This compares to 127 million as of our second quarter earnings release and 90 million a year ago. This is obviously just a significant increase versus where we sat exactly a year ago this week. As usual what our backlog represents is the revenue commitments we have as of today and includes the new business we announced on October 20, and I am just kind of walk through it.

$42 million of this backlog is what we call near term backlog for project-based work, including [servers] for our DG systems, Utility Infrastructure projects and LED lighting that we expect to recognize over the course of the next three quarters from the fourth quarter 2010 through the second quarter of 2011. Our estimate of the spread of the revenue recognition for this $42 million of near term backlog is that 40% of it will be recognized in the fourth quarter. 35% of the 42 million will be recognized in the first quarter of 2011 and approximately 25% of the 42 million that we recognized in the second quarter of 2011.

As a reminder for everyone, what has proven to be a pretty good, very simple three step process to estimate what our total revenue would be for the next three quarters is take that near term backlog of $42 million and spread it according to the percentages I just laid out, add $79 million of revenue in each quarter to account the sales that are made and completed within that quarter and to account for recurring and other regular revenues for example including our Southern Flow revenue that we do not include in that project-based backlog

And last, make assumptions without additional sales, which we will make and complete between now and the period you're estimating that will add to the revenues in that quarter. Obviously there is smaller window selling time to impact the fourth quarter of 2010 of plenty of time to impact the first quarter of ‘11 and second quarter of ‘11 obviously. The net of this is when you apply this method you will find our anticipated revenues in our fourth quarter are lower as they shifted forward in some projects and frankly back in others.

But the revenues for 2011 including the first quarter of 2011 are looking quite strong. The next component of our backlog is $35 million of longer term project based work that we anticipated will be recognized fairly evenly from the third quarter of 2011 through the second quarter of 2013. A longer term project based work being at these high levels is significant improvement from the year ago as we placed a significant focus on building our base of longer term and recurring revenue into the business model. And that really brings to the last component which is that we have $61 million of long-term occurring revenues we expect to be recognized over seven to ten year sweet spot. We got some of it little bit beyond that period as well.

But this figure of $61 million increased $10 million since our last earnings release. To summarizing $42 million of near term project-based backlog plus $35 million of longer term project based backlog plus $61 million of recurring revenue, long term recurring revenue is gives us the $138 million of total backlog and again this is all time high for our company. I am going to switch gears turn to our balance sheet, we continue to be pleased with the strengthened position of our balance sheet, I will lend down those key balance sheet steps, cash at the end of quarter was 14.7 million, albeit 7.5 million outstanding on our revolver which left us with a net cash position of 7 million.

This compares to a net cash position of 4 million at the end of the second quarter and as we discussed on our last call we used cash during our first and second quarters to invest in our IES acquisition and working capital support higher inventories to fulfill EfficientLights product orders to fund the significant growth and to fund the significant growth in our utility services business.

As we anticipated our cash position continue to improve down to third quarter and since our third quarter closed we repaid another $2.5 million off of our revolver and right now we are sitting on a net cash basis of 8 million, $13 million of cash, that’s $5 million outstanding on our revolver. We do think that we will continue to see this gradual improvement as we move to our fourth quarter as well.

Our CapEx for the quarter was 1.3 million of which 500,000 was for the current revenue project capital. This brings our total capital spend to 3.9 million year-to-date and we are now forecasting total CapEx spend of approximately 5 to 6 million for 2010.

And for 2011, we still have $15 million as our budget for CapEx in 2011. This is an increase from 2010 related to several recurrent revenue projects we’ve in process as well as strong pipeline of projects that we have in discussion with customers. With that my summer comment in the quarter that remain in a very strong place financially and we will continue to enjoy terrific flexibility to be able to add strategically and opportunistically to grow the business.

Now with that I will turn it back to the operator to start Q&A.

Question-and-Answer Session

Operator

Thank you sir. (Operator Instructions) Your first question comes from the line of Rick Hoss of Roth Capital Partners. Please proceed sir.

Rick Hoss - Roth Capital Partners

Can you give me a little bit more detail on IES that million, that million, what products did they sell during the quarter?

Chris Hutter

A big chunk of that was our new area lights, we went into production in I guess it was July, shipped our first lights in august. So that was a big chunk of that and then they’ve got a variety of customers that they have supplied and continue to supply components to as they are working on somebody’s strategic opportunities that we’ve sort of laid out today

Rick Hoss - Roth Capital Partners

Okay and then on the recurring revenue projects, lots of volume this quarter. I know that in previous quarters, probably going back three or four at this point, you talked about the underlying value of these assets being, I don't know if it was quite an order of magnitude but it's well ahead of what the published number is. And if you spent $500,000 during the quarter, then obviously these aren't in place, they're not even close to being in place, right?

Chris Hutter

Are you talking about all the assets in place to support the recurring revenues that we have in the backlog

Rick Hoss - Roth Capital Partners

Yes and I guess more just to get a better feel or timeline of the projects that you announced during the quarter. What is the timing as far as when all of those are deployed?

Chris Hutter

There were basically two big slots of projects one of them was for a major retailer, it was really stage to that retailer. Those are absolutely going in the ground now as we speak. I haven’t looked at those efforts at the operation schedule recently but a good chunk of them will be in this quarter. And then there was one very large industrial project that will probably be in the ground I’d say second quarter of next year. And then in fact we've got a really a third big project on the recurring side right now that were under construction work and that on landfill gas project and that will be in the ground and operational in December, so those were the big recurring revenue projects that we kind of process right now.

Rick Hoss - Roth Capital Partners

Okay and then when you guys talk about international, are we talking about Canada?

Sidney Hinton

No sir.

Rick Hoss - Roth Capital Partners

Okay, so we are talking about projects outside of North America?

Sidney Hinton

Yes sir.

Rick Hoss - Roth Capital Partners

Okay and then, Sidney, you’re talking about utility spending. It sounds like there's a lot more activity recently and depending on whose conference call you listen to, some utilities seem to be spending, others do not. What is driving do you think, what's driving the increase in RFQs and maybe an example of the projects that you're seeing out there that have interest around them?

Sidney Hinton

Okay, great question. You are exactly right, there some are spending and some are not, we are busted, primarily serve those who are and who've done well, we do have one relationship where they have actually cut back spending but we fared very well in that process which is reflective of the quality our folks are doing there.

In general I would say that the increased spending and if you follow utilities you are able to guess what I am going to say is driven by the, there is two drivers for it; the first one is a very hot summer and that utilities in times of extreme weather they tend to make more money and their certain expenditures they put off, their discretionary to a certain point relative to timing.

We don’t benefit but tree trimming is a great example, we are not in that business. But that’s one of the things that we spend on land maintenance and another. And so some of its just the utilities been a better financial position and therefore bringing up capital projects that may be were on the above list whether or not they went in. and then the second catalyst obvious I will divide the second one into the two the primary driver is just the relative help and regulatory stability of utilities, now better field for the regulatory environment rate case situations, the demise or I may not should have said that but the apparent demise of Captain trade and utilities feeling like they have a better understanding of future capital requirements and therefore being willing to invest in the T&D side of their business versus just having to hold up the capital expenditures in case they were forced to make significant retrofits, we've been making retrofits anyway on the generation side. And then on the 2B and I would say in slide 90 to 10 the other subpart of B is just some of the stimulus money has finally made it all the way through the cycle and the utilities are actually issuing RFQs relative to spending some of that.

Rick Hoss - Roth Capital Partners

So, some of these utilities maybe even get more comfortable with the change in the House of Representative demographic might help ease some of the spending as well in your opinion?

Sidney Hinton

Definitely, yes. The benefits we have reaped are really worst transpired over the summer with just a general discontent and the backing off I guess because of the healthcare initiatives, backing off on the environmental legislation and utility. Have they understood what to expect more, they certainly planned for all of these different contingencies but that’s all better clarity for them and we are seeing more investments free up on the T&D side of the business.

Operator

Your next question comes from the line of Eric Stine of Northland Capital. Please proceed sir.

Eric Stine - Northland Capital

Just wondering if we can touch on EfficientLights, one of the topics for the last few quarters have been customer concentration. I'm just curious, I know you have had one or a small handful of customers that have taken a big chunk, just the sense of how far through their footprint those customers are? How close to the end for those customers?

Chris Hutter

The customers who were buying have plenty of runway. There are really still many, many stores to go and I think exciting part of it is that, we have been talking about, in fact that we have had customer concentration. I think maybe one of the exciting things that we probably should have highlighted in our comments is that the pipeline we are seeing and that the 25 to $30 million that we expect to deliver next year will definitely broaden that customer base to the extent that we achieve it. It really is an enhanced list of customers that we expect to do business with as we are enter into 2011.

Sidney Hinton

And just to give you some specificity on the customers we’ve penetrated the deepest, I’m just doing it off the top of my head knowning the store counts, I would guess it’s somewhere between 10 and 50%. I don’t think we are more than 50% of any change, and so there is a lot of footprint left.

Eric Stine - Northland Capital

Just the year-over-year decline, I know you had big buying last year, I mean is that just that’s when they were kind of really starting the program and now its just a more gradual roll out?

Sidney Hinton

I would say that is kind of a combination of two things: one that it’s a more methodical roll out, systematized, and two that it’s our perception that we definitely saw a slowdown in capital orders in the retail segment. That seems to have abated based on communications with our customers and the budgeting numbers we have been shared with us for 2011, but we definitely got caught with here in the second half of this year. For the slowdown, they didn’t place orders that we have queued up to anticipate.

Eric Stine - Northland Capital

Maybe just turning to IES, just an update on the UL certification, I believe you got it for the power driver and that might be part of your confident outlook on Ford, just where we stand on UL for some of the other products?

Sidney Hinton

That’s a great question. We are submitting products on a regular basis to UL now. And like drivers you submit a family of drivers at a time. It is still a major ongoing initiative. I think, we’ll I don’t believe we’ve disclosed the number we had anticipated on doing but we’ve calculated up how many and it’s more than hands and toes that we would be submitting to and we are well into that cycle of preparing them for UL submittal which is really a light than its own. In addition to just the product itself, and just continuing to get them in there and we are still pushing that ball forward to one day we will have everything that was in the pipeline through UL and I think going forward it will be just a normal process.

We are still backlogs, only getting stuff in there. But we’ve been impressed with the process. And we have been impressed with the ability to get those listing clearly there is no modifications or very modest user preference type modifications.

Eric Stine - Northland Capital

With IES I believe back in April when you made the acquisition, you talked about a pipeline of $100 million. Is that still the way you think about it, is that directionally grown since you’ve had it for a few months, any thoughts there would be helpful?

Sidney Hinton

I would say two things. For value this calendar so might say (inaudible) cut me of right here. But I would say two things, one there is no question that the pipeline itself of opportunities has grown. It is driven by the drivers, there are just so much there, this area light is being well received. That is definitely grown, but I will say that I think we have a better understanding of what it takes to convert that pipeline into revenue and that the process to do that has been a little more elongated than we hope, not that we communicated but that we were hoping that we would get to first base really fast and then having a better understanding of the approval process that utilities have for their area lights, having a better understanding of candidly the ramifications of us making the purchase some of the major OEMs stepped back to the side, did they want to do business with somebody who is going to make lights as an example, and then we’ve been able to demonstrate to them that now we are in the business of making specific solutions, but our real value is including the core components that we will sell to them for and they will make their own solutions and that we are going to specialize in just a handful of key products that we take all of the way to market with the rest of our intelligence and intellectual property will be directed to their benefit. Is that a fair summary Chris?

Chris Hutter

Yes.

Eric Stine - Northland Capital

And then last thing just on utility infrastructure then I will jump back in the line. Good to hear on the two new ones, which it sounds like may be we should expect that in the near term, but just progress you’ve had historical the one which is taking the step to full expansion or a full relationship, just thoughts on where the other two are at and when those could make that jump?

Chris Hutter

Let me just make sure I understood the question before I answer it. How long does it take to make it up to full relationship?

Eric Stine - Northland Capital

No. I mean you had the three that you announced last year and you’ve had one that kind of got to the $10 million or so level, but you talked about this being a full relationship, I mean just timing and when those other two or progress towards bringing those other two kind of to that same level.

Chris Hutter

Yes, actually, one of them has made it in terms of forecasting and an anticipated revenue rate. And the second one, may very well, I’d have to look it up, it may be very close to that right now in terms of the run rate. We believe all three of those will be in 2011.

Operator

Your next question comes from the lien of Rob Brown of Craig-Hallum. Please proceed.

Rob Brown - Craig-Hallum

You talked about a second trench particularly with that major retailer. Is that similar in size to kind of the first grouping you are doing or could you help us to scope out what that would look like?

Sidney Hinton

We anticipate being a larger group.

Rob Brown - Craig-Hallum

Okay and then how many sort of trenches or groupings could this retailer ultimately become?

Sidney Hinton

Well I would say that a lot. So almost all the retailers we are dealing with have hundreds of sites and that we are only dealing with 10 to 20 or 30 at a time. So there’s trenches. I would say it is likely to be similar to our longest retailer customer throughout that we have done 20 or 25 trenches with them over the years. They don’t do them as large as our largest retail customer, but our longest one we’ve been doing business with them ever since we started and they just consistently release new locations.

Chris Hutter

Candidly, they validate as they gain the experience of the operations of the systems and the real savings both from backup power and peak saving, it reduces the risks factors that they associate with the projects when it comes to allocating capital or to at least awarding the projects to us even if its our capital and it just increases the penetration.

Rob Brown - Craig-Hallum

And then back to the LED business, you said there was 25 to 30 million for that business and kind of an outlook for next year, what kind of mix of products is that? Is it just a case? What's the mix of case lighting, shelf lighting and how do you kind of see that playing out?

Sidney Hinton

I would just guesstimate that, that probably about 60% case lights, 35% walk-in cooler lights; and maybe 5% shelf lights.

Operator

Your next question comes from the line of William Bremer of Maxim Group. Please proceed.

William Bremer - Maxim Group

Can you give us a little more color within the Utility Infrastructure? I know you guys mentioned substation, transmission, distribution; big differences in many of those. Can you tell us exactly what you guys are dominant in, what you're striving for, maybe in terms of kilowatts?

Sidney Hinton

Sure. Well I'd say today, I would hesitate to use the word dominant only because I had respect for those people who are much larger than us, Quanta, Pike. They certainly are dominant. But our relative dominance, in other words is a percentage of our revenue, what have we done and done really well and then recognize for, well of all that’s on the distribution side, both underground and overhead. And that’s just the regular crew worked there.

We've also done on our transmission work. I'm thinking that, I can't remember. I'm thinking its up to 115, Bill. But we've done a number of projects, and that’s an accelerating area of expertise. Winning your first ones are the hardest in our substation work. And I can't remember the sizes of the substation, I apologize for that. And I'm going to guess that probably to date since our creation of this business unit 25% maybe even 35% of all our revenues, I think about maybe even 40% of all our revenues, had been for substations. We have done a lot of work there. And I would say as a percentage of our people, this more of the overhead, underground distribution work but a percentage of our revenue because you supply materials and equipment there. Probably substations would be the second biggest area of expertise. And relative to our ambitions, we understand to win the big substation jobs. We have to win their hearts and confidence so that they build more distribution lines than they do anything. So we have to do that. But you don’t make a lot of money doing that. But you have to do it. So we want to excel that. We want to excel at transmission because while there is not as much of those projects, they are bigger dollar and its viewed with a higher degree of complexity. We are very good at it.

Substation is the place that we think we can make the most money for ourselves and bring the most value to our utility partners because it lets us leverage our engineering competency, where we think we can out engineer the traditional players in that market by building a better substation, a smaller substation, a substation with more capabilities inherent to the gear and controllers which we do internally. That’s very much our view of how to leverage our technical plate but we have to have strategically, we have to add the other two. You make money out of them but its not as thicker margins or deeper value that can be added there, and MicroGrids being the other key area that we are investing in from the technology standpoint.

Operator

Your next question comes from the line of Amit Dayal of Rodman & Renshaw. Please proceed.

Amit Dayal - Rodman & Renshaw

Just two quick questions, maybe I'll limit myself to one. In terms of year-over-year growth for all three segments that we have what should we model from a conservative perspective in 2011?

Chris Hutter

For 2011, Amit?

Amit Dayal - Rodman & Renshaw

Yes.

Chris Hutter

We've given you some senses to EfficientLights and that’s really driven by some of the budgeting dollars that we understand during our customers budgets for 2011. We're not ready to go to 2011 in terms of specific guidance across cost lines.

Amit Dayal - Rodman & Renshaw

If you're seeing like 12% to 15% growth year-over-year relative to (inaudible) in 2010, can we at least maintain the space you think?

Chris Hutter

We haven't really delved into 2011 yet. We certainly with the economy here someone is back, I think we put up some pretty nice points here this year, in top economy obviously. The economy gets to win its back, we should be in a position to accelerate. That’s exactly what we are trying to do with these investments that we are making.

Amit Dayal - Rodman & Renshaw

The LED business, the $25 million to $30 million number that Sidney gave, is that a conservative number? Is that a low end of the range number? Do you think more business in that segment could come in?

Chris Hutter

It’s our best estimate to date of where we think that business will land. I guess the thing that we have done is we've not included any benefit from our parking lot lights in that number

Sidney Hinton

Nor does it include our IES business.

Amit Dayal - Rodman & Renshaw

So the drivers that could help take that number higher up still are available for us basically to…?

Sidney Hinton

Yes, I intend at sharing that number. We think its impressive for just what it represents which is just EfficientLights and just the portions associated with case lights and the refrigerated case lights, walk-in cooler lights and the shelf lights just those three products.

Operator

Your next question comes from the line of Michael Legg of Merriman Capital

Michael Legg - Merriman Capital

You talked about the strong gross margin at 34.8%. Can you tell us what you saw by division as far as either strength in margin or level of margin or whatever you can give us?

Chris Hutter

We don’t give margin by division but I can tell you tell you that generally margins were very health across all our divisions. We didn’t really have instance this and we are one division or another diluted on margins and that includes our other Southern Flow business. So every division contributed to margins probably the business that contributes the most would have been our DG business. We had some instant projects that we did really well on this quarter and so that would probably be the highest in terms of the most significant driver.

Michael Legg - Merriman Capital

And then on to DG, it was up 29%, still very strong, but it's down from the previous two quarters' growth rate. Could you just comment on that a little and how it sequentially compares and things of that nature?

Chris Hutter

It is tough to make, it is really, you really its not smooth I guess as the headline. Because it is project based because we record that business based on milestones because we've got small, little and, small, medium and huge jobs. It is really difficult to compare quarter-to-quarter and sequentially and I wouldn’t really put an outfit of thinking into.

Well that growth rate is a little bit less than it was last quarter or a little bit more than it was a quarter before whatever happens to be. Really I just dial around, what does that backlog look like and how do we think that is going to spread to the next few quarters.

Then last question, you mentioned you have two major new US utilities that you're talking with and they could be anywhere from $2 million to $25 million over time. Any way you can kind of, if the other one that’s an original that you have you are expected to grow to somewhere in the $10 million range, are these in that same size ballpark or could they be larger? What type of size utilities are they?

Sidney Hinton

I would say that one of them is probably in that size range and the other has the potential to be larger.

Michael Legg - Merriman Capital

And what type of expected ramp would we have?

Sidney Hinton

I would guess on the smaller one probably a faster ramp only because they’ve known as other solutions longer. I think the ramp on the larger one just kind of the nature of dancing with the really big utilities as you kind of earn your stripes and this will be our first work of this nature we’ve done other projects more over but not in this division. But based on how we’ve done that before, we would guess that to receive a couple of million dollars of business in 2011 and hopefully [five-ish] in 2011 and then hopefully 10 to 15 in 2013 and out.

Operator

Your final question comes from the line of Dick Ryan of Dougherty. Please proceed, sir.

Dick Ryan - Dougherty

Sidney, the generator issue that occurred in the second quarter, has that been taken care of and I can't recall if there was any impact on the backlog either in Q2 or Q3 with that issue.

Sidney Hinton

Chris can answer the backlog question. I think we did just down the backlog if I remember right. The issue is still being worked. It certainly has affected some of our revenues and that we will have some additional capital expenditures associated with remedying the performance issues that that system was having but we are in a full scale plan of working it through and having it ready for the next season. It is potentially callable every month but it was primarily summer driven.

Dick Ryan - Dougherty

And is there any update with Schneider, I mean on the DG side they started growing this out to the hospital market?

Chris Hutter

We have done some training with Schneider on their sales teams and they are working with their sales teams relative to rolling it out beyond that.

Dick Ryan - Dougherty

Any sense when any sort of business may be contributed from their efforts?

Chris Hutter

I really don’t, And it’s just because of our difficulty in impairing through the curtains of their marketing process but, we had specific goals around doing trainings in certain geographic regions and we have been able to get that in. So the ground works late and now the issue would be how fruitful is that process. No disrespect to them, but many times we’ve always been reluctant to partner with major companies such as that because sometimes there’s a disconnect in the marketing efforts to Schneider’s they seem to be working hard to avoid that disconnect.

They may prove that there is a disconnect anyway no matter how hard they work at it, but we were particularly impressed with their understanding of that issue and they didn't try to tickle our ears nor appear to tickle their own on the matter that they understand, that’s a difficulty, I think we have a better fill by the time we report next, by the time we report for 2010 year end results, we should pretty well know what does that cake look like, what's it looking like. Is there one in the oven or is it still in the mixing bowl on the counter.

Dick Ryan - Dougherty

Hey, Chris on the streetlights, the ROI, what was that? Have you demonstrated in ROI then, what is that?

Chris Hutter

Basically we are targeting a three or four year payback on those lights.

Operator

That concludes today’s question-and-answer session. I will now turn the call back over to Chris Hutter. Please proceed

Chris Hutter

Great. And I know Sidney has some closing comments.

Sidney Hinton

First, we'll continue to work on tightening it down to an hour. In summary, we are pleased with the third quarter and we are very excited about the growth catalysts that we’ve have been investing in and the position that each of them seem to be in. We are bullish of the opportunities to serve our customers in all the areas that we are at and we like the position that we are in.

We are (inaudible) to have an awesome team of people and we are grateful for their talents, their efforts and the strong, strategic and financial position that they’ve put us in. And on behalf of the entire PowerSecure team we want to thank our utility partners, our customers, our suppliers, our banks, our Board of Directors and you, our investors. For your support and your belief is to provide us the opportunities to do what we do. We do not take that support from any of these constituencies lightly and we are focused everyday on being a good return of that trust that each of you have placed on us. We appreciate the time and interest that all of you invested in the call tonight. Thank you for your support.

Operator

This concludes today's presentation. You may now disconnect. Have a good evening.

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