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**UNITED STATES**
**SECURITIES AND EXCHANGE COMMISSION****WASHINGTON D.C. 20549**
**FORM 10-Q**   (Mark one)þ **Quarterly Report pursuant to Section 13 or 15(d) of the SecuritiesExchange Act of 1934 for the quarterly period ended April 30, 2005**
or     o **Transition Reportpursuant to Section13 or 15(d) of theSecurities ExchangeAct of 1934 for thetransition periodfrom                     to                   **
**Commission File Number 001-12488**
**POWELL INDUSTRIES, INC.**       
(Exact name of registrant as specified in its charter)   DELAWARE 88-0106100   (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)   8550 Mosley Drive, Houston, Texas 77075-1180   (Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code (713) 944-6900
     Indicate by **“X”**whether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or forsuch shorter period that the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.
Yes þ No o
     Indicate by **“X”**whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).Yes þ No o
     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, asof the latest practicable date.
          Common Stock, par value $.01 per share; 10,766,965 shares outstanding as of June 6, 2005.  
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POWELL INDUSTRIES, INC. AND SUBSIDIARIES
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For the Quarter Ended April 30, 2005     Part I – Financial Information         Item 1. Condensed Consolidated Financial Statements    Condensed Consolidated Balance Sheets  3 Condensed Consolidated Statements of Operations  4 Condensed Consolidated Statements of Cash Flows  5 Notes to Condensed Consolidated Financial Statements  6      Item 2. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations  13      Item 3. Quantitative and Qualitative Disclosures About Market Risk  17      Item 4. Controls and Procedures  18      Part II –Other Information         Item 1. Legal Proceedings  19      Item 4. Submission of Matters to a Vote of Security Holders  19      Item 6. Exhibits and Reports on Form 8-K  19      Signatures  20  Certification of Thomas W. Powell Certification of Don R. Madison Certification of Thomas W. Powell Certification of Don R. Madison
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**Powell Industries, Inc. and Subsidiaries****Condensed Consolidated Balance Sheets****(In thousands, except share and per share data)**           **April 30,**  **October 31,**   **2005**  **2004**   (Unaudited)     **Assets**        Current Assets:        Cash and cash equivalents $949  $8,974 Marketable securities  40,372   54,208 Accounts receivable, less allowance for doubtful accounts of $678 and$617, respectively  48,738   42,659 Costs and estimated earnings in excess of billings on uncompleted contracts  28,851   19,822 Inventories, net  19,721   15,332 Income taxes receivable  1,717   1,179 Deferred income taxes  1,454   729 Prepaid expenses and other current assets  4,529   2,717        Total Current Assets  146,331   145,620          Property, plant and equipment, net  45,119   45,041 Other assets  5,719   5,418        Total Assets $197,169  $196,079                 **Liabilities and Stockholders’ Equity**        Current Liabilities:        Current maturities of long-term debt and capital lease obligations $468  $474 Income taxes payable  888   1,358 Accounts payable  18,287   14,239 Accrued salaries, bonuses and commissions  6,652   7,964 Billings in excess of costs and estimated earnings on uncompleted contracts  16,810   15,174 Accrued product warranty  1,373   1,545 Other accrued expenses  3,926   5,596        Total Current Liabilities  48,404   46,350          Long-term debt and capital lease obligations, net of current maturities  6,592   6,626 Deferred compensation  1,848   1,744 Other liabilities  1,383   1,306        Total Liabilities  58,227   56,026                 Commitments and contingencies (Note H)                 Minority interest  242   218                 Stockholders’ Equity:        Preferred stock, par value $.01; 5,000,000 shares authorized; none issued  —   — Common stock, par value $.01; 30,000,000 shares authorized; 11,000,000 and11,000,000 shares issued, respectively; 10,765,000 and 10,730,000 sharesoutstanding, respectively  110   110 Additional paid-in capital  9,565   9,433 Retained earnings  132,698   134,419 Treasury stock, 234,000 shares and 270,000 shares, respectively, at cost  (2,202)  (2,514)Accumulated other comprehensive income  7   54 Deferred compensation  (1,478)  (1,667)       Total Stockholders’ Equity  138,700   139,835                 Total Liabilities and Stockholders’ Equity $197,169  $196,079        
The accompanying notes are an integral part of these condensed consolidated financial statements.
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**Powell Industries, Inc. and Subsidiaries****Condensed Consolidated Statements of Operations (unaudited)****(In thousands, except per share data)**                   **Three Months Ended April 30,**  **Six Months Ended April 30,**   **2005**  **2004**  **2005**  **2004** Revenues $58,914  $51,476  $106,603  $104,703                  Cost of goods sold  50,472   42,857   91,202   86,529                               Gross profit  8,442   8,619   15,401   18,174                  Selling, general and administrative expenses  9,353   8,187   18,874   16,726                               Income (loss) before interest, income taxes and minority interest  (911)  432   (3,473)  1,448                  Interest expense  139   34   216   62                  Interest income  (317)  (175)  (594)  (367)                              Income (loss) before income taxes and minority interest  (733)  573   (3,095)  1,753                  Income tax provision (benefit)  (451)  213   (1,375)  646                  Minority interest in net income  13   —   1   —                               Net income (loss) $(295) $360  $(1,721) $1,107                               Net earnings (loss) per common share:                                 Basic $(0.03) $0.03  $(0.16) $0.10              Diluted $(0.03) $0.03  $(0.16) $0.10                               Weighted average shares:                                 Basic  10,763   10,676   10,750   10,664              Diluted  10,763   10,768   10,750   10,764              
The accompanying notes are an integral part of these condensed consolidated financial statements.
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**Powell Industries, Inc. and Subsidiaries****Condensed Consolidated Statements of Cash Flows (unaudited)****(In thousands)**           **Six Months Ended April 30,**   **2005**  **2004** Operating Activities:        Net income (loss) $(1,721) $1,107 Adjustments to reconcile net income (loss) to net cash provided by(used in) operating activities:        Depreciation and amortization  2,042   2,339 Bad debt expense  65   233 Gain on disposition of assets  (21)  — Other  34   21 Deferred income taxes  (988)  (2,852)Changes in operating assets and liabilities:        Accounts receivable, net  (6,144)  (2,261)Costs and estimated earnings in excess of billings onuncompleted contracts  (9,029)  11,082 Inventories  (4,389)  3,324 Prepaid expenses and other current assets  (1,812)  (1,545)Other assets  (83)  (315)Accounts payable and income taxes payable  3,040   (34)Accrued liabilities  (3,154)  (993)Billings in excess of costs and estimated earnings onuncompleted contracts  1,636   1,640 Deferred compensation  263   254 Other liabilities  47   127        Net cash provided by (used in) operating activities  (20,214)  12,127                 Investing Activities:        Proceeds from sale of fixed assets  46   — Purchases of property, plant and equipment  (2,061)  (3,135)Proceeds from sale of short term auction rate securities  18,760   — Purchase of short term auction rate securities  (5,000)  (3,425)       Net cash provided by (used in) investing activities  11,745   (6,560)                Financing Activities:        Borrowings on revolving line of credit  2,089   217 Repayments on revolving line of credit  (2,089)  (135)Proceeds from exercise of stock options  444   497        Net cash provided by financing activities  444   579                 Net increase (decrease) in cash and cash equivalents  (8,025)  6,146 Cash and cash equivalents at beginning of period  8,974   11,863        Cash and cash equivalents at end of period $949  $18,009                 Supplemental disclosures of cash flow information:        Cash paid during the period for:        Interest $212  $62        Income taxes $478  $1,344                 Non-cash investing and financing activities:        Change in fair value of marketable securities during theperiod, net of $17 and $34 income taxes, respectively $28  $63        Issuance of common stock for deferred directors’ fees $14  $75        Assets acquired under capital lease obligations $—  $200        
The accompanying notes are an integral part of these condensed consolidated financial statements.
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**POWELL INDUSTRIES, INC. AND SUBSIDIARIES**
***Notes To Condensed Consolidated Financial Statements (Unaudited)***
A.  BASIS OF PRESENTATION AND STOCK-BASED COMPENSATION    The accompanying unaudited condensed consolidated financial statements have been prepared usingaccounting principles generally accepted in the United States (“GAAP”) for interim financialinformation in accordance with the rules of Regulation S-X of the Securities and ExchangeCommission. Accordingly, these interim financial statements do not include all annualdisclosures required by accounting principles generally accepted in the United States ofAmerica. These financial statements should be read in conjunction with the financial statementsand related footnotes included in the Company’s annual report on Form 10-K for the year endedOctober 31, 2004. In the opinion of management, these condensed consolidated financialstatements include all adjustments, consisting of normal recurring adjustments, which arenecessary for a fair presentation of the Company’s financial position, results of operations,and cash flows. The interim period results are not necessarily indicative of the results to beexpected for the full fiscal year.    The preparation of financial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosure of contingent assetsand liabilities at the date of the condensed consolidated financial statements and the reportedamounts of revenues and expenses during the reporting period. Actual results could differ fromthose estimates.    During the first quarter 2005, we revised auction rate securities held as investments from cashand cash equivalents to available-for-sale marketable securities. Accordingly, we revised ourconsolidated balance sheet as of October 31, 2004 to conform to the current year presentation.The aggregate fair value of these securities is equal to recorded cost, and each auction ratesecurity has a maturity exceeding eight years from April 30, 2005 and October 31, 2004. As ofOctober 31, 2004, $50.3 million of auction rate securities were included in cash and cashequivalents. The statements of cash flows for the six months ended April 30, 2005 and 2004 alsoinclude the revised presentation. The revised statement of cash flows for the period endedApril 30, 2004 reports cash used from investing activities of $6.6 million compared to $3.1million as previously reported.    *Stock-Based Compensation*    In accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 123,“Accounting for Stock-Based Compensation,” we have elected to account for our stock-basedemployee compensation plans under the intrinsic value method established by AccountingPrinciples Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees.” Under APBNo. 25, no compensation expense is recorded when the exercise price of the employee stock optionis greater than or equal to the market price of the common stock on the grant date.    If compensation expense for our stock option plans had been determined based on the fair valueat the grant date for awards through April 30, 2005 consistent with the provisions of SFAS No.123, our net income (loss) and earnings (loss) per share would have been as follows:                   **Three Months Ended April 30,**  **Six Months Ended April 30,**   **2005**  **2004**  **2005**  **2004** Net income (loss), as reported $(295) $360  $(1,721) $1,107 Less: Total stock-based employeecompensation expenses determinedunder fair value based method forall awards, net of related taxeffects  (168)  (228)  (336)  (456)             Pro forma net income (loss) $(463) $132  $(2,057) $651              Basic earnings (loss) per share:                As reported $(0.03) $0.03  $(0.16) $0.10 Pro forma $(0.04) $0.01  $(0.19) $0.06 Diluted earnings (loss) per share:                As reported $(0.03) $0.03  $(0.16) $0.10 Pro forma $(0.04) $0.01  $(0.19) $0.06 
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   *New Accounting Standards*    In November 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 151,“Inventory Costs, an amendment of ARB No. 43, Chapter 4.” The amendments made by SFAS No. 151clarify that abnormal amounts of idle facility expense, freight, handling costs, and wastedmaterials (spoilage) should be recognized as current-period charges and require the allocationof fixed production overheads to inventory based on the normal capacity of the productionfacilities. The guidance is effective for inventory costs incurred during fiscal yearsbeginning after November 23, 2004. We do not believe the adoption of SFAS No. 151 will have amaterial impact on our consolidated financial position, results of operations or cash flows.    In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment.” SFAS No.123(R) will require that the compensation cost relating to share-based payment transactions berecognized in financial statements. That cost will be measured based on the fair value of theequity or liability instruments issued. SFAS No. 123(R) covers a wide range of share-basedcompensation arrangements including share options, restricted share plans, performance-basedawards, share appreciation rights, and employee share purchase plans. SFAS No. 123(R) replacesFASB Statement No. 123, “Accounting for Stock-Based Compensation”, and supersedes APB OpinionNo. 25, “Accounting for Stock Issued to Employees.” SFAS No. 123, as originally issued in 1995,established as preferable a fair value-based method of accounting for share-based paymenttransactions with employees. However, that Statement permitted entities the option ofcontinuing to apply the guidance in APB Opinion No. 25, as long as the footnotes to financialstatements disclosed what net income would have been had the preferable fair value-based methodbeen used. Public entities will be required to apply SFAS No. 123(R) as of the first annualreporting period that begins after June 15, 2005. We are in the process of evaluating theimpact of the adoption of SFAS No. 123(R). B.  EARNINGS PER SHARE    The following table sets forth the computation of basic and diluted earnings (loss) per share(in thousands, except per share data):                   **Three Months Ended April 30,**  **Six Months Ended April 30,**   **2005**  **2004**  **2005**  **2004** *Numerator:*                Net income (loss) $(295) $360  $(1,721) $1,107                               *Denominator:*                Denominator for basicearnings per share-weightedaverage shares  10,763   10,676   10,750   10,664 Dilutive effect of stockoptions  —   92   —   100              Denominator for dilutedearnings per share-adjustedweighted average shares withassumed conversions  10,763   10,768   10,750   10,764                               *Net earnings (loss) per share:*                Basic $(0.03) $0.03  $(0.16) $0.10              Diluted $(0.03) $0.03  $(0.16) $0.10              
   The Company had a net loss for the three and six months ended April 30, 2005;accordingly, the inclusion of common stock equivalents for outstanding stock options would beantidilutive and, therefore, the weighted average shares used to calculate both basic anddiluted loss per share are the same. For the three and six months ended April 30, 2004, optionsto purchase approximately 354,000 and 356,000 shares of common stock were excluded from thecomputation of diluted earnings per share because the options’ exercise prices were greater thanthe average market price of common stock.
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C.  DETAIL OF SELECTED BALANCE SHEET ACCOUNTS    *Allowance for Doubtful Accounts*    Activity in our allowance for doubtful accounts receivable account consists of the following(in thousands):                   **Three Months Ended April 30,**  **Six Months Ended April 30,**   **2005**  **2004**  **2005**  **2004** Balance at beginning of period $674  $1,280  $617  $1,283 Adjustments to the reserve  4   (238)  65   (233)Deductions for uncollectibleaccounts written off, net ofrecoveries  —   (26)  (4)  (34)                              Balance at end of period $678  $1,016  $678  $1,016              
*Warranty Accrual*
Activity in our accrued product warranty accrual account consists of the following (inthousands):                   **Three Months Ended April 30,**  **Six Months Ended April 30,**   **2005**  **2004**  **2005**  **2004** Balance at beginning of period. $1,388  $1,833  $1,545  $1,929 Adjustments to the reserve  350   344   637   695 Deductions for warranty charges  (365)  (414)  (809)  (861)              Balance at end of period $1,373  $1,763  $1,373  $1,763              
*Inventories*
The components of inventories are summarized below (in thousands):           **April 30,**  **October 31,**   **2005**  **2004** Raw materials, parts and subassemblies $13,271  $9,167 Work-in-progress  6,450   6,165        Total inventories $19,721  $15,332        
*Costs and Estimated Earnings on Uncompleted Contracts*
The components of costs and estimated earnings on uncompleted contracts (in thousands):           **April 30,**  **October 31,**   **2005**  **2004** Costs incurred on uncompleted contracts $269,429  $271,442 Estimated earnings  44,498   49,691           313,927   321,133 Less: Billings to date  301,886   316,485          $12,041  $4,648        Included in accompanying balance sheets under the following captions:                 Costs and estimated earnings in excess of billings on uncompleted contracts $28,851  $19,822 Billings in excess of costs and estimated earnings on uncompleted contracts  (16,810)  (15,174)         $12,041  $4,648        
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*Property, plant and equipment*
Property, plant and equipment are summarized below (in thousands):               **April 30,**  **October 31,**  **Range of Asset**   **2005**  **2004**  **Lives** Land $4,720  $4,720   **—** Buildings and improvements  39,540   39,629  3-39 YearsMachinery and equipment  26,729   29,804  3-15 YearsFurniture and fixtures  2,006   2,752  3-10 YearsConstruction in process  5,927   5,336   —               78,922   82,241     Less: accumulated depreciation  (33,803)  (37,200)               Total property, plant and equipment, net $45,119  $45,041                
   Depreciation expense for the six months ended April 30, 2005 and 2004 was $2.0 millionand $2.3 million, respectively. D.  COMPREHENSIVE INCOME    Our comprehensive income (loss) consists of net income (loss), the change in fair value ofmarketable securities and foreign currency translation adjustments. At April 30, 2005, includedin marketable securities are $3.9 million of investment-grade corporate bonds that we haveclassified as available-for-sale. The maturity dates of these bonds vary from 1-9 years. Theseinvestments are carried at fair value, with unrealized gains and losses, net of related taxeffects, included in other comprehensive income. Comprehensive income (loss) for the six monthperiod ended April 30, 2005 and 2004 is as follows (in thousands):                   **Three Months Ended April 30,**  **Six Months Ended April 30,**   **2005**  **2004**  **2005**  **2004** Net income (loss) $(295) $360  $(1,721) $1,107 Unrealized gains (losses)on marketable securities  (17)  (66)  (28)  63                  Unrealized gains (losses)on foreign currencytranslation  —   —   (19)  —              Comprehensive income (loss) $(312) $294  $(1,768) $1,170              
E.  BUSINESS SEGMENTS    We manage our business through operating subsidiaries, which are combined into two reportablebusiness segments: Electrical Power Products and Process Control Systems. Electrical PowerProducts includes equipment and systems for the distribution and control of electrical energy.Process Control Systems consists principally of instrumentation, computer controls,communications and data management systems to control and manage critical processes.    The tables below reflect certain information relating to our operations by segment. Allrevenues represent sales from unaffiliated customers. The accounting policies of the segmentsare the same as those described in the summary of significant accounting policies included inour annual report on Form 10-K for the year ended October 31, 2004. Corporate expenses andcertain assets are allocated to the operating segments primarily based on revenues. Thecorporate assets are mainly cash, cash equivalents and marketable securities.
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     Detailed information regarding our business segments is shown below (in thousands):                   **Three Months Ended April 30,**  **Six Months Ended April 30,**   **2005**  **2004**  **2005**  **2004** Revenues:                Electrical Power Products $48,384  $43,993  $88,148  $90,152 Process Control Systems  10,530   7,483   18,455   14,551              Total $58,914  $51,476  $106,603  $104,703                               Gross profit:                Electrical Power Products $5,950  $7,024  $11,182  $15,223 Process Control Systems  2,492   1,595   4,219   2,951              Total $8,442  $8,619  $15,401  $18,174                               Income (loss) before income taxesand minority interest:                Electrical Power Products $(1,518) $270  $(4,134) $1,201 Process Control Systems  785   303   1,039   552              Total $(733) $573  $(3,095) $1,753                         **April 30,**  **October 31,**   **2005**  **2004** Identifiable Tangible Assets:        Electrical Power Products $136,596  $114,374 Process Control Systems  10,951   11,889 Corporate  48,982   69,141        Total $196,529  $195,404        
   Excluded from identifiable tangible assets is $640,000 and $675,000 of intangible andother assets as of April 30, 2005 and October 31, 2004, respectively. F.  POSTRETIREMENT BENEFITS    The following table illustrates the components of net periodic postretirement benefit expense inthe employee retiree benefit plan (in thousands):                   **Post-Retirement Plan Benefits**   **Three Months Ended April 30,**  **Six Months Ended April 30,**   **2005**  **2004**  **2005**  **2004** Service cost $16  $19  $28  $37 Interest cost  16   21   27   42 Amortization of prior service cost  23   24   40   48 Amortization of net (gain) loss  (6)  (1)  (10)  (1)             Net periodic postretirement benefit expense $49  $63  $85  $126              
G.  INTANGIBLE AND OTHER ASSETS    A summary of intangible and other assets follows (in thousands):                   April 30, 2005  October 31, 2004       Historical  Accumulated  Historical  Accumulated   Cost  Amortization  Cost  Amortization Goodwill  $384  $181  $384  $181                  Intangible and other assets subject to amortization:                Deferred loan costs   233   41   233   35 Patents and Trademarks   830   585   837   563 
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   The above intangible and other assets are included in other assets on the consolidatedbalance sheet. Amortization expense related to intangible assets subject to amortization forthe three and six months ended April 30, 2005 was approximately $18,000 and $28,000,respectively, and $17,000 and $35,000, respectively, for the three and six months ended April30, 2004. Estimated amortization expense for each of the subsequent five fiscal years isexpected to be approximately $50,000. H.  COMMITMENTS AND CONTINGENCIES    Certain customers require us to post a bank letter of credit guarantee or performance bondsissued by a surety. These guarantees and performance bonds assure our customers that we willperform under terms of our contract and with associated vendors and subcontractors. In theevent of default the customer may demand payment from the bank under a letter of credit orperformance by the surety under a performance bond. To date there have been no significantexpenses related to either for the periods reported. We were contingently liable for securedand unsecured letters of credit of $10.8 million as of April 30, 2005. We also had performancebonds totaling approximately $172 million that were outstanding at April 30, 2005.    The Company is a party to a construction joint venture (the “Joint Venture”), which providedprocess control systems to the Central Artery/Tunnel Project (the “Project”) in Boston,Massachusetts, under a contract with the Massachusetts Turnpike Authority (the “MTA”). The JointVenture has submitted claims against the MTA seeking additional reimbursement for work done bythe Joint Venture on the project. In a separate matter, the Joint Venture received notice datedMay 9, 2002 (the “Notice”) from the MTA that a follow-on contractor has asserted a claim againstthe MTA in connection with work done or to be done by the follow-on contractor on the project.One component of the Project involved the Joint Venture performing specific work that the MTAthen bid for the follow-on contractor to complete. The follow-on contractor’s claim, in part,includes allegations that work performed by the Joint Venture was insufficient and defective,thus possibly contributing to the follow-on contractor’s claims for damages against the MTA. Inthe Notice of the potential claim, the MTA advised the Joint Venture that if it is required topay the follow-on contractor additional amounts and such payment is the result of defective workby the Joint Venture, the MTA will seek indemnification from the Joint Venture for suchadditional amounts.    The Joint Venture has no reason to believe the systems it delivered under contract to the MTAwere defective and accordingly it intends to vigorously defend any such allegations. Anunfavorable outcome to the follow-on contractor’s claim could have a material adverse effect onthe Company’s financial condition and results of operations. The ultimate disposition of theJoint Venture’s claim against the MTA and the MTA’s potential claim for indemnification based onthe follow-on contractor’s claims are not presently determinable. I.  CONSOLIDATION OF OPERATIONS    To reduce overhead costs and improve efficiency, we initiated a consolidation plan in fiscal2004 to reduce the number of operating locations within our Electrical Power Products segment.As of June 30, 2004, the consolidation of our Greenville, Texas facility into our North Canton,Ohio facility was completed, resulting in the transfer of our distribution switch product lines.In October 2004, we completed the consolidation of our bus duct product lines by combining ourElyria, Ohio operations into our Northlake, Illinois facility. As of April 30, 2005, theconsolidation of our Watsonville, California operations into our Houston, Texas facility wascompleted, resulting in the transfer of our power electronics product lines to Houston. Theconsolidation of our operations have resulted in the involuntary termination of approximately100 employees.    As of April 30, 2005, the unpaid balance of the consolidation costs is included in accruedsalaries, bonuses and commissions on the consolidated balance sheet.
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     Details of the consolidation reserve during the current period are as follows:                   **Accrued**         **Charges at**  **Six Months Ended**  **Accrued**   **October 31,**  **April 30, 2005**  **Charges at**   **2004**  **Charges**  **Payments**  **April 30, 2005**   (In thousands) Cash charges:                Severance and employee benefits $410  $—  $(365) $45 Shutdown costs  94   20   (114)  —              Subtotal $504   20  $(479) $45               Noncash charges:                Write-down (loss) on fixed assets      46                                          Total charges     $66                         
   For the six months ended April 30, 2005, shutdown costs incurred were relocation expensesfor employees. These expenses are included in selling, general and administrative expenses onthe consolidated statement of operations.
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**POWELL INDUSTRIES, INC. AND SUBSIDIARIES**
**Item 2.*****Management’s Discussion And Analysis Of Financial Condition And Results Of Operations***
*The following discussion of our financial condition and results of operations should be read inconjunction with the accompanying condensed consolidated financial statements and related notes.In the course of operations, we are subject to certain risk factors, including but not limited tocompetition and competitive pressures, sensitivity to general economic and industry conditions,international political and economic risks, availability and price of raw materials and executionof business strategy. Any forward-looking statements made by or on our behalf are made pursuant tothe safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Readers arecautioned that such forward-looking statements involve risks and uncertainties in that the actualresults may differ materially from those projected in the forward-looking statements.*
**Overview**
We develop, design, manufacture, and service equipment and systems for the management and controlof electrical energy and other critical processes. Headquartered in Houston, Texas, we serve thetransportation, environmental, industrial, and utility industries. Our business operations areconsolidated into two business segments: Electrical Power Products and Process Control Systems.Financial information related to these business segments is included in Note E of the Notes toCondensed Consolidated Financial Statements.
**Results of Operations**
*Revenue and Gross Profit*
Consolidated revenues increased $7.4 million to $58.9 million in the second quarter of fiscal 2005as compared to second quarter 2004 revenues primarily due to a strengthening order backlog.Domestic revenues increased by 14% to $49.2 million. International revenues were $9.7 million inthe second quarter 2005 compared to $8.4 million in the same quarter of the prior year. Revenuesoutside of the United States accounted for 16% of consolidated revenues in the second quarter offiscal 2005 unchanged from the same period last year.
For the six months ended April 30, 2005, consolidated revenues increased $1.9 million to $106.6million compared to the six months ended April 30, 2004 of $104.7 million. Domestic revenues forthe first six months of fiscal 2005 were $91.2 million compared to $88.4 million for the first sixmonths of fiscal 2004. International revenues were $15.4 million for the first six months offiscal 2005 compared to $16.3 million for the same period of last year. For the six months endedApril 30, 2005, revenue outside of the United States accounted for 14% of consolidated revenuescompared to 16% for the same period a year ago.
*Electrical Power Products*
Our Electrical Power Products segment recorded revenues of $48.4 million for the three months endedApril 30, 2005 compared to $44.0 million for the same time period of the previous year. During thesecond quarter of fiscal 2005, revenues from utility markets strengthened compared to the sameperiod of the prior year. In the second quarter of fiscal 2005, revenues from public and privateutilities were approximately $27.6 million, an increase of $16.6 million compared to the secondquarter of fiscal 2004. Revenues from industrial customers totaled $19.0 million compared to $30.3million from the same period of the previous year. Municipal and transit projects generatedrevenues of $1.8 million in the second quarter of 2005 compared to $2.7 million in the same perioda year ago.
For the six months ended April 30, 2005, this segment recorded revenues of $88.1 million comparedto $90.2 million for the first six months of fiscal 2004. During the first six months of 2005,revenues from utility markets strengthened from the same period a year ago. Utility revenuestotaled $42.9 million, an increase of approximately 44%. Industrial revenues were $39.5 million,compared to $51.5 million a year ago and revenues from municipal and transit projects totaled $5.8million, compared to $8.9 million for the same period last year.
Gross profit, as a percentage of revenues declined to 12.3% in the second quarter of fiscal 2005,compared to 16.0% in the second quarter of fiscal year 2004. Material costs increased $0.3 millionin the second quarter of fiscal 2005 compared to the same
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period a year ago, primarily due to copper, aluminum and steel. In addition, gross profit marginswere adversely impacted in the second quarter of 2005 by competitive pricing pressures due todepressed market levels when jobs were bid in previous periods. Contract labor increasedapproximately $0.5 million in the second quarter of fiscal year 2005 compared to the same period oflast year due to additional labor needed to handle the increase in volume.
For the six months ended April 30, 2005, gross profit as a percentage of revenues decreased to12.7% from 16.9% for the first six months of fiscal 2004. Higher commodity price levels andcompetitive pricing due to depressed market levels have contributed to lower gross profit. Directmaterial costs increased approximately 2.3%, or $1.0 million, during the first six months of 2005compared to the same period a year ago. In addition, incremental production costs of approximately$0.6 million were incurred during the first three months of fiscal 2005 due to start-updifficulties and inefficiencies with our recently relocated distribution switch product line.
*Process Control Systems*
Revenues in our Process Control Systems segment increased to $10.5 million for the three monthsended April 30, 2005 from $7.5 million for the same period of the prior year. Additionally,revenues for this segment increased to $18.5 million for the six months ended April 30, 2005 from$14.6 million for the same period of the prior year. The majority of the increase related to ourcontract to design and build Intelligent Transportation Systems (ITS) for the Holland and Lincolntunnels from the Port Authority of New York and New Jersey. As of April 30, 2005, the remainingvalue associated with this project in our backlog was $10.7 million which is expected to berecognized as revenue in the next six to nine months.
Gross profit as a percentage of revenues improved to 23.7% in the second quarter of fiscal 2005compared to 21.3% in the same quarter of the prior year and increased to 22.9% for the first halfof fiscal 2005 compared to 20.3% in the same period of fiscal 2004. This increase in gross profitmargin can be attributed to improved job performance on the ITS project discussed above and theincrease in revenue without a commensurate increase in operating costs. Gross profits, as apercentage of revenues, will fluctuate due to the large amount of subcontract work and materialpass-through.
For additional information related to our business segments, see Note E of the Notes to CondensedConsolidated Financial Statements.
*Selling, General and Administrative Expenses*
Selling, general and administrative expenses increased by $1.2 million to $9.4 million in thesecond quarter of 2005 compared to the same period of last year. Research and developmentexpenditures were $0.5 million in the second quarter of fiscal 2005 compared to $0.9 million inlast year’s second quarter. Commission expenses for manufacturing sales representatives, as wellas, direct sales expenses increased by approximately $0.3 million in the second quarter of 2005compared to the second quarter of 2004 due to the increase in revenues and backlog. Accounting andauditing expenses increased by $0.2 million primarily due to costs incurred for Sarbanes-Oxleycompliance. Additionally, selling, general and administrative expenses for the second quarter of2004 were reduced due to the collection of $0.4 million from a customer which had been previouslywritten off as bad dcbt expense.
For the six months ended April 30, 2005, selling, general and administrative expenses were $18.9million, or 17.7% of revenues, compared to $16.7 million, or 16.0% of revenues, for the first sixmonths of fiscal 2004. For the six months ended April 30, 2005, research and developmentexpenditures were $1.2 million compared to $1.8 million in first six months of fiscal 2004.Commission expenses for manufacturing sales representatives, as well as, direct sales expensesincreased by approximately $0.8 million in the first half of fiscal 2005 compared to the secondhalf of fiscal 2004. Accounting and auditing expenses increased by $0.5 million in the first sixmonths of fiscal 2005 compared to the same period of fiscal 2004 primarily due to costs incurredfor Sarbanes-Oxley compliance. Additionally, selling, general and administrative expenses for thesecond quarter of 2004 were reduced due to the collection of $0.4 million from a customer whichhad been previously written off as bad dcbt expense.
Interest expense was approximately $139,000 in the second quarter of fiscal 2005, an increase ofapproximately $105,000 compared to the same period in fiscal 2004. This increase is primarily dueto interest expense related to interest payments to certain state taxing authorities related tovoluntary disclosure agreements.
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For the six months ended April 30, 2005, we incurred $216,000 in interest expense compared to$62,000 for the same time period of fiscal 2004. This increase is primarily related to theinterest payments to state taxing authorities discussed above.
We earned approximately $317,000 of interest income in the second quarter of 2005 compared toapproximately $175,000 in the same period of the previous year and approximately $594,000 in thefirst six months of 2005 compared to $367,000 in the same period of the prior year. Interestincome increased primarily due to higher market interest rates and a higher average balance ofmarketable securities in the first six months of fiscal 2005 compared to the same period in fiscal2004.
*Provision for Income Taxes*
Our provision for income taxes reflects an effective tax rate on earnings before income taxes of(61.5%) in the second quarter of fiscal 2005 compared to 37.2% in the second quarter of fiscal 2004and an effective tax rate of (44.4%) in the first six months of fiscal 2005 compared to 36.9% inthe first six months of fiscal 2004 . This increase is primarily due to a higher blended state taxrate and less federal benefit for certain of those state taxes.
*Net Income*
In the second quarter of 2005, we incurred a net loss of $295,000, or $0.03 per diluted share,compared to net income of $360,000, or $0.03 per diluted share, in the second quarter of fiscal2004. For the six months ended April 30, 2005, we incurred a net loss of $1.7 million, or $0.16per diluted share, compared to net income of $1.1 million, or $0.10 per diluted share, for thefirst six months of 2004. Lower gross profits in our Electrical Power Products business segmentand higher selling, general and administrative expenses have resulted in a net loss in fiscal 2005.
*Backlog*
The order backlog on April 30, 2005, was $161.4 million, compared to $134.3 million at fiscal yearend 2004 and $131.2 million at the end of the second quarter one year ago. New orders placedduring the second quarter totaled $73.6 million compared to $45.3 million in the same period oneyear ago.
**Liquidity and Capital Resources**
We have maintained a strong liquidity position. Working capital was $97.9 million at April 30,2005 compared to $99.3 million at October 31, 2004. As of April 30, 2005, current assets exceededcurrent liabilities by 3.0 times and our debt to capitalization ratio was 4.8%.
As of April 30, 2005, we had cash, cash equivalents and marketable securities of $41.3 millioncompared to $63.2 million as of October 31, 2004. Long-term debt and capital lease obligations,net of current maturities, totaled $6.6 million at April 30, 2005 compared to $6.6 million atOctober 31, 2004. In addition to our long-term debt, we have a $15 million revolving creditagreement expiring February 2007. As of April 30, 2005, there were no borrowings under this line ofcredit. We were in compliance with all debt covenants as of April 30, 2005.
*Operating Activities*
For the six months ended April 30, 2005, cash used in operating activities was $20.2 millioncompared to cash provided by operations of $12.1 million for the six months ended April 30, 2004.This reduction in cash was principally used to fund growth in accounts receivable, inventories andcosts related to uncompleted contracts which were not billed. This use of cash has resulted fromthe ramp up of our manufacturing operations resulting in working capital being required to fund theincrease in volume.
*Investing Activities*
Cash used for the purchase of property, plant and equipment during the six months ended April 30,2005 was $2.1 million compared to $3.1 million for the same period of the prior year. The majorityof our 2005 capital expenditures were used to improve our capabilities to manufacture switchgearand electrical power control rooms. A year ago, the majority of our capital expenditures were usedto increase our manufacturing capabilities available for the manufacture of electrical powermodules. These modules are provided to the oil and gas industry for use on offshore platforms.
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Net proceeds from the sale and purchases of auction rate securities during the six months endedApril 30, 2005 were $13.8 million compared to cash used to purchase short term auction ratesecurities of $3.4 million for the six months ended April 30, 2004. Auction rate securities weresold to finance working capital requirements of the business in the first six months of fiscal2005.
*Financing Activities*
Financing activities provided $0.4 million for the six months ended April 30, 2005 compared to$0.6 million in the same period a year ago. The primary source of cash from financing activitieswas proceeds from the exercise of stock options.
**Outlook**
We expect our principal markets to strengthen throughout 2005. Customer inquiries, or requests forproposals, have steadily strengthened during the second half of fiscal 2004 and on into the firstsix months of 2005. One of the positive trends we have experienced is an increase in new orderactivity. Orders during the second quarter and first quarter of 2005 totaled $73.6 million and$60.1 million, respectively, compared to $45.3 million and $33.1 million in the same periods oneyear ago. We are optimistic that we will maintain this strengthened order rate throughout fiscal2005.
In our Electrical Power Products segment, new orders during the second quarter and first quarter of2005 totaled $62.1 million and $55.5 million, respectively, compared to $38.4 million and $30.3million in the same periods one year ago. In addition, we expect to realize lower overheadexpenses and increased efficiencies as a result of our consolidation efforts initiated in 2004 andcapital improvements, both of which should improve our competitive position. Although our ProcessControl Systems segment continues to experience soft market conditions, we anticipate increasedfunding for municipal projects will be available as general economic conditions strengthen. Webelieve we are well-positioned to take advantage of improving economic conditions.
We anticipate that we will need to reinvest a portion of our cash in operating working capital forthe remainder of fiscal 2005. Working capital needs are anticipated to increase with growinglevels of business activity. We believe that working capital, borrowing capabilities, and cashgenerated from operations will be sufficient to finance the anticipated operational activities,capital improvements, debt repayments and possible future acquisitions for the foreseeable future.
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**POWELL INDUSTRIES, INC. AND SUBSIDIARIES**
***Item 3. Quantitative And Qualitative Disclosures About Market Risk***
We are exposed to certain market risks arising from transactions we have entered into in thenormal course of business. These risks primarily relate to fluctuations in interest rates, foreignexchange rates and commodity prices.
We are subject to market risk resulting from changes in interest rates related to our outstandingdebt and investments in marketable debt securities. Regarding our various debt instrumentsoutstanding at April 30, 2005 and October 31, 2004, a 100 basis point increase in interest rateswould result in a total annual increase in interest expense of less than $75,000. Our investmentsin marketable debt securities are carried at fair value on the consolidated balance sheet, withunrealized gains and losses reported in other comprehensive income. Changes in interest rates willaffect the fair value of the marketable securities as reported. While we do not currently have anyderivative contracts to hedge our exposure to interest rate risk, we have in the past and may inthe future enter into such contracts. Overall, we believe that changes in interest rates will nothave a material near-term impact on our future earnings or cash flows. During each of the pastthree years, we have not experienced a significant effect on our business due to changes ininterest rates.
Our market risk associated with foreign currency rates is not considered to be material, since weprimarily arrange compensation in U.S. dollars. During each of the past three years, we have notexperienced a significant effect on our business due to fluctuations in foreign exchange rates.
We are subject to market risk from fluctuating market prices of certain raw materials. While suchmaterials are typically available from numerous suppliers, commodity raw materials are subject toprice fluctuations. We attempt to pass along such commodity price increases to our customers on acontract-by-contract basis to avoid profit margin erosion. While we may do so in the future, wehave not entered into any derivative contracts to hedge our exposure to commodity risk in fiscalyears 2005 or 2004. During 2004 and the first half or fiscal 2005, we experienced significantprice pressures with some of our key raw materials. Competitive market pressures limited ourability to pass these cost increases to our customers, thus eroding our earnings in 2004 and thefirst half of fiscal 2005. Fluctuations in commodity prices may have a material near-term effecton our future earnings and cash flows.
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**POWELL INDUSTRIES, INC. AND SUBSIDIARIES**
**Item 4.*****Controls And Procedures***
Management, with the participation of our Chief Executive Officer (“CEO”) and Chief FinancialOfficer (“CFO”), has evaluated the effectiveness of our disclosure controls and procedures (asdefined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) as ofthe end of the period covered by this report. Based on such evaluation, our CEO and CFO have eachconcluded that as of the end of such period, our disclosure controls and procedures were effectiveto ensure that information required to be disclosed by us in reports that we file or submit underthe Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reportedwithin the time periods specified in the Securities and Exchange Commission’s rules and forms andthat such information is accumulated and communicated to our management, including the CEO and CFO,as appropriate, to allow timely decisions regarding required disclosures.
We also maintain a system of internal accounting controls that are designed to provide reasonableassurance that our books and records accurately reflect our transactions and that our policies andprocedures are followed. There have not been any changes in our internal control over financialreporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities ExchangeAct of 1934, as amended) during the fiscal quarter to which this report relates that havematerially affected, or are reasonably likely to materially affect, our internal control overfinancial reporting.
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Part II
**OTHER INFORMATION**   ITEM 1. Legal Proceedings  The Company is a party to disputes arising in the ordinary courseof business. Management does not believe that the ultimateoutcome of these disputes will materially affect the financialcondition or results of operations of the Company.   ITEM 4. Submission of Matters to a Vote of Security Holders  At the annual meeting of stockholders of the Company held on April15, 2005, Eugene L. Butler and Ronald J. Wolny were elected asdirectors of the Company with terms ending in 2008. The directorscontinuing in office after the meeting are Joseph L. Becherer,James F. Clark, Thomas W. Powell, Stephen W. Seale, Jr., andRobert C. Tranchon. As to each nominee for director, the numberof votes cast for, against, or withheld, as well as the number ofabstentions and broker non-votes, were as follows:                          Nominee  Votes Cast For  Votes Cast Against  Votes Withheld  Abstentions  Non-votes  Eugene L. Butler   9,879,202    43,560    673,787   —  —  Ronald J. Wolny   10,065,365    58,229    472,955   —  —  
At the annual meeting, the stockholders also approved the adoption of the PowellIndustries, Inc. Non-Employee Director Restricted Stock Plan. The number of votescast for, against, or withheld, as well as the number of abstentions and brokernon-votes, with respect to such matter, were as follows:                       Votes Cast For  Votes Cast Against  Votes Withheld  Abstentions  Non-Votes  8,418,044   831,037    1,289,939    57,529   —  
At the annual meeting, the stockholders also approved the amendment of the PowellIndustries, Inc. 1992 Stock Option Plan to increase the number of shares available forissuance thereunder by 600,000 shares. The number of votes cast for, against, orwithheld, as well as the number of abstentions and broker non-votes, with respect tosuch matter, were as follows:                       Votes Cast For  Votes Cast Against  Votes Withheld  Abstentions  Non-Votes  7,899,018   1,389,041    1,289,939    18,551   —       ITEM 6. Exhibits    3.1 - Certificate of Incorporation of Powell Industries, Inc. filed with the Secretary of State of the State ofDelaware on February 11, 2004 (filed as Exhibit 3.1 to our Form 8-A/A filed November 1, 2004, and incorporated hereinby reference).      3.2 - Bylaws of Powell Industries, Inc. (filed as Exhibit 3.2 to our Form 8-A/A filed November 1, 2004, andincorporated herein by reference).      31.1 - Certification of Thomas W. Powell pursuant to Rule 13a-14(a)/15d-14(a).      31.2 - Certification of Don R. Madison pursuant to Rule 13a-14(a)/15d-14(a).      32.1 - Certification of Thomas W. Powell Pursuant to Section 18 U.S.C. Section 1350, as Adopted Pursuant to Section906 of the Sarbanes-Oxley Act of 2002.      32.2 - Certification of Don R. Madison Pursuant to Section 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906of the Sarbanes-Oxley Act of 2002.
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**SIGNATURES**
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly causedthis report to be signed on its behalf by the undersigned thereunto duly authorized.
POWELL INDUSTRIES, INC.