Table of Contents

  **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 March 31, 2008******OR**   o **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934****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* *(I.R.S. Employer**incorporation or organization)* *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 check mark whether the registrant (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days. þ Yes o No     Indicate by check mark whether the registrant is a large accelerated filer, an acceleratedfiler, a non-accelerated filer, or a smaller reporting company. See the definitions of “largeaccelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of theExchange Act. (Check one):          Large accelerated filer o Accelerated filer þ Non-accelerated filer o Smaller reporting company o    (Do not check if a smaller reporting company)       Indicate by check mark whether the registrant is a shell company (as defined in Exchange ActRule 12b-2). o Yes þ No     Indicate the number of shares outstanding of each of the registrant’s classes of common stock,as of the latest practicable date.     At May 5, 2008, there were 11,305,487 outstanding shares of the registrant’s common stock, parvalue $0.01 per share.  
 

 
**POWELL INDUSTRIES, INC. AND SUBSIDIARIES****TABLE OF CONTENTS**       **Page** **Part I — Financial Information**    Item 1. Condensed Consolidated Financial Statements  3 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 Results of Operations  13 Item 3. Quantitative and Qualitative Disclosures About Market Risk  18 Item 4. Controls and Procedures  18      **Part II — Other Information**    Item 1. Legal Proceedings  19 Item 1A. Risk Factors  19 Item 4. Submission of Matters to a Vote of Security Holders  20 Item 6. Exhibits  20 Signatures  21  Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer Pursuant to Section 906 Certification of Chief Financial Officer Pursuant to Section 906
2

Table of Contents
**PART I — FINANCIAL INFORMATION****Item 1.*****Condensed Consolidated Financial Statements*****POWELL INDUSTRIES, INC. AND SUBSIDIARIES****Condensed Consolidated Balance Sheets****(In thousands, except share and per share data)**           **March 31,**  **September 30,**   **2008**  **2007**   **(Unaudited)**     **ASSETS**        Current Assets:        Cash and cash equivalents $7,786  $5,257 Accounts receivable, less allowance for doubtful accounts of $1,035 and $1,739, respectively  118,424   107,717 Costs and estimated earnings in excess of billings on uncompleted contracts  78,317   69,442 Inventories, net  62,898   47,789 Income taxes receivable  3,180   548 Deferred income taxes  457   1,898 Prepaid expenses and other current assets  3,856   4,235        Total Current Assets  274,918   236,886 Property, plant and equipment, net  64,607   67,401 Goodwill  1,084   1,084 Intangible assets, net  26,997   28,861 Other assets  5,704   6,783        Total Assets $373,310  $341,015        **LIABILITIES AND STOCKHOLDERS’ EQUITY**        Current Liabilities:        Current maturities of long-term debt and capital lease obligations $13,617  $8,464 Income taxes payable  902   1,669 Accounts payable  57,586   65,225 Accrued salaries, bonuses and commissions  17,639   19,010 Billings in excess of costs and estimated earnings on uncompleted contracts  41,734   25,924 Accrued product warranty  6,866   5,787 Other accrued expenses  10,346   9,533        Total Current Liabilities  148,690   135,612 Long-term debt and capital lease obligations, net of current maturities  32,299   27,372 Deferred compensation  3,140   3,155 Postretirement benefit obligation  992   942 Other liabilities  100   87        Total Liabilities  185,221   167,168        Commitments and Contingencies (Note F)        Minority Interest  198   298        Stockholders’ Equity:        Preferred stock, par value $.01; 5,000,000 shares authorized; none issued  —   — Common stock, par value $.01; 30,000,000 shares authorized; 11,267,716 and 11,143,866shares issued, respectively; 11,267,716 and 11,143,866 shares outstanding, respectively  113   111 Additional paid-in capital  22,055   16,854 Retained earnings  164,013   154,572 Accumulated other comprehensive income  2,071   2,557 Deferred compensation  (361)  (545)       Total Stockholders’ Equity  187,891   173,549        Total Liabilities and Stockholders’ Equity $373,310  $341,015        The accompanying notes are an integral part of these condensed consolidated financial statements.
3

Table of Contents
**POWELL INDUSTRIES, INC. AND SUBSIDIARIES****Condensed Consolidated Statements of Operations (Unaudited)****(In thousands, except per share data)**                   **Three Months Ended**  **Six Months Ended**   **March 31, 2008**  **March 31, 2007**  **March 31, 2008**  **March 31, 2007** Revenues $160,333  $141,912  $307,454  $264,688 Cost of goods sold  129,641   119,147   250,067   221,833              Gross profit  30,692   22,765   57,387   42,855 Selling, general and administrative expenses  20,961   18,452   41,072   34,726              Income before interest, income taxes andminority interest  9,731   4,313   16,315   8,129 Interest expense  771   919   1,636   1,607 Interest income  (86)  (120)  (201)  (300)             Income before income taxes and minorityinterest  9,046   3,514   14,880   6,822 Income tax provision  3,236   1,210   5,365   2,430 Minority interest  (219)  50   (100)  109              Net income $6,029  $2,254  $9,615  $4,283                               Net earnings per common share:                Basic $0.54  $0.20  $0.86  $0.39              Diluted $0.53  $0.20  $0.84  $0.39              Weighted average shares:                Basic  11,232   11,033   11,194   10,987              Diluted  11,416   11,123   11,398   11,090              The accompanying notes are an integral part of these condensed consolidated financial statements.
4

Table of Contents
**POWELL INDUSTRIES, INC. AND SUBSIDIARIES****Condensed Consolidated Statements of Cash Flows (Unaudited)****(In thousands)**           **Six Months Ended**   **March 31, 2008**  **March 31, 2007** Operating Activities:        Net income $9,615  $4,283 Adjustments to reconcile net income to net cash used in operatingactivities:        Depreciation  4,057   3,254 Amortization  1,895   1,936 Stock-based compensation  1,860   508 Minority interest  (100)  109 Loss on disposition of assets  11   300 Bad debt expense  436   84 Deferred income taxes  2,362   456 Changes in operating assets and liabilities:        Accounts receivable, net  (11,342)  (3,663)Costs and estimated earnings in excess of billings on uncompleted contracts  (9,084)  (11,816)Inventories  (15,251)  (12,439)Prepaid expenses and other current assets  (2,263)  (6,036)Other assets  (76)  (122)Accounts payable and income taxes payable  (8,344)  11,363 Accrued liabilities  645   (969)Billings in excess of costs and estimated earnings on uncompleted contracts  15,736   12,137 Deferred compensation  169   180 Other liabilities  63   (5)       Net cash used in operating activities  (9,611)  (440)       Investing Activities:        Proceeds from sale of fixed assets  —   155 Purchases of property, plant and equipment  (1,530)  (9,678)       Net cash used in investing activities  (1,530)  (9,523)       Financing Activities:        Borrowings on US revolving line of credit  80,503   28,480 Payments on US revolving line of credit  (66,879)  (28,980)Borrowings on UK revolving line of credit  —   1,959 Payments on UK revolving line of credit  (1,596)  — Payments on UK term loan  (1,212)  (1,177)Payments on industrial development revenue bonds  (400)  (400)Proceeds from exercise of stock options  2,288   2,096 Tax benefit from exercise of stock options  1,016   575 Payments on short-term and other financing  (26)  (333)       Net cash provided by financing activities  13,694   2,220        Net increase (decrease) in cash and cash equivalents  2,553   (7,743)Effect of exchange rate changes on cash and cash equivalents  (24)  310 Cash and cash equivalents at beginning of period  5,257   10,495        Cash and cash equivalents at end of period $7,786  $3,062        The accompanying notes are an integral part of these condensed consolidated financial statements
5

Table of Contents
**POWELL INDUSTRIES, INC. AND SUBSIDIARIES*****Notes to Condensed Consolidated Financial Statements (Unaudited)***A. OVERVIEW AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES     *Overview*Powell Industries, Inc. (“we,” “us,” “our,” “Powell” or the “Company”) was incorporated in thestate of Delaware in 2004 as a successor to a Nevada company incorporated in 1968. The Nevadacorporation was the successor to a company founded by William E. Powell in 1947, which merged intothe Company in 1977. Our major subsidiaries, all of which are wholly-owned, include: PowellElectrical Systems, Inc.; Transdyn, Inc.; Powell Industries International, Inc.; Switchgear &Instrumentation Limited and Switchgear & Instrumentation Properties Limited.We develop, design, manufacture and service custom engineered-to-order equipment and systems forthe management and control of electrical energy and other critical processes. Headquartered inHouston, Texas, we serve the transportation, environmental, energy, industrial and utilityindustries.     *Basis of Presentation*These unaudited condensed consolidated financial statements include the accounts of Powell and itswholly-owned subsidiaries. The financial position and results of operation of our Singapore jointventure, in which we hold a majority ownership, have also been consolidated. As a result of thisconsolidation, we record minority interest on our balance sheet for our joint venture partner’sshare of the equity in the joint venture. All significant intercompany accounts and transactionshave been eliminated in consolidation.These unaudited condensed consolidated financial statements have been prepared pursuant to therules of the Securities and Exchange Commission (“SEC”). Certain information and footnotedisclosures, normally included in annual financial statements prepared in accordance withaccounting principles generally accepted in the United States, have been condensed or omittedpursuant to those rules and regulations. Powell believes that the disclosures made are adequate tomake the information presented not misleading. In the opinion of management, all adjustments,consisting only of normal recurring adjustments, necessary to fairly state the financial position,results of operations and cash flows with respect to the interim consolidated financial statementshave been included. The results of operations for the interim periods are not necessarilyindicative of the results for the entire fiscal year. The year-end balance sheet data was derivedfrom audited financial statements, but does not include all disclosures required by accountingprinciples generally accepted in the United States of America.These unaudited condensed financial statements should be read in conjunction with the auditedconsolidated financial statements and notes thereto of Powell and its subsidiaries included inPowell’s Annual Report on Form 10-K for the year ended September 30, 2007, which was filed with theSEC on December 7, 2007.     *Use of Estimates*The preparation of financial statements in conformity with accounting principles generally acceptedin the United States requires management to make estimates and assumptions that affect the amountsreported in the condensed consolidated financial statements and accompanying footnotes. The amountsrecorded for insurance claims, warranties, legal, income taxes and other contingent liabilitiesrequire judgments regarding the amount of expenses that will ultimately be incurred. We base ourestimates on historical experience and on various other assumptions, as well as the specificcircumstances surrounding these contingent liabilities, in evaluating the amount of liability thatshould be recorded. Estimates may change as new events occur, additional information becomesavailable or operating environments change. Actual results may differ from our estimates. The mostsignificant estimates used in the Company’s financial statements affect revenue and costrecognition for construction contracts, the allowance for doubtful accounts, self-insurance,warranty accruals, income taxes and postretirement benefit obligations.
6

Table of Contents
     *Foreign Currency Translation*The functional currency for our foreign subsidiaries is the local currency in which the entity islocated. The financial statements of all subsidiaries with a functional currency other than theU.S. Dollar have been translated into U.S. Dollars in accordance with Statement of FinancialAccounting Standards (“SFAS”) No. 52, *Foreign Currency Translation*(“SFAS No. 52”). All assets andliabilities of foreign operations are translated into U.S. Dollars using period-end exchange ratesand all revenues and expenses are translated at average rates during the respective period. TheU.S. Dollar results that arise from such translation, as well as exchange gains and losses onintercompany balances of a long-term investment nature, are included in the cumulative currencytranslation adjustments in accumulated other comprehensive income in stockholders’ equity.     *Stock-Based Compensation*Under SFAS No. 123 (revised 2004), *Shared-Based Payment*(“SFAS No. 123R”), we use the Black-Scholesoption pricing model to estimate the fair value of our stock options. We apply the expandedguidance under SFAS No. 123R for the development of our assumptions used as inputs for theBlack-Scholes option pricing model for grants issued after November 1, 2005. Expected volatility isdetermined using historical volatilities based on historical stock prices for a period equal to theexpected term. The expected volatility assumption is adjusted if future volatility is expected tovary from historical experience. The expected term of options represents the period of time thatoptions granted are expected to be outstanding and falls between the options’ vesting andcontractual expiration dates. The risk-free interest rate is based on the yield at the date ofgrant of a zero-coupon U.S. Treasury bond whose maturity period equals the option’s expected term.     *Accumulated Other Comprehensive Income*Accumulated other comprehensive income, which is included as a component of stockholders’ equitynet of tax, includes unrealized gains or losses on currency translation adjustments in foreignconsolidated subsidiaries.     *Income Taxes*The Company uses an estimated annual effective income tax rate in recording its quarterly provisionfor income taxes in the various jurisdictions in which the Company operates. Statutory tax ratechanges and other significant or unusual discrete items are recognized in the quarter in which theyoccur.The Company adopted the provisions of Financial Accounting Standards Board (“FASB”) InterpretationNo. 48, *Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109*,(“FIN 48”) on October 1, 2007. FIN 48 addresses the determination of whether tax benefits claimedor expected to be claimed on a tax return should be recorded in the financial statements. Under FIN48, the Company may recognize the tax benefit from uncertain tax positions only if it is at leastmore likely than not that the tax position will be sustained on examination by the taxingauthorities, based on the technical merits of the position. The tax benefits recognized in thefinancial statements from such a position should be measured based on the largest benefit that hasa greater than fifty percent likelihood of being realized upon settlement with the taxingauthorities. FIN 48 also provides guidance on derecognition, classification, interest and penaltieson income taxes, accounting in interim periods and requires increased disclosures.Upon adoption of FIN 48, the Company recorded a $0.3 million increase in its tax reserves, anoffsetting decrease of $0.2 million to retained earnings for uncertain tax positions and anincrease in deferred income tax assets of $0.1 million. As of the adoption date, the Company hadtotal tax reserves of approximately $1.2 million. This reserve includes an estimate of potentialinterest and penalties on estimated liabilities for uncertain tax positions, which are recorded ascomponents of income tax expense, in the amount of $0.4 million as of October 1, 2007. Subsequentto adoption, no significant changes were made to the Company’s tax reserve balances during thefirst six months of fiscal 2008.The Company’s continuing policy is to recognize interest and penalties related to income taxmatters as tax expense. The amount of interest and penalty expense recorded for the three and sixmonths ended March 31, 2008 was not material.There was no material change in the net amount of unrecognized tax benefits in the three and sixmonths ended March 31, 2008. Management believes that it is reasonably possible that within thenext 12 months the total unrecognized tax benefits will decrease by approximately 35% due to theexpiration of certain statutes of limitations in various state and local jurisdictions.
7

Table of Contents
The Company is subject to income tax in the United States, multiple state jurisdictions and a fewforeign jurisdictions, primarily the United Kingdom. We remain open to examination by the InternalRevenue Service (“IRS”) for tax years 2003 through 2007, as these statutes of limitations have notyet expired. Powell does not consider any state in which it does business to be a major taxjurisdiction under FIN 48. The Company remains open to examination in the United Kingdom since theacquisition of Switchgear & Instrumentation Limited in 2005.     *New Accounting Standards*In September 2006, the FASB issued SFAS No. 157, *Fair Value Measurements*(“SFAS No. 157”), whichdefines fair value, establishes a framework for measuring fair value in generally acceptedaccounting principles and expands disclosure requirements about fair value measurements. SFAS No.157 does not require any new fair value measurements, but provides guidance on how to measure fairvalue by providing a fair value hierarchy used to classify the source of the information. SFAS No.157 is effective for our fiscal year beginning October 1, 2008. The Company is currentlyevaluating the impact of adopting SFAS No. 157.In February 2007, the FASB issued SFAS No. 159, *The Fair Value Option for Financial Assets andFinancial Liabilities, including an amendment of FASB Statement No. 155*(“SFAS No. 159”). SFAS No.159 permits entities to measure many financial instruments and certain other assets and liabilitiesat fair value, with unrealized gains and losses related to these financial instruments reported inearnings at each subsequent reporting date. SFAS No. 159 is effective for fiscal years beginningafter November 15, 2007. We did not elect to measure any additional assets or liabilities at fairvalue that are not already measured at fair value under existing standards. Therefore, theadoption of this standard has no impact on our consolidated financial statements.In December 2007, the FASB issued SFAS No. 141 (revised 2007), *Business Combinations*(“SFAS No.141R”). SFAS No. 141R establishes principles and requirements for how an acquirer recognizes andmeasures in its financial statements the identifiable assets acquired, the liabilities assumed, anynoncontrolling interest in the acquiree and the goodwill acquired. SFAS No. 141R also establishesdisclosure requirements to enable the evaluation of the nature and financial effects of thebusiness combination. SFAS No. 141R is effective as of the beginning of an entity’s fiscal yearthat begins after December 15, 2008, and will be adopted by us in the first quarter of fiscal 2010.We are currently evaluating the potential impact, if any, of the adoption of SFAS No. 141R on ourconsolidated results of operations and financial condition.In December 2007, the FASB issued SFAS No. 160, *Noncontrolling Interests in Consolidated FinancialStatements —an amendment of Accounting Research Bulletin 51*(“SFAS No. 160”). SFAS No. 160establishes accounting and reporting standards for ownership interests in subsidiaries held byparties other than the parent, the amount of consolidated net income attributable to the parent andto the noncontrolling interest, changes in a parent’s ownership interest and the valuation ofretained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS No. 160 alsoestablishes disclosure requirements that clearly identify and distinguish between the interests ofthe parent and the interests of the noncontrolling owners. SFAS No. 160 is effective as of thebeginning of an entity’s fiscal year that begins after December 15, 2008, and will be adopted by usin the first quarter of fiscal 2010. We are currently evaluating the potential impact of theadoption of SFAS No. 160 on our consolidated results of operations and financial condition.B. EARNINGS PER SHAREThe following table sets forth the computation of basic and diluted earnings per share (inthousands, except per share data):                   **Three Months Ended**  **Six Months Ended**   **March 31,**  **March 31,**   **2008**  **2007**  **2008**  **2007** *Numerator:*                Net income $6,029  $2,254  $9,615  $4,283              *Denominator:*                Denominator for basic earnings per share-weighted average shares  11,232   11,033   11,194   10,987 Dilutive effect of stock options and restricted stock  184   90   204   103              Denominator for diluted earnings per share-adjusted weightedaverage shares with assumed conversions  11,416   11,123   11,398   11,090              *Net earnings per share:*                Basic $0.54  $0.20  $0.86  $0.39              Diluted $0.53  $0.20  $0.84  $0.39              
8

Table of Contents
There were no options excluded from the computation of diluted earnings per share for the three andsix months ended March 31, 2008 and 2007, respectively, as the average market prices of our commonstock were greater than the options’ exercise prices.C. DETAIL OF SELECTED BALANCE SHEET ACCOUNTS     *Allowance for Doubtful Accounts*Activity in our allowance for doubtful accounts receivable consists of the following (inthousands):                   **Three Months Ended**  **Six Months Ended**   **March 31,**  **March 31,**   **2008**  **2007**  **2008**  **2007** Balance at beginning of period $1,668  $1,119  $1,739  $1,044 Adjustments to the allowance  366   (143)  436   (84)Deductions for uncollectible accounts written off, net of recoveries  (999)  (94)  (1,133)  (94)Increase due to foreign currency translation  —   —   (7)  16              Balance at end of period $1,035  $882  $1,035  $882                   *Warranty Accrual*Activity in our product warranty accrual consists of the following (in thousands):                   **Three Months Ended**  **Six Months Ended**   **March 31,**  **March 31,**   **2008**  **2007**  **2008**  **2007** Balance at beginning of period $6,162  $3,836  $5,787  $3,443 Adjustments to the accrual  1,301   1,220   2,426   2,204 Deductions for warranty charges  (595)  (394)  (1,307)  (1,036)Increase due to foreign currency translation  (2)  2   (40)  53              Balance at end of period $6,866  $4,664  $6,866  $4,664                   *Inventories*The components of inventories are summarized below (in thousands):           **March 31,**  **September 30,**   **2008**  **2007** Raw materials, parts and subassemblies $49,772  $31,914 Work-in-progress  13,126   15,875        Total inventories $62,898  $47,789             *Cost and Estimated Earnings on Uncompleted Contracts*The components of costs and estimated earnings and related amounts billed on uncompleted contractsare summarized below (in thousands):           **March 31,**  **September 30,**   **2008**  **2007** Costs incurred on uncompleted contracts $524,315  $456,892 Estimated earnings  133,608   104,136           657,923   561,028 Less: Billings to date  621,340   517,510          $36,583  $43,518        Included in the accompanying balance sheets under the following captions:        Costs and estimated earnings in excess of billings on uncompleted contracts $78,317  $69,442 Billings in excess of costs and estimated earnings on uncompleted contracts  (41,734)  (25,924)         $36,583  $43,518        
9

Table of Contents
D. COMPREHENSIVE INCOMEComprehensive income is as follows (in thousands):                   **Three Months Ended**  **Six Months Ended**   **March 31,**  **March 31,**   **2008**  **2007**  **2008**  **2007** Net income $6,029  $2,254  $9,615  $4,283 Unrealized (loss) gain on foreign currency translation, net of tax  —   (24)  (486)  692              Comprehensive income $6,029  $2,230  $9,129  $4,975              E. LONG-TERM DEBTLong-term debt consists of the following (in thousands):           **March 31,**  **September 30,**   **2008**  **2007** US Revolver $15,624  $2,000 UK Revolver  2,993   4,710 UK Term Loan  6,584   7,986 Deferred acquisition payable  15,075   15,075 Industrial development revenue bonds  5,600   6,000 Capital lease obligations  40   65        Subtotal long-term debt and capital lease obligations  45,916   35,836 Less current portion  (13,617)  (8,464)       Total long-term debt and capital lease obligations $32,299  $27,372             *US and UK Revolvers*On December 14, 2007, we amended our existing credit agreement (“Amended Credit Agreement”) with amajor domestic bank and certain other financial institutions. This amendment to our credit facilitywas made to expand our US borrowing capacity by $16.5 million to provide additional working capitalsupport for the Company. The Amended Credit Agreement extended the expiration date to December 31,2011.The Amended Credit Agreement provides for a 1) $58.5 million revolving credit facility (“USRevolver”), 2) £4.0 million (pound sterling) (approximately $8.0 million) revolving credit facility(“UK Revolver”) and 3) £6.0 million (approximately $12.0 million) single advance term loan (“UKTerm Loan”). The Amended Credit Agreement contains certain covenants with respect to minimumearnings (as defined), maximum capital expenditures, minimum tangible net worth and restrictions onour ability to pay dividends. Obligations are secured by the stock of our subsidiaries. Theinterest rate for amounts outstanding under the Amended Credit Agreement is a floating rate basedupon the London interbank offered rate (“LIBOR”) plus a margin which can range from 0% to 1%, asdetermined by the Company’s consolidated leverage ratio as defined within the Amended CreditAgreement. Expenses associated with the issuance of the original credit agreement are classified asdeferred loan costs, totaled $576,000 and are being amortized as a non-cash charge to interestexpense.The US Revolver and the UK Revolver provide for the issuance of letters of credit which wouldreduce the amounts which may be borrowed under the respective revolvers. The amount available underthis agreement was reduced by $15.2 million for our outstanding letters of credit at March 31,2008. There was £1.5 million, or approximately $3.0 million, outstanding under the UK Revolver and$15.6 million outstanding under the US Revolver as of March 31, 2008. Amounts available under theUS Revolver and the UK Revolver were approximately $27.6 million and $5.0 million, respectively, atMarch 31, 2008. The US Revolver and the UK Revolver expire on December 31, 2011.     *UK Term Loan*The UK Term Loan provided £6.0 million, or approximately $12.0 million, for financing the July 2005acquisition of Switchgear & Instrumentation Limited. Approximately £5.0 million, or approximately$10.0 million, of this facility was used to finance the portion of the purchase price of Switchgear& Instrumentation Limited that was denominated in pounds sterling. The remaining £1.0 million, orapproximately $2.0 million, was utilized as the initial working capital for the surviving businessof Switchgear & Instrumentation Limited that we operate (referred to as “S&I”). Quarterlyinstallments of £300,000, or approximately $599,000, began March 31, 2006, with the final paymentdue on March 31, 2010. As of March 31, 2008, £3.3 million, or $6.6 million, was outstanding on theUK Term Loan. The interest rate for amounts outstanding under the UK Term Loan is a floating ratebased upon LIBOR plus a margin
10

Table of Contents
which can range from 0% to 1% as determined by the Company’s consolidated leverage ratio as definedwithin the Amended Credit Agreement.     *Deferred Acquisition Payable*In connection with the acquisition of the Power/Vac® product line, $8.5 million of the totalpurchase price of $32.0 million was paid to General Electric Company (“GE”) at closing on August 7,2006. The remaining balance of the purchase price of $23.5 million is payable in four installmentsevery 10 months over the next 40 months from the acquisition date. The deferred installments resultin a discounted note payable of approximately $15.1 million at March 31, 2008, based on an assumeddiscount rate of 6.6%. The current portion of this deferred acquisition payable is $10.8 millionand is included in the current portion of long-term debt.     *Industrial Development Revenue Bonds*We borrowed $8.0 million in October 2001 through a loan agreement funded with proceeds fromtax-exempt industrial development revenue bonds (“Bonds”). These Bonds were issued by the IllinoisDevelopment Finance Authority and were used for the completion of our Northlake, Illinois facility.Pursuant to the Bond issuance, a reimbursement agreement between the Company and a major domesticbank required an issuance by the bank of an irrevocable direct-pay letter of credit (“Bond LC”) tothe Bonds’ trustee to guarantee payment of the Bonds’ principal and interest when due. The Bond LCis subject to both early termination and extension provisions customary to such agreements. Whilethe Bonds mature in 2021, the reimbursement agreement requires annual redemptions of $400,000 thatcommenced on October 25, 2002. A sinking fund is used for the redemption of the Bonds. At March 31,2008, the balance in the sinking fund was approximately $228,000 and was recorded in cash and cashequivalents. The Bonds bear interest at a floating rate determined weekly by the Bonds’ remarketingagent, which was the underwriter for the Bonds and is an affiliate of the bank. This interest ratewas 2.25% per annum on March 31, 2008.F. COMMITMENTS AND CONTINGENCIES     *Letters of Credit and Bonds*Certain customers require us to post bank letter of credit guarantees or performance bonds issuedby a surety. These guarantees and performance bonds assure our customers that we will perform underterms of our contracts with associated vendors and subcontractors. In the event of default, thecustomer may demand payment from the bank under a letter of credit or performance by the suretyunder a performance bond. To date, there have been no significant expenses related to either forthe periods reported. We were contingently liable for secured and unsecured letters of credit of$28.7 million as of March 31, 2008. We also had performance bonds totaling approximately $126.7million that were outstanding at March 31, 2008.In March 2007, we renewed and amended our facility agreement (“Facility Agreement”) with a largeinternational bank. The Facility Agreement provides S&I with 1) £10.0 million in bonds(approximately $20.0 million), 2) £2.5 million of forward exchange contracts and currency options(approximately $5.0 million) and 3) the issuance of bonds and entering into forward exchangecontracts and currency options. At March 31, 2008, we had outstanding a total of £5.9 million, orapproximately $11.8 million, of bonds under this Facility Agreement.     *Litigation*We are involved in various legal proceedings, claims and other disputes arising in the ordinarycourse of business which, in general, are subject to uncertainties and the outcomes are notpredictable. However, other than the claim discussed below in Other Contingencies, we do notbelieve that the ultimate conclusion of these disputes could materially affect our financialposition or results of operations.     *Other Contingencies*We previously entered into a construction joint venture agreement to supply, install and commissiona Supervisory Control and Data Acquisition System (“SCADA”) to monitor and control the distributionand delivery of fresh water to the City and County of San Francisco Public Utility Commission(“Commission”). The project was substantially completed and has been performing to the satisfactionof the Commission. However, various factors outside the control of the Company and its jointventure partner caused numerous changes and additions to the work that in turn delayed thecompletion of the project. The Commission has withheld liquidated damages and earned contractpayments from the joint venture. The Company has made claims against the Commission for variousmatters, including compensation for extra work and delay to the project.Despite attempts at mediation, the parties could not resolve their dispute, and a jury trialcommenced in December 2006. On May 1, 2007, the jury delivered its verdict in favor of the jointventure, of which the Company is the managing partner, and determined that the Commission hadbreached its contract with the joint venture. The court has issued and filed its final judgmentconfirming the jury verdict and has also awarded pre-judgment interest and post-judgment interest.The judgment is subject to appeal. However, based upon the judgment issued in favor of the Company,we anticipate that we will be able to recover the approximately $1.9 million recorded in theconsolidated balance sheet at March 31, 2008.
11

Table of Contents
G. STOCK-BASED COMPENSATIONRefer to the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2007 fora full description of the Company’s existing stock-based compensation plans.     *Restricted Stock Units*In October 2006, the Company granted approximately 107,000 restricted stock units (“RSU”s) with afair value of $31.86 per RSU to certain officers and key employees. The fair value of the RSUs wasbased on the closing price of the Company’s common stock as reported on the Nasdaq Global Market(“Nasdaq”) on February 23, 2007, which was the date stockholders approved our 2006 EquityCompensation Plan. The actual amount of RSUs earned will be based on cumulative earnings per shareas reported relative to established goals for the remaining two and three year performance cycleswhich began October 1, 2006, and range from 0% to 150% of the target RSUs granted. The remainingvesting period ranges from two to three years. The RSUs do not have voting rights of common stockand the shares of common stock underlying the RSUs are not considered issued and outstanding.Approximately 21,000 of the RSUs granted in October 2006 expired as performance targets were notmet.In October 2007, the Company granted approximately 34,300 RSUs with a fair value of $37.89 per RSUto certain officers and key employees. The fair value of the RSUs was based on the closing priceof the Company’s common stock as reported on the Nasdaq on September 28, 2007. The actual amountof RSUs earned will be based on cumulative earnings per share as reported relative to establishedgoals for the three year performance cycle which began October 1, 2007, and ranges from 0% to 150%of the target RSUs granted. The vesting period is three years. The RSUs do not have voting rightsof common stock and the shares of common stock underlying the RSUs are not considered issued andoutstanding until actually issued.The Company recorded compensation expense of approximately $1.4 million related to the RSUs for thesix months ended March 31, 2008.     *Stock Options*Stock option activity for the six months ended March 31, 2008 was as follows:                           **Remaining**        **Weighted** **Weighted**        **Average** **Average** **Aggregate**  **Stock** **Exercise** **Contractual** **Intrinsic**  **Options** **Price** **Term (Years)** **Value**              **(In thousands)**Outstanding at September 30, 2007  505,450  $17.44         Granted  —   —         Exercised  (123,050)  18.48         Forfeited / Cancelled  (2,800)  17.85                          Outstanding at March 31, 2008  379,600  $17.12   3.05  $6,499                  Exercisable at March 31, 2008  228,860  $16.72   2.58  $3,827                  H. BUSINESS SEGMENTSWe manage our business through operating subsidiaries, which are comprised of two reportablebusiness segments: Electrical Power Products and Process Control Systems. Electrical Power Productsincludes equipment and systems for the distribution and control of electrical energy. ProcessControl Systems consists principally of instrumentation, computer controls, communications and datamanagement systems to control and manage critical processes.The tables below reflect certain information relating to our operations by business segment. Allrevenues represent sales from unaffiliated customers. The accounting policies of the businesssegments are the same as those described in the summary of significant accounting policies.Corporate expenses and certain assets are allocated to the operating business segments primarilybased on revenues. The corporate assets are mainly cash, cash equivalents and marketablesecurities.
12

Table of Contents
Detailed information regarding our business segments is shown below (in thousands):                   **Three Months Ended**  **Six Months Ended**   **March 31,**  **March 31,**   **2008**  **2007**  **2008**  **2007** Revenues:                Electrical Power Products $154,094  $136,034  $295,183  $253,377 Process Control Systems  6,239   5,878   12,271   11,311              Total $160,333  $141,912  $307,454  $264,688              Gross profit:                Electrical Power Products $28,458  $20,933  $53,302  $39,659 Process Control Systems  2,234   1,832   4,085   3,196              Total $30,692  $22,765  $57,387  $42,855              Income before income taxes and minority interest:                Electrical Power Products $8,425  $3,113  $14,039  $6,338 Process Control Systems  621   401   841   484              Total $9,046  $3,514  $14,880  $6,822                         **March 31, 2008**  **September 30, 2007** Identifiable tangible assets:        Electrical Power Products $315,235  $279,901 Process Control Systems  9,347   7,365 Corporate  20,400   23,460        Total $344,982  $310,726        In addition, the Electrical Power Products business segment had approximately $1,084,000 and$1,084,000 of goodwill and $26,997,000 and $28,861,000 of intangible and other assets as of March31, 2008 and September 30, 2007, respectively, and corporate had approximately $246,000 and$344,000 of deferred loan costs, as of March 31, 2008 and September 30, 2007, respectively, whichare not included in identifiable tangible assets above.**Item 2.*****Management’s Discussion and Analysis of Financial Condition and Results of Operations****The following discussion and analysis of our financial condition and results of operations shouldbe read in conjunction with the accompanying condensed consolidated financial statements andrelated notes included elsewhere in this Quarterly Report on Form 10-Q and with our Annual Reporton Form 10-K for the year ended September 30, 2007, which was filed with the Securities andExchange Commission on December 7, 2007 and is available on the SEC’s website at www.sec.gov. Anyforward-looking statements made by or on our behalf are made pursuant to the safe harbor provisionsof the Private Securities Litigation Reform Act of 1995. Readers are cautioned that suchforward-looking statements involve risks and uncertainties in that the actual results may differmaterially from those projected in the forward-looking statements. Important factors that couldcause actual results to differ include risks set forth in “Item 1A. Risk Factors” included in ourAnnual Report on Form 10-K.***Overview**We develop, design, manufacture and service custom engineered-to-order equipment and systems forthe management and control of electrical energy and other critical processes. Headquartered inHouston, Texas, we serve the transportation, environmental, energy, industrial and utilityindustries. Our business operations are consolidated into two business segments: Electrical PowerProducts and Process Control Systems. Financial information related to these business segments isincluded in Note H of Notes to Condensed Consolidated Financial Statements.On August 7, 2006, we purchased certain assets related to the American National Standards Institute(“ANSI”) medium voltage switchgear and circuit breaker business of General Electric Company’s(“GE”) Consumer & Industrial unit located at its West Burlington, Iowa facility. We refer to theacquired product line as “Power/Vac®.” The relocation of the product line from Iowa to Houston,Texas and related activities was substantially completed in February 2008.Overall, we continue to experience strong market demand for our products and services. Pricing inour markets has improved in conjunction with the overall increase in business activity. We believethis increase was a result of the petrochemical and utility markets entering into a new investmentcycle. Customer inquiries, or requests for proposals, steadily strengthened throughout fiscal year2007 and have remained strong into the first six months of fiscal 2008. This increase in customerinquiries has led to increased orders and, accordingly, a very strong backlog of orders.
13

Table of Contents
**Results of Operations***Revenue and Gross Profit*Consolidated revenues increased $18.4 million to $160.3 million in the second quarter of fiscal2008 compared to $141.9 million in the second quarter of fiscal 2007. Revenues increased as theCompany has responded to strong market demand by increasing our capacity and throughput. For thesecond quarter of fiscal 2008, domestic revenues increased by 18.7% to $114.4 million compared tothe second quarter of 2007. Total international revenues were $45.9 million in the second quarterof 2008 compared to $45.5 million in the second quarter of 2007. International revenues areprimarily related to energy related investments, principally oil and gas projects. Gross profit forthe second quarter of fiscal 2008, as compared to the second quarter of fiscal 2007, increased byapproximately $7.9 million to $30.7 million as a result of improved pricing and productivity. Grossprofit as a percentage of revenues increased to 19.1% in the second quarter of fiscal 2008,compared to 16.0% in the second quarter of fiscal 2007. This increase in gross profit as apercentage of revenues resulted from an increased production volume and improved pricing, as wellas the favorable impact from the successful completion of certain jobs with margins that exceededexpectations.For the six months ended March 31, 2008, consolidated revenues increased $42.8 million to $307.5million compared to $264.7 million for the six months ended March 31, 2007. Revenues increasedprimarily due to an increased sales effort and strong market demand. For the first six months offiscal 2008, domestic revenues increased by 25.1% to $219.9 million compared to the first sixmonths of fiscal 2007. Total international revenues were $87.6 million in the first six months of2008 compared to $88.9 million in the first six months of fiscal 2007. Gross profit for the firstsix months of fiscal 2008, as compared to the first six months of fiscal 2007, increased byapproximately $14.5 million, to $57.4 million, as a result of improved pricing and productivity.Gross profit as a percentage of revenues increased to 18.7% for the first six months of fiscal2008, compared to 16.2% for the first six months of fiscal 2007. This increase in gross profit asa percentage of revenues resulted from the increase in production volume and improved pricing, aswell as the favorable impact from the successful completion of certain jobs with margins thatexceeded expectations.*Electrical Power Products*Our Electrical Power Products business segment recorded revenues of $154.1 million in the secondquarter of fiscal 2008, compared to $136.0 million for the second quarter of fiscal 2007. In thesecond quarter of 2008, revenues from public and private utilities were approximately $52.4million, compared to $59.1 million in the second quarter of fiscal 2007. Revenues from industrialand commercial customers totaled $100.9 million in the second quarter of 2008, an increase of $31.0million compared to the second quarter of fiscal 2007. Municipal and transit projects generatedrevenues of $0.8 million in the second quarter of fiscal 2008 compared to $7.1 million in thesecond quarter of fiscal 2007.Business segment gross profit, as a percentage of revenues, was 18.5% in the second quarter offiscal 2008, compared to 15.4% in the second quarter of fiscal 2007. Excluding the direct impact ofthe Power/Vac® product line, business segment gross profit would have been approximately 21.7% inthe second quarter of fiscal 2008.For the six months ended March 31, 2008, our Electrical Power Products segment recorded revenues of$295.2 million, compared to $253.4 million for the six months ended March 31, 2007. In the firstsix months of fiscal 2008, revenues from public and private utilities were approximately $96.1million, compared to $97.4 million in the first six months of fiscal 2007. Revenues fromcommercial and industrial customers totaled $187.2 million in the first six months of fiscal 2008,an increase of $44.7 million compared to the first six months of fiscal 2007. Municipal andtransit projects generated revenues of $11.9 million in the first six months of fiscal 2008,compared to $13.6 million in the first six months of fiscal 2007.For the six months ended March 31, 2008, gross profit from the Electrical Power Products businesssegment, as a percentage of revenues, was 18.1%, compared to 15.7% for the six months ended March31, 2007. The increase in gross profit as a percentage of revenues is attributable to an increasein production volume and improved pricing, along with higher than anticipated margins beingachieved on various jobs. Excluding the direct impact of the Power/Vac® product line, businesssegment gross profit would have been approximately 21.3% for the six months ended March 31, 2008.*Process Control Systems*Our Process Control Systems business segment recorded revenues of $6.2 million in the secondquarter of fiscal 2008, an increase from $5.9 million in the second quarter of fiscal 2007.Business segment gross profit, as a percentage of revenues, increased to 35.8%
14

Table of Contents
in the second quarter of fiscal 2008 compared to 31.1% in the second quarter of fiscal 2007. Thisincrease resulted from a favorable mix of jobs and achieving synergies and increased efficienciesthrough regionalization of operations.For the six months ended March 31, 2008, our Process Control Systems business segment recordedrevenues of $12.3 million, up from $11.3 million for the six months ended March 31, 2007. Businesssegment gross profit increased, as a percentage of revenues, to 33.3% for the first six months offiscal 2008, compared to 28.3% for the first six months of fiscal 2007. This increase resultedfrom a favorable mix of jobs and achieving synergies and increased efficiencies throughregionalization of operations.For additional information related to our business segments, see Note H of Notes to CondensedConsolidated Financial Statements.*Consolidated Selling, General and Administrative Expenses*Consolidated selling, general and administrative expenses increased to 13.1% of revenues in thesecond quarter of fiscal 2008 compared to 13.0% of revenues in the second quarter of fiscal 2007.Selling, general and administrative expenses were $21.0 million for the second quarter of fiscal2008 compared to $18.5 million for the second quarter of fiscal 2007. Selling, general andadministrative expenses increased primarily due to increased costs related to the Power/Vac®product line and related operations and increased compensation costs, including cash and non-cashequity incentives, which are consistent with the increase in volume and earnings. Integrationcosts with the Power/Vac® product line were the primary factor in the increase in selling, generaland administrative expenses as a percentage of revenues for the three months ended March 31, 2008.For the six months ended March 31, 2008, consolidated selling, general and administrative expensesincreased to 13.4% of revenues, compared to 13.1% of revenues for the six months ended March 31,2007. Selling, general and administrative expenses were $41.1 million for the first six months offiscal 2008 compared to $34.7 million for the first six months of fiscal 2007. Selling, generaland administrative expenses increased primarily due to increased selling andadministrative costs related to the Power/Vac® product line and related operations and increasedcompensation costs, including cash and non-cash equity incentives, which are consistent with theincrease in volume and earnings. Integration costs with the Power/Vac® product line were theprimary factor for the increase in selling, general and administrative expenses as a percentage ofrevenues for the six months ended March 31, 2008.*Interest Expense and Income*Interest expense was $0.8 million and $1.6 million for the three and six months ended March 31,2008, a decrease of approximately $148,000 and an increase of approximately $29,000 compared to thethree and six months ended March 31, 2007, respectively. The increase in interest expense isprimarily due to interest expense related to increased borrowings necessary to support ourincreased volume and the acquisition of the Power/Vac® product line.Interest income was $0.1 million and $0.2 million for the three and six months ended March 31, 2008compared to $0.1 million and $0.3 million for the three and six months ended March 31, 2007,respectively. This decrease resulted as cash was used to fund working capital during the first sixmonths of fiscal 2008.*Provision for Income Taxes*Our provision for income taxes reflects an effective tax rate on earnings before income taxes of35.8% in the second quarter of fiscal 2008 compared to 34.4% in the second quarter of fiscal 2007.For the first six months of fiscal 2008, our effective tax rate was 36.1% compared to 35.6% for thefirst six months of fiscal 2007. Our effective tax rate is impacted by income generated in theUnited Kingdom, which has a lower statutory rate than the United States; however, the lowerstatutory rate will be offset by certain expenses that are not deductible for tax purposes in theUnited Kingdom, such as amortization of intangible assets.In addition, adjustments to estimated tax accruals are analyzed and adjusted quarterly as eventsoccur to warrant such change. Adjustments to tax accruals are a component of the effective taxrate.*Net Income*In the second quarter of fiscal 2008, we generated net income of $6.0 million, or $0.53 per dilutedshare, compared to $2.3 million, or $0.20 per diluted share, in the second quarter of fiscal 2007.For the six months ended March 31, 2008, we recorded net income of $9.6 million, or $0.84 perdiluted share, compared to $4.3 million, or $0.39 per diluted share, for the six months ended March31, 2007. We had higher revenues and improved gross profits in all of our business segments,partially offset by an increase in selling,
15

Table of Contents
general and administrative expenses associated with higher levels of business activity andincreased administrative costs related to the integration of the Power/Vac® product line.*Backlog*The order backlog at March 31, 2008 was $536.5 million, compared to $464.5 million at September 30,2007 and $407.6 million at the end of the second quarter of fiscal 2007. New orders placed duringthe second quarter of fiscal 2008 totaled $196.2 million compared to $167.7 million in the secondquarter of fiscal 2007.**Liquidity and Capital Resources**We have maintained a positive liquidity position. Working capital was $126.2 million at March 31,2008, compared to $101.3 million at September 30, 2007. As of March 31, 2008, current assetsexceeded current liabilities by 1.8 times and our debt to total capitalization ratio was 19.6%.The increase in working capital was driven primarily by the increase in accounts receivable andinventories commensurate with the increase in business volume. We anticipate that we will continueto reinvest a portion of our cash generated from operations into working capital this year due toincreased business activity because our progress payment terms on long-term projects with ourcustomers extend beyond the payment terms with our suppliers. Working capital needs areanticipated to increase with growing levels of business activity. We believe that working capital,borrowing capabilities and cash generated from operations will be sufficient to finance theanticipated operational activities, capital improvements and debt repayments for the foreseeablefuture.AtMarch 31, 2008, we had cash and cash equivalents of $7.8 million,compared to $5.3 million at September 30, 2007. The increase in borrowings was primarily due tothe funding of working capital needs due to increased production volume, along with billing termsthat are weighted toward significant completion of long-term projects. Long-term debt and capitallease obligations, including current maturities, totaled $45.9 million at March 31, 2008, comparedto $35.8 million at September 30, 2007. We have a $58.5 million revolving credit facility in theU.S. and an additional £4.0 million (approximately $8.0 million) revolving credit facility in theUnited Kingdom, both of which expire in December 2011. As of March 31, 2008, there wasapproximately $33.9 million borrowed under these lines of credit, which is included in ourlong-term debt. Amounts available under the U.S. revolving credit facility and the revolving creditfacility in the United Kingdom were approximately $27.6 million and $5.0 million, respectively, atMarch 31, 2008. For further information regarding our debt, see Notes E and F of Notes to CondensedConsolidated Financial Statements.***Operating Activities***During the first six months of fiscal 2008 and 2007, cash used in operating activities wasapproximately $9.6 million and $0.4 million, respectively. Cash flow from operations is primarilyinfluenced by demand for our products and services and is negatively impacted as our progresspayment terms on long-term projects with our customers extend beyond the payment terms with oursuppliers. The payment of annual incentive compensation in the first six months of fiscal 2008,along with our recent increase in volume and inventories needed for our existing backlog haveresulted in negative cash flow from operations in the first six months of fiscal 2008.***Investing Activities***Investments in property, plant and equipment during the first six months of fiscal 2008 totaledapproximately $1.5 million compared to $9.7 million during the first six months of fiscal 2007. Themajority of our capital expenditures in the first six months of fiscal 2007 were used to continuethe implementation of our new Enterprise Resource Planning System (“ERP”), and the expansion of twoof our operating facilities as a result of integrating the Power/Vac® product line. These operatingfacility expansions were completed in fiscal 2007.***Financing Activities***Net cash provided by financing activities was approximately $13.7 million for the first six monthsof fiscal 2008, compared to $2.2 million for the first six months of fiscal 2007. Borrowings on theline of credit were used to fund operations and capital expenditures.**New Accounting Standards**In September 2006, the FASB issued SFAS No. 157, *Fair Value Measurements*(“SFAS No. 157”), whichdefines fair value,
16

Table of Contents
establishes a framework for measuring fair value in generally accepted accounting principles andexpands disclosure requirements about fair value measurements. SFAS No. 157 does not require anynew fair value measurements, but provides guidance on how to measure fair value by providing a fairvalue hierarchy used to classify the source of the information. SFAS No. 157 is effective for ourfiscal year beginning October 1, 2008. The Company is currently evaluating the impact of adoptingSFAS No. 157.In February 2007, the FASB issued SFAS No. 159, *The Fair Value Option for Financial Assets andFinancial Liabilities, including an amendment of FASB Statement No. 155*(“SFAS No. 159”). SFAS No.159 permits entities to measure many financial instruments and certain other assets and liabilitiesat fair value, with unrealized gains and losses related to these financial instruments reported inearnings at each subsequent reporting date. SFAS No. 159 is effective for fiscal years beginningafter November 15, 2007. We did not elect to measure any additional assets or liabilities at fairvalue that are not already measured at fair value under existing standards. Therefore, theadoption of this standard has no impact on our consolidated financial statements.In December 2007, the FASB issued SFAS No. 141 (revised 2007), *Business Combinations*(“SFAS No.141R”). SFAS No. 141R establishes principles and requirements for how an acquirer recognizes andmeasures in its financial statements the identifiable assets acquired, the liabilities assumed, anynoncontrolling interest in the acquiree and the goodwill acquired. SFAS No. 141R also establishesdisclosure requirements to enable the evaluation of the nature and financial effects of thebusiness combination. SFAS No. 141R is effective as of the beginning of an entity’s fiscal yearthat begins after December 15, 2008, and will be adopted by us in the first quarter of fiscal 2010.We are currently evaluating the potential impact, if any, of the adoption of SFAS No. 141R on ourconsolidated results of operations and financial condition.In December 2007, the FASB issued SFAS No. 160, *Noncontrolling Interests in Consolidated FinancialStatements – an amendment of Accounting Research Bulletin 51*(“SFAS No. 160”). SFAS No. 160establishes accounting and reporting standards for ownership interests in subsidiaries held byparties other than the parent, the amount of consolidated net income attributable to the parent andto the noncontrolling interest, changes in a parent’s ownership interest and the valuation ofretained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS No. 160 alsoestablishes disclosure requirements that clearly identify and distinguish between the interests ofthe parent and the interests of the noncontrolling owners. SFAS No. 160 is effective as of thebeginning of an entity’s fiscal year that begins after December 15, 2008, and will be adopted by usin the first quarter of fiscal 2010. We are currently evaluating the potential impact of theadoption of SFAS No. 160 on our consolidated results of operations and financial condition.**Critical Accounting Policies**The discussion and analysis of our financial condition and results of operations are based on ourconsolidated financial statements, which have been prepared in accordance with accountingprinciples generally accepted in the United States. The preparation of these consolidated financialstatements requires us to make estimates and assumptions that affect the reported amounts of assetsand liabilities, disclosures of contingent assets and liabilities known to exist at the date of theconsolidated financial statements and the reported amounts of revenues and expenses during thereporting period. We evaluate our estimates on an ongoing basis, based on historical experience andon various other assumptions that are believed to be reasonable under the circumstances. There canbe no assurance that actual results will not differ from those estimates.There have been no material changes to our critical accounting policies as disclosed in our AnnualReport on Form 10-K for the year ended September 30, 2007, except as follows:*Income Taxes —*We account for uncertain tax positions in accordance with FASB Interpretation No.48, *Accounting for Uncertainty in Income Taxes, an interpretation of SFAS No. 109, Accounting forIncome Taxes*, (“FIN 48”). FIN 48 prescribes a comprehensive model for how companies shouldrecognize, measure, present and disclose in their financial statements uncertain tax positionstaken or to be taken on a tax return. The income tax laws and regulations are voluminous and areoften ambiguous. As such, we are required to make many subjective assumptions and judgmentsregarding our tax positions that can materially affect amounts recognized in the consolidatedbalance sheets and statements of operations.**Outlook for Fiscal 2008**Our backlog of orders is approximately $536.5 million, the highest in our history. Customerinquiries, or requests for proposals, have steadily strengthened over the past three fiscal years.We anticipate that strong business activities in our principal markets will continue throughout2008.Backlog growth has been driven by strong market demand in petrochemical, utility and transportationmarkets. Additionally, our
17

Table of Contents
acquisitions in 2005 and 2006 have strengthened our strategic position in the electrical powerproducts market and expanded our product offering in the utility, industrial and commercialmarkets. We enhanced our capabilities with the addition of medium and low voltage IEC switchgear,intelligent motor control systems and power distribution solutions. The Power/Vac® switchgearproduct line acquired from GE has a large installed base and a broad customer base across utility,industrial and commercial markets. These acquisitions provided us with a significantly broaderproduct portfolio and enhanced our capabilities to meet market demands around the world. We alsosignificantly enhanced our ability to reach a broader market and gain access to new customers witha long-term commercial alliance with GE, which obligates GE to purchase from us their requirementsfor ANSI medium voltage switchgear and circuit breakers and other related equipment and components.The costs and effort to relocate the Power/Vac® product line has negatively impacted our earningsto date, and we expect this to continue through 2008 as we continue the integration efforts. Webelieve that our expanded product portfolio and new channels to new markets have strengthened us inour Electrical Power Products business segment and positioned us for continued growth.We anticipate that we will continue to reinvest our cash generated from operations to support ourincreased business activity and the acquired Power/Vac® product line. Working capital needs areanticipated to increase with growing levels of business activity. We believe that cash availableand borrowing capacity should be sufficient to finance anticipated operational activities, capitalimprovements and debt repayments for the foreseeable future.**Item 3.*****Quantitative and Qualitative Disclosures About Market Risk***We are exposed to certain market risks arising from transactions we have entered into in the normalcourse 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 floating ratebank credit facility. At March 31, 2008, $30.9 million was outstanding, bearing interest atapproximately 4.75% per year. A hypothetical 100 basis point increase in variable interest rateswould result in a total annual increase in interest expense of approximately $309,000. While we donot currently have any derivative contracts to hedge our exposure to interest rate risk, we have inthe past and may in the future enter into such contracts. Overall, we believe that changes ininterest rates will not have a material near-term impact on our future earnings or cash flows.During each of the past three years, we have not experienced a significant effect on our businessdue to changes in interest rates.We have significant operations that expose us to currency risk in the British Pound Sterling and toa lesser extent the Euro. We believe the exposure to the effects that fluctuating foreigncurrencies have on our consolidated results of operations is limited because the foreign operationsprimarily invoice customers and collect obligations in their respective currencies or U.S. Dollarsand a portion of our credit facility is payable in British Pounds Sterling. Additionally, expensesassociated with these transactions are generally contracted and paid for in the same localcurrencies. While we do not currently have any derivative contracts to hedge our exposure toforeign currency exchange risk, we have in the past and may in the future enter into suchcontracts.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 a negative effect on profit margin. While we may do so in thefuture, we have not currently entered into any derivative contracts to hedge our exposure tocommodity risk. We continue to experience price increases with some of our key raw materials.Competitive market pressures may limit our ability to pass these cost increases to our customers,thus negatively impacting our earnings. Fluctuations in commodity prices may have a material impacton our future earnings and cash flows.**Item 4.*****Controls and Procedures*****Evaluation of Disclosure Controls and Procedures**We have established and maintain a system of disclosure controls and procedures that are designedto provide reasonable assurance that information required to be disclosed in our reports filed withthe Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934 is recorded,processed, summarized and reported within the time periods specified in the rules and forms of theCommission and that such information is accumulated and communicated to our management, includingour Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allowtimely decisions regarding required disclosures.Management, with the participation of our CEO and CFO, has evaluated the effectiveness of thedesign and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) of the Securities Exchange Act of 1934, as amended) as of the end of the period coveredby this report. Based on such evaluation, our CEO and CFO have each concluded that as of March
18

Table of Contents
31, 2008, our disclosure controls and procedures were effective to provide reasonable assurancethat information required to be disclosed by us in reports that we file or submit under theSecurities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported withinthe time periods specified in the Securities and Exchange Commission’s rules and forms and thatsuch information is accumulated and communicated to our management, including the CEO and CFO, asappropriate, to allow timely decisions regarding required disclosures.**Internal Control over Financial Reporting**During the first six months of fiscal 2008, management continued the domestic ERP implementationwhich began in fiscal 2006. This conversion has involved various changes to internal processes andcontrol procedures over financial reporting; however, the basic internal controls over financialreporting have not materially changed as a result of the continuation of the domestic ERPimplementation.**Design and Operation of Control Systems**Our management, including the CEO and CFO, does not expect that our disclosure controls andprocedures or our internal control over financial reporting will prevent or detect all errors andall fraud. A control system, no matter how well designed and operated, can provide only reasonable,not absolute, assurance that the control system’s objectives will be met. The design of a controlsystem must reflect the fact that there are resource constraints, and the benefits of controls mustbe considered relative to their costs. Further, because of the inherent limitations in all controlsystems, no evaluation of controls can provide absolute assurance that misstatements due to erroror fraud will not occur or that all control issues and instances of fraud, if any, within theCompany have been detected. These inherent limitations include the realities that judgments indecision-making can be faulty and breakdowns can occur because of simple error or mistakes.Controls can be circumvented by the individual acts of some persons, by collusion of two or morepeople, or by management override of the controls. The design of any system of controls is based inpart on certain assumptions about the likelihood of future events, and there can be no assurancethat any design will succeed in achieving its stated goals under all potential future conditions.Over time, controls may become inadequate because of changes in conditions or personnel, ordeterioration in the degree of compliance with policies or procedures. Because of the inherentlimitations in a cost-effective control system, misstatements due to error or fraud may occur andnot be detected.**PART II — OTHER INFORMATION****Item 1.*****Legal Proceedings***We previously entered into a construction joint venture agreement to supply, install and commissiona Supervisory Control and Data Acquisition System (“SCADA”) to monitor and control the distributionand delivery of fresh water to the City and County of San Francisco Public Utility Commission(“Commission”). The project was substantially completed and has been performing to the satisfactionof the Commission. However, various factors outside of the control of the Company and its jointventure partner caused numerous changes and additions to the work that in turn delayed thecompletion of the project. The Commission has withheld liquidated damages and earned contractpayments from the joint venture. The Company has made claims against the Commission for variousmatters, including compensation for extra work and delay to the project.Despite attempts at mediation, the parties could not resolve their dispute, and a jury trialcommenced in December 2006. On May 1, 2007, the jury delivered its verdict in favor of the jointventure, of which the Company is the managing partner, and determined that the Commission hadbreached its contract with the joint venture. The court has issued and filed its final judgmentconfirming the jury verdict and has also awarded pre-judgment interest and post-judgment interest.The judgment is subject to appeal. However, based upon the judgment issued in favor of the Company,we anticipate that we will be able to recover the approximately $1.9 million recorded in thecondensed consolidated balance sheet at March 31, 2008.**Item 1A.*****Risk Factors***There are no material changes from the risk factors previously disclosed in the Company’s AnnualReport on Form 10-K for the fiscal year ended September 30, 2007.
19

Table of Contents
**Item 4.*****Submission of Matters to a Vote of Security Holders***At the annual meeting of stockholders of the Company held on February 29, 2008, Eugene L. Butlerand Ronald J. Wolny were re-elected as directors of the Company with terms ending in 2011. Thedirectors continuing in office after the meeting are Joseph L. Becherer, James F. Clark, Thomas W.Powell, Stephen W. Seale, Jr. and Robert C. Tranchon. As to each nominee for director, the numberof votes cast for, against or withheld, as well as the number of abstentions and broker non-votes,were as follows:                           **Votes Cast**          **Nominee** **Votes Cast For**  **Against**  **Votes Withheld**  **Abstentions**  **Non-Votes** Eugene L. Butler  9,989,535   4,001   920,481   —   — Ronald J. Wolny  10,639,795   5,154   269,068   —   — **Item 6.*****Exhibits***     **Number**   **Description of Exhibits**3.1 — Certificate of Incorporation of Powell Industries, Inc. filed with the Secretary ofState of the State of Delaware on February 11, 2004 (filed as Exhibit 3.1 to our Form8-A/A filed November 1, 2004, and incorporated herein by reference).     3.2 — By-laws of Powell Industries, Inc. (filed as Exhibit 3.2 to our Form 8-A/A filedNovember 1, 2004, and incorporated herein by reference).     *31.1 — Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a).     *31.2 — Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a).     *32.1 — Certification of Chief ExecutiveOfficer Pursuant to Section 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.     *32.2 — Certification of Chief FinancialOfficer Pursuant to Section 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * Filed herewith
20

Table of Contents
**SIGNATURES**     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned, thereunto duly authorized.         POWELL INDUSTRIES, INC.     (Registrant)         May 7, 2008 By: /s/ Thomas W. Powell         Date   Thomas W. Powell      Chairman and Chief Executive Officer      (Principal Executive Officer)         May 7, 2008 By:  /s/ Don R. Madison         Date   Don R. Madison      Executive Vice President      Chief Financial and Administrative Officer      (Principal Financial and Accounting Officer)  
21

Table of Contents
**EXHIBIT INDEX**     **Number**   **Exhibit Title**3.1 — Certificate of Incorporation of Powell Industries, Inc. filed with the Secretary ofState of the State of Delaware on February 11, 2004 (filed as Exhibit 3.1 to ourForm 8-A/A filed November 1, 2004, and incorporated herein by reference).     3.2 — By-laws of Powell Industries, Inc. (filed as Exhibit 3.2 to our Form 8-A/A filedNovember 1, 2004, and incorporated herein by reference).     *31.1 — Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a).     *31.2 — Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a).     *32.1 — Certification of Chief Executive Officer Pursuant to Section 18 U.S.C. Section 1350,as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.     *32.2 — Certification of Chief Financial Officer Pursuant to Section 18 U.S.C. Section 1350,as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * Filed herewith
22