##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON D.C. 20549
 FORM 10-Q
  þ
    
    Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 for the quarterly period ended July 31, 2006.
 or
 o
    
    Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
 for the transition period from  to  .
 Commission File Number 001-12488
 POWELL INDUSTRIES, INC.
  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)
  þ o
  o þ o
  o þ




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##### 



Part I
 Financial InformationItem 1.
    
    Condensed Consolidated Financial StatementsCondensed Consolidated Balance Sheets
    
    
    3Condensed Consolidated Statements of Operations
    
    
    4Condensed Consolidated Statements of Cash Flows
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    17Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    21Item 4.
    
    Controls and Procedures
    
    
    21Part II
 Other InformationItem 1.
    
    Legal Proceedings
    
    
    22Item 1A.
    
    Risk Factors
    
    
    22Item 6.
    
    Exhibits
    
    
    23Signatures
    
    
    24Certification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO Pursuant to Section 906Certification of CFO Pursuant to Section 906
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##### 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)
 July 31,
    
    
    October 31,2006
    
    
    2005(Unaudited)AssetsCurrent Assets:Cash and cash equivalents
    
    $
    27,833
    
    
    $
    24,844Marketable securities
    
    
    
    
    
    
    8,200Accounts receivable, less allowance for doubtful accounts of $825 and $567, respectively
    
    
    84,549
    
    
    
    65,385Costs and estimated earnings in excess of billings on uncompleted contracts
    
    
    39,767
    
    
    
    35,328Inventories, net
    
    
    30,295
    
    
    
    21,616Income taxes receivable
    
    
    44
    
    
    
    507Deferred income taxes
    
    
    643
    
    
    
    1,836Prepaid expenses and other current assets
    
    
    2,776
    
    
    
    4,461Total Current Assets
    
    
    185,907
    
    
    
    162,177Property, plant and equipment, net
    
    
    56,591
    
    
    
    55,678Goodwill
    
    
    203
    
    
    
    203Intangible assets, net
    
    
    4,625
    
    
    
    3,505Other assets
    
    
    6,144
    
    
    
    5,096Total Assets
    
    $
    253,470
    
    
    $
    226,659Liabilities and Stockholders EquityCurrent Liabilities:Current maturities of long-term debt and capital lease obligations
    
    $
    3,415
    
    
    $
    2,095Income taxes payable
    
    
    4,086
    
    
    
    1,185Accounts payable
    
    
    31,214
    
    
    
    22,104Accrued salaries, bonuses and commissions
    
    
    12,367
    
    
    
    9,820Billings in excess of costs and estimated earnings on uncompleted contracts
    
    
    15,537
    
    
    
    15,742Accrued product warranty
    
    
    3,384
    
    
    
    1,836Other accrued expenses
    
    
    7,549
    
    
    
    5,957Total Current Liabilities
    
    
    77,552
    
    
    
    58,739Long-term debt and capital lease obligations, net of current maturities
    
    
    17,450
    
    
    
    19,436Deferred compensation
    
    
    1,733
    
    
    
    1,918Other liabilities
    
    
    1,526
    
    
    
    1,871Total Liabilities
    
    
    98,261
    
    
    
    81,964Commitments and contingencies (Note G)Minority interest
    
    
    303
    
    
    
    281Stockholders Equity:Preferred stock, par value $.01; 5,000,000 shares authorized; none issued
    
    
    
    
    
    
    Common stock, par value $.01; 30,000,000 shares authorized; 11,001,733 and 11,001,733
shares issued, respectively; 10,907,546 and 10,849,278 shares outstanding, respectively
    
    
    110
    
    
    
    110Additional paid-in capital
    
    
    12,510
    
    
    
    10,252Retained earnings
    
    
    143,665
    
    
    
    136,670Treasury stock, 94,187 and 152,455 shares, respectively, at cost
    
    
    (847
    )
    
    
    (1,417
    )Accumulated other comprehensive income (loss)
    
    
    432
    
    
    
    (11
    )Deferred compensation
    
    
    (964
    )
    
    
    (1,190
    )Total Stockholders Equity
    
    
    154,906
    
    
    
    144,414Total Liabilities and Stockholders Equity
    
    $
    253,470
    
    
    $
    226,659
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Powell Industries, Inc. and Subsidiaries
 
 Condensed Consolidated Statements of Operations (unaudited)
 (In thousands, except per share data)
 Three Months Ended July 31,
    
    
    Nine Months Ended July 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenues
    
    $
    104,021
    
    
    $
    66,915
    
    
    $
    286,265
    
    
    $
    173,518Cost of goods sold
    
    
    84,928
    
    
    
    54,354
    
    
    
    231,652
    
    
    
    145,556Gross profit
    
    
    19,093
    
    
    
    12,561
    
    
    
    54,613
    
    
    
    27,962Selling, general and administrative expenses
    
    
    15,705
    
    
    
    9,887
    
    
    
    42,540
    
    
    
    28,761Income (loss) before interest, income taxes
and minority interest
    
    
    3,388
    
    
    
    2,674
    
    
    
    12,073
    
    
    
    (799
    )Interest expense
    
    
    476
    
    
    
    130
    
    
    
    1,137
    
    
    
    346Interest income
    
    
    (197
    )
    
    
    (289
    )
    
    
    (736
    )
    
    
    (883
    )Income (loss) before income taxes and
minority interest
    
    
    3,109
    
    
    
    2,833
    
    
    
    11,672
    
    
    
    (262
    )Income tax provision (benefit)
    
    
    1,345
    
    
    
    695
    
    
    
    4,655
    
    
    
    (680
    )Minority interest in net income
    
    
    7
    
    
    
    6
    
    
    
    22
    
    
    
    7Net income
    
    $
    1,757
    
    
    $
    2,132
    
    
    $
    6,995
    
    
    $
    411Net earnings per common share:Basic
    
    $
    0.16
    
    
    $
    0.20
    
    
    $
    0.64
    
    
    $
    0.04Diluted
    
    $
    0.16
    
    
    $
    0.19
    
    
    $
    0.63
    
    
    $
    0.04Weighted average shares:Basic
    
    
    10,888
    
    
    
    10,775
    
    
    
    10,869
    
    
    
    10,757Diluted
    
    
    11,140
    
    
    
    10,939
    
    
    
    11,090
    
    
    
    10,886
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Powell Industries, Inc. and Subsidiaries
 
 Condensed Consolidated Statements of Cash Flows (unaudited)
(In thousands)
 Nine Months Ended July 31,2006
    
    
    2005Operating Activities:Net income
    
    $
    6,995
    
    
    $
    411Adjustments to reconcile net income to net cash provided by (used
in) operating activities:Depreciation and amortization
    
    
    4,906
    
    
    
    3,244Amortization of unearned restricted stock
    
    
    138
    
    
    
    91Stock-based compensation
    
    
    1,841
    
    
    
    Bad debt expense
    
    
    254
    
    
    
    30Loss (gain) on disposition of assets
    
    
    79
    
    
    
    (21
    )Net realized gain on available-for-sale securities
    
    
    
    
    
    
    (28
    )Deferred income taxes
    
    
    (991
    )
    
    
    (1,048
    )Other
    
    
    22
    
    
    
    149Changes in operating assets and liabilities:Accounts receivable, net
    
    
    (18,681
    )
    
    
    (19,961
    )Costs and estimated earnings in excess of billings on
uncompleted contracts
    
    
    (4,238
    )
    
    
    (5,680
    )Inventories
    
    
    (8,490
    )
    
    
    (3,359
    )Prepaid expenses and other current assets
    
    
    2,174
    
    
    
    (2,762
    )Other assets
    
    
    573
    
    
    
    68Accounts payable and income taxes payable
    
    
    11,690
    
    
    
    (770
    )Accrued liabilities
    
    
    5,578
    
    
    
    128Billings in excess of costs and estimated earnings on
uncompleted contracts
    
    
    (302
    )
    
    
    1,473Deferred compensation
    
    
    (60
    )
    
    
    351Other liabilities
    
    
    85
    
    
    
    (37
    )Net cash provided by (used in) operating activities
    
    
    1,573
    
    
    
    (27,721
    )Investing Activities:Proceeds from sale of fixed assets
    
    
    29
    
    
    
    46Proceeds from maturities and sales of available-for-sale securities
    
    
    
    
    
    
    3,817Purchases of property, plant and equipment
    
    
    (4,803
    )
    
    
    (3,226
    )Proceeds from sale of short-term auction rate securities
    
    
    8,200
    
    
    
    43,060Purchases of short-term auction rate securities
    
    
    
    
    
    
    (5,000
    )Acquisition of S&I
    
    
    
    
    
    
    (18,460
    )Acquisition of UMS
    
    
    (1,524
    )
    
    
    Net cash provided by investing activities
    
    
    1,902
    
    
    
    20,237Financing Activities:Borrowings on U.S. revolving line of credit
    
    
    3,791
    
    
    
    5,905Payments on U.S. revolving line of credit
    
    
    (3,791
    )
    
    
    (5,905
    )Borrowings on UK term loan
    
    
    
    
    
    
    10,598Payments on UK term loan
    
    
    (1,107
    )
    
    
    Payments on UK revolving line of credit
    
    
    (913
    )
    
    
    Proceeds from short-term financing
    
    
    897
    
    
    
    Payments on short-term financing
    
    
    (160
    )
    
    
    Payments on capital lease obligations
    
    
    (73
    )
    
    
    (119
    )Debt issue costs
    
    
    
    
    
    
    (461
    )Tax benefit from exercise of stock options
    
    
    134
    
    
    
    234Proceeds from exercise of stock options
    
    
    640
    
    
    
    1,350Net cash (used in) provided by financing activities
    
    
    (582
    )
    
    
    11,602Net increase in cash and cash equivalents
    
    
    2,893
    
    
    
    4,118Effect of exchange rate changes on cash and cash equivalents
    
    
    96
    
    
    
    Cash and cash equivalents at beginning of period
    
    
    24,844
    
    
    
    8,974Cash and cash equivalents at end of period
    
    $
    27,833
    
    
    $
    13,092
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POWELL INDUSTRIES, INC. AND SUBSIDIARIES
 
 Notes To Condensed Consolidated Financial Statements (Unaudited)
 A.
    
    OVERVIEW AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESOverviewWe develop, design, manufacture and service equipment and systems for the management and
control of electrical energy and other critical processes. Headquartered in Houston, Texas,
we serve the transportation, environmental, industrial, and utility industries. Our business
operations are consolidated into two business segments: Electrical Power Products and
Process Control Systems. Financial information related to these business segments is
included in Note I herein.Note B contains information related to our acquisitions of Switchgear & Instrumentation
Limited in July 2005, herein referred to as S&I, and Utility Metering Specialists, Inc. in
July 2006, herein referred to as UMS. The operating results of both acquisitions are
included in our Electrical Power Products business segment.Subsequent to the period covered by this report, we acquired certain assets from General
Electric Companys Consumer and Industrial Division as described in Note K herein.Basis of PresentationThe condensed consolidated financial statements include the accounts of Powell Industries,
Inc. and its wholly-owned subsidiaries (we, us, our, Powell, or the Company). All
significant intercompany accounts and transactions are eliminated in consolidation.The accompanying unaudited condensed consolidated financial statements have been prepared
using accounting principles generally accepted in the United States of America (GAAP) for
interim financial information in accordance with the rules of Regulation S-X of the
Securities and Exchange Commission. Accordingly, these interim financial statements do not
include all annual disclosures required by GAAP. These financial statements should be read
in conjunction with the financial statements and related footnotes included in the Companys
annual report on Form 10-K for the year ended October 31, 2005. In the opinion of
management, these condensed consolidated financial statements include all adjustments,
consisting of normal recurring adjustments that are necessary for a fair presentation of our
financial position, results of operations and cash flows. The interim period results are not
necessarily indicative of the results to be expected for the full fiscal year.Use of EstimatesThe preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the amounts reported in the condensed consolidated
financial statements and accompanying footnotes. The amounts we record for insurance claims,
warranties, legal and other contingent liabilities require judgments regarding the amount of
expenses that will ultimately be incurred. We base our estimates on historical experience
and on various other assumptions, as well as the specific circumstances surrounding these
contingent liabilities, in evaluating the amount of liability that should be recorded.
Estimates may change as new events occur, additional information becomes available, or
operating environments change. Actual results may differ from our estimates. The most
significant estimates used in our financial statements affect revenue and cost recognition
for construction contracts, legal accruals, the allowance for doubtful accounts,
self-insurance, warranty accruals and postretirement benefit obligations.
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Foreign Currency Translation
 Foreign Currency Translation
 Supplemental disclosures of cash flow information
 Nine Months Ended July 31,2006
    
    2005Cash paid during the period for:Interest
    
    $
    934
    
    
    $
    326Income taxes
    
    
    2,645
    
    
    
    562Non-cash investing and financing activities:Change in fair value of marketable securities during
the period, net
of $0 and $9 income taxes, respectively
    
    $
    
    
    
    $
    26Receivable for stock options exercised
    
    
    24
    
    
    
    Issuance of common stock for deferred directors fees
    
    
    24
    
    
    
    14Restricted stock grants
    
    
    129
    
    
    
    Unrealized gain on forward contracts
    
    
    
    
    
    
    13Unrealized foreign currency gain/(loss)
    
    
    443
    
    
    
    (67
    )Accrued acquisition costs
    
    
    
    
    
    
    485
 Stock-Based CompensationIn the first quarter of fiscal 2006, we adopted Statement of Financial Accounting Standards
No. 123 (revised 2004), Share-Based Payment (SFAS No. 123R). We adopted the new
statement using the modified prospective method of adoption, which does not require
restatement of prior periods. The revised standard eliminated the intrinsic value method of
accounting for share-based employee compensation under APB Opinion No. 25, Accounting for
Stock-Based Compensation, which we previously used (see pro-forma disclosure of prior period
included herein). The revised standard generally requires the recognition of the cost of
employee services for share-based compensation based on the grant date fair value of the
equity or liability instruments issued and any unearned or deferred compensation
(contra-equity accounts) related to awards prior to adoption be eliminated against the
appropriate equity accounts. Also under the new standard, excess income tax benefits related
to share-based compensation expense that must be recognized directly in equity are considered
financing rather than operating cash flow activities. The effect of the adoption of the new
standard on cash flows in the third quarter of 2006 was not material.Under SFAS No. 123R, we continue to use the Black-Scholes option pricing model to estimate
the fair value of our stock options. However, we will apply the expanded guidance under SFAS
No. 123R for the development of our assumptions used as inputs for the Black-Scholes option
pricing model for grants issued after November 1, 2005. Expected volatility is determined
using historical volatilities based on historical stock prices for a period equal to the
expected term. The expected volatility assumption is adjusted if future volatility is
expected to vary from historical experience. The expected term of options represents the
period of time that options granted are expected to be outstanding and falls between the
options vesting and contractual expiration dates. The risk-free interest rate is based on
the yield at the date of grant of a zero-coupon U.S. Treasury bond whose maturity period
equals the options expected term.
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Accumulated Other Comprehensive Income (Loss)Accumulated other comprehensive income (loss), which is included as a component of
stockholders equity net of tax, includes unrealized gains or losses on available-for-sale
marketable securities, derivative instruments and currency translation adjustments in foreign
consolidated subsidiaries.New Accounting PronouncementIn July 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes(FIN 48). FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in the Companys financial statements in accordance
with FASB Statement No. 109, Accounting for Income Taxes.FIN 48 also prescribes a
recognition threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return and provides
guidance on derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. The provisions of FIN 48 are to be applied to all tax
positions upon initial adoption of this standard. Only tax positions that meet the more
likely than not recognition threshold at the effective date may be recognized or continue to
be recognized upon adoption of FIN 48. FIN 48 is effective for our fiscal year beginning
October 1, 2007. The Company is currently evaluating the impact of adopting FIN 48.ReclassificationsCertain reclassifications have been made in prior period financial statements to conform to
current period presentation. These reclassifications had no effect on net income, financial
position or cash flows.
 B.
    
    ACQUISITIONUtility Metering Specialists, Inc. (UMS)On July 14, 2006, we acquired certain assets and hired the service and administrative
employees of an electrical services company in Louisiana for approximately $1.5 million. The
purchase price was paid from existing cash and short-term marketable securities. This
acquisition allows us to extend sales and service to the Eastern Gulf Coast Region. As this
acquisition is not material to the consolidated financial results or financial position of
the Company, no additional disclosure is included in these Notes to Condensed Consolidated
Financial Statements. Approximately $1.5 million of the purchase price is included in
intangible assets in the Condensed Consolidated Balance Sheets. The
purchase price resulted primarily in additional intangible assets and
as a result such amounts are subject to further adjustment as
information becomes available.Switchgear & Instrumentation Limited (S&I)On July 4, 2005, we acquired selected assets and assumed certain operating liabilities and
contracts of Switchgear & Instrumentation Limited. S&Is primary manufacturing facility is
in the United Kingdom. This acquisition is part of our overall strategy to increase our
international presence. S&I affords us the opportunity to serve our customers with products
covering a wider range of electrical standards and opens new geographic markets previously
closed due to a lack of product portfolio. The fit, culture and market position of Powell
and S&I are favorably comparable with similar reputations in engineered-to-order solutions.
S&I is a supplier of medium- and low-voltage switchgear, intelligent motor control systems,
and power distribution solutions to a wide range of process industries, with a focus on oil
and gas, petrochemical and other process-related industries. Total consideration paid for
S&I was approximately $18.0 million (excluding expenses of approximately $1.2 million).
Approximately $10.3 million was funded from existing cash and investments and the balance was
provided from the UK Term Loan (as defined in Note F herein). The results of operations of
S&I are included in our Condensed Consolidated Financial Statements from July 4, 2005. The
Condensed Consolidated Balance Sheets include an allocation of the purchase price to the
assets acquired and liabilities assumed based on estimates of fair value.
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Accounts receivable
    
    $
    4,730Costs and estimated earnings in excess of billings
    
    
    4,492Inventories
    
    
    3,745Prepaid expenses and other current assets
    
    
    379Property, plant and equipment
    
    
    9,542Intangible assets
    
    
    3,846Accounts payable
    
    
    (5,793
    )Billings in excess of costs and estimated earnings
    
    
    (1,440
    )Other accrued expenses
    
    
    (334
    )Total purchase price
    
    $
    19,167
   EstimatedAmount
    
    
    LifeUnpatented technology
    
    $
    2,175
    
    
    7 yearsTradenames
    
    
    1,025
    
    
    10 yearsBacklog
    
    
    646
    
    
    6 monthsTotal
    
    $
    3,846
  Three Months Ended
    
    Nine Months EndedJuly 31, 2005
    
    July 31, 2005Revenues
    
    $
    73,791
    
    
    $
    213,880Net income
    
    $
    1,458
    
    
    $
    246Net earnings per common share:Basic
    
    $
    0.14
    
    
    $
    0.02Diluted
    
    $
    0.13
    
    
    $
    0.02
  1)
    
    Impact of additional interest expense related to the portion of the purchase
price financed with the UK Term Loan and lower interest income as a result of the sale
of available-for-sale securities used to fund the remainder of the purchase price;2)
    
    Elimination of the operating results of certain businesses of S&I which were not acquired;3)
    
    Elimination of lease expense and recording of additional depreciation expense
related to assets which were previously leased from S&Is previous parent;4)
    
    Impact of amortization expense related to intangible assets;5)
    
    Adjustment to the income tax provision to reflect the statutory rate in the United
Kingdom.
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Accounting for Performance
of Construction-Type and Certain Production-Type Contracts
 C.
    
    EARNINGS PER SHAREThe following table sets forth the computation of basic and diluted earnings per share (in
thousands, except per share data):
 Three Months Ended July 31,
    
    
    Nine Months Ended July 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Numerator:Net income
    
    $
    1,757
    
    
    $
    2,132
    
    
    $
    6,995
    
    
    $
    411Denominator:Denominator for basic earnings
per share-weighted average shares
    
    
    10,888
    
    
    
    10,775
    
    
    
    10,869
    
    
    
    10,757Dilutive effect of stock options
    
    
    252
    
    
    
    164
    
    
    
    221
    
    
    
    129Denominator for diluted earnings
per share-adjusted weighted average
shares with assumed conversions
    
    
    11,140
    
    
    
    10,939
    
    
    
    11,090
    
    
    
    10,886Net earnings per share:Basic
    
    $
    0.16
    
    
    $
    0.20
    
    
    $
    0.64
    
    
    $
    0.04Diluted
    
    $
    0.16
    
    
    $
    0.19
    
    
    $
    0.63
    
    
    $
    0.04
 Excluded from the computation of diluted earnings per share were options to purchase
approximately 24,000 shares of common stock for the three and nine months ended July 31,
2006, and options to purchase approximately 24,000 and 297,000 shares of common stock for the
three and nine months ended July 31, 2005, respectively. These options were excluded from
the computation because the effect of the options was not dilutive as their exercise prices
were greater than the average market price of our common stock.D.
    
    DETAIL OF SELECTED BALANCE SHEET ACCOUNTSAllowance for Doubtful AccountsActivity in our allowance for doubtful accounts receivable consists of the following (in
thousands):
 Three Months Ended July 31,
    
    
    Nine Months Ended July 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Balance at beginning of period
    
    $
    756
    
    
    $
    678
    
    
    $
    567
    
    
    $
    617Adjustments to the allowance
    
    
    67
    
    
    
    (35
    )
    
    
    248
    
    
    
    30Deductions for uncollectible accounts
written off, net of recoveries
    
    
    1
    
    
    
    
    
    
    
    6
    
    
    
    (4
    )Increase due to foreign currency translation
    
    
    1
    
    
    
    
    
    
    
    4
    
    
    
    Balance at end of period
    
    $
    825
    
    
    $
    643
    
    
    $
    825
    
    
    $
    643
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Warranty Accrual
  Three Months Ended July 31,
    
    
    Nine Months Ended July 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Balance at beginning of period
    
    $
    3,337
    
    
    $
    1,373
    
    
    $
    1,836
    
    
    $
    1,545Adjustments to the accrual
    
    
    848
    
    
    
    441
    
    
    
    3,159
    
    
    
    1,078Deductions for warranty charges
    
    
    (816
    )
    
    
    (207
    )
    
    
    (1,652
    )
    
    
    (1,016
    )Increase due to foreign currency translation
    
    
    15
    
    
    
    
    
    
    
    41
    
    
    
    Balance at end of period
    
    $
    3,384
    
    
    $
    1,607
    
    
    $
    3,384
    
    
    $
    1,607
  Inventories
  July 31,
    
    
    October 31,2006
    
    
    2005Raw materials, parts and subassemblies
    
    $
    17,342
    
    
    $
    12,794Work-in-progress
    
    
    12,953
    
    
    
    8,822Total Inventories
    
    $
    30,295
    
    
    $
    21,616
 Costs and Estimated Earnings on Uncompleted Contracts
  July 31,
    
    
    October 31,2006
    
    
    2005Costs incurred on uncompleted contracts
    
    $
    274,914
    
    
    $
    293,741Estimated earnings
    
    
    59,709
    
    
    
    55,360334,623
    
    
    
    349,101Less: Billings to date
    
    
    310,393
    
    
    
    329,515$
    24,230
    
    
    $
    19,586Included in the accompanying balance sheets under the following captions:Costs and estimated earnings in excess of billings on uncompleted contracts
    
    $
    39,767
    
    
    $
    35,328Billings in excess of costs and estimated earnings on uncompleted contracts
    
    
    (15,537
    )
    
    
    (15,742
    )$
    24,230
    
    
    $
    19,586
 E.
    
    COMPREHENSIVE INCOMEComprehensive income for the three and nine months ended July 31, 2006 and 2005 is as follows
(in thousands):
 Three Months Ended July 31,
    
    
    Nine Months Ended July 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Net income
    
    $
    1,757
    
    
    $
    2,132
    
    
    $
    6,995
    
    
    $
    411Other comprehensive income, net of taxUnrealized gain (loss) on marketable
securities
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    (26
    )Unrealized gain (loss) on foreign
currency translation
    
    
    (51
    )
    
    
    (48
    )
    
    
    443
    
    
    
    (67
    )Unrealized gain on fair value hedge
    
    
    
    
    
    
    13
    
    
    
    
    
    
    
    13Comprehensive income
    
    $
    1,706
    
    
    $
    2,099
    
    
    $
    7,438
    
    
    $
    331
 11




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##### Table of Contents



F.
    
    LONG-TERM DEBTUS and UK RevolversOn June 29, 2005, we entered into a new senior credit agreement (Credit Agreement) with a
major domestic bank and certain other financial institutions which replaced our existing
revolving line of credit. The Credit Agreement also replaced an existing letter of credit
facility used to guarantee payment of our existing loan agreement that was funded with
proceeds from tax-exempt industrial development revenue bonds. This expanded credit facility
was put in place to partially fund the acquisition of and provide working capital support for
S&I.The Credit Agreement provides for a 1) $22.0 million revolving credit facility (US
Revolver), 2) £4.0 million (pound sterling) (approximately $7.0 million) revolving credit
facility (UK Revolver) and 3) £6.0 million (approximately $10.7 million) single advance
term loan (UK Term Loan). The Credit Agreement contains customary affirmative and negative
covenants and restricts our ability to pay dividends. In addition, there are various
restrictive covenants pertaining to maintenance of net worth and certain financial ratios.
Obligations are secured by the stock of our subsidiaries. The interest rate for amounts
outstanding under the Credit Agreement is a floating rate based upon LIBOR plus a margin
which can range from 1.25% to 2.25%, as determined by the Companys consolidated leverage
ratio as defined in the Credit Agreement.The US Revolver and the UK Revolver provide for the issuance of letters of credit which would
reduce the amounts which may be borrowed under the respective revolvers. The amount
available under this agreement is reduced by $11.9 million for our outstanding letters of
credit at July 31, 2006. There was £1.9 million, or approximately $3.5 million, outstanding
under the UK revolver as of July 31, 2006, with interest rates ranging from 5.60% to 5.635%.
No amounts were borrowed on the US Revolver as of July 31, 2006. The US Revolver and the UK
Revolver expire on June 30, 2008.UK Term LoanThe UK Term Loan is a single advance term loan of £6.0 million, or approximately $10.7
million, used for financing the acquisition of S&I. Approximately £5.0 million, or
approximately $8.9 million, of this facility was used to finance the portion of the purchase
price of S&I that was denominated in pounds sterling. The remaining £1.0 million, or
approximately $1.8 million, was utilized as the initial working capital for S&I. Quarterly
installments of £300,000, or approximately $532,000, began March 31, 2006, with the final
payment due on March 31, 2010. As of July 31, 2006, £5.4 million, or approximately $10.1
million of the UK Term Loan was outstanding and the per annum interest rate was 5.75%.Expenses associated with the issuance of the Credit Agreement are classified as deferred loan
costs and totaled $501,000 and are being amortized as a non-cash charge to interest expense
over the term of the agreement (three years).Tax Exempt Industrial Development Revenue BondsWe borrowed $8.0 million in October 2001 through a loan agreement funded with proceeds from
tax-exempt industrial development revenue bonds (Bonds). These Bonds were issued by the
Illinois Development Finance Authority and were used for the completion of our Northlake,
Illinois facility. While the Bonds mature in 2021, the reimbursement agreement requires
annual redemptions of $400,000. A sinking fund is used for the redemption of the Bonds. The
Bonds bear interest at a floating rate determined weekly by the Bonds remarketing agent,
which was the underwriter for the Bonds and is an affiliate of the bank. At July 31, 2006,
approximately $6.4 million was outstanding on the bonds and the interest rate is based on
similar types of short-term municipal securities and was 3.73% per annum on July 31, 2006.We are currently engaged in an audit with the Internal Revenue Service (IRS) related to our
tax exempt industrial development revenue bonds. We have furnished the IRS with various
requested materials in connection with the
audit. The IRS is reviewing these materials and has not yet informed us as to their
conclusions. Based on discussions with the IRS, management does not believe the outcome will
have a material impact on its consolidated financial position or results of operations.
 12




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##### Table of Contents



Capital LeasesSome machinery and equipment used in our manufacturing facilities was financed through
capital lease agreements. These capital lease agreements are collateralized by the leased
property. The capital lease obligations are at a fixed interest rate of 3%.G.
    
    COMMITMENTS AND CONTINGENCIESLetters of Credit and BondsCertain customers require us to post a bank letter of credit guarantee or performance bonds
issued by a surety. These guarantees and performance bonds assure our customers that we will
perform under terms of our contract. In the event of default, the customer may demand payment
from the bank under a letter of credit or performance by the surety under a performance bond.
To date, there have been no significant expenses related to either for the periods reported.
We were contingently liable for secured and unsecured letters of credit of $12.5 million as
of July 31, 2006. We also had performance bonds totaling approximately $125.3 million
outstanding at July 31, 2006.In November 2005, we entered into a new facility agreement (Facility Agreement) with a
large international bank. The Facility Agreement provides for 1) £15.0 million in bonds
(approximately $26.0 million), 2) £1.5 million of forward exchange contracts and currency
options (approximately $2.6 million), and 3) the issuance of bonds and the entering into of
forward exchange contracts and currency options. At July 31, 2006, we had outstanding bonds
of £0.6 million, or approximately $1.1 million.ContingenciesThe Company previously entered into a construction joint venture agreement to supply,
install, and commission a Supervisory Control and Data Acquisition System (SCADA) to
monitor and control the distribution and 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 satisfaction of the Commission. However, various
factors outside of the control of the Company and its joint venture partner caused numerous
changes and additions to the work that in turn delayed the completion of the project. The
Commission has withheld liquidated damages and earned contract payments from the joint
venture. The Company has made claims against the Commission for various matters including
compensation for extra work and delay to the project.The Company is currently pursuing the recovery of amounts owed under the contract, as well as
legal and other costs incurred to prosecute its claim. Unless this matter is otherwise
resolved, this claim is scheduled to go to trial in 2006. As of July 31, 2006, the Company
had approximately $1.6 million recorded in the consolidated balance sheet for contractually
owed amounts in accounts receivable and costs and estimated earnings in excess of billings on
uncompleted contracts related to its portion of this contract. Consistent with Company
policy, only revenue to the extent of costs of directed change orders have been recorded by
the Company. No amounts have been recorded by the Company related to the Companys claims
and counterclaims alleging breach of the agreement. Although a failure to recover the
amounts recorded could have a material adverse effect on the Companys results of operations,
the Company believes that, under the circumstances and on the basis of information now
available, an unfavorable outcome is unlikely.The Company was a party to a construction joint venture (the Joint Venture), which provided
process control systems to the Central Artery/Tunnel Project (the Project) in Boston,
Massachusetts under a contract with the Massachusetts Turnpike Authority (the MTA). The
Joint Venture submitted claims against the MTA seeking additional reimbursement for work done
by the Joint Venture on the project. These claims were settled and resulted in a net
increase in the contract amount of approximately $2.0 million, of which $1.5 million was
reflected as additional revenues by the Company for the three and nine months ended July 31,
2005.See Note F for discussion related to our tax exempt industrial development revenue bonds.H.
    
    STOCK-BASED COMPENSATIONRefer to the Companys Annual Report on Form 10-K for the fiscal year ended October 31, 2005
for a full description of the Companys stock-based compensation plans.
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##### Table of Contents



Modification to Stock Option VestingIn July 2006, the Compensation Committee of the Board of Directors modified the vesting
requirements for stock options upon retirement. The Committee voted to automatically vest
granted options upon retirement at age 60 with 10 years of service or at age 62 regardless of
service. Stock options are vested at retirement and will remain exercisable for the
remaining life of the option. All other terms of stock options remain the same.In accordance with SFAS No. 123R, we recognized approximately $0.9 million in non-cash
compensation expense in the third quarter of 2006 related to the modification. This non-cash
expense was recorded in selling, general and administrative expenses in July 2006. After the
modification adjustment, there is $1.8 million of unrecognized non-cash compensation expense
related to non-vested stock options at July 31, 2006. Of the $1.8 million unrecognized
compensation expense, $0.5 million will be expensed over a revised weighted-average period of
approximately 1.7 years. The remaining $1.3 million is expected to be recognized over a
weighted-average period of approximately 2.1 years. In addition, at July 31, 2006, there was
approximately $0.1 million of total unrecognized compensation expense related to restricted
stock which is expected to be recognized over a period of less than one year.Pro Forma Earnings Per ShareThe following table presents the pro forma effect on net income and earnings per share as if
we had applied the fair value recognition to stock-based compensation prior to the adoption
of SFAS No. 123R during the three and nine month period ended July 31, 2005 (in thousands
except per share amounts):
 Three Months Ended
    
    
    Nine Months EndedJuly 31, 2005
    
    
    July 31, 2005Net income as reported
    
    $
    2,132
    
    
    $
    411Less: Stock option compensation expense, net of taxes
    
    
    (185
    )
    
    
    (504
    )Net income (loss) pro forma
    
    $
    1,947
    
    
    $
    (93
    )Basic earnings (loss) per share:As reported
    
    $
    0.20
    
    
    $
    0.04Pro forma
    
    $
    0.18
    
    
    $
    (0.01
    )Diluted earnings (loss) per share:As reported
    
    $
    0.19
    
    
    $
    0.04Pro forma
    
    $
    0.18
    
    
    $
    (0.01
    )
 14




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##### Table of Contents



Stock OptionsStock option activity for the nine months ended July 31, 2006 is as follows:
 RemainingWeighted-
    
    Weighted-Average
    
    AggregateStock
    
    Average
    
    Contractual Term
    
    Intrinsic ValueOptions
    
    Exercise Price
    
    (years)
    
    (in thousands)Outstanding at October 31, 2005
    
    
    908,690
    
    
    $
    16.37Granted
    
    
    
    
    
    
    Exercised
    
    
    44,800
    
    
    
    14.82Forfeited
    
    
    
    
    
    
    Outstanding at July 31, 2006
    
    
    863,890
    
    
    
    16.45
    
    
    
    4.07
    
    
    $
    4,567Exercisable at July 31, 2006
    
    
    643,610
    
    
    
    16.11
    
    
    
    3.49
    
    
    $
    3,605
 I.
    
    BUSINESS SEGMENTSWe manage our business through operating subsidiaries, which are
comprised of two reportable business segments: Electrical Power
Products and Process Control Systems. Electrical Power Products
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.On July 14, 2006, we acquired certain assets and hired the service
and administrative employees of an electrical services company in
Louisiana (UMS). The operating results of UMS are included in
our Electrical Power Products business segment as of that date.On July 4, 2005, we acquired selected assets and assumed certain
operating liabilities and contracts of Switchgear &
Instrumentation Limited in the United Kingdom (S&I). The
operating results and tangible assets of S&I are included in our
Electrical Power Products business segment as of that date.The tables below reflect certain information relating to our
operations by segment. All revenues represent sales from
unaffiliated customers. The accounting policies of the segments
are the same as those described in the summary of significant
accounting policies. Corporate expenses and certain assets are
allocated to the operating segments primarily based on revenues.
The corporate assets are mainly cash, cash equivalents, and
marketable securities.Detailed information regarding our business segments is shown below (in thousands):
 Three Months Ended July 31,
    
    
    Nine Months Ended July 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenues:Electrical Power Products
    
    $
    96,896
    
    
    $
    58,214
    
    
    $
    265,413
    
    
    $
    146,362Process Control Systems
    
    
    7,125
    
    
    
    8,701
    
    
    
    20,852
    
    
    
    27,156Total
    
    $
    104,021
    
    
    $
    66,915
    
    
    $
    286,265
    
    
    $
    173,518Gross profit:Electrical Power Products
    
    $
    17,431
    
    
    $
    9,221
    
    
    $
    49,277
    
    
    $
    20,403Process Control Systems
    
    
    1,662
    
    
    
    3,340
    
    
    
    5,336
    
    
    
    7,559Total
    
    $
    19,093
    
    
    $
    12,561
    
    
    $
    54,613
    
    
    $
    27,962Income (loss) before
income taxes and minority
interest:Electrical Power Products
    
    $
    2,942
    
    
    $
    994
    
    
    $
    10,779
    
    
    $
    (3,140
    )Process Control Systems
    
    
    167
    
    
    
    1,839
    
    
    
    893
    
    
    
    2,878Total
    
    $
    3,109
    
    
    $
    2,833
    
    
    $
    11,672
    
    
    $
    (262
    )
 July 31,
    
    
    October 31,2006
    
    
    2005Identifiable tangible assets:Electrical Power Products
    
    $
    208,509
    
    
    $
    172,544Process Control Systems
    
    
    10,406
    
    
    
    10,762Corporate
    
    
    28,648
    
    
    
    39,013Total
    
    $
    247,563
    
    
    $
    222,319
 15




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##### Table of Contents



In addition, the Electrical Power Products business segment had $203,000 and $203,000 of
goodwill and $4,625,000 and $3,505,000 of intangible assets as of July 31, 2006 and October
31, 2005, respectively. Additionally, Corporate had $1,079,000 and $632,000 of deferred loan
costs and other assets as of July 31, 2006 and October 31, 2005, respectively, which are not
included in identifiable tangible assets above.J.
    
    CONSOLIDATION OF OPERATIONSTo reduce overhead costs and improve efficiency, we initiated a consolidation plan in fiscal
2004 to reduce the number of operating locations within our Electrical Power Products
segment. The majority of the costs related to this consolidation related to severance and
employee benefit expenses for involuntary terminations in 2004. During the first nine months
of fiscal 2005, $66,000 of additional shutdown costs and write downs of fixed assets were
expensed and included in the Condensed Consolidated Statements of Operations.K.
    
    SUBSEQUENT EVENTOn 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 for
$32 million, not including expenses. An initial payment of $8.5 million was paid at closing
from existing cash and short-term marketable securities with the remainder payable in four
installments every 10 months over the next 40 months of $5.5 million, $6.25 million, $6.25
million and $5.5 million, respectively. The deferred installments result in a discounted
purchase price of approximately $28.8 million. We are also required to purchase the
remaining inventory for additional consideration and have the option to purchase additional
equipment after completion of the transition and product relocation to Houston, Texas.In connection with the acquisition, we entered into a 15 year supply agreement with GE
pursuant to which GE will purchase from the Company (subject to limited conditions for
exceptions) all of its requirements for ANSI medium voltage switchgear and circuit breakers
and other related equipment and components. We have also agreed to purchase certain of our
required product components and subassemblies from GE. In addition, GE has agreed to
provide services related to transitioning the product line from West Burlington, Iowa to the
Companys Houston, Texas facility.In connection with the acquisition, we entered into a lease agreement for a facility in
Houston, Texas, which increased our manufacturing space by approximately 140,000 square feet.
The lease will cost approximately $34,000 per month.Additionally, we amended our existing Credit Agreement with Bank of America, N.A. to increase
the US Revolver by $20.0 million to $42.0 million. This increase in our credit facility was
made to assist with future payments related to the GE acquisition and to finance the increase
in working capital associated with the start-up, relocation and operation of the product
line. This amended line of credit expires on December 31, 2010. Certain financial covenants
were changed in conjunction with this amendment to our credit facility.
 16




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##### Table of Contents



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 in
conjunction with the accompanying condensed consolidated financial statements and related notes
included elsewhere in this Form 10-Q and our Annual Report on Form 10-K as filed with the
Securities and Exchange Commission for the year ended October 31, 2005. In the course of
operations, we are subject to certain risk factors, including but not limited to competition and
competitive pressures, sensitivity to general economic and industry conditions, international
political and economic risks, availability and price of raw materials and execution of business
strategy. Any forward-looking statements made by or on our behalf are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. Readers are cautioned
that such forward-looking statements involve risks and uncertainties in that actual results may differ
materially from those projected in the forward-looking statements.
 Overview
  Results of Operations
 Revenue and Gross Profit
   Electrical Power Products
    17




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##### Table of Contents



Process Control Systems
    Consolidated Selling, General, and Administrative Expenses
 Share-Based Payment
  Interest Income and Expense
  18




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##### Table of Contents



Provision for Income Taxes
    Net Income
  Backlog
  Liquidity and Capital Resources
   19




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##### Table of Contents



Operating Activities
  Investing Activities
   Financing Activities
  Outlook
    20




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##### Table of Contents



Item 3. Quantitative And Qualitative Disclosures About Market Risk
    
 Item 4. Controls And Procedures
   21




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##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1.
    
    Legal Proceedings
 The Company previously entered into a construction joint venture agreement to
supply, install, and commission a Supervisory Control and Data Acquisition System
(SCADA) to monitor and control the distribution and 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 satisfaction of the
Commission. However, various factors outside of the control of the Company and its
joint venture partner caused numerous changes and additions to the work that in turn
delayed the completion of the project. The Commission has withheld liquidated damages
and earned contract payments from the joint venture. The Company has made claims
against the Commission for various matters including compensation for extra work and
delay to the project.The Company is currently pursuing the recovery of amounts owed under the contract, as
well as legal and other costs incurred to prosecute its claim. Unless this matter is
otherwise resolved, it is expected to go to trial in 2006 in Alameda County Superior
Court, State of California. As of July 31, 2006, the Company had approximately $1.6
million recorded in the consolidated balance sheet for contractually owed amounts in
accounts receivable and costs and estimated earnings in excess of billings on
uncompleted contracts related to its portion of this contract. Consistent with Company
policy, only costs of directed change orders have been recorded by the Company. No
amounts have been recorded by the Company related to the Companys claims and
counterclaims alleging breach of the agreement. Although a failure to recover the
amounts recorded could have a material adverse effect on the Companys results of
operations, the Company believes that, under the circumstances and on the basis of
information now available, an unfavorable outcome is unlikely.The Company was a party to a construction joint venture (the Joint Venture), which
provided process control systems to the Central Artery/Tunnel Project (the Project) in
Boston, Massachusetts under a contract with the Massachusetts Turnpike Authority (the
MTA). The Joint Venture submitted claims against the MTA seeking additional
reimbursement for work done by the Joint Venture on the project. These claims were
settled and resulted in a net increase in the contract amount of approximately $2.0
million, of which $1.5 million was reflected as additional revenues by the Company for
the three and nine months ended July 31, 2005.
 
 Item 1A. Risk Factors
 There are no material changes from the risk factors
previously disclosed in the Companys Annual Report on
Form 10-K for the fiscal year ended October 31, 2005.
 22




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##### Table of Contents



Item 6. Exhibits
 3.1 -
    
    Certificate of Incorporation of Powell Industries, Inc. filed with
the Secretary of State of the State of Delaware on February 11, 2004 (filed as
Exhibit 3.1 to our Form 8-A/A filed November 1, 2004, and incorporated herein by
reference).3.2 -
    
    Bylaws of Powell Industries, Inc. (filed as Exhibit 3.2 to our Form
8-A/A filed November 1, 2004, and incorporated herein by reference).*31.1 -
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.*31.2 -
    
    Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.*32.1 -
    
    Certification of Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.*32.2 -
    
    Certification of Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
 
 *
    
    Filed herewith. 23




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##### Table of Contents



SIGNATURES
  
 September 11,
2006
Date
    
    /s/ THOMAS W. POWELL

Thomas W. PowellPresident and Chief Executive Officer(Principal Executive Officer)September 11,
2006
Date
    
    /s/ DON R. MADISON

Don R. MadisonVice President and Chief Financial Officer(Principal Financial Officer)
 24




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##### Table of Contents



EXHIBIT INDEX
 Number
    
    
    
    Exhibit Title3.1
    
    -
    
    Certificate of Incorporation of Powell Industries, Inc. filed with the Secretary of
State of the State of Delaware on February 11, 2004 (filed as Exhibit 3.1 to our Form
8-A/A filed November 1, 2004, and incorporated herein by reference).3.2
    
    -
    
    Bylaws of Powell Industries, Inc. (filed as Exhibit 3.2 to our Form 8-A/A filed
November 1, 2004, and incorporated herein by reference).*31.1
    
    -
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*31.2
    
    -
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*32.1
    
    -
    
    Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*32.2
    
    -
    
    Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 *
    
    Filed herewith.
 25