##### 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
January 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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##### Table of Contents



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
    
    
    16Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    19Item 4. Controls and Procedures
    
    
    19Part
II  Other InformationItem 1. Legal Proceedings
    
    
    20Item 1A. Risk Factors
    
    
    20Item 4. Submission of Matters to a Vote of Security Holders
    
    
    21Item 6. Exhibits
    
    
    21Signatures
    
    
    22Certification of CEO Pursuant to Rule 13a-14(a)Certification of CFO Pursuant to Rule 13a-14(a)Certification of CEO Pursuant to Section 1350Certification of CFO Pursuant to Section 1350
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Powell Industries, Inc. and Subsidiaries
 
 Condensed Consolidated Balance Sheets
 (In thousands, except share and per share data)
 January 31,
    
    
    October 31,2006
    
    
    2005(Unaudited)AssetsCurrent Assets:Cash and cash equivalents
    
    $
    16,816
    
    
    $
    24,844Marketable securities
    
    
    10,200
    
    
    
    8,200Accounts receivable, less allowance for doubtful accounts of $665 and
$567, respectively
    
    
    62,317
    
    
    
    65,385Costs and estimated earnings in excess of billings on uncompleted contracts
    
    
    44,509
    
    
    
    35,328Inventories, net
    
    
    25,208
    
    
    
    21,616Income taxes receivable
    
    
    234
    
    
    
    507Deferred income taxes
    
    
    1,392
    
    
    
    1,836Prepaid expenses and other current assets
    
    
    7,717
    
    
    
    4,461Total Current Assets
    
    
    168,393
    
    
    
    162,177Property, plant and equipment, net
    
    
    55,281
    
    
    
    55,678Goodwill
    
    
    203
    
    
    
    203Intangible assets, net
    
    
    3,186
    
    
    
    3,505Other assets
    
    
    3,779
    
    
    
    5,096Total Assets
    
    $
    230,842
    
    
    $
    226,659Liabilities and Stockholders EquityCurrent Liabilities:Current maturities of long-term debt and capital lease obligations
    
    
    2,615
    
    
    
    2,095Income taxes payable
    
    
    1,389
    
    
    
    1,185Accounts payable
    
    
    22,692
    
    
    
    22,104Accrued salaries, bonuses and commissions
    
    
    8,754
    
    
    
    9,820Billings in excess of costs and estimated earnings on uncompleted contracts
    
    
    18,415
    
    
    
    15,742Accrued product warranty
    
    
    2,103
    
    
    
    1,836Other accrued expenses
    
    
    6,023
    
    
    
    5,957Total Current Liabilities
    
    
    61,991
    
    
    
    58,739Long-term debt and capital lease obligations, net of current maturities
    
    
    18,833
    
    
    
    19,436Deferred compensation
    
    
    1,727
    
    
    
    1,918Other liabilities
    
    
    1,794
    
    
    
    1,871Total Liabilities
    
    
    84,345
    
    
    
    81,964Commitments and contingencies (Note F)Minority interest
    
    
    299
    
    
    
    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; 10,855,378 and 10,849,278 shares
outstanding, respectively
    
    
    110
    
    
    
    110Additional paid-in capital
    
    
    10,698
    
    
    
    10,252Retained earnings
    
    
    137,763
    
    
    
    136,670Treasury stock, 146,355 and 152,455 shares, respectively, at cost
    
    
    (1,359
    )
    
    
    (1,417
    )Accumulated other comprehensive income (loss)
    
    
    44
    
    
    
    (11
    )Deferred compensation
    
    
    (1,058
    )
    
    
    (1,190
    )Total Stockholders Equity
    
    
    146,198
    
    
    
    144,414Total Liabilities and Stockholders Equity
    
    $
    230,842
    
    
    $
    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 January 31,2006
    
    
    2005Revenues
    
    $
    83,813
    
    
    $
    47,689Cost of goods sold
    
    
    69,036
    
    
    
    40,730Gross profit
    
    
    14,777
    
    
    
    6,959Selling, general and administrative expenses
    
    
    12,984
    
    
    
    9,521Income (loss) before interest, income taxes and minority interest
    
    
    1,793
    
    
    
    (2,562
    )Interest expense
    
    
    335
    
    
    
    77Interest income
    
    
    (302
    )
    
    
    (277
    )Income (loss) before income taxes and minority interest
    
    
    1,760
    
    
    
    (2,362
    )Income tax provision (benefit)
    
    
    649
    
    
    
    (924
    )Minority interest in net income (loss)
    
    
    18
    
    
    
    (12
    )Net income (loss)
    
    $
    1,093
    
    
    $
    (1,426
    )Net earnings (loss) per common share:Basic
    
    $
    0.10
    
    
    $
    (0.13
    )Diluted
    
    $
    0.10
    
    
    $
    (0.13
    )Weighted average shares:Basic
    
    
    10,853
    
    
    
    10,737Diluted
    
    
    11,004
    
    
    
    10,737
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Powell Industries, Inc. and Subsidiaries
 
 Condensed Consolidated Statements of Cash Flows (unaudited)
 (In thousands)
 Three Months Ended January 31,2006
    
    
    2005Operating Activities:Net income (loss)
    
    $
    1,093
    
    
    $
    (1,426
    )Adjustments to reconcile net income to net cash used in operating activities:Depreciation and amortization
    
    
    1,805
    
    
    
    1,158Amortization of unearned restricted stock
    
    
    52
    
    
    
    17Bad debt expense
    
    
    98
    
    
    
    62Loss on disposition of assets
    
    
    48
    
    
    
    49Deferred income taxes
    
    
    331
    
    
    
    (1,320
    )Stock-based compensation
    
    
    417
    
    
    
    Changes in operating assets and liabilities:Accounts receivable, net
    
    
    2,914
    
    
    
    (7,661
    )Costs and estimated earnings in excess of billings on uncompleted contracts
    
    
    (9,195
    )
    
    
    1,615Inventories
    
    
    (3,607
    )
    
    
    (2,428
    )Prepaid expenses and other current assets
    
    
    (2,985
    )
    
    
    (2,121
    )Other assets
    
    
    1,301
    
    
    
    68Accounts payable and income taxes payable
    
    
    816
    
    
    
    520Accrued liabilities
    
    
    (725
    )
    
    
    (3,763
    )Billings in excess of costs and estimated earnings on uncompleted contracts
    
    
    2,678
    
    
    
    3,081Deferred compensation
    
    
    (111
    )
    
    
    130Other liabilities
    
    
    135
    
    
    
    25Net cash used in operating activities
    
    
    (4,935
    )
    
    
    (11,994
    )Investing Activities:Proceeds from sale of fixed assets
    
    
    21
    
    
    
    39Purchases of property, plant and equipment
    
    
    (1,178
    )
    
    
    (1,539
    )Proceeds from sale of short-term auction rate securities
    
    
    
    
    
    
    7,635Purchase of short-term auction rate securities
    
    
    (2,000
    )
    
    
    Net cash (used in) provided by investing activities
    
    
    (3,157
    )
    
    
    6,135Financing Activities:Borrowings on revolving line of credit
    
    
    2,820
    
    
    
    1,348Repayments on revolving line of credit
    
    
    (2,820
    )
    
    
    (1,348
    )Payments on capital lease obligations
    
    
    (13
    )
    
    
    Tax benefit from exercise of stock options
    
    
    19
    
    
    
    31Proceeds from exercise of stock options
    
    
    67
    
    
    
    88Net cash provided by financing activities
    
    
    73
    
    
    
    119Net decrease in cash and cash equivalents
    
    
    (8,019
    )
    
    
    (5,740
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    (9
    )
    
    
    Cash and cash equivalents at beginning of period
    
    
    24,844
    
    
    
    8,974Cash and cash equivalents at end of period
    
    $
    16,816
    
    
    $
    3,234Supplemental disclosures of cash flow information:Cash (received) paid during the period for:Interest
    
    $
    278
    
    
    $
    77Income taxes
    
    $
    (201
    )
    
    $
    387Non-cash investing and financing activities:Change in fair value of marketable securities during the period, net of
$0 and $7 income taxes, respectively
    
    $
    
    
    
    $
    (12
    )Unrealized foreign currency gain
    
    $
    13
    
    
    $
    
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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. On July 4, 2005, we acquired selected assets and assumed certain
operating liabilities and contracts of Switchgear and Instrumentation Limited in the United
Kingdom. The acquired business is referred to herein as S&I. The operating results of S&I
are included in our Electrical Power Products business segment. Financial information
related to these business segments is included in Note H 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, which 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 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, the allowance for doubtful accounts, self-insurance, warranty
accruals, and postretirement benefit obligations.
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Foreign Currency TranslationThe functional currency for our foreign subsidiaries is the local currency in which the
entity is located. The financial statements of all subsidiaries with a functional currency
other than the U.S. Dollar have been translated into U.S. Dollars in accordance with
Statement of Financial Accounting Standards No. 52, Foreign Currency Translation. All
assets and liabilities of foreign operations are translated into U.S. Dollars using
period-end exchange rates and all revenues and expenses are translated at average rates
during the respective period. The U.S. Dollar results that arise from such translation, as
well as exchange gains and losses on intercompany balances of a long-term investment nature,
are included in the cumulative currency translation adjustments in accumulated other
comprehensive income (loss) in stockholders equity.Stock-Based CompensationIn the first quarter of 2006, we adopted SFAS No. 123 (revised 2004), Share-Based Payment.
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. The effect of adoption of the new standard in
the first quarter of 2006, related to stock options and restricted stock plans was an
additional expense of $0.4 million pretax, or $0.3 million after tax ($0.02 per share, basic
and diluted). 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 first quarter of 2006 was not material. At January 31, 2006, there was
$3.3 million of total unrecognized compensation cost related to non-vested stock options.
This compensation is expected to be recognized over a weighted-average period of
approximately 2.3 years. In addition, at January 31, 2006, there was $0.2 million of total
unrecognized compensation cost related to restricted stock. This compensation is expected to
be recognized over a period of less than two years.Under SFAS 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
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.The following table presents the proforma effect on net income and earning per share as if we
had applied the fair value recognition of SFAS 123 to stock-based compensation prior to the
adoption of SFAS 123R during the three month period ended January 31, 2005 (in thousands
except per share amounts):
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Three Months EndedJanuary 31, 2005Net loss, as reported
    
    $
    (1,426
    )Less: Stock option compensation expense
    
    
    (166
    )Net loss, pro forma
    
    $
    (1,592
    )Net loss per share:Basic and diluted, as reported
    
    $
    (0.13
    )Basic and diluted, pro forma
    
    $
    (0.15
    )
  RemainingWeighted-
    
    Weighted-Average
    
    AggregateStock
    
    average
    
    Contractual Term
    
    Intrinsic ValueOptions
    
    Exercise Price
    
    (Years)
    

(in
thousands)Outstanding at October 31, 2005
    
    
    908,690Granted
    
    
    Exercised
    
    
    6,100Forfeited
    
    
    Outstanding at January 31, 2006
    
    
    902,590
    
    
    $
    16.40
    
    
    
    4.03
    
    
    $
    4,219Exercisable at January 31, 2006
    
    
    412,270
    
    
    $
    15.31
    
    
    
    2.50
    
    
    $
    2,365
 The Company has the following stock-based compensation plans:The 1992 Stock Option Plan, as amended (the 1992 Plan), permits the Company to grant
to key employees non-qualified options and stock grants, subject to certain conditions and
restrictions as determined by the Compensation Committee of the Board of Directors and
proportionate adjustments in the event of stock dividends, stock splits and similar corporate
transactions. The number of shares available for issuance under the 1992 Plan is 2.7 million
            shares. There were no stock grants the first quarter of fiscal 2006. Stock options are
granted at an exercise price equal to the fair market value of the common stock on the date
of the grant. Generally, options granted have an expiration date of seven years from the
grant date and vest in increments of 20% per year over a five-year period. Pursuant to the
1992 Plan, option holders who exercise their options and hold the underlying shares of common
stock for five years, vest in a stock grant equal to 20% of the original option shares.
While restricted until the expiration of five years, the stock grant is considered issued at
the date of the stock option exercise and is included in earnings per share.The 2000 Non-Employee Stock Option Plan, as amended, was adopted for the benefit of members
of the Board of Directors of the Company who, at the time of their service, are not employees
of the Company or any of its affiliates. Annually, each eligible Director who is continuing
to serve as a Director, will receive a grant of an option to purchase 2,000 shares of our
common stock. Stock options granted to the Directors are non-qualified and are granted at an
exercise price equal to the fair market value of the common stock at the date of grant.
Generally, options granted have expiration terms of seven years from the date of grant and
will vest in full one year from the grant date. There will be no further grants awarded
under this plan. The Compensation Committee of the Board of Directors plans to terminate the
2000 Non-Employee Director Stock Option Plan after all outstanding options have been
exercised or have expired.
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The Non-Employee Director Restricted Stock Plan (the Restricted Stock Plan) was adopted for
the benefit of members of the Board of Directors of the Company who, at the time of their
service, are not employees of the Company or any of its affiliates. Subject to certain
conditions and restrictions as determined by the Compensation Committee of the Board of
Directors and proportionate adjustments in the event of stock dividends, stock splits and
similar corporate transactions, annually each eligible director will receive 2,000 shares of
restricted stock on the date of the June Board of Directors meeting. The maximum aggregate
number of shares of stock that may be issued under the Restricted Stock Plan is 150,000 and
will consist of authorized but unissued or reacquired shares of stock or any combination
thereof. The restricted stock grants vest 50 percent per year over a two year period on each
anniversary of the grant date. Unless sooner terminated by the Board, the Restricted Stock
Plan will terminate at the close of business on December 16, 2014, and no further grants
shall be made under the plan after such date. Awards granted before such date shall continue
to be subject to the terms and conditions of the plan and the respective agreements pursuant
to which they were granted.Accumulated Other Comprehensive Income (Loss)Accumulated other comprehensive income (loss), which is included as a component of
stockholders equity net of tax, includes net income, unrealized gains or losses on
available-for-sale marketable securities and currency translation adjustments in foreign
consolidated subsidiaries.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.
    
    ACQUISITIONOn July 4, 2005, we acquired selected assets and assumed certain operating liabilities and
contracts of Switchgear & Instrumentation Limited. We refer to the acquired business herein
as S&I. 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 G herein). The results of operations of S&I are included in our Consolidated
Financial Statements from July 4, 2005. The Condensed Consolidated Balance Sheets includes
an allocation of the purchase price to the assets acquired and liabilities assumed based on
estimates of fair value.The purchase price allocation was as follows (in thousands):
 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
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The amounts assigned to property, plant and equipment were based on independent appraisals of
the property and plant, as well as the more significant pieces of machinery and equipment.The amounts allocated to intangible assets related to the S&I acquisition were as follows (in
thousands):
 EstimatedAmount
    
    
    LifeUnpatented technology
    
    $
    2,175
    
    
    7 yearsTradenames
    
    
    1,025
    
    
    10 yearsBacklog
    
    
    646
    
    
    6 monthsTotal
    
    $
    3,846
 The unaudited pro forma data presented below reflects the results of Powell Industries, Inc.
and the acquisition of S&I assuming the acquisition was completed on November 1, 2004 (in
thousands, except per share data):
 Three Months EndedJanuary 31, 2005Revenues
    
    $
    64,116Net loss
    
    $
    (1,745
    )Net loss per common share:Basic
    
    $
    (0.16
    )Diluted
    
    $
    (0.16
    )
 The unaudited pro forma information includes the operating results of S&I prior to the
acquisition date adjusted to include the pro forma impact of the following:
 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;
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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.
 The unaudited pro forma results above do not purport to be indicative of the results that
would have been obtained if the acquisition occurred as of the beginning of the period
presented or that may be obtained in the future.Prior to the acquisition by Powell, S&I operating results were reported under accounting
principles generally accepted in the United Kingdom (UK GAAP). Revenues and costs related
to long-term contracts accounted for under UK GAAP were not recognized on a
percentage-of-completion basis of accounting. UK GAAP allows companies to recognize revenue
on long-term contracts when the contract is complete (completed contract method). The
unaudited pro forma results above were prepared based on the Companys best estimate of
percentage-of-completion for long-term contracts under SOP 81-1, 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 (loss) per share
(in thousands, except per share data):
 Three Months EndedJanuary 31,2006
    
    
    2005Numerator:Net income (loss)
    
    $
    1,093
    
    
    $
    (1,426
    )Denominator:Denominator for basic earnings
(loss) per share-weighted
average shares
    
    
    10,853
    
    
    
    10,737Dilutive effect of stock options
    
    
    151
    
    
    
    Denominator for diluted
earnings (loss) per
share-adjusted weighted average
shares with assumed conversions
    
    
    11,004
    
    
    
    10,737Net earnings (loss) per share:Basic
    
    $
    0.10
    
    
    $
    (0.13
    )Diluted
    
    $
    0.10
    
    
    $
    (0.13
    )
 For the three months ended January 31, 2006, options to purchase approximately 24,000
            shares were excluded from the computation of diluted earnings per share because the options
exercise prices were greater than the average market price of our common stock. We had a net
loss for the three months ended January 31, 2005; accordingly, the inclusion of common stock
equivalents for outstanding stock options would be antidilutive and, therefore the weighted
average shares used to calculate both basic and diluted loss per share are the same.
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D.
    
    DETAIL OF SELECTED BALANCE SHEET ACCOUNTSAllowance of Doubtful AccountsActivity in our allowance for doubtful accounts receivable consists of the following (in
thousands):
 Three Months EndedJanuary 31,2006
    
    
    2005Balance at beginning of period
    
    $
    567
    
    
    $
    617Adjustments to the allowance
    
    
    98
    
    
    
    61Deductions for uncollectible accounts written off, net of recoveries
    
    
    
    
    
    
    (4
    )Balance at end of period
    
    $
    665
    
    
    $
    674
 Warranty AccrualActivity in our accrued product warranty account consists of the following (in thousands):
 Three Months EndedJanuary 31,2006
    
    
    2005Balance at
beginning of period
    
    $
    1,836
    
    
    $
    1,545Additions to the accrual
    
    
    727
    
    
    
    287Deductions for warranty charges
    
    
    (460
    )
    
    
    (444
    )Balance at end of period
    
    $
    2,103
    
    
    $
    1,388
 InventoriesThe components of inventories are summarized below (in
thousands):
 January 31,
    
    
    October 31,2006
    
    
    2005Raw
materials, parts and subassemblies
    
    $
    14,561
    
    
    $
    12,794Work-in-progress
    
    
    10,647
    
    
    
    8,822Total Inventories
    
    $
    25,208
    
    
    $
    21,616
 Costs and Estimated Earnings on Uncompleted ContractsThe components of costs and estimated earnings and related amounts billed on uncompleted
contracts (in thousands):
 January 31,
    
    
    October 31,2006
    
    
    2005Costs incurred on uncompleted contracts
    
    $
    234,855
    
    
    $
    293,741Estimated earnings
    
    
    48,352
    
    
    
    55,360283,207
    
    
    
    349,101Less: Billings to date
    
    
    257,113
    
    
    
    329,515$
    26,094
    
    
    $
    19,586Included in accompanying balance sheets under the following captions:Costs and estimated earnings in excess of billings on uncompleted
contracts
    
    $
    44,509
    
    
    $
    35,328Billings in excess of costs and estimated earnings on uncompleted
contracts
    
    
    (18,415
    )
    
    
    (15,742
    )$
    26,094
    
    
    $
    19,586
 E.
    
    COMPREHENSIVE INCOME (LOSS)Our comprehensive income (loss) consists of net income (loss), the change in fair value of
marketable securities and foreign currency translation adjustments. Comprehensive income
(loss) for the three month period ended January 31, 2006, and 2005, is as follows (in
thousands):
 Three Months EndedJanuary 31,2006
    
    
    2005Net income (loss)
    
    $
    1,093
    
    
    $
    (1,426
    )Unrealized gain (loss) on marketable securities
    
    
    
    
    
    
    (12
    )Unrealized gain (loss) on foreign currency translation
    
    
    13
    
    
    
    (19
    )Comprehensive income (loss)
    
    $
    1,106
    
    
    $
    (1,457
    )
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F.
    
    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 and with associated vendors and subcontractors. 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 $12.2 million as of January 31, 2006. We also had
performance bonds totaling approximately $177.3 million that were outstanding at January 31,
2006.Other 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 January 31, 2006,
the Company had approximately $1.4 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.G.
    
    LONG-TERM DEBTOn November 10, 2005, we entered into a new facility agreement (Facility Agreement) with a
large international bank. The Facility Agreement allows S&I the ability to issue bonds and
enter into forward exchange contracts and currency options.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.On 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 $10.6 million) single advance
term loan (UK Term Loan). The Credit Agreement contains customary affirmative and negative
covenants and restricts our ability to pay dividends. The most restrictive
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covenant requires the Company to achieve certain operating results, as defined. 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
within 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 $11.6 million for our outstanding letters of
credit at January 31, 2006. There was £2.4 million, or approximately $4.2 million,
outstanding under the UK revolver as of January 31, 2006, with interest rates ranging from
6.30% to 6.35%. No amounts were borrowed on the US Revolver. The US Revolver and the UK
Revolver expire on June 30, 2008.The UK Term Loan provides for borrowings of £6.0 million, or approximately $10.7 million, for
our financing requirements related to 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, are due beginning March 31, 2006, with
the final payment due on March 31, 2010. As of January 31, 2006, the full amount of the UK
Term Loan was outstanding and the per annum interest rate was 6.35%.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).We 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. Pursuant to the Bond issuance, a reimbursement agreement between the
Company and a major domestic bank required an issuance by the bank of an irrevocable
direct-pay letter of credit (Bond LC) to the Bonds trustee to guarantee payment of the
Bonds principal and interest when due. The Bond LC periodically changes in amount to equal
the outstanding balance of the Bonds and terminates on October 25, 2006. The Bond LC is
subject to both early termination and extension provisions customary to such agreements.
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. This interest rate is based on
similar types of short-term municipal securities and was 3.12% per annum on January 31, 2006.Some machinery and equipment used in our manufacturing facilities were 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%.H.
    
    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.
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On July 4, 2005, we acquired selected assets and assumed certain operating liabilities and
contracts of Switchgear & Instrumentation Limited in the United Kingdom. We refer to the
acquired business herein as 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 EndedJanuary 31,2006
    
    
    2005Revenues:Electrical Power Products
    
    $
    76,642
    
    
    $
    39,764Process Control Systems
    
    
    7,171
    
    
    
    7,925Total
    
    $
    83,813
    
    
    $
    47,689Gross profit:Electrical Power Products
    
    $
    13,064
    
    
    $
    5,232Process Control Systems
    
    
    1,713
    
    
    
    1,727Total
    
    $
    14,777
    
    
    $
    6,959Income (loss) before income taxes and minority interest:Electrical Power Products
    
    $
    1,399
    
    
    $
    (2,617
    )Process Control Systems
    
    
    361
    
    
    
    255Total
    
    $
    1,760
    
    
    $
    (2,362
    )
 January 31,
    
    
    October 31,2006
    
    
    2005Identifiable tangible assets:Electrical Power Products
    
    $
    184,750
    
    
    $
    172,544Process Control Systems
    
    
    11,256
    
    
    
    10,762Corporate
    
    
    30,860
    
    
    
    39,013Total
    
    $
    226,866
    
    
    $
    222,319
 In addition, the Electrical Power Products business segment had $203,000 and $203,000 of
goodwill and $3,186,000 and $3,505,000 of intangible and other assets as of January 31, 2006,
and October 31, 2005, respectively. Additionally, Corporate had $587,000 and $632,000 of
deferred loan costs as of January 31, 2006, and October 31, 2005, respectively, which are not
included in identifiable tangible assets above.I.
    
    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 our consolidation changes related to severance and employee benefit
expenses for involuntary terminations in 2004. During the first quarter 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.
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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 the actual results may
differ materially from those projected in the forward-looking statements.
 Overview
  Results of Operations
 Revenue and Gross Profit
  Electrical Power Products
   16




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Process Control Systems
    Consolidated Selling, General, and Administrative Expenses
  Interest Income and Expense
   Provision for Income Taxes
  Net Income
  Backlog
  17




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Liquidity and Capital Resources
   Operating Activities
  Investing Activities
   Financing Activities
  Outlook
    18




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Item 3. Quantitative And Qualitative Disclosures About Market Risk
    
 Item 4. Controls And Procedures
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PART II
 OTHER INFORMATION
 
 Item 1. Legal Proceedings
   
 Item 1A. Risk Factors
  20




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Item 4. Submission of Matters to a Vote of Security Holders
  
 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).*10.1 
    
    First Amendment to Credit Agreement dated November 7, 2005, among Powell Industries, Inc.; Inhoco 3210
Limited (n/k/a Switchgear and Instrumentation Limited); Switchgear & Instrumentation Properties Limited;
Bank of America, N.A.; and the other lenders parties thereto (filed as Exhibit 10.14 to our Form 10-K
for the fiscal year ended October 31, 2005, and incorporated herein by reference).*10.2 
    
    Second Amendment to Credit Agreement dated January 11, 2006, among Powell Industries, Inc., Switchgear &
Instrumentation Limited, Switchgear & Instrumentation Properties Limited, Bank of America, N.A., and the
other lenders parties thereto (filed as Exhibit 10.15 to our Form 10-K for the fiscal year ended October
31, 2005, 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.
 
 *
    
    Previously filed. 21




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##### Table of Contents



SIGNATURES
  
 March 9,
2006Date
    
    /s/ THOMAS W. POWELLThomas W. PowellPresident and Chief Executive Officer(Principal Executive Officer)March 9, 2006Date
    
    /s/ DON R. MADISONDon R. MadisonVice President and Chief Financial Officer(Principal Financial Officer)
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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).*10.1 
    
    First Amendment to Credit Agreement dated November 7, 2005, among Powell Industries, Inc.; Inhoco 3210
Limited (n/k/a Switchgear and Instrumentation Limited); Switchgear & Instrumentation Properties Limited;
Bank of America, N.A.; and the other lenders parties thereto (filed as Exhibit 10.14 to our Form 10-K
for the fiscal year ended October 31, 2005, and incorporated herein by reference).*10.2 
    
    Second Amendment to Credit Agreement dated January 11, 2006, among Powell Industries, Inc., Switchgear &
Instrumentation Limited, Switchgear & Instrumentation Properties Limited, Bank of America, N.A., and the
other lenders parties thereto (filed as Exhibit 10.15 to our Form 10-K for the fiscal year ended October
31, 2005, 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.
 
 *
    
    Previously filed. 23