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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 December 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
    
    
    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 6. Exhibits
    
    
    21Signatures
    
    
    22Certification 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)
 December 31,
    
    
    September 30,2006
    
    
    2006(Unaudited)
    
    
    (See Note A)AssetsCurrent Assets:Cash and cash equivalents
    
    $
    4,955
    
    
    $
    10,495Accounts receivable, less allowance for doubtful accounts of $1,119 and
$1,044, respectively
    
    
    111,648
    
    
    
    108,002Costs and estimated earnings in excess of billings on uncompleted contracts
    
    
    52,325
    
    
    
    43,067Inventories, net
    
    
    36,712
    
    
    
    28,940Income taxes receivable
    
    
    1,291
    
    
    
    44Deferred income taxes
    
    
    162
    
    
    
    Prepaid expenses and other current assets
    
    
    5,813
    
    
    
    2,398Total Current Assets
    
    
    212,906
    
    
    
    192,946Property, plant and equipment, net
    
    
    64,521
    
    
    
    60,336Goodwill
    
    
    1,084
    
    
    
    1,084Intangible assets, net
    
    
    31,498
    
    
    
    32,263Other assets
    
    
    5,670
    
    
    
    5,495Total Assets
    
    $
    315,679
    
    
    $
    292,124Liabilities and Stockholders EquityCurrent Liabilities:Current maturities of long-term debt and capital lease obligations
    
    $
    8,454
    
    
    $
    8,510Income taxes payable
    
    
    1,761
    
    
    
    156Accounts payable
    
    
    39,263
    
    
    
    44,377Accrued salaries, bonuses and commissions
    
    
    11,148
    
    
    
    13,183Billings in excess of costs and estimated earnings on uncompleted contracts
    
    
    37,536
    
    
    
    16,752Accrued product warranty
    
    
    3,836
    
    
    
    3,443Other accrued expenses
    
    
    8,041
    
    
    
    9,806Total Current Liabilities
    
    
    110,039
    
    
    
    96,227Long-term debt and capital lease obligations, net of current maturities
    
    
    38,295
    
    
    
    33,886Deferred compensation
    
    
    1,739
    
    
    
    1,735Postretirement benefits obligation
    
    
    1,171
    
    
    
    1,146Other liabilities
    
    
    63
    
    
    
    90Total Liabilities
    
    
    151,307
    
    
    
    133,084Commitments and contingencies (Note G)Minority interest
    
    
    337
    
    
    
    278Stockholders Equity:Preferred stock, par value $.01; 5,000,000 shares authorized; none issued
    
    
    
    
    
    
    Common stock, par value $.01; 30,000,000 shares authorized; 11,002,779 and
11,001,733 shares issued, respectively; 11,002,779 and 10,924,046 shares
outstanding, respectively
    
    
    110
    
    
    
    110Additional paid-in capital
    
    
    13,830
    
    
    
    12,776Retained earnings
    
    
    149,382
    
    
    
    146,490Treasury stock, -0- and 77,687 shares, respectively, at cost
    
    
    
    
    
    
    (525
    )Accumulated other comprehensive income
    
    
    1,533
    
    
    
    817Deferred compensation
    
    
    (820
    )
    
    
    (906
    )Total Stockholders Equity
    
    
    164,035
    
    
    
    158,762Total Liabilities and Stockholders Equity
    
    $
    315,679
    
    
    $
    292,124
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Powell Industries, Inc. and Subsidiaries
 
 Condensed Consolidated Statements of Operations (Unaudited)
 (In thousands, except per share data)
 Three Months EndedDecember 31, 2006
    
    
    January 31, 2006(See Note A)Revenues
    
    $
    122,776
    
    
    $
    83,813Cost of goods sold
    
    
    101,319
    
    
    
    69,036Gross profit
    
    
    21,457
    
    
    
    14,777Selling, general and administrative expenses
    
    
    16,274
    
    
    
    12,984Income before interest, income taxes and minority interest
    
    
    5,183
    
    
    
    1,793Interest expense
    
    
    688
    
    
    
    335Interest income
    
    
    (180
    )
    
    
    (302
    )Income before income taxes and minority interest
    
    
    4,675
    
    
    
    1,760Income tax provision
    
    
    1,724
    
    
    
    649Minority interest in net income
    
    
    59
    
    
    
    18Net income
    
    $
    2,892
    
    
    $
    1,093Net earnings per common share:Basic
    
    $
    0.26
    
    
    $
    0.10Diluted
    
    $
    0.26
    
    
    $
    0.10Weighted average shares:Basic
    
    
    10,942
    
    
    
    10,853Diluted
    
    
    11,121
    
    
    
    11,004
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Powell Industries, Inc. and Subsidiaries
 
 Condensed Consolidated Statements of Cash Flows (Unaudited)
 (In thousands)
 Three Months EndedDecember 31, 2006
    
    
    January 31, 2006(See Note A)Operating Activities:Net income
    
    $
    2,892
    
    
    $
    1,093Adjustments to reconcile net income to net cash used in operating activities:Depreciation
    
    
    1,551
    
    
    
    1,470Amortization
    
    
    947
    
    
    
    335Amortization of unearned restricted stock
    
    
    68
    
    
    
    52Stock-based compensation
    
    
    206
    
    
    
    417Bad debt expense
    
    
    58
    
    
    
    98(Gain) loss on disposition of assets
    
    
    (10
    )
    
    
    48Deferred income taxes
    
    
    (182
    )
    
    
    331Minority interest earnings
    
    
    59
    
    
    
    18Changes in operating assets and liabilities:Accounts receivable, net
    
    
    (2,984
    )
    
    
    2,914Costs and estimated earnings in excess of billings on uncompleted
contracts
    
    
    (9,054
    )
    
    
    (9,195
    )Inventories
    
    
    (7,588
    )
    
    
    (3,607
    )Prepaid expenses and other current assets
    
    
    (4,694
    )
    
    
    (2,985
    )Other assets
    
    
    (42
    )
    
    
    1,301Accounts payable and income taxes payable
    
    
    (3,968
    )
    
    
    816Accrued liabilities
    
    
    (3,580
    )
    
    
    (725
    )Billings in excess of costs and estimated earnings on uncompleted
contracts
    
    
    20,645
    
    
    
    2,678Deferred compensation
    
    
    90
    
    
    
    (111
    )Other liabilities
    
    
    1
    
    
    
    117Net cash used in operating activities
    
    
    (5,585
    )
    
    
    (4,935
    )Investing Activities:Proceeds from sale of fixed assets
    
    
    155
    
    
    
    21Purchases of property, plant and equipment
    
    
    (5,430
    )
    
    
    (1,178
    )Purchases of short-term auction rate securities
    
    
    
    
    
    
    (2,000
    )Net cash used in investing activities
    
    
    (5,275
    )
    
    
    (3,157
    )Financing Activities:Borrowings on U.S. revolving line of credit
    
    
    8,892
    
    
    
    2,820Payments on U.S. revolving line of credit
    
    
    (5,892
    )
    
    
    (2,820
    )Borrowings on UK revolving line of credit
    
    
    1,959
    
    
    
    Payments on UK revolving line of credit
    
    
    (588
    )
    
    
    Payments on short-term financing
    
    
    (160
    )
    
    
    Payments on capital lease obligations
    
    
    (13
    )
    
    
    (13
    )Payments on tax exempt industrial development revenue bonds
    
    
    (400
    )
    
    
    Tax benefit from exercise of stock options
    
    
    264
    
    
    
    19Proceeds from exercise of stock options
    
    
    925
    
    
    
    67Net cash provided by financing activities
    
    
    4,987
    
    
    
    73Net decrease in cash and cash equivalents
    
    
    (5,873
    )
    
    
    (8,019
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    333
    
    
    
    (9
    )Cash and cash equivalents at beginning of period
    
    
    10,495
    
    
    
    24,844Cash and cash equivalents at end of period
    
    $
    4,955
    
    
    $
    16,816
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POWELL INDUSTRIES, INC. AND SUBSIDIARIES
 
 Notes To Condensed Consolidated Financial Statements (Unaudited)
 A.
    
    OVERVIEW AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESChange in Fiscal Year-EndEffective September 30, 2006, we changed our fiscal year from October 31 to September
30. We have not restated prior year financial statements to conform to the new fiscal year
as we do not believe the results would be materially different because our operations and
cash flows do not fluctuate on a seasonal basis and the change in fiscal year end is 30 days.
Therefore, our consolidated operating results and cash flows for the three months ended
December 31, 2006 (first quarter of fiscal 2007) will be compared to the operating results
for the three months ended January 31, 2006 (first quarter of fiscal 2006).OverviewWe 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, energy, 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 acquisition of medium voltage switchgear and
circuit breaker product lines from General Electric in August 2006, herein referred to as
Power/Vac®. Additionally, we acquired a service company located in Louisiana in
July 2006. The operating results of both acquisitions are included in our Electrical Power
Products business segment from their respective acquisition dates.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
Transition Report on Form 10-K for the year ended September 30, 2006. 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
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affect revenue
and cost recognition for construction contracts, legal accruals, the allowance for doubtful
accounts, self-insurance, warranty accruals and postretirement benefit obligations.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 in stockholders equity.Stock-Based CompensationUnder Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based
Payment(SFAS No. 123R), we use the Black-Scholes option pricing model to estimate the
fair value of our stock options. We 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.Accumulated Other Comprehensive IncomeAccumulated other comprehensive income, which is included as a component of stockholders
equity net of tax, includes unrealized gains or losses on currency translation adjustments in
foreign consolidated subsidiaries.New Accounting StandardsIn 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.In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements,which
defines fair value, establishes a framework for measuring fair value in generally
accepted accounting principles, and expands disclosures about fair value measurements.
SFAS No. 157 does not require any new fair value measurements, but provides guidance on
how to measure fair value by providing a fair value hierarchy used to classify the
source of the information. SFAS No. 157 is effective for our fiscal year beginning
October 1, 2008. The Company is currently evaluating the impact of adopting SFAS No.
157.In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined
Benefit Pension and Other Postretirement Benefits, an Amendment of FASB Statements No.
87, 88, 106 and 123R.SFAS No. 158 requires an employer with a defined benefit pension
plan to (1) recognize the funded status of the benefit plan in its
statement of financial position, (2) recognize as a component of other comprehensive income,
net of tax, the gains or losses and prior service costs or credits that arise during the
period but are not recognized as components of net periodic benefit cost pursuant to FASB
Statement No. 87 or FASB Statement No. 106, (3) measure defined
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benefit plan assets and
obligations as of the date of the employers fiscal year-end statement of financial position,
and (4) disclose in the notes to the financial statements additional information about
certain effects on net periodic benefit cost for the next fiscal year that arise from delayed
recognition of the gains or losses, prior service costs or credits, and transition asset or
obligation. SFAS No. 158 is required to be adopted by September 30, 2007. We do not expect
the adoption of SFAS No. 158 to have a material impact on our consolidated financial
position, results of operations or cash flows.B.
    
    ACQUISITIONLouisiana AcquisitionOn 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.General Electric Companys Medium Voltage Switchgear and Circuit Breakers (Power/Vac®)On August 7, 2006, we purchased certain assets related to the manufacturing of 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 $32.0 million, not including expenses. 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 facilities in
Houston, Texas. The relocation of the product line includes all related product technology
and design information, engineering, manufacturing and related activities and is estimated to
be completed during the first half of fiscal 2008. GE will continue to manufacture products
and supply them to Powell during the transition period. Following the transition period, the
new product line will be manufactured in Houston, Texas and will require between 300 and 350
employees. This acquisition supports our strategy to expand our product offerings and
enhance our customer base. This product line has typically been marketed to customers in the
distribution, commercial, industrial, and utilities sectors. The Power/Vac® product line
will be marketed through the existing sales force of GE as well as our own sales team.The $32.0 million purchase price consisted of an initial payment of $8.5 million 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 from August 2006 of $5.5 million,
$6.25 million, $6.25 million and $5.5 million, respectively. The deferred installments
resulted in a discounted purchase price of approximately $28.8 million based on an assumed
discount rate of 6.6%. Approximately $1.2 million of expenses were incurred related to the
acquisition resulting in a total discounted purchase price of $30.0 million. We are also
required to purchase the remaining inventory at the end of the transition period for the
carrying value of such inventory in sellers accounting records and have the option to
purchase additional equipment after completion of the transition and product relocation to
Houston, Texas.We entered into a lease agreement for a facility in Houston, Texas, in connection with this
acquisition, which increased our manufacturing space by approximately 140,000 square feet.
The lease costs approximately $34,000 per month.
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The discounted purchase price (including expenses) allocation was as follows (in thousands):
 EstimatedAmount
    
    
    LifeSupply agreement
    
    $
    17,570
    
    
    15 yearsUnpatented technology
    
    
    5,300
    
    
    6 yearsNon-compete agreement
    
    
    4,010
    
    
    5 yearsTrademark
    
    
    2,650
    
    
    15 yearsEquipment, tools and dies
    
    
    400
    
    
    
    5 to 7 yearsGoodwill (tax deductible)
    
    
    88
    
    
    
    Total purchase price
    
    $
    30,018
  ®
 Three Months EndedJanuary 31, 2006Pro forma revenues
    
    $
    106,341Pro forma net income
    
    $
    2,234Net earnings per common share:Pro forma:Basic
    
    $
    0.21Diluted
    
    $
    0.20As reported:Basic
    
    $
    0.10Diluted
    
    $
    0.10
 ®
 1)
    
    Impact of additional interest expense related to the purchase price;2)
    
    Impact of amortization expense related to intangible assets;3)
    
    Adjustment to the income tax provision.
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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 EndedDecember 31, 2006
    
    
    January 31, 2006Numerator:Net income
    
    $
    2,892
    
    
    $
    1,093Denominator:Denominator for basic earnings
per share-weighted average shares
    
    
    10,942
    
    
    
    10,853Dilutive effect of stock options and restricted stock
    
    
    179
    
    
    
    151Denominator for diluted earnings
per share-adjusted weighted average
shares with assumed conversions
    
    
    11,121
    
    
    
    11,004Net earnings per share:Basic
    
    $
    0.26
    
    
    $
    0.10Diluted
    
    $
    0.26
    
    
    $
    0.10
 Excluded from the computation of diluted earnings per share were options to purchase
approximately 2,000 and 24,000 shares of common stock for the three months ended December 31,
2006 and January 31, 2006, 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 EndedDecember 31, 2006
    
    
    January 31, 2006Balance at beginning of period
    
    $
    1,044
    
    
    $
    567Adjustments to the allowance
    
    
    59
    
    
    
    98Deductions for uncollectible accounts
written off, net of recoveries
    
    
    
    
    
    
    Increase due to foreign currency translation
    
    
    16
    
    
    
    Balance at end of period
    
    $
    1,119
    
    
    $
    665
 Warranty Accrual
  Three Months EndedDecember 31, 2006
    
    
    January 31, 2006Balance at beginning of period
    
    $
    3,443
    
    
    $
    1,836Adjustments to the accrual
    
    
    984
    
    
    
    727Deductions for warranty charges
    
    
    (642
    )
    
    
    (460
    )Increase due to foreign currency translation
    
    
    51
    
    
    
    Balance at end of period
    
    $
    3,836
    
    
    $
    2,103
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Inventories
  December 31,
    
    
    September 30,2006
    
    
    2006Raw materials, parts and subassemblies
    
    $
    23,641
    
    
    $
    18,772Work-in-progress
    
    
    13,071
    
    
    
    10,168Total Inventories
    
    $
    36,712
    
    
    $
    28,940
 Costs and Estimated Earnings on Uncompleted Contracts
  December 31,
    
    
    September 30,2006
    
    
    2006Costs incurred on uncompleted contracts
    
    $
    315,747
    
    
    $
    300,247Estimated earnings
    
    
    63,917
    
    
    
    64,964379,664
    
    
    
    365,211Less: Billings to date
    
    
    364,875
    
    
    
    338,896$
    14,789
    
    
    $
    26,315Included in the accompanying balance sheets under the following captions:Costs and estimated earnings in excess of billings on uncompleted contracts
    
    $
    52,325
    
    
    $
    43,067Billings in excess of costs and estimated earnings on uncompleted contracts
    
    
    (37,536
    )
    
    
    (16,752
    )$
    14,789
    
    
    $
    26,315
 E.
    
    COMPREHENSIVE INCOMEComprehensive income is as follows (in thousands):
 Three Months EndedDecember 31, 2006
    
    
    January 31, 2006Net income
    
    $
    2,892
    
    
    $
    1,093Other comprehensive income, net of taxUnrealized gain on foreign
currency translation translation
    
    
    716
    
    
    
    13Comprehensive income
    
    $
    3,608
    
    
    $
    1,106
 F.
    
    LONG-TERM DEBTLong-term debt consists of the following (in thousands):
 December 31,
    
    
    September 30,2006
    
    
    2006US Revolver
    
    $
    6,000
    
    
    $
    3,000UK Revolver
    
    
    4,506
    
    
    
    2,434UK Term Loan
    
    
    9,404
    
    
    
    9,550Deferred acquisition payable
    
    
    20,273
    
    
    
    20,273Industrial development revenue bonds
    
    
    6,000
    
    
    
    6,400Capital lease obligations
    
    
    103
    
    
    
    115Other borrowings
    
    
    463
    
    
    
    624Subtotal long-term debt and capital lease obligations
    
    
    46,749
    
    
    
    42,396Less current portion
    
    
    (8,454
    )
    
    
    (8,510
    )Total long-term debt and capital lease obligations
    
    $
    38,295
    
    
    $
    33,886
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US and UK RevolversOn August 4, 2006, we amended our existing credit agreement (Amended Credit Agreement) with
a major domestic bank and certain other financial institutions. This amendment to our credit
facility was made to expand our US borrowing capacity by $20.0 million to provide partial
funding for the acquisition of the Power/Vac® product line and to provide working
capital support for the Company. The Amended Credit Agreement expires on December 31, 2010.
Expenses associated with the issuance of the Amended Credit Agreement are classified as
deferred loan costs and totaled $576,000 and are being amortized as a non-cash charge to
interest expense over the term of the agreement.The Amended Credit Agreement provides for a 1) $42.0 million revolving credit facility (US
Revolver), 2) £4.0 million (pounds sterling) (approximately $7.8 million) revolving credit
facility (UK Revolver) and 3) £6.0 million (approximately $11.8 million) single advance
term loan (UK Term Loan). The Amended Credit Agreement contains certain covenants with
respect to minimum earnings (as defined), maximum capital expenditures, minimum tangible net
worth and restricts our ability to pay dividends. Obligations are secured by the stock of
our subsidiaries. The interest rate for amounts outstanding under the Amended Credit
Agreement is a floating rate based upon LIBOR plus a margin which can range from 0% to 1%, as
determined by the Companys consolidated leverage ratio as defined within the Amended 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 $13.2 million for our outstanding letters of
credit at December 31, 2006. There was £2.3 million, or approximately $4.5 million,
outstanding under the UK Revolver and $6.0 million outstanding under the US Revolver as of
December 31, 2006.UK Term LoanThe UK Term Loan provides for borrowings of £6.0 million, or approximately $11.8 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 $0.6 million, began March 31, 2006 with the final
payment due on March 31, 2010. As of December 31, 2006, £4.8 million, or $9.4 million, was
outstanding under the UK Term Loan. The interest rate for amounts outstanding under the UK
Term Loan is a floating rate based upon LIBOR plus a margin which can range from 0% to 1%, as
determined by the Companys consolidated leverage ratio as defined within the Amended Credit
Agreement.Deferred Acquisition PayableIn connection with the acquisition of the Power/Vac® product line, $8.5 million of
the total purchase price of $32.0 million was paid to GE at closing on August 7, 2006. The
remaining balance of the purchase price of $23.5 million
is payable in four installments every 10 months over the next 40 months from the acquisition
date. The deferred installments result in a discounted note payable of approximately $28.8
million at December 31, 2006 based on an assumed discount rate of 6.6%. The current portion
of this deferred acquisition payable is $5.2 million and is included in the current portion
of long-term debt.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. 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 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 that commenced on October 25,
2002. A sinking fund is used for the redemption of the
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##### Table of Contents



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 was 4.0% per annum on
December 31, 2006.We are currently engaged in an audit with the Internal Revenue Service (IRS) related to our
Bonds. We have furnished the IRS with the information requested in their audit. The IRS is
reviewing these materials and has not yet informed us as to their conclusions. Based on our
discussions with the IRS, management does not believe the outcome of this audit will have a
material impact on the consolidated financial position or results of operations. Assuming an
adverse conclusion was reached by the IRS, the Company could have to redeem the Bonds, with a
penalty, using the available capacity under our Amended Credit Agreement.Capital Leases and OtherSome 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%.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 $14.0 million as
of December 31, 2006. We also had performance bonds totaling approximately $118.6 million
outstanding at December 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 $29.4 million), 2) £1.5 million of forward exchange contracts and currency
options (approximately $2.9 million), and 3) the issuance of bonds and the entering into of
forward exchange contracts and currency options. At December 31, 2006, we had outstanding
bonds of £4.9 million, or approximately $9.7 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. This matter is currently being tried
in court. As of December 31, 2006, the Company had approximately $1.8 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.
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##### Table of Contents



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 September 30,
2006 for a full description of the Companys existing stock-based compensation plans.Stock OptionsStock option activity for the three months ended December 31, 2006 is as follows:
 RemainingWeighted-
    
    Weighted-Average
    
    AggregateStock
    
    Average
    
    Contractual Term
    
    Intrinsic ValueOptions
    
    Exercise Price
    
    (years)
    
    (in thousands)Outstanding at September 30, 2006
    
    
    732,770
    
    
    $
    17.37Granted
    
    
    
    
    
    
    Exercised
    
    
    (61,633
    )
    
    
    16.88Forfeited
    
    
    
    
    
    
    Outstanding at December 31, 2006
    
    
    671,137
    
    
    
    17.41
    
    
    
    4.51
    
    
    $
    5,491Exercisable at December 31, 2006
    
    
    486,737
    
    
    
    17.40
    
    
    
    4.02
    
    
    $
    3,990
 Additionally, 5,100 shares were issued in fiscal 2007 related to options exercised in
fiscal 2006.Restricted StockIn September 2006, our Board of Directors approved the 2006 Equity Compensation Plan subject
to stockholder approval. This plan allows the Company to grant certain employees restricted
stock awards, incentive and non-qualified stock options, performance awards or stock
appreciation rights. A total of 750,000 shares of our common stock have been authorized for
issuance under this plan. The adoption of the 2006 Equity Compensation Plan has been
submitted to the stockholders for approval at the stockholders meeting on February 23, 2007.These RSUs entitle the employee to receive common stock on the vesting date assuming that
certain levels of performance are achieved. The vesting period ranges from one to three
years. RSUs do not have voting rights of common stock and the common shares underlying the
RSUs are not considered issued and outstanding.For fiscal 2007, Powell will grant approximately 110,000 RSUs upon stockholder approval.
These RSUs will have a grant date of February 23, 2007 upon approval of the stockholders.
Compensation expense will be recorded for fiscal 2007 based on the closing price on February
23, 2007.Additionally, 12,000 restricted shares were issued in the first quarter of fiscal 2007 under
the Restricted Stock Plan.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.The operating results of the Louisiana acquisition and the Power/Vac® product
lines are included in our Electrical Power Products business segment as of their respective
acquisition dates.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 and cash equivalents.
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##### Table of Contents



Detailed information regarding our business segments is shown below (in thousands):
 Three Months EndedDecember 31, 2006
    
    
    January 31, 2006Revenues:Electrical Power Products
    
    $
    117,343
    
    
    $
    76,642Process Control Systems
    
    
    5,433
    
    
    
    7,171Total
    
    $
    122,776
    
    
    $
    83,813Gross profit:Electrical Power Products
    
    $
    20,093
    
    
    $
    13,064Process Control Systems
    
    
    1,364
    
    
    
    1,713Total
    
    $
    21,457
    
    
    $
    14,777Income before income taxes and minority interest:Electrical Power Products
    
    $
    4,592
    
    
    $
    1,399Process Control Systems
    
    
    83
    
    
    
    361Total
    
    $
    4,675
    
    
    $
    1,760
 December 31,
    
    
    September 30,2006
    
    
    2006Identifiable tangible assets:Electrical Power Products
    
    $
    261,299
    
    
    $
    238,798Process Control Systems
    
    
    9,678
    
    
    
    8,813Corporate
    
    
    11,629
    
    
    
    10,626Total
    
    $
    282,606
    
    
    $
    258,237
  15




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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 Transition Report on Form 10-K for the eleven months
ended September 30, 2006 (Form 10-K) as filed with the Securities and Exchange Commission. 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. Important factors that could
cause actual results to differ include risks set forth in Item 1A. Risk Factors included in our
Form 10-K.
 Overview
   ® ®
 ® ® ®
  Results of Operations
 Revenue and Gross Profit
 ® ® ®
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##### Table of Contents



Electrical Power Products
 ®
 ®
 Process Control Systems
   Consolidated Selling, General and Administrative Expenses
 ®
 Interest Income and Expense
 ®
  Provision for Income Taxes
  17




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##### Table of Contents



Net Income
  Backlog
  Liquidity and Capital Resources
    Operating Activities
  Investing Activities
  Financing Activities
  Outlook
  ®
 18




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##### Table of Contents



®
 
 Item 3. Quantitative And Qualitative Disclosures About Market Risk
    
 Item 4. Controls And Procedures
   19




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PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
   
 Item 1A. Risk Factors
  20




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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).10.1
    
    
    
    Fourth Amendment to Credit Agreement dated December 7, 2006 among
Powell Industries, Inc., Switchgear & Instrumentation Limited, Switchgear &
Instrumentation Properties Limited, Bank of America, N.A., and the other lenders
party thereto (filed as Exhibit 10.17 to our Transition Report on Form 10-K for the
transition period ended September 30, 2006, 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. 21




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##### Table of Contents



SIGNATURES
  
 February 9, 2007Date
    
    /s/ THOMAS W. POWELLThomas W. PowellPresident and Chief Executive Officer(Principal Executive Officer)February 9,
2007Date
    
    /s/ DON R. MADISONDon R. MadisonVice President and Chief Financial Officer(Principal Financial Officer)
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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).10.1
    
    
    
    Fourth Amendment to Credit Agreement dated December 7, 2006 among Powell Industries,
Inc., Switchgear & Instrumentation Limited, Switchgear & Instrumentation Properties Limited,
Bank of America, N.A., and the other lenders party thereto (filed as Exhibit 10.17 to our
Transition Report on Form 10-K for the transition period ended September 30, 2006, 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