0000080420FALSE2020FY--09-30P1M1P3YP3YP3Y00000804202019-10-012020-09-30iso4217:USD00000804202020-03-31xbrli:shares00000804202020-12-0700000804202020-09-3000000804202019-09-30iso4217:USDxbrli:shares00000804202018-10-012019-09-3000000804202017-10-012018-09-300000080420us-gaap:CommonStockMember2017-09-300000080420us-gaap:AdditionalPaidInCapitalMember2017-09-300000080420us-gaap:RetainedEarningsMember2017-09-300000080420us-gaap:TreasuryStockMember2017-09-300000080420us-gaap:AccumulatedOtherComprehensiveIncomeMember2017-09-3000000804202017-09-300000080420us-gaap:RetainedEarningsMember2017-10-012018-09-300000080420us-gaap:AccumulatedOtherComprehensiveIncomeMember2017-10-012018-09-300000080420us-gaap:CommonStockMember2017-10-012018-09-300000080420us-gaap:AdditionalPaidInCapitalMember2017-10-012018-09-300000080420us-gaap:CommonStockMember2018-09-300000080420us-gaap:AdditionalPaidInCapitalMember2018-09-300000080420us-gaap:RetainedEarningsMember2018-09-300000080420us-gaap:TreasuryStockMember2018-09-300000080420us-gaap:AccumulatedOtherComprehensiveIncomeMember2018-09-3000000804202018-09-300000080420us-gaap:RetainedEarningsMember2018-10-012019-09-300000080420us-gaap:AccumulatedOtherComprehensiveIncomeMember2018-10-012019-09-300000080420us-gaap:CommonStockMember2018-10-012019-09-300000080420us-gaap:AdditionalPaidInCapitalMember2018-10-012019-09-300000080420us-gaap:CommonStockMember2019-09-300000080420us-gaap:AdditionalPaidInCapitalMember2019-09-300000080420us-gaap:RetainedEarningsMember2019-09-300000080420us-gaap:TreasuryStockMember2019-09-300000080420us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-09-300000080420us-gaap:RetainedEarningsMember2019-10-012020-09-300000080420us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-10-012020-09-300000080420us-gaap:CommonStockMember2019-10-012020-09-300000080420us-gaap:AdditionalPaidInCapitalMember2019-10-012020-09-300000080420us-gaap:CommonStockMember2020-09-300000080420us-gaap:AdditionalPaidInCapitalMember2020-09-300000080420us-gaap:RetainedEarningsMember2020-09-300000080420us-gaap:TreasuryStockMember2020-09-300000080420us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-09-300000080420us-gaap:AccountsReceivableMember2020-09-300000080420us-gaap:AccountsReceivableMember2019-09-300000080420us-gaap:OtherAssetsMember2020-09-300000080420srt:MinimumMember2019-10-012020-09-300000080420us-gaap:AccountingStandardsUpdate201602Member2019-10-010000080420us-gaap:LandMember2020-09-300000080420us-gaap:LandMember2019-09-300000080420us-gaap:BuildingAndBuildingImprovementsMember2020-09-300000080420us-gaap:BuildingAndBuildingImprovementsMember2019-09-300000080420srt:MinimumMemberus-gaap:BuildingAndBuildingImprovementsMember2019-10-012020-09-300000080420srt:MaximumMemberus-gaap:BuildingAndBuildingImprovementsMember2019-10-012020-09-300000080420us-gaap:MachineryAndEquipmentMember2020-09-300000080420us-gaap:MachineryAndEquipmentMember2019-09-300000080420srt:MinimumMemberus-gaap:MachineryAndEquipmentMember2019-10-012020-09-300000080420srt:MaximumMemberus-gaap:MachineryAndEquipmentMember2019-10-012020-09-300000080420us-gaap:FurnitureAndFixturesMember2020-09-300000080420us-gaap:FurnitureAndFixturesMember2019-09-300000080420srt:MinimumMemberus-gaap:FurnitureAndFixturesMember2019-10-012020-09-300000080420srt:MaximumMemberus-gaap:FurnitureAndFixturesMember2019-10-012020-09-300000080420us-gaap:ConstructionInProgressMember2020-09-300000080420us-gaap:ConstructionInProgressMember2019-09-300000080420us-gaap:AssetsHeldUnderCapitalLeasesMember2019-09-300000080420us-gaap:AssetsHeldUnderCapitalLeasesMember2020-09-30xbrli:pure0000080420us-gaap:TransferredOverTimeMemberus-gaap:RevenueFromContractWithCustomerMember2019-10-012020-09-300000080420us-gaap:TransferredOverTimeMemberus-gaap:RevenueFromContractWithCustomerMember2018-10-012019-09-300000080420us-gaap:TransferredAtPointInTimeMemberus-gaap:RevenueFromContractWithCustomerMember2019-10-012020-09-300000080420us-gaap:TransferredAtPointInTimeMemberus-gaap:RevenueFromContractWithCustomerMember2018-10-012019-09-3000000804202020-10-012020-09-300000080420country:US2019-10-012020-09-300000080420country:US2018-10-012019-09-300000080420country:CA2019-10-012020-09-300000080420country:CA2018-10-012019-09-300000080420us-gaap:EMEAMember2019-10-012020-09-300000080420us-gaap:EMEAMember2018-10-012019-09-300000080420srt:AsiaPacificMember2019-10-012020-09-300000080420srt:AsiaPacificMember2018-10-012019-09-300000080420powl:MexicoCentralAmericaAndSouthAmericaMember2019-10-012020-09-300000080420powl:MexicoCentralAmericaAndSouthAmericaMember2018-10-012019-09-300000080420us-gaap:OilAndGasServiceMember2019-10-012020-09-300000080420us-gaap:OilAndGasServiceMember2018-10-012019-09-300000080420powl:PetrochemicalMember2019-10-012020-09-300000080420powl:PetrochemicalMember2018-10-012019-09-300000080420us-gaap:ElectricityMember2019-10-012020-09-300000080420us-gaap:ElectricityMember2018-10-012019-09-300000080420powl:TractionPowerCustomerMember2019-10-012020-09-300000080420powl:TractionPowerCustomerMember2018-10-012019-09-300000080420powl:OtherCustomersMember2019-10-012020-09-300000080420powl:OtherCustomersMember2018-10-012019-09-300000080420powl:PurchasedTechnologyMember2020-09-300000080420powl:PurchasedTechnologyMember2019-09-300000080420powl:AmendedAndRestatedCreditAgreementMemberus-gaap:DomesticLineOfCreditMember2019-09-270000080420powl:AmendedAndRestatedCreditAgreementMemberus-gaap:DomesticLineOfCreditMember2020-09-300000080420us-gaap:FinancialStandbyLetterOfCreditMemberus-gaap:DomesticLineOfCreditMemberpowl:FacilityAgreementMember2020-09-300000080420powl:AmendedAndRestatedCreditAgreementMemberus-gaap:DomesticLineOfCreditMember2019-09-272019-09-270000080420powl:AmendedAndRestatedCreditAgreementMemberus-gaap:DomesticLineOfCreditMemberus-gaap:FederalFundsEffectiveSwapRateMember2019-09-272019-09-270000080420powl:AmendedAndRestatedCreditAgreementMemberus-gaap:DomesticLineOfCreditMemberus-gaap:LondonInterbankOfferedRateLIBORMember2019-09-272019-09-270000080420powl:AmendedAndRestatedCreditAgreementMembersrt:MinimumMemberus-gaap:DomesticLineOfCreditMemberus-gaap:BaseRateMember2019-09-272019-09-270000080420srt:MaximumMemberpowl:AmendedAndRestatedCreditAgreementMemberus-gaap:DomesticLineOfCreditMemberus-gaap:EurodollarMember2019-09-272019-09-270000080420powl:IndustrialDevelopmentRevenueBondsMember2001-10-310000080420powl:IndustrialDevelopmentRevenueBondsMember2020-09-300000080420us-gaap:SuretyBondMember2020-09-300000080420powl:PowellUKLimitedMemberpowl:FacilityAgreementMember2020-09-3000000804202020-04-012020-06-300000080420us-gaap:ForeignCountryMember2020-09-300000080420us-gaap:DeferredCompensationArrangementWithIndividualByTypeOfCompensationPensionAndOtherPostretirementBenefitsMember2020-09-300000080420us-gaap:DeferredCompensationArrangementWithIndividualByTypeOfCompensationPensionAndOtherPostretirementBenefitsMember2019-10-012020-09-300000080420powl:CompanyOwnedLifeInsurancePoliciesMemberus-gaap:DeferredCompensationArrangementWithIndividualByTypeOfCompensationPensionAndOtherPostretirementBenefitsMember2020-09-300000080420us-gaap:DefinedBenefitPostretirementHealthCoverageMember2019-10-012020-09-300000080420us-gaap:DefinedBenefitPostretirementHealthCoverageMembersrt:MinimumMember2019-10-012020-09-300000080420srt:MaximumMember2019-10-012020-09-300000080420us-gaap:DefinedBenefitPostretirementHealthCoverageMember2019-09-300000080420us-gaap:DefinedBenefitPostretirementHealthCoverageMember2020-09-300000080420srt:MaximumMemberus-gaap:DefinedBenefitPostretirementHealthCoverageMember2018-10-012019-09-300000080420srt:MaximumMemberus-gaap:DefinedBenefitPostretirementHealthCoverageMember2019-10-012020-09-300000080420srt:MaximumMemberus-gaap:DefinedBenefitPostretirementHealthCoverageMember2017-10-012018-09-300000080420powl:TwoThousandFourteenEquityIncentivePlanMemberus-gaap:RestrictedStockUnitsRSUMember2019-10-012020-09-300000080420powl:TimeBasedRestrictedStockUnitMembersrt:MinimumMemberus-gaap:RestrictedStockUnitsRSUMember2019-10-012020-09-300000080420srt:MaximumMemberpowl:TimeBasedRestrictedStockUnitMemberus-gaap:RestrictedStockUnitsRSUMember2019-10-012020-09-300000080420powl:TimeBasedRestrictedStockUnitMemberpowl:TwoThousandFourteenEquityIncentivePlanMemberus-gaap:RestrictedStockUnitsRSUMember2019-10-012020-09-300000080420powl:TwoThousandFourteenEquityIncentivePlanMembersrt:MinimumMemberpowl:PerformanceBasedRestrictedStockUnitMemberus-gaap:RestrictedStockUnitsRSUMember2019-10-012020-09-300000080420srt:MaximumMemberpowl:TwoThousandFourteenEquityIncentivePlanMemberpowl:PerformanceBasedRestrictedStockUnitMemberus-gaap:RestrictedStockUnitsRSUMember2019-10-012020-09-300000080420powl:TwoThousandFourteenEquityIncentivePlanMemberpowl:PerformanceBasedRestrictedStockUnitMemberus-gaap:RestrictedStockUnitsRSUMember2019-10-012020-09-300000080420us-gaap:RestrictedStockUnitsRSUMember2020-09-300000080420us-gaap:RestrictedStockUnitsRSUMember2019-09-300000080420us-gaap:RestrictedStockUnitsRSUMember2019-10-012020-09-300000080420powl:TwoThousandFourteenEquityIncentivePlanMember2020-09-300000080420powl:NonEmployeeDirectorEquityIncentivePlanMember2014-02-280000080420powl:NonEmployeeDirectorEquityIncentivePlanMemberus-gaap:RestrictedStockMember2014-02-012014-02-280000080420powl:NonEmployeeDirectorEquityIncentivePlanMemberus-gaap:RestrictedStockMember2014-02-280000080420us-gaap:ShareBasedCompensationAwardTrancheOneMemberus-gaap:RestrictedStockMember2014-02-012014-02-280000080420us-gaap:ShareBasedCompensationAwardTrancheTwoMemberus-gaap:RestrictedStockMember2014-02-012014-02-280000080420powl:NonEmployeeDirectorEquityIncentivePlanMemberus-gaap:RestrictedStockMember2020-02-012020-02-290000080420powl:NonEmployeeDirectorEquityIncentivePlanMemberus-gaap:RestrictedStockMember2020-02-280000080420powl:NonEmployeeDirectorEquityIncentivePlanMemberus-gaap:RestrictedStockMember2019-02-012019-02-280000080420powl:NonEmployeeDirectorEquityIncentivePlanMemberus-gaap:RestrictedStockMember2019-02-280000080420powl:NonEmployeeDirectorEquityIncentivePlanMember2020-09-300000080420powl:NonEmployeeDirectorEquityIncentivePlanMemberus-gaap:RestrictedStockMember2020-09-300000080420powl:NonEmployeeDirectorEquityIncentivePlanMemberus-gaap:RestrictedStockMember2019-09-300000080420us-gaap:RestrictedStockMember2019-10-012020-09-300000080420us-gaap:RestrictedStockMember2018-10-012019-09-300000080420us-gaap:RestrictedStockMember2017-10-012018-09-300000080420us-gaap:RestrictedStockUnitsRSUMember2018-10-012019-09-300000080420us-gaap:RestrictedStockUnitsRSUMember2017-10-012018-09-300000080420us-gaap:FairValueMeasurementsRecurringMemberus-gaap:FairValueInputsLevel1Member2020-09-300000080420us-gaap:FairValueInputsLevel2Memberus-gaap:FairValueMeasurementsRecurringMember2020-09-300000080420us-gaap:FairValueMeasurementsRecurringMemberus-gaap:FairValueInputsLevel3Member2020-09-300000080420us-gaap:FairValueMeasurementsRecurringMember2020-09-300000080420us-gaap:FairValueMeasurementsRecurringMemberus-gaap:FairValueInputsLevel1Member2019-09-300000080420us-gaap:FairValueInputsLevel2Memberus-gaap:FairValueMeasurementsRecurringMember2019-09-300000080420us-gaap:FairValueMeasurementsRecurringMemberus-gaap:FairValueInputsLevel3Member2019-09-300000080420us-gaap:FairValueMeasurementsRecurringMember2019-09-300000080420country:CA2017-10-012018-09-300000080420country:CA2020-09-30powl:numberOfSegments0000080420country:US2017-10-012018-09-300000080420powl:MiddleEastAndAfricaMember2019-10-012020-09-300000080420powl:MiddleEastAndAfricaMember2018-10-012019-09-300000080420powl:MiddleEastAndAfricaMember2017-10-012018-09-300000080420powl:FAREASTMember2019-10-012020-09-300000080420powl:FAREASTMember2018-10-012019-09-300000080420powl:FAREASTMember2017-10-012018-09-300000080420srt:EuropeMember2019-10-012020-09-300000080420srt:EuropeMember2018-10-012019-09-300000080420srt:EuropeMember2017-10-012018-09-300000080420powl:MexicoCentralAmericaAndSouthAmericaMember2017-10-012018-09-300000080420country:US2020-09-300000080420country:US2019-09-300000080420country:CA2019-09-300000080420country:GB2020-09-300000080420country:GB2019-09-3000000804202019-10-012019-12-3100000804202020-01-012020-03-3100000804202020-07-012020-09-3000000804202018-10-012018-12-3100000804202019-01-012019-03-3100000804202019-04-012019-06-3000000804202019-07-012019-09-300000080420powl:SeparationCostsMember2020-04-012020-06-300000080420us-gaap:SubsequentEventMember2020-11-032020-11-03

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
Form 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2020
OR
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.
(Exact name of registrant as specified in its charter)
Delaware 88-0106100
(State or other jurisdiction of
incorporation or organization)
 (I.R.S. Employer
Identification No.)
8550 Mosley Road 
Houston
Texas77075-1180
(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code:
(713) 944-6900
 

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading SymbolName of each exchange on which registered
Common Stock, par value $0.01 per sharePOWLNASDAQ Global Market

Securities registered pursuant to Section 12(g) of Act: None
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    ☐  Yes     ☒  No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    ☐  Yes    ☒  No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and emerging growth company in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes ☒  No

The aggregate market value of the common stock held by non-affiliates of the registrant was approximately $227 million as of March 31, 2020, based upon the closing price on the NASDAQ Global Market on that date.  For purposes of the calculation above only, all directors, executive officers and beneficial owners of 5% or more of the outstanding shares of the registrant's common stock are considered to be “affiliates.”
At December 7, 2020, there were 11,646,173 outstanding shares of the registrant’s common stock, par value $0.01 per share.

Documents Incorporated By Reference

Portions of the registrant’s definitive proxy statement for the 2020 annual meeting of stockholders to be filed not later than 120 days after September 30, 2020, are incorporated by reference into Part III of this Form 10-K.



POWELL INDUSTRIES, INC.
TABLE OF CONTENTS
 
  Page
 
   
  
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
   
  
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
   
  
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
   
  
Item 15.
Item 16.
Signatures
2


CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS;
RISK FACTORS
Unless otherwise indicated, all references to “we,” “us,” “our,” “Powell” or “the Company” include Powell Industries, Inc. and its consolidated subsidiaries.
Forward-Looking Statements
This Annual Report on Form 10-K (Annual Report) includes forward-looking statements based on our current expectations, which are subject to risks and uncertainties. Forward-looking statements include information concerning future results of operations and financial condition. Statements that contain words such as “believes,” “expects,” “anticipates,” “intends,” “estimates,” “continue,” “should,” “could,” “may,” “plan,” “project,” “predict,” “will” or similar expressions may be forward-looking statements. These forward-looking statements are subject to risks and uncertainties, and many factors could affect the future financial results and condition of the Company. Factors that may have a material effect on our revenues, expenses and operating results include, among other things, adverse business or market conditions, our ability to meet our customers’ scheduling requirements, our customers’ financial conditions and their ability to secure financing to support current and future projects, the availability and cost of materials from suppliers, availability of skilled labor force, adverse competitive developments and changes in customer requirements as well as those circumstances discussed under “Part I, Item 1A. Risk Factors,” below. Accordingly, actual results may differ materially from those expressed or implied by the forward-looking statements contained in this Annual Report. 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.
The forward-looking statements contained in this Annual Report are based on current assumptions that we will continue to develop, market, manufacture and ship products and provide services on a competitive and timely basis; that economic and competitive conditions in our markets will not change in a materially adverse way; that we will accurately identify and meet customer needs for products and services; that we will be able to hire and retain skilled laborers and key employees; that our products and capabilities will remain competitive; that the financial markets and banking systems will remain stable and availability of credit will continue; that risks related to shifts in customer demand are minimized and that there will be no material adverse change in the operations or business of the Company. Assumptions relating to these factors involve judgments that are based on available information, which may not be complete, and are subject to changes in many factors beyond the Company’s control that can materially affect results. Because of these and other factors that affect our operating results, past financial performance should not be considered an indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods.

3


PART I

Item 1. Business
Overview
Powell Industries, Inc. is a Delaware corporation founded by William E. Powell in 1947. We develop, design, manufacture and service custom-engineered equipment and systems which (1) distribute, control and monitor the flow of electrical energy and (2) provide protection to motors, transformers and other electrically powered equipment. We are headquartered in Houston, Texas, and our major subsidiaries, all of which are wholly owned, include: Powell Electrical Systems, Inc.; Powell (UK) Limited; Powell Canada, Inc.; and Powell Industries International, B.V.
Our website is powellind.com. We make available, free of charge on or through our website, copies of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports, filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as is reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (SEC). Additionally, all of our reports filed with the SEC are available via their website at http://www.sec.gov.
References to Fiscal 2020, Fiscal 2019 and Fiscal 2018 used throughout this Annual Report relate to our fiscal years ended September 30, 2020, 2019 and 2018, respectively.
Products and Services
Our principal products include integrated power control room substations (PCRs®), custom-engineered modules, electrical houses (E-Houses), traditional and arc-resistant distribution switchgear and control gear, medium-voltage circuit breakers, monitoring and control communications systems, motor control centers, switches and bus duct systems. These products are designed for application voltages ranging from 480 volts to 38,000 volts and are used in oil and gas refining, onshore and offshore oil and gas production, petrochemical, liquefied natural gas (LNG) terminals, pipeline, terminal, mining and metals, light rail traction power, electric utility, pulp and paper and other heavy industrial markets. Our product scope includes designs tested to meet both U.S. and international standards, under both the American National Standards Institute (ANSI) and International Electrotechnical Commission (IEC). We assist customers by providing value-added services such as spare parts, field service inspection, installation, commissioning, modification and repair, retrofit and retrofill components for existing systems and replacement circuit breakers for switchgear that is obsolete or that is no longer produced by the original manufacturer. We seek to establish long-term relationships with the end users of our systems as well as the design and construction engineering firms contracted by those end users. We believe that our culture of safety and focus on customer satisfaction, along with our financial strength, allow us to continue to capitalize on opportunities in the industries we serve.
Products and services are principally sold directly to the end user or to an engineering, procurement and construction (EPC) firm on behalf of the end user. Each project is specifically engineered and manufactured to meet the exact specifications and requirements of the individual customer. Powell’s expertise is in the design and engineering, manufacturing, project management and integration of the various systems into a single, custom-engineered deliverable. We market and sell our products and services, which are typically awarded in competitive bid situations, to a wide variety of customers and governmental agencies spanning across diverse markets and geographic regions. Contracts often represent large-scale and complex projects with an individual customer. By their nature, these projects are typically nonrecurring. Thus, multiple and/or continuous projects of similar magnitude with the same customer may vary. As such, the timing of large project awards may cause material fluctuations in our revenues and gross profits.
Occasionally our contracts may operate under a consortium or teaming arrangement. Typically, we enter into these arrangements with reputable companies with which we have conducted business with previously. These arrangements are generally made to leverage competitive positioning or where scale and/or size dictates the use of such arrangement.
Due to the nature and timing of large projects, a significant percentage of our revenues in a given period may result from one specific contract or customer. Although we could be adversely impacted by a significant reduction in business volume from a particular industry, we do not believe the loss of any specific customer would have a material adverse effect on our business. However, from time to time, an individual manufacturing facility may have significant volume from one particular customer that would be material to that facility. No customer accounted for more than 10% of our consolidated revenues in Fiscal 2020, Fiscal 2019 or Fiscal 2018.
4


Research and development activities are critical to Powell’s future and are focused on both the development of new products and services as well as enhancing current product offerings. Our expertise in vacuum circuit breaker engineering is internationally recognized, and we have a sustained commitment to incorporating continuous product improvements that will ensure operational safety and reliability across the markets we serve.
Markets
We strive to be the supplier of choice for custom-engineered system solutions and services to a variety of customers and markets. Our activities are predominantly in the oil and gas and electric utility industries, but also include other markets where customers need to manage, monitor and control large amounts of electrical energy through a complex network of electrical components and systems. The majority of our business is in support of capital investment projects that are highly complex and competitively bid. Our customized systems are designed to meet the specifications of our customers. Each system is designed, engineered and manufactured to the specific requirements of the particular application. We consider our engineering, project management, systems integration and technical support capabilities vital to the success of our business.
Specific to the oil and gas sector, we serve both the upstream and downstream end markets. Within the downstream segment, our primary customers typically are engaged in refining activities and/or leveraging natural gas feedstocks for the production of petrochemical or LNG products. We have developed strong relationships with our customers over the years and strive to maintain our position as a preferred service provider to solve our customers' complex electrical needs.
We believe that our products and services, integration capabilities, technical and project management acumen, application engineering expertise and specialty contracting experience, together with our financial strength and responsiveness to the needs of our customers, give us a sustainable competitive advantage in our markets. We compete with a small number of multinational competitors that sell to a broad industrial and geographic market, as well as smaller, regional competitors that typically have limited capabilities and scope of supply. Some of our competitors are significantly larger and have substantially greater global resources such as engineering, manufacturing and marketing. Our principal competitors include ABB, Eaton, Schneider and Siemens. The competitive factors used during bid evaluation by our customers vary from project to project and may include technical support and application expertise, engineering and manufacturing capabilities, equipment rating, delivered value, scheduling and price. While projects are typically non-recurring, a significant portion of our business is from repeat customers and many times involves third-party EPC firms hired by the end user and with whom we also have long, established relationships. Ultimately, our competitive position is dependent upon our ability to provide quality custom-engineered products, services and systems on a timely basis at a competitive price.
Backlog
Backlog represents management's estimate of the remaining unsatisfied performance obligation from work to be performed on our firm orders under uncompleted contracts and customer purchase orders, including approved change orders as well as new contractual agreements on which work has not begun. Our backlog will be recognized as revenue as we complete the remaining performance obligations. Our backlog does not include service- and maintenance-type contracts for which we have the rights to invoice as services are performed. Typically, our contracts may have an early termination for convenience clause at the discretion of our customers; however, most of these contracts typically provide for the reimbursement of our costs incurred and a reasonable margin in the event of such early termination. Our methodology for determining backlog may not be comparable to the methodology used by other companies.
Our backlog at September 30, 2020 totaled $476.8 million compared to $419.0 million at September 30, 2019. Backlog improved primarily due to a substantial contract awarded in the second quarter of Fiscal 2020 that will support the integrated electrical distribution requirements for a large domestic industrial complex. We anticipate that approximately $282.5 million of Fiscal 2020 ending backlog will be fulfilled during our fiscal year ending September 30, 2021. Backlog may not be indicative of future operating results as orders in our backlog may be cancelled or modified by our customers and may not be indicative of continuing revenue performance over future fiscal quarters.
Raw Materials
The principal raw materials used in our operations include steel, copper and aluminum and various electrical components. Material costs represented 47% of revenues in Fiscal 2020, Fiscal 2019 and Fiscal 2018. Unanticipated changes in material requirements, market conditions and disruptions in the supply chain or price increases could impact production costs and affect our consolidated results of operations.
5


Our supply base for certain key components and raw materials is limited. Changes in our design to accommodate similar components from other suppliers could be implemented to resolve a supply problem related to a sole-sourced component. In this circumstance, supply problems could result in delays in our ability to meet commitments to our customers. We believe that sources of supply for raw materials and components are generally sufficient, and we do not believe a temporary shortage of materials will cause any significant adverse impact in the future. While we are not dependent on any one supplier for the majority of our raw materials, we are highly dependent on our suppliers in order to meet commitments to our customers. During Fiscal 2020, as a result of the challenges created by the COVID-19 pandemic and market volatility, we experienced minor supply disruptions and anticipate that supply disruptions may continue. We continue to monitor and work with our suppliers who have been impacted by the COVID-19 pandemic to ensure we are able to meet our customer commitments. We have also reviewed and will continue to review contracts with our suppliers, making adjustments accordingly. While we have not experienced significant issues in the purchase of key raw materials or components in the past three fiscal years, we continue to monitor the availability and price of components and raw materials on a regular basis, as well as any potential impact on our operations. 
Our business is subject to the effects of changing material prices. During the last three fiscal years, we have not experienced significant price volatility for raw materials or component parts used in the production of our products. While the cost outlook for commodities used in the production of our products is not certain, we believe we can manage this volatility through contract pricing adjustments, with material-cost predictive estimating and by actively pursuing internal cost reduction efforts. We did not enter into any derivative contracts to hedge our exposure to commodity price changes in Fiscal 2020, 2019 or 2018.
Human Capital
At September 30, 2020, we had 1,997 full-time employees and 149 contract employees located primarily in the U.S., Canada and the U.K. Our employees are not represented by unions, and we believe that our relationship with our employees is good. Periodically, demand for qualified personnel increases in certain geographic areas due to increased construction or economic activity. We continue to monitor our demand for skilled and unskilled labor and provide training and competitive compensation packages in an effort to attract and retain skilled employees.
Three of our top human capital priorities are workplace safety, internal promotion and key employee retention. Powell emphasizes a culture of safety that runs throughout the Company. We establish annual goals and monthly operating metrics, which have resulted in a safety incident rate that is one-half the industry average across Powell. We believe that internal promotion and key employee retention are critical components to our long-term success. The average tenure of our employees is 10 years. Our annual Organizational Capabilities Review is focused on succession planning within our organization and is reviewed annually by our Board of Directors. We measure our success based on the percentage of internal promotions to key positions and our ability to attract and retain key employees.
Intellectual Property
While we hold various patents, trademarks, servicemarks, copyrights and licenses, we do not consider any individual intellectual property to be material to our consolidated business operations.
Seasonality
Our operations are not generally affected by seasonality. However, weather and natural phenomena can temporarily impact the performance of our operations. Furthermore, quarterly operating results may fluctuate in our first fiscal quarter due to the reduction in the number of workdays related to the number of holidays in that fiscal quarter.
Government Regulations
We are subject to various government regulations in the United States as well as various international locations where we operate. These regulations cover several diverse areas including environmental compliance, import and export controls, economic sanctions, data and privacy protection, transfer pricing rules, anti-bribery, anti-trafficking and anti-trust provisions. Our policies mandate compliance with applicable laws and regulations administered by various state, federal and international agencies. We instituted various training programs to educate our employees on compliance with governmental regulations, as well as applied legal and ethical practices in our everyday work. We do not believe that compliance with governmental regulations will have a material impact on our capital expenditures, results of operations or competitive position.


6


Item 1A. Risk Factors
Our business is subject to a variety of risks and uncertainties, including, but not limited to, the risks and uncertainties described below. If any of the following risks occur, the business's financial condition, cash flows, liquidity and results of operations may be negatively impacted, and we may not be able to achieve our quarterly, annual or long-range plans. Additional risks and uncertainties not known to us or not described below may also negatively impact our business and results of operations. This Annual Report also includes statements reflecting assumptions, expectations, projections, intentions or beliefs about future events that are intended as “forward-looking statements” under the Private Securities Litigation Reform Act of 1995 and should be read in conjunction with the discussion under “Forward-Looking Statements,” above.

Risk Factors Related to our Business and Industry
Our business is subject to the cyclical nature of the end markets that we serve. This has had, and may continue to have, an adverse effect on our future operating results.
The end markets that we serve have historically been, and will continue to be vulnerable to general downturns, which in turn could materially and adversely affect the demand for our products and services. Our customer projects, budgets for capital expenditures and the need for our services have in the past, and may in the future, be adversely affected by among other things, poor economic conditions, low commodity prices, political uncertainties, and currency fluctuations. These variables may impact the number and/or the amount of new awards, delays in the timing of awards or potential cancellation of projects. The uncertainty of our contract award timing is outside of our control and can also present difficulties in matching workforce size with contract requirements. In some cases, we bear and maintain the cost of a ready workforce that may be larger than necessary in anticipation of future workforce needs. If an expected contract is delayed or not received, we may incur additional costs in staff or facility redundancy that could have an adverse impact on our business, financial condition and results of operations.
Our industry is highly competitive.
Some of our competitors are significantly larger and have substantially greater global resources such as engineering, manufacturing and marketing resources, and at various times, may be a customer or supplier on any given project. Competition in the industry depends on a number of factors, including the number of projects available, technical ability, production capacity, location and price. Certain of our competitors may have lower cost structures and may, therefore, be able to provide their products or services at lower prices. Similarly, we cannot be certain that we will be able to maintain or enhance our competitive position within our industry, maintain our customer base at current levels, increase our customer base or continue to provide technologically superior products at a competitive price. New companies may enter the markets in which we compete, or industry consolidation may occur, further increasing competition in our markets. Our failure to compete effectively could adversely affect future revenues and have an adverse impact on our results of operations.
Technological innovations by competitors may make existing products and production methods obsolete.
All of the products that we manufacture and sell depend upon the best available technology for success in the marketplace. The industries in which we operate are characterized by intense competition and are highly sensitive to technological innovation and customer requirements. It is possible for competitors (both domestic and international) to develop products or production methods that will make current products or methods obsolete or at a minimum hasten their obsolescence; therefore, we cannot be certain that our competitors will not develop the expertise, experience and resources to provide products and services that are superior in both price and quality. Our future success will depend, in part, on our ability to anticipate and offer products that meet changing customer specifications. Failure to successfully develop new products, or to enhance existing products, could result in the loss of existing customers to competitors, the inability to attract new business or an overall reduction in our competitive position, any of which may adversely affect our business or results of operations.
Unforeseen difficulties with expansions, relocations or consolidations of existing facilities could adversely affect our operations.
From time to time we may decide to enter new markets, build or lease additional facilities, expand our existing facilities, relocate or consolidate one or more of our operations or exit a facility we may own or lease. Increased costs and production delays arising from the staffing, relocation, sublease, expansion or consolidation of our facilities could adversely affect our business and results of operations.
7


Quality problems with our products could harm our reputation and erode our competitive position.
The success of our business depends upon the quality of our products and our relationships with customers. In the event that one of our products fails to meet our customers' standards or safety requirements or fails to operate effectively, our reputation could be harmed, which would adversely affect our marketing and sales efforts. We provide warranties to our customers for our products and the cost to satisfy customer warranty claims, which may include, among other things, costs for the repair or replacement of products, could adversely impact our business and results of operations.
Growth and product diversification through strategic acquisitions involves a number of risks.
Our strategy includes the pursuit of growth and product diversification through the acquisition of companies or assets and entering into joint ventures that will enable us to expand our geographic coverage and product and service offerings. We periodically review potential acquisitions; however, we may be unable to successfully implement this strategy. Acquisitions involve certain risks, including difficulties in the integration of operations and systems; failure to realize cost savings; the termination of relationships by key personnel and customers of the acquired company and a failure to add additional employees to handle the increased volume of business. Additionally, financial and accounting challenges and complexities in areas such as valuation, tax planning, treasury management and financial reporting from our acquisitions may impact our operating results. Due diligence may not be adequate or reveal all risks and challenges associated with our acquisitions. Companies that we acquire may not achieve revenues, profitability or cash flows that we expected, or that ultimately justify the investment. It is possible that impairment charges resulting from the overpayment for an acquisition may negatively impact our results of operations. Financing for acquisitions may require us to obtain additional equity or debt financing, which may not be available on attractive terms, if at all, or which may be restricted under the terms of our credit facility or other financing arrangements. Any failure to successfully complete or successfully integrate acquisitions could have a material adverse effect on our business and results of operations.
Our business requires skilled and unskilled labor, and we may be unable to attract and retain qualified employees.
Our ability to maintain our productivity at competitive levels may be limited by our ability to employ, train and retain personnel necessary to meet our requirements. We face competition for qualified personnel in our industry. We may experience shortages of qualified personnel such as engineers, project managers and select skilled trades. We cannot be certain that we will be able to maintain an adequate skilled labor force or key technical personnel necessary to operate efficiently and to support our growth strategy and operations. We cannot be certain that our labor costs will not increase as a result of a shortage in the supply of skilled, unskilled and technical personnel. Labor shortages or increased labor costs could impair our ability to maintain our business, meet customer commitments or grow our revenues, and may adversely impact our business and results of operations.
We are exposed to risks relating to the use of subcontractors on some of our projects.
We hire subcontractors to perform work on some projects and sometimes depend on third-party suppliers to provide equipment and materials necessary to complete or ship our products. If our subcontractors do not perform as expected for any reason, we may experience delays in completing our projects or incur additional costs. In addition, we may have disputes with these independent subcontractors arising from, among other things, the quality and timeliness of the work they have performed. Any of these factors could adversely impact our business and results of operations.
Misconduct by our employees or subcontractors, or a failure to comply with laws or regulations, could harm our reputation, damage our relationships with customers and subject us to criminal and civil enforcement actions.
Misconduct, fraud, non-compliance with applicable laws and regulations, or other improper activities by one or more of our employees or subcontractors could have a significant negative impact on our business and reputation. While we take precautions to prevent and detect these activities, such precautions may not be effective and are subject to inherent limitations, including human error and fraud. Acts of misconduct, or our failure to comply with applicable laws or regulations, could subject us to fines and penalties, harm our reputation, damage our relationships with customers and could adversely impact our business and results of operations.
Unsatisfactory safety performance may subject us to penalties, negatively impact customer relationships, result in higher operating costs, and negatively impact employee morale and turnover.
We place great emphasis on workplace safety in our entire organization through various safety initiatives and training. We have both indoor and outdoor manufacturing facilities that are susceptible to numerous industrial safety risks that can lead to personal injury, loss of life, damage to property and equipment, as well as potential environmental damage. While we take
8


every precaution to avoid incidents, we have experienced accidents in the past and may again in the future, which can negatively affect our safety record. A poor safety record can harm our reputation with existing and potential customers, jeopardize our relationship with employees and could adversely impact our business and results of operations.
Catastrophic events, including natural disasters, health epidemics (including the COVID-19 pandemic), acts of war and terrorism, among others, could disrupt our business.
The occurrence of catastrophic events, ranging from natural disasters to health epidemics (including the COVID-19 pandemic), to acts of war and terrorism, among others, could disrupt or delay our ability to operate our business and complete projects for our customers and could potentially expose us to third-party liability claims. We may declare the existence of a force majeure event under our contracts in certain situations; however, a customer may dispute our force majeure claim, which may result in additional liabilities. Losses arising from such events may or may not be fully covered by our various insurance policies or may be subject to deductibles or exceed coverage limits. In addition, such events could result in temporary or long-term delays and/or cancellations of orders for raw materials from our suppliers that could impact our project execution. These situations or other disruptions are outside of our control and may adversely impact our business and results of operations.
The spread of COVID-19 has created and continues to create significant uncertainty and economic disruption across the world. It is difficult to predict the economic impact that the COVID-19 pandemic may have on our business, results of operations and cash flows going forward. Certain of our customers have asked that we delay our manufacturing of their projects as their operations have been negatively impacted by this pandemic, the reduced oil and gas demand and commodity price volatility. These delays may have a negative effect on the timing of revenue recognition and cash flow. We have experienced supply disruptions and anticipate these supply disruptions may continue. Any delays in the supply of material or labor could negatively impact our production schedule and delay the completion of certain projects. The extent to which the COVID-19 pandemic specifically will impact our business will depend on numerous factors that are hard to predict, some of which include: the duration, spread and severity of the pandemic; governmental actions in response to the pandemic; including travel restrictions and quarantine or related orders; any closures of our offices and facilities or those of our suppliers as a result of the pandemic, and how quickly and to what extent normal economic and operating conditions can resume. Any of these factors, as well as other related business impacts resulting from COVID-19, could contribute to the risks and uncertainties described in this Annual Report. As a result, the magnitude of the impact on our business, results of operations and cash flows is not currently known.
Risk Factors Related to our Financial Condition and Markets
Economic uncertainty and financial market conditions may impact our customer base, suppliers and backlog.
Various factors drive demand for our products and services, including the price and demand for oil and gas, capital expenditures, economic forecasts and financial markets. Unanticipated increases in raw material requirements or prices, the imposition of tariffs, and changes in supplier availability or supplier consolidation, could increase production costs and adversely affect profitability. Uncertainty regarding these factors could impact our customers and severely impact the demand for projects and orders for our products and services. Additionally, the loss of significant volume from one particular customer at one of our facilities could adversely impact the operating results of that facility. If one or more of our suppliers or subcontractors experiences difficulties that result in a reduction or interruption in supply to us, or they fail to meet our manufacturing requirements, our business could be adversely impacted until we are able to secure alternative sources. Furthermore, our ability to maintain or expand our business would be limited in the future if we are unable to maintain or increase our bonding capacity or our bank credit facility on favorable terms or at all. Similarly, disruptions in the capital markets may also adversely impact our customer's ability to finance projects, which could result in contract cancellations or delays. These disruptions could lead to reduced demand for our products and services and could have an adverse impact on our business, financial condition and results of operations.
Our backlog is subject to unexpected adjustments, cancellations and scope reductions and, therefore, may not be a reliable indicator of our future earnings.
We have a backlog of uncompleted contracts. Backlog represents management's best estimate of the remaining performance obligation from work to be performed on uncompleted contracts, including new contractual agreements on which work has not begun. From time to time, projects are cancelled, delayed or modified due to customer, industry or macroeconomic conditions. While we may be reimbursed for certain costs, we may not have a contractual right to the total revenue reflected in our backlog. We may be unable to recover certain direct costs and cancelled projects may also result in additional unrecoverable costs due to the underutilization of our assets. Accordingly, the amounts recorded in backlog may not be a reliable indicator of our future operating results and may not be indicative of continuing revenue performance over future fiscal quarters.
9


Revenues recognized over time from our fixed-price contracts could result in volatility in our results of operations.
As discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates” and in the Notes to Consolidated Financial Statements included elsewhere in this Annual Report, the majority of our revenues are recognized over time. Revenues are recognized as work is performed and costs are incurred. The revenue earned to date is calculated by multiplying the total contract price by the percentage of performance to date, which is based on total costs incurred to date compared to the total estimated costs at completion. The determination of the revenue recognized requires the use of estimates of costs to be incurred for the performance of the contract. The cost estimation process is based upon the professional knowledge and experience of our management teams, engineers, project managers and financial professionals. We bear the risk of cost overruns in most of our contracts, which may result in reduced profits. Contract losses are recognized in full when determined, and estimates of revenue and cost to complete are adjusted based on ongoing reviews of estimated contract performance. Previously recorded estimates of revenues and costs are adjusted as the project progresses and circumstances change. In certain circumstances, it is possible that such adjustments to costs and revenues could have an adverse impact on our results of operations.
Many of our contracts contain performance obligations that may subject us to penalties or additional liabilities.
Many of our customer contracts have schedule and performance obligation clauses that, if we fail to meet, could subject us to penalty provisions, liquidated damages or claims against the company or our outstanding letters of credit or performance bonds. In addition, some customer contracts stipulate protection against our gross negligence or willful misconduct. Each individual contract defines the conditions under which the customer may make a claim against us. It is possible that adjustments arising from such claims, or our failure to manage our contract risk, may not be covered by insurance and could have an adverse impact on our results of operations.
Fluctuations in the price and supply of materials used to manufacture our products may reduce our profits and could adversely impact our ability to meet commitments to our customers.
Our material costs represented 47% of our consolidated revenues for Fiscal 2020. Unanticipated increases in raw material requirements or prices, the imposition of tariffs, and changes in supplier availability or supplier consolidation, could increase production costs and adversely affect profitability as fixed-price contracts may prohibit our ability to charge the customer for the increase in raw material prices. We purchase a wide variety of materials and component parts from various suppliers to manufacture our products, including steel, aluminum, copper and various components. Our supply base for certain key components and raw materials is limited and may come from a single supplier. If we are unable to obtain key components and raw materials from these suppliers, the key components and raw materials may not be readily available from other suppliers or available with acceptable terms. Our success depends on our ability to meet customer commitments and could be negatively impacted if a supplier experiences a disruption or discontinuance in their operations. The time and effort associated with the selection and qualification of a new supplier and changes in our design and testing to accommodate similar components from other suppliers could be significant. Additionally, we rely on certain competitors for key materials used in our products. This could negatively impact our ability to manufacture our products if the relationships change or become adversarial.
Obtaining surety bonds, letters of credit, bank guarantees, or other financial assurances, may be necessary for us to successfully bid on and obtain certain contracts.
We are often required to provide our customers security for the performance of their projects in the form of surety bonds, letters of credit or other financial assurances. Our continued ability to obtain surety bonds, letters of credit or other financial assurances will depend on our capitalization, working capital and past performance. Our ability to issue letters of credit is dependent upon the availability of adequate credit issued by our banks and could be negatively impacted by our compliance with our financial covenants. Future compliance with such covenants may be affected by factors beyond our control, including general or industry-specific economic downturns. We are also dependent on the overall bonding capacity, pricing and terms available in the surety markets. As such, we cannot guarantee our ability to maintain a sufficient level of bonding capacity in the future. The restriction, reduction or termination of our surety bond agreements could limit our ability to bid on new opportunities and would require us to issue letters of credit under our bank facilities in lieu of surety bonds, thereby reducing availability under our credit facility, which could have an adverse impact on our business and results of operations.
Failure to remain in compliance with covenants or obtain waivers or amendments under our credit agreement could adversely impact our business.
Our credit agreement contains various financial covenants and restrictions, which are described in Note G of the Notes to Consolidated Financial Statements. Our ability to remain in compliance with such financial covenants and restrictions may be
10


affected by factors beyond our control, including general or industry-specific economic downturns. If we fail to remain in compliance with such covenants and restrictions, absent a modification or waiver, this could result in an event of default under the credit agreement. Among other things, the occurrence of an event of default could limit our ability to obtain additional financing or result in acceleration of outstanding amounts under the credit agreement or a termination of the agreement, any of which could have an adverse impact on our liquidity, business and results of operations.
We extend credit to customers in conjunction with our performance under fixed-price contracts which subjects us to potential credit risks.
We typically agree to allow our customers to defer payment on projects until certain milestones have been met or until the projects are substantially completed, and customers typically withhold some portion of amounts due to us as retainage. Our payment arrangements subject us to potential credit risk related to changes in business and economic factors affecting our customers, including material changes in our customers' revenues or cash flows. If we are unable to collect amounts owed to us, or retain amounts paid to us, our cash flows would be reduced, and we could experience losses if those amounts exceed current allowances. Any of these factors could adversely impact our business and results of operations.
We carry insurance against many potential liabilities, but our management of risk may leave us exposed to unidentified or unanticipated risks.
Although we maintain insurance policies with respect to our related exposures, including certain casualty, property, business interruption and self-insured medical and dental programs, these policies contain deductibles, self-insured retentions and limits of coverage. In addition, we may not be able to continue to obtain insurance at commercially reasonable rates or may be faced with liabilities not covered by insurance, such as, but not limited to, environmental contamination or terrorist attacks. We estimate our liabilities for known claims and unpaid claims and expenses based on information available as well as projections for claims incurred but not reported. However, insurance liabilities, some of which are self-insured, are difficult to estimate due to various factors. If any of our insurance policies or programs are not effective in mitigating our risks, we may incur losses that are not covered by our insurance policies, that are subject to deductibles or that exceed our estimated accruals or our insurance policy limits, which could adversely impact our business and results of operations.
Our international operations expose us to risks that are different from, or possibly greater than, the risks we are exposed to domestically and may adversely affect our operations.
Revenues associated with projects located outside of the U.S., including revenues generated from our operations in the U.K. and Canada, accounted for approximately 23% of our consolidated revenues in Fiscal 2020. While our manufacturing facilities are located in developed countries with historically stable operating and fiscal environments, our business and results of operations could be adversely affected by a number of factors, including: political and economic instability; social unrest, acts of terrorism, force majeure, war or other armed conflict; inflation; changes in tax laws; the application of foreign labor regulations; currency fluctuations, devaluations and conversion restrictions and/or governmental activities that limit or disrupt markets, restrict payments or limit the movement of funds and trade restrictions or economic embargoes imposed by the U.S. or other countries. Additionally, the compliance with foreign and domestic import and export regulations and anti-corruption laws, such as the U.S. Foreign Corrupt Practices Act, General Data Protection Regulation, or similar laws of other jurisdictions outside the U.S., could adversely impact our ability to compete for contracts in such jurisdictions. Moreover, the violation of such laws or regulations, by us or our representatives, could result in severe penalties including monetary fines, criminal proceedings and suspension of export privileges.
Additionally, fluctuating foreign currency exchange rates may impact our financial results. The functional currency of our foreign operations is typically the currency of the country in which the foreign operation is located. Accordingly, our financial performance is subject to fluctuations due to changes in foreign currency exchange rates relative to the U.S. dollar.
11


Failures or weaknesses in our internal controls over financial reporting could adversely affect our ability to report on our financial condition and results of operations accurately and/or on a timely basis.
We are required to comply with Section 404 of the Sarbanes-Oxley Act of 2002, which requires, among other things, an assessment by our management of our internal control over financial reporting. Preparing our financial statements involves a number of complex processes, many of which are performed manually and are dependent upon individual data input or review. We are continually working to maintain and strengthen our internal controls over financial reporting, however, any system of controls has limitations, including the possibility of human error, the circumvention or overriding of controls and/or fraud. Our failure to maintain effective internal controls over financial reporting could adversely affect our ability to report our financial results on a timely and accurate basis, which could result in a loss of investor confidence in our financial reports or have an adverse impact on our business and results of operations.
A failure in our business systems or cyber security attacks on any of our facilities, or those of third parties, could adversely affect our business and our internal controls.
Our organization is dependent upon the proper functioning of our business systems that support our production, engineering, human resources, estimating, finance, and project management functions. If any of our financial, operational, or other data processing systems fail or have other significant shortcomings due to natural disaster, power loss, telecommunications failures, cyber security attacks or other similar events, our business or results of operations could be adversely affected. In addition, despite implementation of security measures, our business systems may be vulnerable to computer viruses, cyber-attacks, the accidental release of sensitive information and other unauthorized access. These failures of our business systems or security breaches could impact our customers, employees and reputation and result in a disruption to our operations or in legal claims or proceedings. A material network breach of our business systems could involve the theft of intellectual property, financial data, employee or customer data, which may be used by competitors. We rely on third-party systems which could also suffer operational system failure or cyber-attacks. Any of these occurrences could disrupt our business, result in potential liability or reputational damage or otherwise have an adverse effect on our business or results of operations.
Network security and internal control measures have been implemented to address these risks and disruptions to our business. However, our portfolio of hardware and software products, solutions and services and information contained within our enterprise information technology (IT) systems may be vulnerable to damage or disruption caused by circumstances beyond our control such as catastrophic events, cyber-attacks, other malicious activities from unauthorized third parties, power outages, natural disasters, computer system or network failures or computer viruses. Any significant disruption or failure could damage our reputation or have a material adverse effect on our business and our results of operations.
Risk Factors Related to our Common Stock
Our stock price could decline or fluctuate significantly due to unforeseen circumstances. These fluctuations may cause our stockholders to incur losses.
Our stock price could fluctuate or decline due to a variety of factors including, but not limited to, the risks factors described herein, the timing and cancellation of projects, changes in our estimated costs to complete projects, investors' opinions of the sectors and markets in which we operate or failure of our operating results to meet the expectations of securities analysts or investors, which could reduce investor confidence. These factors could adversely affect our business, and the trading price of our common stock could decline significantly.
There can be no assurance that we will declare or pay future dividends on our common stock.
Our Board of Directors has approved a regular dividend since Fiscal 2014. The declaration, amount and timing of future dividends are subject to capital availability and determinations by our Board of Directors that cash dividends are in the best interest of our stockholders and are in compliance with all respective laws and applicable agreements. Our ability to declare and pay dividends will depend upon, among other factors, our financial condition, results of operations, cash flows, current and anticipated expansion plans, requirements under Delaware law and other factors that our Board of Directors may deem relevant. A reduction in or elimination of our dividend payments could have a material negative effect on our stock price.
12


Risk Factors Related to Legal and Regulatory Matters
Our operations could be adversely impacted by the effects of government regulations.
We are subject to various government regulations in the United States as well as various international locations where we operate. These regulations cover several areas including environmental compliance, import and export controls, economic sanctions, data and privacy protection, transfer pricing rules, anti-bribery, anti-trafficking and anti-trust provisions. These laws and regulations are administered by various state, federal and international agencies. Changes in policy, laws or regulations, including those affecting oil and gas exploration and development activities and the resulting decisions by customers and other industry participants, could reduce demand for our products and services, which would have a negative impact on our operations. Various regulations have been implemented around the world related to safety and certification requirements applicable to oil and gas drilling and production activities, and we cannot predict whether operators will be able to satisfy these requirements. Further, we cannot predict future changes in any country in which we operate and how those changes may affect our ability to perform projects in those regions.

The Dodd-Frank Wall Street Reform and Consumer Protection Act requires disclosure of use of "conflict" minerals mined from the Democratic Republic of Congo and adjoining countries and our efforts to prevent the use of such minerals. In our industry, conflict minerals are most commonly found in metals. As there may be only a limited number of suppliers offering "conflict-free" metals, we cannot be sure that we will be able to obtain necessary metals in sufficient quantities or at competitive prices. Also, we may face challenges with our customers and suppliers if we are unable to sufficiently verify that the metals used in our products are "conflict-free."
Changes in and compliance with environmental laws could adversely impact our financial results.
Private lawsuits or enforcement actions by federal, state, provincial or foreign regulatory agencies may materially increase our costs. Certain environmental laws may make us potentially liable for the remediation of contamination at or emanating from our properties or facilities. Although we seek to obtain indemnities against liabilities relating to historical contamination at the facilities we own or operate, we cannot provide any assurance that we will not incur liabilities relating to the remediation of potential contamination, including contamination we did not cause. These potential environmental liabilities may or may not be fully covered by our various insurance policies and may adversely affect our business and results operations.
Provisions of our charter documents or Delaware law could delay or prevent an acquisition of our company, even if the acquisition would be beneficial to our stockholders, and could make it more difficult to change management. 
Because we are governed by Delaware law, we are subject to the provisions of Section 203 of the Delaware General Corporation Law. These provisions prohibit a publicly held Delaware corporation from engaging in a business combination with an interested stockholder, generally, a person who, together with its affiliates, owns, or within the last three years has owned, 15% of our voting stock, for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner.
In addition, provisions of our Certificate of Incorporation and bylaws may discourage, delay or prevent a merger, acquisition or other change in control that stockholders might otherwise consider favorable, including transactions in which stockholders might otherwise receive a premium for their shares. These provisions may frustrate or prevent any attempt by our stockholders to replace or remove our current management by making it more difficult to replace or remove our Board of Directors.
Significant developments arising from recent U.S. Government proposals concerning tariffs and other economic proposals could adversely impact our business.
As a result of recent changes to U.S. administration policy and recent U.S. government proposals, there may be greater restrictions and economic disincentives on international trade that could include significant increases in tariffs on goods. Changes in U.S. or international social, political, regulatory and economic conditions or in laws and policies governing foreign trade, manufacturing, development and investment in the territories and countries where we currently develop and sell our products, and any negative sentiment towards the U.S. as a result of such changes, could adversely impact our business and results of operations.
13


General Risk Factors
Actual and potential claims, lawsuits and proceedings could ultimately reduce our profitability and liquidity and weaken our financial condition.
We could be named as a defendant in future legal proceedings that claim damages in connection with the operation of our business. Most of the actions against us arise out of the normal course of our performing services or manufacturing equipment. From time to time, we may be a plaintiff in legal proceedings against customers in which we seek to recover payment of contractual amounts due to us, as well as claims for increased costs incurred by us. When appropriate, we establish provisions against certain legal exposures, and we adjust such provisions from time to time according to ongoing developments related to each exposure, as well as any potential recovery from our insurance, if applicable. If, in the future, our assumptions and estimates related to such exposures prove to be inadequate or wrong, or our insurance coverage is insufficient, our business and results of operations could be adversely affected. In addition, claims, lawsuits and proceedings may harm our reputation or divert management resources away from operating our business. Losses arising from such events may or may not be fully covered by our various insurance policies or may be subject to deductibles or exceed coverage limits.
Changes in tax laws and regulations may change our effective tax rate and could have a material effect on our financial results.
We are subject to income taxes in the U.S. and numerous foreign jurisdictions. A change in tax laws, deductions or credits, treaties or regulations, or their interpretation, in the countries in which we operate could result in a higher tax rate on our pre-tax income, which could have a material impact on our net income. We are regularly under audit by tax authorities, and our tax estimates and tax positions could be materially affected by many factors including the final outcome of tax audits and related litigation, the introduction of new tax accounting standards, legislation, regulations and related interpretations, our global mix of earnings, the extent to which deferred tax assets are realized and changes in uncertain tax positions. A significant increase in our statutory tax rates could have a material impact on our net income or loss and cash flow.
The departure of key personnel could disrupt our business.
We depend on the continued efforts of our executive officers, senior management and other key professionals. We cannot be certain that any individual will continue in such capacity for any particular period of time. The loss of key personnel, or the inability to hire and retain qualified employees, could negatively impact our ability to perform and manage our business.

14


Item 1B. Unresolved Staff Comments
None.

Item 2. Properties
We own our principal manufacturing and fabrication facilities and periodically lease smaller facilities throughout the U.S., Canada and the U.K. Our facilities are generally located in areas that are readily accessible to materials and labor pools and are maintained in good condition. These facilities are expected to meet our needs for the foreseeable future.
Our principal locations as of September 30, 2020, are as follows: 
LocationDescriptionAcresApproximate
Square Footage
Houston, TXCorporate office and manufacturing facility21.4 428,515 
Houston, TXOffice and manufacturing facility53.4 290,554 
Houston, TXOffice, fabrication facility and yard63.3 82,320 
North Canton, OHOffice and manufacturing facility8.0 115,200 
Northlake, ILOffice and manufacturing facility10.0 103,500 
Bradford, U.K.Office and manufacturing facility7.9 129,200 
Acheson, Alberta, CanadaOffice and manufacturing facility20.1 330,168 

Item 3. Legal Proceedings
We are involved in various legal proceedings, claims and other disputes arising from our commercial operations, projects, employees and other matters which, in general, are subject to uncertainties and in which the outcomes are not predictable.  Although we can give no assurances about the resolution of pending claims, litigation or other disputes and the effect such outcomes may have on us, management believes that any ultimate liability resulting from the outcome of such proceedings, to the extent not otherwise provided or covered by insurance, will not have a material adverse effect on our consolidated financial position or results of operations or liquidity.

Item 4. Mine Safety Disclosures
Not applicable.

15



PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock trades on the NASDAQ Global Market (NASDAQ) under the symbol “POWL.”
As of December 7, 2020, the closing price of our common stock on the NASDAQ was $27.54 per share. As of December 7, 2020, there were 274 stockholders of record of our common stock. All common stock held in street names is recorded in the Company’s stock register as being held by one stockholder.
See “Part III, Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” of this Annual Report for information regarding securities authorized for issuance under our equity compensation plans.
Dividend Policy
The Board anticipates declaring cash dividends in future quarters; however, there is no assurance as to future dividends or their amounts because they depend on future earnings, capital requirements, financial condition and debt covenants.  
16


Performance Graph
The following Performance Graph and related information shall not be deemed “soliciting material” or to be “filed” with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that we specifically incorporate it by reference into such filing.
The following graph compares, for the period from October 1, 2015 to September 30, 2020, the cumulative stockholder return on our common stock with the cumulative total return on the IShares Russell 2000, the Invesco S&P SmallCap 600 Energy, the NASDAQ Market Index, and the Industrial Electrical Equipment Group (a select group of peer companies – Altra Industrial Motion Corp.; Ameresco, Inc.; AZZ Inc.; Belden Inc.; Daktronics Inc.; EnerSys; Franklin Electric Co, Inc.; Littelfuse Inc.; LSI Industries Inc.; McDermott International, Inc.; Preformed Line Products; A O Smith Corporation; Thermon Group Holdings and Woodward, Inc.). In Fiscal 2020, the IShares Russell 2000 and the Invesco S&P SmallCap 600 Energy were added as more comparable indices to replace the NASDAQ Market Index as this index is not necessarily indicative of Powell's performance or its peers. The comparison assumes that $100 was invested on October 1, 2015, in our common stock, the IShares Russell 2000, the Invesco S&P SmallCap 600 Energy, the NASDAQ Market Index and the Industrial Electrical Equipment Group, and that all dividends were re-invested. The stock price performance reflected on the following graph is not necessarily indicative of future stock price performance.
powl-20200930_g1.jpg
17


Item 6. Selected Financial Data
The selected financial data shown below for the past five years was derived from our audited financial statements, adjusted for discontinuing operations. The historical results are not necessarily indicative of the operating results to be expected in the future. The selected financial data should be read in conjunction with “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes included elsewhere in this Annual Report.
 Years ended September 30,
 20202019201820172016
Statement of Operations:(In thousands, except per share data)
Revenues$518,499 $517,180 $448,716 $395,911 $565,243 
Cost of goods sold423,924 430,204 383,361 345,142 459,038 
Gross profit94,575 86,976 65,355 50,769 106,205 
Selling, general and administrative expenses67,662 69,950 66,768 61,524 74,924 
Research and development expenses6,265 6,327 6,717 6,906 6,731 
Amortization of intangible assets177 177 205 355 352 
Insurance proceeds— (950)— — — 
Restructuring and other, net1,400 11 787 1,322 8,441 
Operating income (loss)19,071 11,461 (9,122)(19,338)15,757 
Other income(506)— (747)(2,029)(2,029)
Interest (income) expense, net(753)(873)(676)(390)(7)
Income (loss) before income taxes20,330 12,334 (7,699)(16,919)17,793 
Income tax provision (benefit) (1)
3,670 2,444 (547)(7,433)2,283 
Net income (loss)$16,660 $9,890 $(7,152)$(9,486)$15,510 
Earnings (loss) per share:     
Basic$1.43 $0.85 $(0.62)$(0.83)$1.36 
Diluted$1.42 $0.85 $(0.62)$(0.83)$1.36 
(1) For an explanation of the effective tax rate for the last three fiscal years, see Note I of the Notes to Consolidated Financial Statements included elsewhere in this Annual Report.
 Years ended September 30,
 20202019201820172016
Balance Sheet Data:(In thousands)
Cash, cash equivalents and short-term investments (1)
$178,921 $124,681 $49,754 $95,188 $97,720 
Property, plant and equipment, net114,372 120,812 128,764 139,420 144,977 
Total assets472,278 467,411 429,951 414,986 462,516 
Long-term debt, including current maturities800 1,200 1,600 2,000 2,400 
Total stockholders' equity306,626 299,153 301,644 321,296 335,317 
Total liabilities and stockholders' equity472,278 467,411 429,951 414,986 462,516 
Dividends paid on common stock12,066 11,998 11,916 11,875 11,845 
(1) Excludes current and non-current restricted cash totaling $25.1 million and $24.9 million as of September 30, 2018 and 2017, respectively.
Years ended September 30,
20202019201820172016
Other Financial Data:(In thousands)
Backlog$476,819 $419,012 $260,900 $250,123 $291,354 
Bookings, net of cancellations and scope reductions576,782 676,051 458,884 355,064 417,510 


18


Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations for the twelve months ended September 30, 2020 compared to the twelve months ended September 30, 2019 should be read in conjunction with the accompanying consolidated financial statements and related notes. We have elected to omit discussion on the earliest of the three years covered by the consolidated financial statements presented. Refer to Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and Liquidity and Capital Resources located in our Form 10-K for the fiscal year ended September 30, 2019, filed on December 5, 2019, for reference to discussion of the fiscal year ended September 30, 2018, the earliest of the three fiscal years presented. 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, and the actual results may differ materially from those projected in the forward-looking statements. For a description of the risks and uncertainties, please see “Cautionary Statement Regarding Forward-Looking Statements; Risk Factors” and “Part I, Item 1A. Risk Factors,” included elsewhere in this Annual Report.

Overview
We develop, design, manufacture and service custom-engineered equipment and systems for the distribution, control and monitoring of electrical energy. Headquartered in Houston, Texas, we serve the oil and gas markets, including onshore and offshore oil and gas production, pipeline, refining and LNG terminals, as well as petrochemical, electric utility and light traction power. Revenues and costs are primarily related to custom engineered-to-order equipment and systems and are accounted for under percentage-of-completion accounting, which precludes us from providing detailed price and volume information. Our backlog includes various projects that typically take a number of months to produce.
The markets in which we participate are capital-intensive and cyclical in nature. Cyclicality is predominantly driven by customer demand, global economic conditions and anticipated environmental, safety or regulatory changes that affect the manner in which our customers proceed with capital investments. Our customers analyze various factors including the demand and price for oil, gas and electrical energy, the overall economic and financial environment, governmental budgets, regulatory actions and environmental concerns. These factors influence the release of new capital projects by our customers, which are traditionally awarded in competitive bid situations. Scheduling of projects is matched to the customer requirements, and projects typically take a number of months to produce. Schedules may change during the course of any particular project, and our operating results can, therefore, be impacted by factors outside of our control.
Within the industrial sector, specifically oil, gas and petrochemical, the demand for our electrical distribution solutions is very cyclical and closely correlated to the level of capital expenditures of our end user customers as well as prevailing global economic conditions.
Beginning in late Fiscal 2018, the combination of a growing global economy, abundant sources of favorably priced natural gas feedstock, and an energy industry focus on transition to natural gas and cleaner-burning fuels drove an increase in capital investment opportunities, specifically across the oil, gas and petrochemical sectors. We have seen opportunities for natural gas related projects targeting global demand for cleaner-burning fuels. Additionally, projects within the domestic petrochemical sector have benefited from the low feedstock prices of natural gas. Specific to natural gas, the business was awarded a substantial contract in the second quarter of Fiscal 2020 that will support the integrated electrical distribution requirements for a large domestic industrial complex. This specific project will take over three years to design, manufacture, integrate, test and ship.
Impact of the COVID-19 Pandemic and Oil and Gas Commodity Market Volatility on Powell
The spread of COVID-19 has created significant uncertainty and economic disruption across the world during the second half of Fiscal 2020 and continuing into Fiscal 2021. This pandemic has negatively impacted energy demand, which in turn has resulted in considerable volatility across the oil and gas commodity markets. The demand for our products and services as well as our operations have been negatively impacted by COVID-19, resulting from the associated reduction in oil and gas demand and volatility in commodity prices noted above.

From an operational standpoint, although our facilities are located in areas that have in the past been subject to stay-at-home orders, we have not closed any of our facilities for an extended period of time and have operated as an "essential business" under local government orders. However, as a result of the uncertainty that our customers are currently experiencing, some projects have been cancelled, and certain of our customers have asked that we delay our manufacturing on their projects as their operations have been negatively impacted by this pandemic and the reduced oil and gas demand. We have experienced supply disruptions and anticipate that these supply disruptions may continue. We continue to monitor and work with our suppliers who
19


have been impacted by this pandemic to ensure that we are able to meet our customer commitments. We also have reviewed and will continue to review contracts with our suppliers, making adjustments accordingly. We continue to take the necessary steps to ensure the safety of our employees, customers and vendors. These steps include, among others, promoting increased social distancing practices and enhanced cleaning efforts in our offices and facilities. We are utilizing and exploring the use of technology across our operations to further enhance social distancing and improve safety. These safety precautions have and may continue to have an adverse impact on our costs, efficiency and productivity going forward.

In response to the lower demand across select end markets, we have and will continue to take various actions to reduce costs. During the third quarter of Fiscal 2020, we reduced our global workforce by approximately 12% resulting in severance costs of $1.4 million. Additionally, we instituted a temporary furlough program for our salaried workforce in North America which reduced salaried compensation by $1.3 million in the second half of Fiscal 2020. We have also reduced our capital and discretionary spending in response to current business conditions and will continue to monitor the economic conditions during Fiscal 2021.

As discussed further under the heading "Outlook" below, it is difficult to predict the economic impact that this pandemic, as well as reduced oil and gas demand and commodity price volatility, may have on our business, results of operations and cash flows going forward.


Results of Operations
Twelve Months Ended September 30, 2020 Compared to Twelve Months Ended September 30, 2019
Revenue and Gross Profit
Revenues increased by $1.3 million, to $518.5 million in Fiscal 2020 resulting from the solid backlog position at the beginning of Fiscal 2020 and the improved market conditions across our petrochemical and oil and gas markets beginning in late Fiscal 2018. Domestic revenues decreased by 2%, or $6.2 million, to $398.8 million in Fiscal 2020. International revenues increased by 7% to $119.7 million in Fiscal 2020, driven largely by increased end market activity across the Middle East and Asia. Our international revenues include both revenues generated from our international facilities as well as revenues from export projects generated at our domestic facilities.
Revenue from our core oil and gas markets decreased by 19%, or $47.1 million, to $195.2 million in Fiscal 2020 while petrochemical revenue increased by 36%, or $33.3 million, to $126.7 million in Fiscal 2020. The economic impact resulting from the COVID-19 pandemic and associated reduction in global demand across the oil and gas end markets has negatively impacted our orders rate and corresponding revenue. The partial offset in favorable petrochemical revenues is being generated by the successful execution of previously booked orders from our petrochemical end markets and lower natural gas prices. Revenue from utility markets increased by 5%, or $3.8 million, to $88.8 million and traction market revenue increased by 58%, or $15.6 million, to $42.4 million in Fiscal 2020, primarily driven by an increase in volume across our international locations. Revenue from all other markets combined decreased by $4.3 million to $65.4 million in Fiscal 2020.
Gross profit increased by 9%, or $7.6 million, to $94.6 million in Fiscal 2020. Gross profit as a percentage of revenues increased to 18% in Fiscal 2020, compared to 17% in Fiscal 2019, due to strong margins in backlog as well as cost efficiencies and productivity in our North American manufacturing facilities.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased 3%, or $2.3 million, to $67.7 million in Fiscal 2020, primarily due to decreased personnel costs as a result of workforce reductions and lower travel-related costs resulting from the COVID-19 pandemic. Selling, general and administrative expenses, as a percentage of revenues, decreased to 13% in Fiscal 2020 compared to 14% in Fiscal 2019, primarily due to our continued focus on aligning our cost structure with anticipated volume.
Insurance Proceeds
In Fiscal 2019, we settled a 2017 business interruption insurance claim relating to Hurricane Harvey and received proceeds of $1.0 million, which was included within operating income.
20


Restructuring and Other, Net
In response to the COVID-19 pandemic, reductions in global oil and gas demand and volatility of commodity prices, we implemented workforce reductions across the business. As a result, we recorded $1.4 million of separation costs during Fiscal 2020.
In Fiscal 2019, we recorded additional lease expense of $0.7 million related to certain unused facility leases in Canada. We also recorded income from a recovery of $0.7 million in Fiscal 2019 as a result of a favorable settlement of a claim related to the divestiture of a subsidiary in Fiscal 2014.
Other Income
During Fiscal 2020, we recorded other income of $0.5 million related to a death benefit received from our company-owned life insurance policy related to a retired employee.
Income Tax Provision
We recorded an income tax provision of $3.7 million in Fiscal 2020, resulting in an effective tax rate of 18%, compared to an income tax provision of $2.4 million in Fiscal 2019 at an effective tax rate of 20%. In Fiscal 2020, the effective tax rate was favorably impacted by the current year estimated Research and Development Tax Credit (R&D Tax Credit) as well as the utilization of net operating loss carryforwards in Canada that were fully reserved with a valuation allowance. Additionally, we reversed a reserve of $1.7 million resulting from a favorable settlement of an IRS audit and the expiration of statutes of limitations. The effective tax rate for Fiscal 2020 was negatively impacted by the valuation allowance set up against our U.K. deferred tax assets in the amount of $0.5 million. The effective tax rate for Fiscal 2019 approximated the U.S. federal statutory rate as the immaterial losses incurred by various foreign jurisdictions reserved with a valuation allowance had a minimal impact on the effective tax rate.
Net Income
In Fiscal 2020, net income of $16.7 million, or $1.42 per diluted share, improved from a net income of $9.9 million, or $0.85 per diluted share in Fiscal 2019, primarily from increased gross profit resulting from favorable productivity, as well as lower selling and administrative costs and the favorable impact of the reversal of the reserves for unrecognized tax benefits, which was partially offset by the separation costs incurred in Fiscal 2020.
Backlog
The order backlog at September 30, 2020 was $476.8 million, a 14% increase from the $419.0 million at September 30, 2019. The increase in backlog is due in large part to the substantial contract awarded in the second quarter of Fiscal 2020 that will support the integrated electrical distribution requirements for a large domestic industrial complex. Bookings, net of cancellations and scope reductions, decreased by 15% in Fiscal 2020 to $576.8 million, compared to $676.1 million in Fiscal 2019, primarily due to decreased global demand across our core oil and gas markets.

Outlook
The markets in which we participate are capital-intensive and cyclical in nature. Cyclicality is predominantly driven by macroeconomic variables that directly impact customer demand. These variables are most often driven by global economic conditions and/or environmental, safety or regulatory changes which may affect the manner in which our customers proceed with capital investments. Our customers routinely analyze various factors including the demand and price for oil, gas and electrical energy, the overall economic and financial environment, governmental budgets, regulatory actions and environmental concerns throughout the procurement decision process. These factors influence the release of new capital projects by our customers, which are traditionally awarded in competitive bid situations. Scheduling of projects is matched to customer requirements, and projects typically take a number of months to produce. Schedules may change during the course of any particular project, and our operating results can, therefore, be impacted by factors outside of our control.
A significant portion of our revenues has historically been from the oil, gas and petrochemical markets. Oil and gas commodity price levels have been unstable over the last several years, and our customers have in certain cases, delayed some of their major capital investment projects. Beginning in late Fiscal 2018 through the first quarter of Fiscal 2020, our customers' decisions to invest in projects across our key oil and gas and petrochemical markets were influenced to some extent by the stabilization of commodity prices and the increased global demand for cleaner-burning fuels during that period of time. We believe that this change in market sentiment during that period of time had a favorable impact on our orders and backlog entering Fiscal 2020.
21


However, the recent declines in oil prices and the global economic impacts from COVID-19 may have a negative impact on our business going forward, as discussed in more detail below. Specific to the energy industry focus on transition to natural gas and cleaner-burning fuels, the business was awarded a substantial contract in the second quarter of Fiscal 2020 that will support the integrated electrical distribution requirements for a large domestic industrial complex. This specific project has begun and will take over three years to design, manufacture, integrate, test and ship.
Our operating results are impacted by factors such as the timing of new order awards, customer approval of final engineering and design specifications and delays in customer construction schedules, all of which contribute to short-term earnings variability and the timing of project execution. Our operating results also have been, and may continue to be, impacted by the timing and resolution of change orders, project close-out and resolution of potential contract claims and liquidated damages, all of which could improve or deteriorate gross margins during the period in which these items are resolved with our customers. These factors may result in periods of underutilization of our resources and facilities, which may negatively impact our ability to cover our fixed costs. The increased orders recognized in Fiscal 2018 and 2019 have led to improved revenue and operating results for Fiscal 2020. We continue to monitor the variables that impact our markets while adjusting to the global conditions in order to maintain a competitive cost and technological advantage in the markets that we serve.
The spread of COVID-19 has created and continues to create significant uncertainty and economic disruption across the world during the second half of Fiscal 2020 and continuing into Fiscal 2021. This pandemic has negatively impacted global energy demand, which in turn has resulted in considerable volatility across the oil and gas commodity markets. Certain of our customers have asked that we delay our manufacturing on their projects as their operations have been negatively impacted by these factors.
As a result of these circumstances, we anticipate that a decrease in commercial activity may negatively impact our business, results of operations and cash flows going forward. We have and may need to continue to adjust our workforce and labor costs to correspond to the reduced customer demand. We will take prudent measures to maintain our strong liquidity and cash position, which may include reducing our capital expenditures and research and development costs, as well as reducing or eliminating future dividend payments. However, the extent to which the COVID-19 pandemic specifically will continue to impact our business will depend on numerous factors that are difficult to predict, some of which include: the duration, spread and severity of the pandemic; governmental actions in response to the pandemic, including travel restrictions and quarantine or related governmental orders; any closures of our offices and facilities or those of our suppliers as a result of the pandemic, and how quickly and to what extent normal economic and operating conditions can resume. Therefore, the magnitude of the impact on our business, results of operations and cash flows is not currently known.
Liquidity and Capital Resources
As of September 30, 2020, current assets exceeded current liabilities by 2.2 times, and our debt to total capitalization was 0.26%.
Cash, cash equivalents and short-term investments increased to $178.9 million at September 30, 2020, compared to $124.7 million at September 30, 2019. This increase in cash was driven in part by the timing of the contract billing milestones related to our recent contract award for a large domestic industrial project as well as the year-over-year reduction in our accounts receivables balance. We believe that our strong working capital position, available borrowings under our credit facility and available cash should be sufficient to finance future operating activities, capital improvements, research and development initiatives and debt repayments for the foreseeable future.
On September 27, 2019, we entered into an Amended and Restated Credit Agreement with Bank of America, N.A. (the "U.S. Revolver") which replaced our prior credit agreement. The U.S. Revolver is a $75.0 million revolving credit facility, which is available for both borrowings and letters of credit and expires September 2024. As of September 30, 2020, there were no amounts borrowed under this facility, and letters of credit outstanding were $38.7 million. As of September 30, 2020, $36.3 million was available for the issuance of letters of credit and borrowing under the U.S. Revolver. Total long-term debt, including current maturities, totaled $0.8 million at September 30, 2020 related to outstanding industrial development revenue bonds. We are required to maintain certain financial covenants, the most significant of which are a consolidated leverage ratio less than 3.0 to 1.0 and a consolidated interest coverage ratio of greater than 3.0 to 1.0. The consolidated leverage ratio is our most restrictive covenant and a decrease in our earnings before interest, taxes, depreciation and amortization (EBITDA) could restrict our ability to issue letters of credit under the U.S. Revolver. For further information regarding our debt, see Notes G and H of Notes to Consolidated Financial Statements.
22


Approximately $26.2 million of our cash and cash equivalents at September 30, 2020 was held outside of the U.S. for international operations. It is our intention to indefinitely reinvest all current and future foreign earnings internationally in order to ensure sufficient working capital to support our international operations. In the event that we elect to repatriate some or all of the foreign earnings that were previously deemed to be indefinitely reinvested outside the U.S., we may incur additional tax expense upon such repatriation under current tax laws.
Operating Activities
Operating activities provided net cash of $72.4 million and $68.8 million in Fiscal 2020 and Fiscal 2019, respectively. Cash flow from operations is primarily influenced by project volume, the timing of milestone payments from our customers and the payment terms with our suppliers. This increase in operating cash flows was primarily due to the timing of contract billing milestones related to our recent contract award for a large domestic industrial project awarded in the second quarter of Fiscal 2020 as well as a significant reduction in the accounts receivables balance.
Investing Activities
Investing activities used $17.5 million during Fiscal 2020 compared to $3.0 million provided during the same period in Fiscal 2019. The increase in cash used by investing activities in Fiscal 2020 was primarily due to an increase in short-term investments.
Financing Activities
Net cash used in financing activities was $13.1 million in Fiscal 2020 and $13.9 million in Fiscal 2019, which primarily consisted of approximately $12 million of dividends paid in each year.
Contractual and Other Obligations
At September 30, 2020, our long-term contractual obligations were limited to debt and leases. The table below details our commitments by type of obligation, including interest if applicable, and the period that the payment will become due (in thousands).

Payments Due by Period:
 Long-Term Debt ObligationsNet Operating Lease ObligationsTotal
Less than 1 year$400 $1,980 $2,380 
1 to 3 years401 2,154 2,555 
3 to 5 years— 85 85 
More than 5 years— — — 
Total long-term contractual obligations$801 $4,219 $5,020 

As of September 30, 2020, the total unrecognized tax benefit related to uncertain tax positions was $1.3 million. We believe that it is reasonably possible that within the next 12 months, the total unrecognized tax benefits will decrease by approximately $0.1 million due to the settlement with taxing authorities related to voluntary filings. We are unable to make reasonably reliable estimates regarding the timing of future cash outflows, if any, associated with the remaining unrecognized tax benefits.
Other Commercial Commitments
We are contingently liable for letters of credit and bank guarantees totaling $45.9 million as of September 30, 2020, with the following potential cash outflows in the event that we are unable to perform under our contracts (in thousands):
Payments Due by Period:Letters of
Credit/Bank Guarantees
Less than 1 year$16,096 
1 to 3 years8,733 
More than 3 years21,088 
Total long-term commercial obligations$45,917 
23


We also had surety bonds totaling $162.4 million that were outstanding at September 30, 2020. Surety bonds are primarily used to guarantee our contract performance to our customers.
Off-Balance Sheet Arrangements
 
We had no significant off-balance sheet arrangements during the periods presented.
Effects of Inflation
We are subject to inflation, which can cause increases in our costs of raw materials, primarily copper, aluminum and steel. Fixed-price contracts can limit our ability to pass these increases to our customers, thus negatively impacting our earnings. Inflation in commodity prices could potentially impact our operations in future years.

Critical Accounting Policies and Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities known to exist at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. We evaluate our estimates on an ongoing basis, based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. There can be no assurance that actual results will not differ from those estimates.
We believe the following accounting policies and estimates to be critical in the preparation and reporting of our consolidated financial statements.
Revenue Recognition
Our revenues are primarily generated from the manufacturing of custom-engineered products and systems under long-term fixed-price contracts under which we agree to manufacture various products such as traditional and arc-resistant distribution switchgear and control gear, medium-voltage circuit breakers, monitoring and control communications systems, motor control centers, switches and bus duct systems. These products may be sold separately as an engineered solution, but are typically integrated into custom-built enclosures which we also build. These enclosures are referred to as power control room substations (PCRs®), custom-engineered modules or electrical houses (E-Houses). Some contracts may also include the installation and the commissioning of these enclosures.
Revenue from these contracts is generally recognized over time utilizing the cost-to-cost method to measure the extent of progress toward the completion of the performance obligation and the recognition of revenue over time. We believe that this method is the most accurate representation of our performance, because it directly measures the value of the services transferred to the customer over time as we incur costs on our contracts. Contract costs include all direct materials, labor, and indirect costs related to contract performance, which may include indirect labor, supplies, tools, repairs and depreciation costs.
We enter into contracts to provide value-added services such as field service inspection, installation, commissioning, modification and repair, as well as retrofit and retrofill components for existing systems. As a practical expedient, if the service contract terms give us the right to invoice the customer for an amount that corresponds directly with the value of our performance completed to date (i.e., a service contract in which we bill a fixed amount for each hour of service provided), then we recognize revenue over time in each reporting period corresponding to the amount that we have the right to invoice. Our performance obligations are satisfied as the work progresses.
We also have sales orders for spare parts and replacement circuit breakers for switchgear that are obsolete or that are no longer produced by the original manufacturer. Revenues from these sales orders are recognized at a point in time when we fulfill our performance obligation to the customer, which is typically upon shipment.
Additionally, some contracts may contain a cancellation clause that could limit the amount of revenue we are able to recognize over time. In these instances, revenue and costs associated with these contracts are deferred and recognized at a point in time when the performance obligation is fulfilled.
Selling and administrative costs incurred in relation to obtaining a contract are typically expensed as incurred. We periodically utilize a third-party sales agent to obtain a contract and will pay a commission to that agent. We record the full commission liability to the third-party sales agents at the order date, with a corresponding deferred asset. As the project progresses, we
24


record commission expense based on percentage of completion rates that correlate to the project and reduce the deferred asset. Once we have been paid by the customer, we pay the commission, and the deferred liability is reduced.
Performance Obligations
A performance obligation is a promise in a contract or with a customer to transfer a distinct good or service. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue as the performance obligations are satisfied. To determine the proper revenue recognition for contracts, we evaluate whether a contract should be accounted for as more than one performance obligation or, less commonly, whether two or more contracts should be combined and accounted for as one performance obligation. This evaluation of performance obligations requires significant judgment. The majority of our contracts have a single performance obligation where multiple engineered products and services are combined into a single, custom-engineered solution. Our contracts generally include a standard assurance warranty that typically ends 18 months after shipment. Occasionally, we provide service-type warranties that will extend the warranty period. These extended warranties qualify as separate performance obligations, and revenue is deferred and recognized over the warranty period. If we determine during the evaluation of the contract that there are multiple performance obligations, we allocate the transaction price to each performance obligation using our best estimate of the standalone selling price of each distinct good or service in the contract.
Remaining unsatisfied performance obligations, which we refer to as backlog, represent the estimated transaction price for goods and services for which we have a material right, but work has not been performed. Backlog may not be indicative of future operating results as orders may be cancelled or modified by our customers. Our backlog does not include service and maintenance-type contracts for which we have the right to invoice as services are performed.
Contract Estimates
Actual revenues and project costs may vary from previous estimates due to changes in a variety of factors. The cost estimation process is based upon the professional knowledge and experience of our engineers, project managers and financial professionals. Factors that are considered in estimating the work to be completed and ultimate contract recovery include the availability and productivity of labor, the nature and complexity of the work to be performed, the availability of materials, and the effect of any delays on our project performance. We periodically review our job performance, job conditions, estimated profitability and final contract settlements, including our estimate of total costs and make revisions to costs and income in the period in which the revisions are probable and reasonably estimable. Whenever revisions of estimated contract costs and contract values indicate that the contract costs will exceed estimated revenues, thus creating a loss, a provision for the total estimated loss is recorded in that period.
Variable Consideration
It is common for our long-term contracts to contain variable consideration that can either increase or decrease the transaction price. Due to the nature of our contracts, estimating total cost and revenue can be complex and subject to variability due to change orders, back charges, spare parts, early completion bonuses, customer allowances and liquidated damages. We estimate the amount of variable consideration based on the expected value method, which is the sum of probability-weighted amount, or the most likely amount method, which uses various factors including experience with similar transactions and assessment of our anticipated performance. Variable consideration is included in the transaction price if legally enforceable and to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur once the uncertainty associated with the variable consideration is resolved.
Contract Modifications
Contracts may be modified for changes in contract specifications and requirements. We consider contract modifications to exist when the modification either creates new or changes the enforceable rights and obligations under the contract. Most of our contract modifications are for goods and services that are not distinct from the existing performance obligation. Contract modifications result in a cumulative catch-up adjustment to revenue based on our measure of progress for the performance obligation.
Impairment of Long-Lived Assets
We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value may not be realizable. If an evaluation is required, the estimated future undiscounted cash flows associated with the asset are compared to the asset’s carrying amount to determine if recording an impairment of such asset is necessary. This requires us to make long-term forecasts of the future revenues and costs related to the assets subject to review. Forecasts require assumptions
25


about demand for our products and future market conditions. Estimating future cash flows requires significant judgment, and our projections may vary from cash flows eventually realized. Future events and unanticipated changes to assumptions could require a provision for impairment in a future period. The effect of any impairment would be reflected in income (loss) from operations in the Consolidated Statements of Operations. In addition, we estimate the useful lives of our long-lived assets and other intangibles and periodically review these estimates to determine whether these lives are appropriate.
Accruals for Contingent Liabilities
From time to time, contingencies such as insurance-related claims, liquidated damages and legal claims arise in the normal course of business. Pursuant to applicable accounting standards, we must evaluate such contingencies to subjectively determine the likelihood that an asset has been impaired, or a liability has been incurred at the date of the financial statements, as well as evaluate whether the amount of the loss can be reasonably estimated. If the likelihood is determined to be probable, and it can be reasonably estimated, the estimated loss is recorded. The amounts we record for contingent liabilities require judgments regarding the amount of expenses that will ultimately be incurred. We use past experience and history, as well as the specific circumstances surrounding each contingent liability, including estimated legal costs, in evaluating the amount of liability that should be recorded. Actual results could differ from our estimates.
Warranty Costs
Estimated costs of warranties are accrued based on historical warranty claim costs in relation to current revenues. In addition, specific provisions are made when product failures are projected outside historical experience. Our standard terms and conditions of sale include a warranty for parts and service for the earlier of 18 months from the date of shipment or 12 months from the date of energization, whichever occurs first. Actual results could differ from our estimates.
Occasionally projects require warranty terms that are longer than our standard terms due to the nature of the project. Extended warranty terms may be negotiated and included in our contracts. The allocated revenue associated with the extended warranty is deferred and recorded as a contract liability and recognized over the extended warranty period.
Accounting for Income Taxes
We account for income taxes under the asset and liability method, based on the income tax laws and rates in the countries in which operations are conducted, and income is earned. This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities. Developing our provision for income taxes requires significant judgment and expertise in federal, international and state income tax laws, regulations and strategies, including the determination of deferred tax assets and liabilities and, if necessary, any valuation allowances that may be required for deferred tax assets. In assessing the extent to which net deferred tax assets may be realized, we consider whether it is more likely than not that some portion or all of the net deferred tax assets may not be realized. The ultimate realization of net deferred tax assets is dependent on the generation of future taxable income during the periods in which those temporary differences become deductible. Estimates may change as new events occur, estimates of future taxable income during the carryforward period are reduced or increased, additional information becomes available, or operating environments change, which may result in a full or partial reversal of the valuation allowance. We will continue to assess the adequacy of the valuation allowance on a quarterly basis. Our judgments and tax strategies are subject to audit by various taxing authorities.
The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns. We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Accounting literature also provides guidance on derecognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, and income tax disclosures. Judgment is required in assessing the future tax consequences of events that have been recognized in our financial statements or tax returns. Variations in the actual outcome of these future tax consequences could materially impact our financial position and results of operations.
See Note I of Notes to Consolidated Financial Statements for disclosures related to the valuation allowance recorded in relation to foreign deferred taxes.
26


Foreign Currency Translation
The functional currency for our foreign operating 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. All assets and liabilities of foreign operations are translated into U.S. Dollars using year-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 loss in stockholders’ equity.


Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to certain market risks arising from transactions we have entered into in the normal course of business. These risks primarily relate to fluctuations in market conditions, commodity prices, foreign currency transactions and interest rates.
Market Risk
We are exposed to general market risk and its potential impact on accounts receivable or costs and estimated earnings in excess of billings on uncompleted contracts. The amounts recorded may be at risk if our customers’ ability to pay these obligations is negatively impacted by economic conditions. Our customers are typically in the oil and gas markets, including onshore and offshore oil and gas production, pipeline, refining and liquefied natural gas terminals, as well as petrochemical, electric utility and light traction power. Occasionally, our customer may be an engineering, procurement and construction firm (EPC) which may increase our market risk exposure based on the business climate of the EPC firm. We maintain ongoing discussions with customers regarding contract status with respect to payment status, change orders and billing terms in an effort to monitor collections of amounts billed.
Commodity Price Risk
We are subject to market risk from fluctuating market prices of certain raw materials used in our products. While such materials are typically available from numerous suppliers, commodity raw materials are subject to price fluctuations. We attempt to pass along such commodity price increases to our customers on a contract-by-contract basis to avoid a negative effect on profit margin. While we may do so in the future, we have not currently entered into any derivative contracts to hedge our exposure to commodity risk. We continue to experience price volatility with some of our key raw materials and components. Fixed-price contracts may limit our ability to pass cost increases to our customers, thus negatively impacting our earnings. Fluctuations in commodity prices may have a material impact on our future earnings and cash flows.
Foreign Currency Transaction Risk
We have operations that expose us to currency risk in the British Pound Sterling, the Canadian Dollar and to a lesser extent the Peso and the Euro, among others. Amounts invested in our foreign operations are translated into U.S. Dollars at the exchange rates in effect at the balance sheet date. The resulting translation adjustments are recorded as accumulated other comprehensive loss, a component of stockholders’ equity in our Consolidated Balance Sheets. We believe the exposure to the effects that fluctuating foreign currencies have on our consolidated results of operations is limited because the foreign operations primarily invoice customers and collect obligations in their respective currencies or U.S. Dollars. Additionally, expenses associated with these transactions are generally contracted and paid for in the same local currencies. For Fiscal 2020, our realized foreign exchange gain was less than $0.1 million and is included in selling, general and administrative expenses in the Consolidated Statements of Operations.
 
Our accumulated other comprehensive loss, which is included as a component of stockholders’ equity, was $24.5 million as of September 30, 2020, a decrease of less than $0.1 million compared to September 30, 2019. This decrease in comprehensive loss was primarily a result of fluctuations in the currency exchange rates for the Canadian Dollar and British Pound Sterling as we remeasured the foreign operations of those divisions. 
 
We do not typically hedge our exposure to potential foreign currency translation adjustments.
27


Interest Rate Risk
If we borrow under our U.S. Revolver, we will be subject to market risk resulting from changes in interest rates related to our floating rate bank credit facility. If we were to make such borrowings, a hypothetical 100 basis point increase in variable interest rates may result in a material impact to our financial statements. While we do not currently have any derivative contracts to hedge our exposure to interest rate risk, in the past we have entered and may in the future enter into such contracts. During each of the periods presented, we have not experienced a significant effect on our business due to changes in interest rates.

28


Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial StatementsPage
Financial Statements: 
29


Report of Independent Registered Public Accounting Firm



To the Board of Directors and Stockholders of Powell Industries, Inc.

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Powell Industries, Inc. and its subsidiaries (the “Company”) as of September 30, 2020 and 2019, and the related consolidated statements of operations, of comprehensive income (loss), of stockholders’ equity and of cash flows for each of the three years in the period ended September 30, 2020, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of September 30, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of September 30, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2020 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

Change in Accounting Principle

As discussed in Notes B and M to the consolidated financial statements, the Company changed the manner in which it accounts for leases in the year ended September 30, 2020.

Basis for Opinions

The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the
30


company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.



/s/ PricewaterhouseCoopers LLP

Houston, Texas
December 9, 2020

We have served as the Company’s auditor since 2004.





31


POWELL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)  
 September 30,
 20202019
ASSETS  
Current Assets:  
Cash and cash equivalents$160,216 $118,639 
Short-term investments18,705 6,042 
Accounts receivable, less allowance for doubtful accounts of $510 and $301
69,957 112,093 
Contract assets50,995 55,374 
Inventories28,968 29,202 
Income taxes receivable467 233 
Prepaid expenses4,402 4,335 
Other current assets1,948 2,650 
Total Current Assets335,658 328,568 
Property, plant and equipment, net114,372 120,812 
Operating lease assets, net5,217 — 
Goodwill and intangible assets, net1,161 1,337 
Deferred income taxes3,644 5,117 
Other assets12,226 11,577 
Total Assets$472,278 $467,411 
LIABILITIES AND STOCKHOLDERS' EQUITY  
Current Liabilities:  
Current maturities of long-term debt$400 $400 
Accounts payable35,029 51,180 
Contract liabilities79,445 71,464 
Accrued compensation and benefits21,739 20,182 
Accrued product warranty2,771 2,946 
Current operating lease liabilities2,352 — 
Income taxes payable1,861 913 
Other current liabilities9,350 10,811 
Total Current Liabilities152,947 157,896 
Long-term debt, net of current maturities400 800 
Deferred compensation (Note J)6,710 6,447 
Long-term operating lease liabilities3,434 — 
Other long-term liabilities2,161 3,115 
Total Liabilities165,652 168,258 
Commitments and Contingencies (Note H)
Stockholders' Equity:  
Preferred stock, par value $0.01; 5,000,000 shares authorized; none issued
  
Common stock, par value $0.01; 30,000,000 shares authorized; 12,422,411 and 12,372,766 shares issued, respectively
124 124 
Additional paid-in capital61,998 59,153 
Retained earnings294,016 289,422 
Treasury stock, 806,018 shares at cost
(24,999)(24,999)
Accumulated other comprehensive loss(24,513)(24,547)
Total Stockholders' Equity306,626 299,153 
Total Liabilities and Stockholders' Equity$472,278 $467,411 

The accompanying notes are an integral part of these consolidated financial statements.
32


POWELL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data) 
 Year Ended September 30,
 202020192018
Revenues$518,499 $517,180 $448,716 
Cost of goods sold423,924 430,204 383,361 
Gross profit94,575 86,976 65,355 
Selling, general and administrative expenses67,662 69,950 66,768 
Research and development expenses6,265 6,327 6,717 
Amortization of intangible assets177 177 205 
Insurance proceeds (950) 
Restructuring and other, net1,400 11 787 
Operating income (loss)19,071 11,461 (9,122)
Other income(506) (747)
Interest expense228 230 207 
Interest income(981)(1,103)(883)
Income (loss) before income taxes20,330 12,334 (7,699)
Income tax provision (benefit)3,670 2,444 (547)
Net income (loss)$16,660 $9,890 $(7,152)
Earnings (loss) per share:   
Basic$1.43 $0.85 $(0.62)
Diluted $1.42 $0.85 $(0.62)
Weighted average shares:   
Basic11,624 11,571 11,507 
Diluted11,693 11,634 11,507 
Dividends per share$1.04 $1.04 $1.04 
 
The accompanying notes are an integral part of these consolidated financial statements.
33


POWELL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
 Year Ended September 30,
 202020192018
Net income (loss)$16,660 $9,890 $(7,152)
Foreign currency translation adjustments60 (2,743)(3,100)
Postretirement benefit adjustment, net of tax(26)(25)75 
Comprehensive income (loss)$16,694 $7,122 $(10,177)
 
 The accompanying notes are an integral part of these consolidated financial statements.
34


POWELL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)  
 Common StockAdditional
Paid-in
Capital
Retained
Earnings
Treasury StockAccumulated
Other
Comprehensive
Income/(Loss)
 
 SharesAmountSharesAmountTotal
Balance, September 30, 201712,234 $122 $54,329 $310,598 (806)$(24,999)$(18,754)$321,296 
Net loss— — — (7,152)— — — (7,152)
Foreign currency translation adjustments— — — — — — (3,100)(3,100)
Stock-based compensation32 — 3,152 — — — — 3,152 
Shares withheld in lieu of employee tax withholding— — (712)— — — — (712)
Issuance of restricted stock15 1 — — — — — 1 
Dividends paid— — — (11,916)— — — (11,916)
Postretirement benefit adjustment, net of tax of $20
— — — — — — 75 75 
Balance, September 30, 201812,281 $123 $56,769 $291,530 (806)$(24,999)$(21,779)$301,644 
Net income— — — 9,890 — — — 9,890 
Foreign currency translation adjustments— — — — — — (2,743)(2,743)
Stock-based compensation78 1 3,838 — — — — 3,839 
Shares withheld in lieu of employee tax withholding— — (1,454)— — — — (1,454)
Issuance of restricted stock14 — — — — — —  
Dividends paid— — — (11,998)— — — (11,998)
Postretirement benefit adjustment, net of tax of $7
— — — — — — (25)(25)
Balance, September 30, 201912,373 $124 $59,153 $289,422 (806)$(24,999)$(24,547)$299,153 
Net income— — — 16,660 — — — 16,660 
Foreign currency translation adjustments— — — — — — 60 60 
Stock-based compensation33 — 3,474 — — — — 3,474 
Shares withheld in lieu of employee tax withholding— — (629)— — — — (629)
Issuance of restricted stock16 — — — — — —  
Dividends paid— — — (12,066)— — — (12,066)
Postretirement benefit adjustment, net of tax of $7
— — — — — — (26)(26)
Balance, September 30, 202012,422 $124 $61,998 $294,016 (806)$(24,999)$(24,513)$306,626 
 
The accompanying notes are an integral part of these consolidated financial statements.

35


POWELL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended September 30,
 202020192018
Operating Activities:   
Net income (loss)$16,660 $9,890 $(7,152)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:   
Depreciation and amortization10,538 12,032 12,903 
Stock-based compensation3,474 3,839 3,152 
Bad debt expense258 233 111 
Deferred income taxes1,473 820 (2,170)
Gain on amended supply agreement  (507)
Gain on cash surrender value of life insurance(506) (240)
Changes in operating assets and liabilities:   
Accounts receivable, net41,969 (20,193)(37,176)
Contract assets and liabilities, net12,546 55,333 (14,117)
Inventories304 (7,989)(3,023)
Income taxes720 6,681 996 
Prepaid expenses and other current assets662 (2,626)(237)
Accounts payable(15,309)9,550 8,152 
Accrued liabilities465 1,419 8,859 
Other, net(860)(230)1,906 
Net cash provided by (used in) operating activities72,394 68,759 (28,543)
Investing Activities:   
Purchases of short-term investments(18,553)(5,869)(22,261)
Maturities of short-term investments6,146 13,088 35,248 
Purchases of property, plant and equipment, net(5,130)(4,255)(4,415)
Proceeds from life insurance policy   1,861 
Net cash provided by (used in) investing activities(17,537)2,964 10,433 
Financing Activities:   
Payments on industrial development revenue bonds(400)(400)(400)
Shares withheld in lieu of employee tax withholding(629)(1,454)(712)
Dividends paid(12,066)(11,998)(11,916)
Net cash used in financing activities(13,095)(13,852)(13,028)
Net increase (decrease) in cash, cash equivalents and restricted cash41,762 57,871 (31,138)
Effect of exchange rate changes on cash, cash equivalents and restricted cash(185)(957)(347)
Cash, cash equivalents and restricted cash at beginning of period118,639 61,725 93,210 
Cash, cash equivalents and restricted cash at end of period$160,216 $118,639 $61,725 

The accompanying notes are an integral part of these consolidated financial statements.
36


POWELL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A. Business and Organization
Powell Industries, Inc. (we, us, our, Powell or the Company) was incorporated in the state of Delaware in 2004 as a successor to a Nevada company incorporated in 1968. The Nevada company was the successor to a company founded by William E. Powell in 1947, which merged into the Company in 1977. Our major subsidiaries, all of which are wholly owned, include: Powell Electrical Systems, Inc.; Powell (UK) Limited; Powell Canada Inc.; and Powell Industries International, B.V.
We develop, design, manufacture and service custom-engineered equipment and systems which (1) distribute, control and monitor the flow of electrical energy and (2) provide protection to motors, transformers and other electrically powered equipment. Our principal products include integrated power control room substations (PCRs®), custom-engineered modules, electrical houses (E-Houses), traditional and arc-resistant distribution switchgear and control gear, medium-voltage circuit breakers, monitoring and control communications systems, motor control centers, switches and bus duct systems. These products are designed for application voltages ranging from 480 volts to 38,000 volts and are used in oil and gas refining, onshore and offshore oil and gas production, petrochemical, liquefied natural gas (LNG) terminals, pipeline, terminal, mining and metals, light rail traction power, electric utility, pulp and paper and other heavy industrial markets. Our product scope includes designs tested to meet both U.S. and international standards, under both the American National Standards Institute (ANSI) and International Electrotechnical Commission. We assist customers by providing value-added services such as spare parts, field service inspection, installation, commissioning, modification and repair, retrofit and retrofill components for existing systems and replacement circuit breakers for switchgear that is obsolete or that is no longer produced by the original manufacturer. We seek to establish long-term relationships with the end users of our systems as well as the design and construction engineering firms contracted by those end users. We believe that our culture of safety and focus on customer satisfaction, along with our financial strength, allow us to continue to capitalize on opportunities in the industries we serve.
References to Fiscal 2020, Fiscal 2019 and Fiscal 2018 used throughout these Notes to Consolidated Financial Statements relate to our fiscal years ended September 30, 2020, 2019 and 2018, respectively.

Impact of the COVID-19 Pandemic and Oil and Gas Commodity Market Volatility on Powell

The spread of COVID-19 has created significant uncertainty and economic disruption across the world during the second half of Fiscal 2020 and continuing into Fiscal 2021. This pandemic has negatively impacted energy demand, which in turn has resulted in considerable volatility across the oil and gas commodity markets. As a result, some of our industrial customers are deferring or suspending their planned capital expenditures. Certain of our customers have asked that we delay our manufacturing on their projects as their operations have been negatively impacted by this pandemic and the reduced oil and gas demand. We continue to work with and review the contracts with our key suppliers who have been impacted by this pandemic to ensure that we are able to meet our customer commitments.

From an operational standpoint, although our facilities are located in areas that have been or continue to be subject to stay-at-home orders, we have not closed any of our facilities for an extended amount of time and have continued to operate as an "essential business" under these orders across all of our locations. We continue to take the necessary steps to ensure the safety of our employees, customers and vendors. These steps include, among others, promoting increased social distancing practices and enhanced cleaning efforts in our offices and facilities. We are also using technology across our operations to further enhance social distancing and improve safety. These increased safety precautions may have an adverse impact on our efficiency and productivity going forward.

As a result of the circumstances noted above, we anticipate that a decrease in commercial activity will negatively impact our business, results of operations and cash flows going forward. We have and may need to continue to adjust our workforce and labor costs to correspond to the reduced customer demand. We will take prudent measures to maintain our strong liquidity and cash position, which may include reducing our capital expenditures and research and development costs, as well as reducing or eliminating future dividend payments. However, the extent to which the COVID-19 pandemic specifically will impact our business will depend on numerous factors that are hard to predict, some of which include: the duration, spread and severity of the pandemic; governmental actions in response to the pandemic, including travel restrictions and quarantine or related governmental orders; any closures of our offices and facilities or those of our suppliers as a result of the pandemic, and how quickly and to what extent normal economic and operating conditions can resume. Therefore, the magnitude of the impact on our business, results of operations and cash flows is not currently known.

37


B. Summary of Significant Accounting Policies
 
Principles of Consolidation
The consolidated financial statements include the accounts of Powell and our wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States (U.S. GAAP) requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying footnotes. The most significant estimates used in our financial statements affect revenue recognition and estimated cost recognition on our customer contracts, the allowance for doubtful accounts, provision for excess and obsolete inventory, warranty accruals and income taxes. The amounts recorded for warranties, legal, income taxes, impairment of long-lived assets (when applicable) 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. Additionally, the recognition of deferred tax assets requires estimates related to future income and other assumptions regarding timing and future profitability because the ultimate realization of net deferred tax assets is dependent on the generation of future taxable income during periods in which temporary differences become deductible. Estimates routinely change as new events occur, additional information becomes available or operating environments change. Actual results may differ from our prior estimates.
Cash and Investments
Cash and cash equivalents
Cash and cash equivalents, primarily funds held in money market savings instruments, are reported at their current carrying value, which approximates fair value due to the short-term nature of these instruments, and are included in cash and cash equivalents in our Consolidated Balance Sheets.
Short-term Investments - Short-term investments include time deposits with original maturities of three months or more.
Supplemental Disclosures of Cash Flow Information (in thousands): 
 Year Ended September 30,
 202020192018
Cash paid (received) during the period for:  
Interest received, net of interest expense$(753)$(873)$(676)
Income taxes paid (received), net of refunds1,770 (5,219)354 
Non-cash capital expenditures264 1,248 129 
Fair Value of Financial Instruments
Financial instruments include cash, cash equivalents, short-term investments, restricted cash, receivables, deferred compensation, payables and debt obligations. Except as described below, due to the short-term nature of account receivables and account payables, the book value is representative of their fair value. The carrying value of debt approximates fair value as interest rates are indexed to the Federal Funds Rate or the bank’s prime rate.
Accounts Receivable
Accounts receivable are stated net of allowances for doubtful accounts. We maintain and continually assess the adequacy of the allowance for doubtful accounts representing our estimate for losses resulting from the inability of our customers to pay amounts due to us. This estimated allowance is based on historical experience of uncollected accounts, the level of past due accounts, the overall level of outstanding accounts receivable, information about specific customers with respect to their inability to make payments and expectations of future conditions that could impact the collectability of accounts receivable. Future changes in our customers’ operating performance and cash flows, or in general economic conditions, could have an impact on their ability to fully pay these amounts, which could have a material impact on our operating results. In most cases,
38


receivables are not collateralized. However, we utilize letters of credit to secure payment on projects when possible. As of September 30, 2020 and 2019, accounts receivable included retention amounts of $6.9 million and $5.6 million, respectively. Retention amounts are in accordance with applicable provisions of contracts and become due upon completion of contractual requirements. Of the retained amount at September 30, 2020, $5.9 million is expected to be collected in the next twelve months and is recorded in accounts receivable. The remaining $1.0 million is recorded in other assets and is expected to be collected in Fiscal 2022.
Contract Balances

The timing of revenue recognition, billings and cash collections affects accounts receivable, contract assets and contract liabilities in our Consolidated Balance Sheets.
Contract assets are recorded when revenues are recognized in excess of amounts billed for fixed-price contracts as determined by the billing milestone schedule. Contract assets are transferred to accounts receivable when billing milestones have been met, or we have an unconditional right to payment.
Contract liabilities typically represent advance payments from contractual billing milestones and billings in excess of revenue recognized. It is unusual to have advanced milestone payments with a term greater than one year, which could represent a financing component on the contract.
Our contract assets and liabilities are reported in a net position on a contract-by-contract basis at the end of each reporting period and are generally classified as current.
Inventories
Inventories are stated at the lower of cost or net realizable value using weighted-average methods and include the cost of materials, labor and manufacturing overhead. We use estimates in determining the level of reserves required to state inventory at the lower of cost or net realizable value. Our estimates are based on market activity levels, production requirements, the physical condition of products and technological innovation. Changes in any of these factors may result in adjustments to the carrying value of inventory.
Property, Plant and Equipment
Property, plant and equipment are stated at cost and are depreciated using the straight-line method over the estimated useful lives of the assets. Expenditures for repairs and maintenance are charged to expense when incurred. Expenditures for major renewals and improvements, which extend the useful lives of existing equipment, are capitalized and depreciated. Upon retirement or disposition of property, plant and equipment, the cost and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is recognized in the Consolidated Statements of Operations.
 
We review property, plant and equipment for impairment whenever events or changes in circumstances indicate that the carrying value may not be realizable. If an evaluation is required, the estimated future undiscounted cash flows associated with the asset are compared to the asset’s carrying amount to determine if recording an impairment of such asset is necessary. If an impairment is indicated, we record an impairment loss equal to the difference between the carrying value and the fair value of the long-lived asset. This requires us to make long-term forecasts of the future revenues and the costs related to the assets subject to review. Forecasts require assumptions about demand for our products and future market conditions. Estimating future cash flows requires significant judgment, and our projections may vary from cash flows eventually realized. Future events and unanticipated changes to assumptions could require a provision for impairment in a future period. The effect of any impairment would be reflected in income (loss) from operations in the Consolidated Statements of Operations. In addition, we estimate the useful lives of our property, plant and equipment and periodically review these estimates to determine whether these lives are appropriate.
Income Taxes
We account for income taxes under the asset and liability method, based on the income tax laws and rates in the countries in which operations are conducted, and income is earned. This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities. Developing our provision for income taxes requires significant judgment and expertise in federal, international and state income tax laws, regulations and strategies, including the determination of deferred tax assets and liabilities and, if necessary, any valuation allowances that may be required for deferred tax assets. In assessing the extent to
39


which net deferred tax assets may be realized, we consider whether it is more likely than not that some portion or all of the net deferred tax assets may not be realized. The ultimate realization of net deferred tax assets is dependent on the generation of future taxable income during the periods in which those temporary differences become deductible. Estimates may change as new events occur, estimates of future taxable income during the carryforward period are reduced or increased, additional information becomes available or operating environments change, which may result in a full or partial reversal of the valuation allowance. We will continue to assess the adequacy of the valuation allowance on a quarterly basis. Our judgments and tax strategies are subject to audit by various taxing authorities.
The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns. We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Accounting literature also provides guidance on derecognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, and income tax disclosures. Judgment is required in assessing the future tax consequences of events that have been recognized in our financial statements or tax returns. Variations in the actual outcome of these future tax consequences could materially impact our financial statements.
Revenue Recognition
Our revenues are primarily generated from the manufacturing of custom-engineered products and systems under long-term fixed-price contracts that may last from one month to several years, depending on the contract. Revenue from these contracts is generally recognized over time utilizing the cost-to-cost method to measure the extent of progress toward the completion of the performance obligation and the recognition of revenue over time. We believe that this method is the most accurate representation of our performance because it directly measures the value of the services transferred to the customer over time as we incur costs on our contracts. Contract costs include all direct materials, labor and indirect costs related to contract performance, which may include indirect labor, supplies, tools, repairs and depreciation costs.
We enter into contracts to provide value-added services such as field service inspection, installation, commissioning, modification and repair, as well as retrofit and retrofill components for existing systems. As a practical expedient, if the service contract terms give us the right to invoice the customer for an amount that corresponds directly with the value of our performance completed to date (i.e., a service contract in which we bill a fixed amount for each hour of service provided), then we recognize revenue over time in each reporting period corresponding to the amount with which we have the right to invoice. Our performance obligations are satisfied as the work progresses.
We also have sales orders for spare parts and replacement circuit breakers for switchgear that are obsolete or that are no longer produced by the original manufacturer. Revenues from these sales orders are recognized at a point in time when we fulfill our performance obligation to the customer, which is typically upon shipment.
Additionally, some contracts may contain a cancellation clause that could limit the amount of revenue we are able to recognize over time. In these instances, revenue and costs associated with these contracts are deferred and recognized at a point in time when the performance obligation is fulfilled.
Selling and administrative costs incurred in relation to obtaining a contract are typically expensed as incurred. We periodically utilize a third-party sales agent to obtain a contract and will pay a commission to that agent. We record the full commission liability to the third-party sales agent at the order date, with a corresponding deferred asset. As the project progresses, we record commission expense based on percentage of completion rates that correlate to the project and reduce the deferred asset. Once we have been paid by the customer, we pay the commission, and the deferred liability is reduced.
Warranty Costs
Estimated costs of warranties are accrued based on historical warranty claim costs in relation to current revenues. In addition, specific provisions are made when product failures are projected outside historical experience. Our standard terms and conditions of sale include a warranty for parts and service for the earlier of 18 months from the date of shipment or 12 months from the date of energization, whichever occurs first. Actual results could differ from our estimate.
Occasionally projects require warranty terms that are longer than our standard terms due to the nature of the project. Extended warranty terms may be negotiated and included in our contracts. The allocated revenue associated with the extended warranty is deferred and recorded as a contract liability and recognized over the extended warranty period.
40


Research and Development Expense
Research and development activities are directed toward the development of new products and processes as well as improvements in existing products and processes. These costs, which primarily include salaries, contract services and supplies, are expensed as incurred. Such amounts were $6.3 million, $6.3 million and $6.7 million in Fiscal 2020, 2019 and 2018, respectively.
Foreign Currency Translation
The 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. All assets and liabilities of foreign operations are translated into U.S. Dollars using year-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 loss in stockholders’ equity.
Stock-Based Compensation
We measure stock-based compensation cost at the grant date based on the fair value of the award. Compensation expense is recognized over the period during which the recipient is required to provide service in exchange for the awards, typically the vesting period. Excess income tax benefits related to share-based compensation expense are recognized as income tax expense or benefit in the Consolidated Statement of Operations. Cash paid when directly withholding shares on an employee's behalf for tax withholding purposes is classified as a financing activity. We account for forfeitures as they occur, rather than estimate expected forfeitures.
New Accounting Standards
In February 2016, the Financial Accounting Standards Board (FASB) issued a new topic on leases that requires lessees to recognize lease assets and lease liabilities on the balance sheet for all leases with terms longer than twelve months. Leases are classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. Effective October 1, 2019, we adopted the new lease accounting standard and recorded operating lease assets and operating lease liabilities of approximately $7.0 million and determined that no adjustment to retained earnings was necessary. Financial results for reporting periods after October 1, 2019 are reported under the new standard; however financial results for prior periods were not adjusted and will continue to be presented in accordance with the previous standard. Upon adoption, we elected a package of practical expedients which, among other things, allowed for the historical classification of our existing leases to carry forward. Additionally, we elected to separate non-lease components for our real estate and IT infrastructure asset classes. All other asset classes account for both lease and non-lease components in the operating lease asset and operating lease liability calculations. See Note M for further discussion of leases.

In June 2016, the FASB issued a new topic on measurement of credit losses. The topic introduces an impairment model known as the current expected credit loss (CECL) model that is based on an expected loss methodology rather than an incurred loss methodology for financial instruments. Under the new topic, an entity recognizes as an allowance its estimate of expected credit losses with the intention of improving financial reporting by requiring timelier recognition of such losses. Enhanced disclosure of information regarding how a company developed its allowance, including changes in the factors that influenced management's estimate of expected credit losses and the reasons for those changes, will be required upon adoption. We are still evaluating the impact this new topic will have on our consolidated financial statements which will be adopted in Fiscal 2021.

In November 2016, the FASB issued a new topic on the statement of cash flows that changes the presentation of restricted cash and cash equivalents on the statement of cash flows. Restricted cash and restricted cash equivalents will be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. We adopted this topic in Fiscal 2019, and our Consolidated Cash Flow Statements for all periods reflect this presentation.

C. Earnings Per Share
We compute basic earnings per share by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings per common and potential common share includes the weighted average of additional shares associated with the incremental effect of dilutive restricted stock and restricted stock units, as prescribed by the FASB guidance on earnings per share.
41


The following table reconciles basic and diluted weighted average shares used in the computation of earnings per share (in thousands, except per share data):  
 Year Ended September 30,
 202020192018
Numerator:   
Net income (loss) $16,660 $9,890 $(7,152)
Denominator:   
Weighted average basic shares11,624 11,571 11,507 
Dilutive effect of restricted stock units69 63  
Weighted average diluted shares with assumed conversions11,693 11,634 11,507 
Earnings (loss) per share:   
Basic$1.43 $0.85 $(0.62)
Diluted$1.42 $0.85 $(0.62)

For the year ended September 30, 2018, we incurred a net loss; therefore, all potential common shares were deemed to be anti-dilutive.


D. Detail of Selected Balance Sheet Accounts
Allowance for Doubtful Accounts
Activity in our allowance for doubtful accounts consisted of the following (in thousands): 
 September 30,
 20202019
Balance at beginning of period$301 $157 
Bad debt expense258 233 
Uncollectible accounts written off, net of recoveries(32)(81)
Change due to foreign currency translation(17)(8)
Balance at end of period$510 $301 
Inventories
The components of inventories are summarized below (in thousands): 
 September 30,
 20202019
Raw materials, parts and subassemblies$31,202 $31,781 
Work-in-progress1,539 1,100 
Provision for excess and obsolete inventory(3,773)(3,679)
Total inventories$28,968 $29,202 
42


Property, Plant and Equipment
Property, plant and equipment are summarized below (in thousands): 
 September 30,Range of
 20202019Asset Lives
Land$22,008 $21,963 
Buildings and improvements122,529 122,404 
3 - 39 Years
Machinery and equipment108,439 106,137 
3 - 15 Years
Furniture and fixtures3,611 3,611