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2 0 1 8 A N N U A L R E P O R T
DETERMINATION
ON DISPLAY
Among many things, this past year has
been a testament to how our company
has demonstrated its unstoppable
commitment to establishing value for
our customers and investors. And our
momentum continues.
DELIVERING
IN A CHALLENGING
ENVIRONMENT
PRIMED TO SUCCEED
Dear Stockholders,
Not a day goes by
that I don’t truly
appreciate the
enduring commitment
of our people. That
commitment has
earned the trust of our
customers and the
growth of our valued
relationships. In the second quarter of 2018, we
began to see the encouraging signs of a resurging
market after years that tested the entire industry.
High waters and tall orders
While our facilities fared well through Hurricane
Harvey, many of our employees and Gulf Coast
customers were hit hard. Amidst the devastation,
I saw inspiring examples of human spirit—of the
can-do attitude that has long served as one of
Powell’s guiding values. In the face of natural
disaster, we truly shined.
Employees at every location stepped up to help
our customers deal with massive outages and
get their facilities back online. Our company was
able to coordinate thousands of engineering
drawings and synchronize processes among
many facilities—delivering finished equipment to
our customers in record time.
Our customers took note. They came to our
facilities to shake hands with the employees
who demonstrated the teamwork and talent
necessary to prevail. We’ve shown the world
exactly what we’re made of.
A unified Powell
Powell has carved out a unique position in
the industry; providing comprehensive,
custom-engineered solutions encompassing
the design, fabrication, assembly, and delivery
of integrated substations.
Anyone can sell individual components. At Powell,
we excel in the design, manufacturing, and
integration of these systems. And now, thanks to
the process standardization we’ve implemented—
and tested—across our system, we’re ready to
ascend to a higher level of achievement.
New regulations, new technologies,
new opportunities
Today, I can confidently say that Powell is
prepared to go global. We have the power to
leverage our strengths and seamlessly combine
our resources to approach customers worldwide.
Whether they want to build a substation from
the ground up or expand upon an existing
installation, we can meet their unique needs with
an engineered-to-order solution.
WE HAVE THE POWER TO
LEVERAGE OUR STRENGTHS
AND SEAMLESSLY COMBINE
OUR RESOURCES TO APPROACH
CUSTOMERS WORLDWIDE.
We’re here to guide our customers through
the complexity of evolving regulations, which
vary not only between states but countries. At
Powell, we’ve made it our business to stay on
top of governmental regulations so that we can
provide our customers with safe, responsible
solutions as well as comprehensive guidance.
Innovation
To help our customers more effectively
and efficiently manage their assets, we are
strategically enhancing our electrical automation
capabilities. Intelligent technologies are making
significant inroads industry-wide, and we are
also strengthening our focus on R&D.
We’re looking hard not only at improving internal
operations, but at the external processes that
affect those operations. Our goal is to recognize
our customers’ needs and provide them with
innovative and affordable solutions, supporting
them as they shift from a reactive to a predicative
maintenance approach in their operations.
These are the things we plan to do. And we’ve
never been better positioned to do them. Powell
is determined to be ahead of the curve, playing a
pivotal role as we move forward.
A renewed momentum for today—
and tomorrow
Moving into the future, the industry is facing
challenges that will demand both change and
insight. If the last few years have proven anything,
it is that Powell is uniquely prepared with the
confidence, the capability, and the determination
to help our customers move forward.
Brett A. Cope
President & CEO
YEAR IN REVIEW
(QUARTERLY)
(In millions)
150
150
350
2
Third
Fourth
Second
First
Second
Third
Fourth
First
Second
Third
Fourth
First
First
Second
Third
Fourth
New Orders
Revenues
Net Income (Loss)
Backlog
CONSOLIDATED
FINANCIAL HIGHLIGHTS
(In millions)
800
800
600
30
2014
2015
2016
2017
2018
2014
2015
2016
2017
2018
2014
2015
2016
2018
2017
2014
2015
2016
2017
2018
New Orders
Revenues
Net Income (Loss)
Backlog
Year Ended September 30,
2014
2015
2016
2017
2018
(In thousands, except per share data)
Consolidated Statement of Operations Data
Revenues
Gross Profit
Income (Loss) From Continuing Operations
Net Income (Loss)
$ 647,814
125,474
19,620
29,224
$ 661,858
108,261
9,439
9,439
$ 565,243
106,205
15,510
15,510
$ 395,911
$ 448,716
50,769
(9,486 )
(9,486 )
65,355
(7,152 )
(7,152 )
Per Share Data
Continuing Operations Earnings (Loss)
Discontinued Operations Earnings
Diluted Earnings (Loss)
Consolidated Balance Sheet Data
Working Capital
Total Assets
Long-Term Debt
Total Stockholders’ Equity
1.63
0.80
2.43
199,228
541,443
3,200
371,097
0.80
—
0.80
172,147
468,824
2,800
333,262
1.36
—
1.36
(0.83 )
—
(0.83 )
(0.62 )
—
(0.62 )
185,892
462,516
2,400
335,317
164,492
414,986
2,000
321,296
158,813
429,951
1,600
301,644
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
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2018
OR
☒
☐
For the transition period from to
Commission File Number 001-12488
Powell Industries, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
8550 Mosley Road
Houston, Texas
(Address of principal executive offices)
88-0106100
(I.R.S. Employer
Identification No.)
77075-1180
(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 class: Name of each exchange on which registered:
Common Stock, par value $.01 per share NASDAQ 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§232.405 of this chapter) is not contained
herein and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 is a shell company (as defined in Exchange Act Rule 12b-2). ☐ Yes ☒ No
The aggregate market value of the common stock held by non-affiliates of the registrant was approximately $308 million as of March 31, 2018,
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 are considered to be “affiliates.”
At December 7, 2018, there were 11,501,848 outstanding shares of the registrant’s common stock, par value $0.01 per share.
Portions of the registrant’s definitive proxy statement for the 2019 annual meeting of stockholders to be filed not later than 120 days after
September 30, 2018, are incorporated by reference into Part III of this Form 10-K.
Documents Incorporated By Reference
POWELL INDUSTRIES, INC.
TABLE OF CONTENTS
Cautionary Statement Regarding Forward-Looking Statements; Risk Factors
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
PART I
PART II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures about Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
PART III
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Exhibits, Financial Statement Schedules
Form 10-K Summary
PART IV
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
Page
3
4
6
12
12
12
12
13
14
15
22
24
50
50
50
51
51
51
51
51
52
54
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
Item 1. Business
Overview
PART I
Powell Industries, Inc. 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. 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 this Annual Report on Form
10-K and other reports, 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.
We develop, design, manufacture and service custom-engineered products 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 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,
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 and International Electrotechnical Commission. We assist customers by providing value-added products and
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 engineering,
procurement and construction (EPC) firms contracted by those end users.
References to Fiscal 2018, Fiscal 2017 and Fiscal 2016 used throughout this Annual Report relate to our fiscal years ended
September 30, 2018, 2017 and 2016, respectively.
Customers and Markets
Our principal customers are sophisticated users of large amounts of electrical energy that typically require a complex combination of
electrical components and systems. These customers' industries include oil and gas refining, onshore and offshore oil and gas
production, petrochemical, pipeline, terminal, mining and metals, light rail traction power, electric utility, pulp and paper and other
heavy industrial markets.
Products and services are principally sold directly to the end user or to an 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, governmental agencies, 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.
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 which
would be material to that facility. No customer accounted for more than 10% of our consolidated revenues in Fiscal 2018, Fiscal
2017 or Fiscal 2016.
4
Competition
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. 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.
We believe our products and services, integration capabilities, technical and project management strengths, application engineering
expertise and specialty contracting experience, together with our responsiveness and flexibility to the needs of our customers and
our financial strength, 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 resources. 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 the dollar amount of revenue that we expect to realize from work to be performed on uncompleted contracts,
including approved change orders as well as new contractual agreements on which work has not begun. Our methodology for
determining backlog may not be comparable to the methodology used by other companies. Orders included in our backlog are
represented by customer purchase orders and contracts, which we believe to be firm. Our backlog at September 30, 2018 totaled
$260.9 million compared to $250.1 million at September 30, 2017. Backlog improved primarily due to increased demand from
municipal and transit projects. We anticipate that approximately $249 million of Fiscal 2018 ending backlog will be fulfilled during
our fiscal year ending September 30, 2019. Backlog may not be indicative of future operating results as orders in our backlog may
be cancelled or modified by our customers.
Raw Materials and Suppliers
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 2018, Fiscal 2017 and Fiscal 2016. Unanticipated changes in material requirements,
disruptions in supplies or price increases could impact production costs and affect our consolidated results of operations.
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. While we have not experienced
significant or unusual issues in the purchase of key raw materials or components in the past three fiscal years, we continue to
monitor tariff regulations and their 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 2018, 2017 or 2016.
Employees
At September 30, 2018, we had 1,985 full-time 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.
5
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.
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 actually occur, our business, financial condition, cash flows, liquidity and results of operations
could 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.
Our business is largely dependent on customers in the oil and gas markets and we are adversely impacted by extended periods of
low oil or gas prices, which decrease our customers’ spending, the demand for our products and services and the prices we are
able to charge. This has had, and may continue to have, an adverse effect on our future operating results.
Oil and gas prices, after improving somewhat, are still down from 2014 levels and are expected to remain volatile. This decline in
oil and gas prices since 2014 has had a negative effect on our markets and led to the reduction of projects available and thus reduced
our revenue and our backlog of projects. Unfavorable commodity prices have caused oil and gas companies to change their
strategies, reduce project spending and delay and/or cancel projects. The price for oil and gas can be influenced by many factors,
including global economic growth, inventory levels and supply and demand for these commodities. These factors could cause oil
and gas prices to remain depressed or decrease further, which could result in a continued decrease in customer projects that could
adversely impact our operations. Continued periods of reduced oil and gas prices will negatively impact our business and results of
operations and could result in impairment losses on our long-lived assets.
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 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 credit facility on favorable terms or at all. These disruptions could
lead to reduced demand for our products and services and could adversely impact our business and results of operations.
Our backlog is subject to unexpected adjustments and cancellations and, therefore, may not be a reliable indicator of our future
earnings.
We have a backlog of uncompleted contracts. Backlog represents the dollar amount of revenue that we expect to realize 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 or modified and while we may be reimbursed for certain costs, we may not have a contractual right to the total
revenue reflected in our backlog. In addition to our being unable to recover certain direct costs, 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 earnings.
The use of percentage-of-completion accounting on 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 on the percentage-of-completion method of accounting. Under the percentage-of-
completion method of accounting, 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 or total
6
labor dollars incurred to date compared to the total estimated costs or total labor dollars estimated at completion. The method used to
determine the percentage of completion is typically the cost method, unless the labor method is a more accurate method of
measuring the progress of the project. Application of the percentage-of-completion method of accounting 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. 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 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.
The majority of our contracts contain performance obligations that may subject us to penalties or additional liabilities.
Most 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 2018. 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.
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 than we are able to provide. 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.
Our operations could be adversely impacted by the effects of government regulations.
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
7
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 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 tax rate could
have a material impact on our net income or loss and cash flow.
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 with customers located outside of the U.S., including sales from our operations in the U.K. and Canada, accounted for
approximately 25% of our consolidated revenues in Fiscal 2018. 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 and the United Kingdom's referendum to
withdraw from the European Union. 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.
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.
Our business requires skilled 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 significant 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
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
8
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 which 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 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.
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.
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, 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.
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 and other unauthorized access.
These security breaches could 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.
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
9
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.
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.
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.
Catastrophic events could disrupt our business.
The occurrence of catastrophic events, ranging from natural disasters to health epidemics, to acts of war and terrorism, 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 which 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.
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.
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.
10
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.
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.
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. 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 and our inability to borrow under our credit
agreement could adversely impact our business.
Our credit agreement contains various financial covenants and restrictions, which are described in Note F of the Notes to
Consolidated Financial Statements. Until we meet certain financial ratios in future quarters, we continue to be unable to borrow
against this credit agreement and we must provide cash collateral to secure our outstanding letters of credit. Our ability to remain in
compliance with such financial covenants and restrictions may be 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 future financing or result in acceleration of outstanding amounts under the credit
agreement or a termination of the agreement. Our inability to borrow under our credit agreement could have an adverse impact on
our liquidity, operations, capital expenditures or strategic decisions.
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.
11
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, 2018, are as follows:
Location
Houston, TX
Houston, TX
Houston, TX
North Canton, OH
Northlake, IL
Bradford, U.K.
Acheson, Alberta, Canada
Item 3. Legal Proceedings
Description
Acres
Corporate office and manufacturing facility
Office and manufacturing facility
Office, fabrication facility and yard
Office and manufacturing facility
Office and manufacturing facility
Office and manufacturing facility
Office and manufacturing facility
21.4
53.4
63.3
8.0
10.0
7.9
20.1
Approximate
Square Footage
428,515
290,554
82,320
115,200
103,500
129,200
330,168
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. These
legal proceedings and claims may not be fully covered by our insurance policies or may exceed our policy limits. Although we can
give no assurances about the outcome of pending legal proceedings, claims and other disputes, we do not believe that the ultimate
conclusion of these disputes could materially affect our results of operations, cash flow and financial position.
Item 4. Mine Safety Disclosures
Not applicable.
12
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, 2018, the closing price of our common stock on the NASDAQ was $27.60 per share. As of December 7, 2018,
there were 281 stockholders of record of our common stock. All common stock held in street names are 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.
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 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, 2013 to September 30, 2018, the cumulative stockholder return on
our common stock with the cumulative total return on 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.; Electro
Scientific Industries, Inc.; EnerSys; Franklin Electric Co, Inc.; Littelfuse Inc.; LSI Industries Inc.; Preformed Line Products; A O
Smith Corporation and Woodward, Inc.). The comparison assumes that $100 was invested on October 1, 2013, in our common
stock, 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.
13
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,
2018
2017
2016
2015
2014
(In thousands, except per share data)
Statement of Operations:
Revenues ...................................................................................... $ 448,716 $ 395,911 $ 565,243 $ 661,858 $ 647,814
522,340
Cost of goods sold ........................................................................ 383,361
125,474
65,355
Gross profit ..................................................................................
87,756
66,768
Selling, general and administrative expenses ...............................
7,608
6,717
Research and development expenses ...........................................
779
205
Amortization of intangible assets .................................................
—
787
Restructuring and separation expenses.........................................
29,331
(9,122 )
(1,522 )
(747 )
165
(676 )
30,688
11,068
19,620
9,604
9,439 $ 29,224
Operating income (loss) ...............................................................
Other income ................................................................................
Interest (income) expense (net) ....................................................
553,597
108,261
76,801
6,980
435
3,397
20,648
(2,402 )
59
22,991
13,552
9,439
—
459,038
106,205
74,924
6,731
352
8,441
15,757
(2,029 )
(7 )
17,793
2,283
15,510
—
Income (loss) from continuing operations ....................................
Income from discontinued operations, net of tax (2) ...................
Income (loss) from continuing operations before income taxes ...
Income tax provision (benefit) (1) ...............................................
345,142
50,769
61,524
6,906
355
1,322
(19,338 )
(2,029 )
(390 )
Net income (loss) ......................................................................... $
(7,152 )
—
(7,152 ) $
(9,486 ) $ 15,510 $
(16,919 )
(7,433 )
(7,699 )
(547 )
(9,486 )
—
Earnings (Loss) per share:
Continuing operations .................................................................
Discontinued operations .............................................................. —
Basic earnings (loss) per share ....................................................
$
$
(0.62 ) $
(0.62 ) $
(0.83 ) $
—
(0.83 ) $
1.36 $
—
1.36 $
0.80 $
—
0.80 $
1.63
0.80
2.43
Continuing operations .................................................................
Discontinued operations .............................................................. —
Diluted earnings (loss) per share .................................................
1.62
0.80
2.42
(1) For an explanation of the effective tax rate for the last three fiscal years, see Note H of the Notes to Consolidated Financial
Statements included elsewhere in this Annual Report.
(0.83 ) $
—
(0.83 ) $
1.36 $
—
1.36 $
0.79 $
—
0.79 $
(0.62 ) $
(0.62 ) $
$
$
(2) On January 15, 2014, we sold our wholly-owned subsidiary Transdyn Inc. to a global provider of electronic toll collection
systems headquartered in Vienna, Austria.
Years ended September 30,
2018
2017
2016
2015
2014
(In thousands)
Balance Sheet Data:
Cash, cash equivalents and short-term investments (3) ................ $
Property, plant and equipment, net ............................................... 128,764
Total assets ................................................................................... 429,951
1,600
Long-term debt, including current maturities ...............................
Total stockholders' equity ............................................................. 301,644
Total liabilities and stockholders' equity ...................................... 429,951
11,916
Dividends paid on common stock ................................................
49,754 $ 95,188 $ 97,720 $ 43,569 $ 103,118
156,896
144,977
541,443
462,516
3,200
2,400
371,097
335,317
541,443
462,516
11,998
11,845
(3) Excludes current and non-current restricted cash totaling $25.1 million and $24.9 million as of September 30, 2018 and 2017,
respectively. For further discussion on our restricted cash, see Note F of the Notes to Consolidated Financial Statements.
139,420
414,986
2,000
321,296
414,986
11,875
154,594
468,824
2,800
333,262
468,824
12,358
14
Other Financial Data:
Backlog ......................................................................................... 260,900 250,123 291,354 441,437 507,092
New Orders ................................................................................... 458,884 355,064 417,510 606,754 725,772
(In thousands)
Years ended September 30,
2018
2017
2016
2015
2014
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 should be read in conjunction with the
accompanying consolidated financial statements and related notes. 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 refining, onshore and offshore oil and gas
production, petrochemical, pipeline, terminal, mining and metals, light rail traction power, electric utility, pulp and paper and other
heavy industrial markets. 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.
Due to the significant decline in oil and gas prices from peak 2014 levels, many of our customers have reduced their capital budgets
and cut costs, and in certain instances have delayed or cancelled projects that we were pursuing. This has negatively impacted our
revenues and project backlog over the last three years. In response to our reduced project backlog and the challenging market
outlook in our core oil, gas and petrochemical markets, we took steps in Fiscal 2016 and 2017 to reduce our overall cost structure
and better align our costs with future production requirements. Since the second half of Fiscal 2017, our core oil, gas and
petrochemical markets have begun to strengthen resulting in increased revenues and orders.
Results of Operations
Twelve Months Ended September 30, 2018 Compared to Twelve Months Ended September 30, 2017
Revenue and Gross Profit
Revenues increased 13%, or $52.8 million, to $448.7 million in Fiscal 2018, compared to Fiscal 2017, primarily due to the increase
in orders in Fiscal 2018. Domestic revenues increased 19%, or $52.9 million, to $332.2 million. Our international revenues
decreased slightly by less than $0.1 million to $116.5 million in Fiscal 2018, compared to Fiscal 2017 and includes both revenue
generated from our international facilities, as well as export revenues from our domestic facilities.
Revenues from commercial and industrial projects increased 28%, or $71.0 million, to $325.2 million in Fiscal 2018, compared to
Fiscal 2017. Revenues from public and private utilities increased 6%, or $4.6 million, to $89.0 million in Fiscal 2018, compared to
Fiscal 2017. Revenues from municipal and transit projects decreased 40%, or $22.8 million, to $34.5 million in Fiscal 2018,
compared to Fiscal 2017. The changes in revenues in our market sectors were primarily due to the timing and mix of projects in our
backlog. Additionally in Fiscal 2018, remediation efforts after Hurricane Harvey resulted in approximately $7 million of revenue in
our commercial and industrial markets.
15
Gross profit increased 29%, or $14.6 million, to $65.4 million in Fiscal 2018, compared to Fiscal 2017. Gross profit as a percentage
of revenues increased to 15% in Fiscal 2018 compared to 13% in Fiscal 2017. Gross profit increased due to improved market
conditions and efficiencies resulting from increased volume in our U.S. manufacturing facilities.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 9%, or $5.2 million, to $66.8 million in Fiscal 2018, compared to Fiscal
2017, primarily due to the increase in variable performance based compensation in Fiscal 2018. Selling, general and administrative
expenses, as a percentage of revenues, decreased to 15% in Fiscal 2018 compared to 16% in Fiscal 2017, primarily due to the
increased revenues discussed above and our continued efforts to align our cost structure with current market conditions.
Restructuring and Separation Expenses
In Fiscal 2018, we incurred $0.8 million of restructuring expense related to anticipated losses on the sublet of a Canadian facility
that we exited in a prior period. In Fiscal 2017, we recorded $1.3 million in separation costs as we continued to reduce our overall
cost structure to better align our costs with current and future production requirements.
Other Income
We recorded other income of $0.7 million and $2.0 million in Fiscal 2018 and Fiscal 2017, respectively. In Fiscal 2018, we recorded
the final $0.5 million amortization of the deferred gain from the amended supply agreement (see Note E of the Notes to
Consolidated Financial Statements), as well as a $0.2 million gain from the settlement of a Company-owned life insurance policy. In
Fiscal 2017, the $2.0 million of other income was the amortization of the deferred gain mentioned above.
Income Tax Benefit
We recorded an income tax benefit of $0.5 million in Fiscal 2018, compared to the income tax benefit of $7.4 million we recorded in
Fiscal 2017. The effective tax rate for Fiscal 2018 was 7% compared to an effective tax rate of 44% for Fiscal 2017. The effective
rate for Fiscal 2018 was negatively impacted by the relative amounts of income/loss recognized in the various tax jurisdictions as
well as a foreign tax loss which is reserved with a valuation allowance. Additionally, we recorded deferred tax expense of $0.5
million due to the deferred tax rate differential related to the re-measurement of our U.S. deferred tax assets under the Tax Cuts and
Jobs Act, which were not realized prior to the end of Fiscal 2018. The effective tax rate for Fiscal 2017 was favorably impacted by
the lower tax rate in the U.K., the relative amounts of income/loss recognized in various jurisdictions, the utilization of net operating
loss carryforwards in Canada that have been fully reserved with a valuation allowance, as well as $0.9 million of discrete items
recognized during the year, primarily related to the Research and Development Tax Credit.
Net Loss
In Fiscal 2018, we recorded a net loss of $7.2 million, or $0.62 per diluted share, an improvement of $2.3 million over the net loss of
$9.5 million, or $0.83 per diluted share, that we recorded in Fiscal 2017. The decrease in losses in Fiscal 2018 compared to the prior
year were primarily due to increased revenues and gross profit in Fiscal 2018 as we experienced increased demand in our core oil,
gas and petrochemical markets.
Backlog
Our backlog includes various projects, some of which are petrochemical, oil and gas construction and transportation infrastructure
projects which take a number of months to produce. The order backlog at September 30, 2018 increased to $260.9 million,
compared to $250.1 million at September 30, 2017, primarily due to increased demand from municipal and transit projects.
New orders placed in Fiscal 2018 increased to $458.9 million, compared to $355.1 million in Fiscal 2017. This increase in orders
was primarily due to improved market conditions in our U.S. commercial and industrial markets.
16
Twelve Months Ended September 30, 2017 Compared to Twelve Months Ended September 30, 2016
Revenue and Gross Profit
Revenues decreased 30%, or $169.3 million, to $395.9 million in Fiscal 2017, compared to Fiscal 2016, primarily due to the
continued decrease in our project backlog as we completed existing projects and continue to see lower demand from our customers
in our core oil, gas and petrochemical markets. Domestic revenues decreased 31%, or $126.0 million, to $279.3 million and
international revenues decreased 27%, or $43.4 million, to $116.6 million in Fiscal 2017, compared to Fiscal 2016. This reduction in
geographic revenues year over year was primarily driven by the decline in our project backlog mentioned above. Revenues from
commercial and industrial projects decreased 39%, or $164.9 million, to $254.2 million in Fiscal 2017, compared to Fiscal 2016,
primarily due to lower demand in our core oil, gas and petrochemical markets. Revenues from public and private utilities decreased
17%, or $17.5 million, to $84.4 million in Fiscal 2017, compared to Fiscal 2016. Revenues from municipal and transit projects
increased 30%, or $13.1 million, to $57.3 million in Fiscal 2017, compared to Fiscal 2016 due to the timing of certain projects.
Gross profit decreased 52%, or $55.4 million, to $50.8 million in Fiscal 2017, compared to Fiscal 2016. Gross profit as a percentage
of revenues decreased to 13% in Fiscal 2017 compared to 19% in Fiscal 2016. Gross profit and margins continued to be negatively
impacted by our reduced volume resulting in under absorption of our manufacturing facility costs and a shift in our project mix to
smaller projects which typically have lower margins. This decline in volume and margins was primarily due to a decline in our
project backlog resulting from depressed market conditions and competitive pricing pressures primarily in our core oil, gas and
petrochemical markets. Gross profit margins were negatively impacted by execution challenges on certain municipal transit projects
and operating inefficiencies associated with the increased volume from municipal transit projects. The municipal transit market is
price competitive and projects typically yield lower margins.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased 18%, or $13.4 million, to $61.5 million in Fiscal 2017, compared to Fiscal
2016, primarily due to the cost reduction efforts we took in Fiscal 2016 in response to our adverse market outlook at that time, as
well as lower incentive compensation expenses. Selling, general and administrative expenses, as a percentage of revenues, increased
to 16% in Fiscal 2017 compared to 13% in Fiscal 2016, primarily due to the reduction in revenue discussed above.
Restructuring and Separation Expenses
In Fiscal 2017, we incurred $1.3 million in separation and restructuring costs, compared to $8.4 million in Fiscal 2016. In Fiscal
2017, we continued to reduce our overall cost structure to better align our costs with current and future production requirements. The
separation and restructuring costs incurred in Fiscal 2016 were due to the realignment of our senior management team and
workforce reductions as a result of our adverse market outlook at that time, and reductions in project backlog.
Other Income
We recorded other income of $2.0 million in both Fiscal 2017 and Fiscal 2016, which was the amortization of the deferred gain from
the amended supply agreement, which was fully amortized at December 31, 2017. See Note E of the Notes to Consolidated
Financial Statements.
Income Tax Benefit/Provision
We recorded an income tax benefit of $7.4 million in Fiscal 2017, compared to the income tax provision of $2.3 million we recorded
in Fiscal 2016. The effective tax rate for Fiscal 2017 was 44% compared to an effective tax rate of 13% for Fiscal 2016. The
effective tax rates for both Fiscal 2017 and 2016 were favorably impacted by the lower tax rate in the U.K., the relative amounts of
income/loss recognized in various jurisdictions, as well as the utilization of net operating loss carryforwards in Canada that are fully
reserved with a valuation allowance. Additionally, the effective tax rates for both Fiscal 2017 and 2016 were favorably impacted by
discrete items recognized, primarily related to the Research and Development Tax Credit (R&D Tax Credit), in the amounts of $0.9
million and $0.8 million, respectively. See Note H of the Notes to Consolidated Financial Statements.
Net Income/Loss
In Fiscal 2017, we recorded a net loss of $9.5 million, or $0.83 per diluted share, a decrease from net income of $15.5 million, or
$1.36 per diluted share that we recorded in Fiscal 2016. The reduction in net income compared to the prior year was primarily due to
a decline in our project backlog due to depressed market conditions and competitive pricing pressures, primarily in our core oil, gas
and petrochemical markets.
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Backlog
Our backlog includes various projects, some of which are petrochemical, oil and gas construction and transportation infrastructure
projects which take a number of months to produce. The order backlog at September 30, 2017 was $250.1 million, compared to
$291.4 million at September 30, 2016. New orders placed in Fiscal 2017 totaled $355.1 million, compared to $417.5 million in
Fiscal 2016. This decrease in orders was primarily due to lower demand from our customers in our core oil, gas and petrochemical
markets.
Outlook
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 or regulatory changes which 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 customer requirements. Projects typically take a
number of months to produce, and schedules may change during the course of any particular project.
A significant portion of our revenues have historically been from the oil, gas and petrochemical markets. In Fiscal 2018, we saw an
increase in customers' investments in maintenance and small projects; however, some customers continue to delay their major
capital investments. The reduction in available projects has increased price pressures over the past two years and has impacted, and
may continue to negatively impact, our backlog, revenues and operating results.
Our operating results have been 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 have had a negative impact on the timing of
project execution. Our operating results also have been, and could 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 and negatively impact our ability to cover our fixed costs. We continue to assess
our cost structure, operating performance and service offerings as the oil, gas and petrochemical markets remain challenging and
uncertain. During Fiscal 2018, we experienced an increase in new orders and saw an improvement in revenues and operating results
that we anticipate will continue into Fiscal 2019. We continue to focus on maintaining our cash position, improving efficiencies in
production and investing in future business opportunities.
Our increase in project volume has required cash to fund operations, but we believe that our strong working capital position and
available cash and short-term investments should be sufficient to finance future operating activities, research and development
initiatives, capital improvements and debt repayments for the foreseeable future. We continue to monitor the factors that drive our
markets and will continue to strive to maintain our leadership and competitive advantage in the markets we serve while aligning our
cost structures with market conditions.
Liquidity and Capital Resources
As of September 30, 2018, current assets exceeded current liabilities by 2.3 times and our debt to total capitalization was 0.53%.
Cash, cash equivalents and short-term investments decreased to $49.8 million at September 30, 2018, compared to $95.2 million at
September 30, 2017, as cash has been used in operations to fund working capital requirements from our increased project volume.
We also had restricted cash held in a pledged collateral account related to our amended credit agreement (U.S. Revolver) of $25.1
million and $24.9 million, respectively, at September 30, 2018 and 2017. For further information regarding our U.S. Revolver, see
Note F of the Notes to Consolidated Financial Statements.
Until we meet certain financial ratios in future quarters, we are unable to borrow under the U.S. Revolver. We believe that our strong
working capital position and available cash and short-term investments should be sufficient to finance future operating activities,
capital improvements and debt repayments for the foreseeable future. We continue to monitor the factors that drive our markets and
will continue to strive to maintain our leadership and competitive advantage in the markets we serve while aligning our cost
structures with market conditions.
Our U.S Revolver is a $75.0 million revolving credit facility in the U.S, and as of September 30, 2018, there were no amounts
borrowed under this facility. Total letters of credit outstanding under our U.S. Revolver, which reduce the availability of credit under
18
our U.S. Revolver, were $23.1 million at September 30, 2018 and $24.1 million at September 30, 2017. Currently, our U.S. Revolver
can only be used for letters of credit until we meet certain financial ratios as described in Note D of the Notes to Consolidated
Financial Statements. As of September 30, 2018, $51.9 million was available for the issuance of letters of credit under the U.S.
Revolver, subject to the cash collateral requirements mentioned above. Total long-term debt, including current maturities, totaled
$1.6 million at September 30, 2018, compared to $2.0 million at September 30, 2017. For further information regarding our debt,
see Notes F and G of Notes to Consolidated Financial Statements.
Approximately $26 million of our cash and short-term investments at September 30, 2018 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., under current tax laws we would incur
additional tax expense upon such repatriation.
Operating Activities
During Fiscal 2018, net cash used in operating activities was $28.5 million. During Fiscal 2017, net cash provided by operating
activities was $36.8 million and in Fiscal 2016, net cash provided by operating activities was $74.9 million. Cash flow from
operations is primarily influenced by the timing of milestone payments from our customers and the payment terms with our
suppliers, and is adversely impacted during a ramp up in business as cash is used to fund the projects until billing milestones have
been met and payments are collected. Cash flow from operating activities was lower in Fiscal 2018 compared to Fiscal 2017 due to
increases in accounts receivable, project billings and inventories as our increased project volume requires cash to fund the growth.
Cash flow from operations declined during Fiscal 2017 compared to Fiscal 2016 primarily as a result of our decrease in operating
income and the payments of prior year accrued bonuses and commissions. Cash flow from operations in Fiscal 2017 was favorably
impacted by the collection of accounts receivable and the reduction in inventories during our down cycle in project activity.
Investing Activities
Purchases of property, plant and equipment during Fiscal 2018 totaled $4.5 million compared to $3.6 million and $3.0 million in
Fiscal 2017 and 2016, respectively. The increase in capital spending in Fiscal 2018 was in response to our ramp up in volume.
During Fiscal 2018, our net maturities on our short-term investments were reduced to $13.0 million, compared to the $26.8 million
in short-term investments we purchased in Fiscal 2017, as we used cash to fund operating activities in Fiscal 2018 as mentioned
above. In Fiscal 2017, we reclassified $24.9 million as restricted cash for pledged collateral as stipulated by our amended credit
agreement.
Financing Activities
Net cash used in financing activities was $13.0 million in Fiscal 2018, $12.7 million in Fiscal 2017 and $17.4 million in Fiscal 2016
and included approximately $12 million of dividends paid in each of the three years.
Contractual and Other Obligations
At September 30, 2018, 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
Obligations
Net Operating
Lease Obligations
Total
Less than 1 year .............................................................................. $
1 to 3 years ......................................................................................
3 to 5 years ......................................................................................
More than 5 years ...........................................................................
Total long-term contractual obligations .......................................... $
421 $
1,221
—
—
1,642 $
1,743 $
4,097
3,173
—
9,013 $
2,164
5,318
3,173
—
10,655
As of September 30, 2018, the total unrecognized tax benefit related to uncertain tax positions was $1.9 million. We estimate that
none of this will be paid within the next 12 months. However, we believe that it is reasonably possible that within the next 12
months, the total unrecognized tax benefits will decrease by approximately 22% due to the expiration of certain statutes of
limitations and 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.
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Other Commercial Commitments
We are contingently liable for letters of credit and bank guarantees totaling $26.4 million as of September 30, 2018.
The following table reflects potential cash outflows that may result in the event that we are unable to perform under our contracts (in
thousands):
Payments Due by Period:
Less than 1 year ................................................................................................................................................. $
1 to 3 years ........................................................................................................................................................
More than 3 years ..............................................................................................................................................
Total long-term commercial obligations ........................................................................................................... $
Letters of
Credit/Bank
Guarantees
17,721
5,285
3,403
26,409
We also had performance and maintenance bonds totaling $160.6 million that were outstanding at September 30, 2018. Performance
and maintenance bonds are primarily used to guarantee our contract performance to our customers.
Off-Balance Sheet Arrangements
We had no 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. The 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 United
States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses and the disclosures of contingent assets and liabilities. We base our estimates on historical experience and on
various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.
We believe the following accounting policies and estimates to be critical in the preparation and reporting of our consolidated
financial statements.
For the year ended September 30, 2018, our operating loss was reduced by $3.9 million as a result of changes in contract estimates
related to projects in progress at the beginning of the year. These changes in estimates resulted primarily from, among other things,
successful execution and close-out improvements, as well as other changes in facts and circumstances during these periods.
Revenue Recognition
Our revenues are primarily generated from the engineering and manufacturing of custom products under long-term contracts that
may last from one month to several years, depending on the contract. Revenues from long-term contracts are recognized on the
percentage-of-completion method of accounting.
Under the percentage-of-completion method of accounting, revenues are recognized as work is performed. 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 or
total labor dollars incurred to date compared to the total estimated costs or total labor dollars estimated at completion. The method
used to determine the percentage of completion is typically the cost method, unless the labor method is a more accurate method of
measuring the progress of the project. Application of the percentage-of-completion method of accounting requires the use of
estimates of costs to be incurred for the performance of the contract. Contract costs include all direct material costs, direct labor
costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs and all costs associated
with operation of equipment. 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 effect
of change orders, the availability of materials, the effect of any delays on our project performance and the recoverability of any
20
claims. Changes in job performance, job conditions, estimated profitability and final contract settlements, including our estimate of
liquidated damages, if any, may result in revisions to costs and income, with their effects being recognized in the period in which the
revisions are determined. 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.
Revenues associated with maintenance, repair and service contracts are recognized when the services are performed. Expenses
related to these types of services are recognized as incurred.
Costs and estimated earnings in excess of billings on uncompleted contracts also include certain costs associated with unapproved
change orders. These costs are included when change order approval is probable. Amounts are carried at the lower of cost or net
realizable value. Revenue is recognized to the extent of costs incurred when recovery is probable. The amounts recorded involve the
use of judgments and estimates; thus, actual recoverable amounts could differ from original assumptions.
As discussed in Note B of the Notes to Consolidated Financial Statements, effective for the quarter ending December 31, 2018, we
will adopt the new revenue recognition standard using the modified retrospective transition method. The new standard will be
applied to contracts with customers that were not substantially complete as of October 1, 2018. Our financial results for reporting
periods after October 1, 2018 will be presented under the new standard; however, our financial results for prior periods will not be
retrospectively adjusted. We have substantially completed our evaluation of the impact of the new standard on our contracts with
customers, including identification of differences that will result from the new requirements. Based on this evaluation, we estimate
that the net cumulative adjustment to retained earnings from adoption will not be material to our consolidated financial statements.
Our disclosures related to revenue recognition will expand to address new quantitative and qualitative requirements regarding the
nature, amount and timing of revenue from contracts with customers and additional information related to contract assets and
liabilities.
Allowance for Doubtful Accounts
We maintain and continually assess the adequacy of an 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. However, 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, among other things, could have a material
adverse impact on our operating results.
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 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.
21
Warranty Costs
We provide for estimated warranty costs with the recognition of revenue based upon historical rates applicable to individual product
lines. In addition, specific provisions are made when the costs of such warranties are expected to exceed accruals. 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. Occasionally projects require warranty terms which are longer than our
standard terms due to the nature of the project. Extended warranty terms may be negotiated and included in our contracts. We use
past experience and historical claims to determine the estimated liability. Actual results could differ from our estimate.
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. Due to the historical Canadian losses, and the losses that we projected at the time of
determination, we were required under the more likely than not accounting standard to record a valuation allowance against the
Canadian net deferred tax assets because we anticipated that we may not be able to realize the benefits of the net operating loss
carryforwards and other deductible differences. 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.
See Note H of Notes to Consolidated Financial Statements for disclosures related to the valuation allowance recorded in relation to
foreign deferred taxes.
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 income 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
22
negatively impacted by economic conditions. Our customers and their industries are typically engineering, procurement and
construction firms, oil and gas refining, offshore oil and gas production, petrochemical, pipeline, terminal, mining and metals, light
rail traction power, electric utility, pulp and paper and other heavy industrial customers. We maintain ongoing discussions with
customers regarding their contract status with respect to payments, 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 Euro.
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 income (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 2018, our realized foreign exchange losses were $0.2 million and are 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 $21.8 million as of
September 30, 2018, an increase from $18.8 million at September 30, 2017. This increase 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 currently hedge our exposure to potential foreign currency translation adjustments.
Interest Rate Risk
If we meet certain covenants and are able to 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 past three years, we have not experienced a significant effect on our business due to
changes in interest rates.
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Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
Financial Statements:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of September 30, 2018 and 2017
Consolidated Statements of Operations for the Years Ended September 30, 2018, 2017 and 2016
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended September 30, 2018, 2017 and 2016
Consolidated Statements of Stockholders’ Equity for the Years Ended September 30, 2018, 2017 and 2016
Consolidated Statements of Cash Flows for the Years Ended September 30, 2018, 2017 and 2016
Notes to Consolidated Financial Statements
Page
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27
28
29
30
31
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24
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, 2018 and 2017, 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, 2018, 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, 2018, 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, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in
the period ended September 30, 2018 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, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
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 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.
25
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 12, 2018
We have served as the Company’s auditor since 2004.
26
POWELL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
September 30,
2018
2017
Current Assets:
ASSETS
$
Cash and cash equivalents .......................................................................................................
Short-term investments ............................................................................................................
Restricted cash .........................................................................................................................
Accounts receivable, less allowance for doubtful accounts of $157 and $179 ........................
Costs and estimated earnings in excess of billings on uncompleted contracts ........................
Inventories ...............................................................................................................................
Income taxes receivable ..........................................................................................................
Deferred income taxes .............................................................................................................
Prepaid expenses .....................................................................................................................
Other current assets .................................................................................................................
36,584 $
13,170
19,154
92,548
82,545
21,352
6,904
—
3,775
630
Total Current Assets ................................................................................................................. 276,662
128,764
5,987
1,514
11,087
5,937
429,951 $
Property, plant and equipment, net ...........................................................................................
Restricted cash .........................................................................................................................
Goodwill and intangible assets, net ..........................................................................................
Other assets ..............................................................................................................................
Deferred income taxes ..............................................................................................................
$
Total Assets ..............................................................................................................................
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
$
Current maturities of long-term debt .......................................................................................
Income taxes payable ..............................................................................................................
Accounts payable ....................................................................................................................
Accrued compensation and benefits ........................................................................................
Billings in excess of costs and estimated earnings on uncompleted contracts ........................
Accrued product warranty .......................................................................................................
Other current liabilities ............................................................................................................
Deferred credit ─ short term (Note E) ................................................................................
400 $
897
40,714
22,274
43,174
2,604
7,786
—
Total Current Liabilities ........................................................................................................... 117,849
1,200
5,902
3,356
Total Liabilities ........................................................................................................................ 128,307
Long-term debt, net of current maturities ................................................................................
Deferred compensation (Note I) ...............................................................................................
Other long-term liabilities ........................................................................................................
Commitments and Contingencies (Note G)
Stockholders' Equity:
68,359
26,829
15,104
53,852
51,554
18,448
8,222
3,539
3,701
463
250,071
139,420
9,747
1,719
13,800
229
414,986
400
1,219
33,269
14,984
26,166
3,174
5,860
507
85,579
1,600
5,314
1,197
93,690
—
—
Preferred stock, par value $.01; 5,000,000 shares authorized; none issued .............................
Common stock, par value $.01; 30,000,000 shares authorized; 12,280,556 and
12,234,656 shares issued, respectively .....................................................................................
Additional paid-in capital ........................................................................................................
Retained earnings ....................................................................................................................
Treasury stock, 806,018 shares at cost ....................................................................................
Accumulated other comprehensive loss ..................................................................................
123
56,769
291,530
(24,999 )
(21,779 )
Total Stockholders' Equity ....................................................................................................... 301,644
Total Liabilities and Stockholders' Equity ...............................................................................
$
429,951 $
The accompanying notes are an integral part of these consolidated financial statements.
27
122
54,329
310,598
(24,999 )
(18,754 )
321,296
414,986
POWELL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Revenues .................................................................................................... $
Cost of goods sold ......................................................................................
Gross profit ................................................................................................
Year Ended September 30,
2018
2017
2016
448,716 $
383,361
65,355
395,911 $
345,142
50,769
565,243
459,038
106,205
Selling, general and administrative expenses .............................................
Research and development expenses .........................................................
Amortization of intangible assets ...............................................................
Restructuring and separation expenses.......................................................
Operating income (loss) .............................................................................
Other income (See Note E) ........................................................................
Interest expense ..........................................................................................
Interest income ...........................................................................................
66,768
6,717
205
787
(9,122 )
(747 )
207
(883 )
61,524
6,906
355
1,322
(19,338 )
(2,029 )
168
(558 )
Income (loss) before income taxes .............................................................
(7,699 )
(16,919 )
74,924
6,731
352
8,441
15,757
(2,029 )
149
(156 )
17,793
Income tax provision (benefit) ...................................................................
(547 )
(7,433 )
2,283
Net income (loss) ....................................................................................... $
(7,152 ) $
(9,486 ) $
15,510
Earnings (loss) per share:
Basic ...........................................................................................................
$
(0.62 ) $
Diluted ........................................................................................................
$
(0.62 ) $
(0.83 ) $
(0.83 ) $
1.36
1.36
Weighted average shares:
Basic ...........................................................................................................
Diluted ........................................................................................................
Dividends per share ....................................................................................
$
11,507
11,507
1.04 $
11,453
11,453
1.04 $
11,400
11,431
1.04
The accompanying notes are an integral part of these consolidated financial statements.
28
POWELL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
Year Ended September 30,
2018
2017
2016
Net income (loss) ........................................................................................................... $
(7,152 ) $
Foreign currency translation adjustments .......................................................................
Postretirement benefit adjustment, net of tax .................................................................
(3,100 )
75
(9,486 ) $
4,822
192
Comprehensive income (loss) ........................................................................................ $
(10,177 ) $
(4,472 ) $
15,510
(928 )
(439 )
14,143
The accompanying notes are an integral part of these consolidated financial statements.
29
POWELL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
Common Stock
Treasury Stock
Shares
Amount
Shares
Amount
Balance, September 30, 2015 ........................................ 12,100 $
Net income .............................................................. —
Foreign currency translation adjustments......................... —
Stock-based compensation........................................... 81
Excess tax benefit from share-based compensation ............ —
Shares withheld in lieu of employee tax withholding .......... —
Issuance of restricted stock .......................................... 18
Purchase of treasury shares .......................................... —
Dividends paid ......................................................... —
Postretirement benefit adjustment, net of tax of $(237) ....... —
Balance, September 30, 2016 ........................................ 12,199 $
Net loss .................................................................. —
Foreign currency translation adjustments......................... —
Stock-based compensation........................................... 18
Shares withheld in lieu of employee tax withholding .......... —
Issuance of restricted stock .......................................... 17
Dividends paid ......................................................... —
Postretirement benefit adjustment, net of tax of $103 ......... —
Balance, September 30, 2017 ........................................ 12,234 $
Net loss .................................................................. —
Foreign currency translation adjustments......................... —
Stock-based compensation........................................... 32
Shares withheld in lieu of employee tax withholding .......... —
Issuance of restricted stock .......................................... 15
Dividends paid ......................................................... —
Postretirement benefit adjustment, net of tax of $20 ........... —
Balance, September 30, 2018 ........................................ 12,281 $
Additional
Paid-in
Capital
Retained
Earnings
121 $ 48,507 $ 328,294
15,510
—
—
—
—
—
—
4,883
—
—
—
(387 )
—
—
(1,000 )
—
—
1
—
—
—
—
—
(11,845 )
—
—
—
122 $ 52,003 $ 331,959
—
—
(9,486 )
—
—
—
—
2,724
—
—
—
(398 )
—
—
—
—
—
(11,875 )
—
—
—
122 $ 54,329 $ 310,598
—
—
(7,152 )
—
—
—
—
3,152
—
—
—
(712 )
—
—
1
—
—
(11,916 )
—
—
—
123 $ 56,769 $ 291,530
(670 ) $ (21,259 ) $
—
—
—
—
—
—
(136 )
—
—
—
—
—
—
—
—
(3,740 )
—
—
(806 ) $ (24,999 ) $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(806 ) $ (24,999 ) $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(806 ) $ (24,999 ) $
Accumulated
Other
Comprehensive
Income/(Loss)
Total
(22,401 ) $ 333,262
15,510
(439 )
(23,768 ) $ 335,317
—
(928 )
—
—
—
—
—
—
(439 )
—
4,822
—
—
—
—
192
—
(3,100 )
—
—
—
—
75
(928 )
4,883
(387 )
(1,000 )
1
(3,740 )
(11,845 )
(9,486 )
4,822
2,724
(398 )
—
(7,152 )
(3,100 )
3,152
(712 )
1
(11,875 )
192
(18,754 ) $ 321,296
(11,916 )
75
(21,779 ) $ 301,644
The accompanying notes are an integral part of these consolidated financial statements.
30
POWELL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Operating Activities:
Net income (loss) ..............................................................................................................
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating
activities:
$
Year Ended September 30,
2018
2017
2016
(7,152 ) $
(9,486 ) $
15,510
Depreciation...................................................................................................................... 12,698
Amortization ..................................................................................................................... 205
Stock-based compensation .................................................................................................. 3,152
Excess tax benefit from stock-based compensation ................................................................ —
Bad debt expense/(recovery) ............................................................................................... 111
Deferred income taxes ........................................................................................................ (2,170 )
Gain on amended supply agreement ..................................................................................... (507 )
Gain on cash surrender value of life insurance ...................................................................... (240 )
—
Cash received from amended supply agreement ....................................................................
Changes in operating assets and liabilities:
Accounts receivable ........................................................................................................... (37,176 )
Costs and billings in excess of estimates on uncompleted contracts ......................................... (14,117 )
Inventories ........................................................................................................................ (3,023 )
Income taxes ..................................................................................................................... 996
Prepaid expenses and other current assets ............................................................................. (237 )
Accounts payable .............................................................................................................. 8,152
Accrued liabilities .............................................................................................................. 8,859
Other, net .......................................................................................................................... 1,906
Net cash provided by (used in) operating activities ................................................................
(28,543 )
Investing Activities:
(4,502 )
Purchases of property, plant and equipment ..........................................................................
87
Proceeds from sale of property, plant and equipment .............................................................
Purchases of short-term investments .................................................................................... (22,261 )
Maturities of short-term investments ................................................................................... 35,248
1,861
Proceeds from life insurance policy .....................................................................................
(290 )
Changes in restricted cash ..................................................................................................
10,143
Net cash provided by (used in) investing activities ................................................................
Financing Activities:
(400 )
Payments on industrial development revenue bonds ..............................................................
—
Excess tax benefit from stock-based compensation ...............................................................
(712 )
Shares withheld in lieu of employee tax withholding .............................................................
—
Purchase of treasury shares .................................................................................................
Dividends paid .................................................................................................................. (11,916 )
Net cash used in financing activities.....................................................................................
(13,028 )
(31,428 )
(347 )
68,359
36,584 $
Net increase (decrease) in cash and cash equivalents .............................................................
Effect of exchange rate changes on cash and cash equivalents ................................................
Cash and cash equivalents, beginning of period ....................................................................
Cash and cash equivalents, end of period ............................................................................. $
12,400
355
2,724
—
(160 )
100
(2,029 )
—
2,333
47,983
(3,270 )
8,213
(6,758 )
453
(2,417 )
(11,676 )
(1,950 )
36,815
(3,636 )
12
(60,018 )
33,189
—
(24,851 )
(55,304 )
(400 )
—
(398 )
—
(11,875 )
(12,673 )
(31,162 )
1,801
97,720
68,359 $
12,979
352
4,883
387
187
2,330
(2,029 )
—
2,333
369
39,612
6,159
(195 )
861
(11,658 )
3,927
(1,101 )
74,906
(3,044 )
187
—
—
—
—
(2,857 )
(400 )
(387 )
(1,000 )
(3,740 )
(11,845 )
(17,372 )
54,677
(526 )
43,569
97,720
The accompanying notes are an integral part of these consolidated financial statements.
31
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 for the distribution, control and monitoring
of electrical energy designed to (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 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,
offshore oil and gas production, petrochemical, 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 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.
References to Fiscal 2018, Fiscal 2017 and Fiscal 2016 used throughout these Notes to Consolidated Financial Statements relate to
our fiscal years ended September 30, 2018, 2017 and 2016, respectively.
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 and cost
recognition for construction 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. Estimates may
change as new events occur, additional information becomes available or operating environments change. Actual results may differ
from our estimates.
Cash and Cash Equivalents
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.
Restricted Cash - Restricted cash includes cash and cash equivalents that are unavailable for withdrawal or usage for general
obligations. Restricted cash on our Consolidated Balance Sheet represents a pledged cash collateral balance which is required under
32
our amended credit agreement and is held in an interest-bearing savings account. See Note F for further discussion on restricted
cash.
Supplemental Disclosures of Cash Flow Information (in thousands):
Cash paid (received) during the period for:
Interest paid, net of interest income................................................................................
$
Income taxes paid, net of refunds ...................................................................................
Non-cash capital expenditures .......................................................................................
(676 ) $
354
129
(384 )
(764 )
634
4
(352 )
221
Year Ended September 30,
2018
2017
2016
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, receivables are not collateralized.
However, we utilize letters of credit to secure payment on projects when possible. At September 30, 2018 and 2017, we had
retention amounts of $4.2 million and $2.1 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, 2018, $3.8 million
is expected to be collected in the next fiscal year and is recorded in accounts receivable. The remaining $0.4 million is recorded in
other assets and will be collected in Fiscal 2020.
Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts
Costs and estimated earnings in excess of billings on uncompleted contracts arise when revenues are recorded on a percentage-of-
completion basis but cannot be invoiced under the terms of the contract. Such amounts are invoiced upon completion of contractual
milestones.
Costs and estimated earnings in excess of billings on uncompleted contracts also include certain costs associated with unapproved
change orders. These costs are included when the approval of the change order is probable. Amounts are carried at the lower of cost
or net realizable value. Revenue is recognized to the extent of costs incurred when recovery is probable. The amounts recorded
involve the use of judgments and estimates; thus, actual recoverable amounts could differ from original assumptions.
In accordance with industry practice, assets and liabilities related to costs and estimated earnings in excess of billings on
uncompleted contracts, as well as billings in excess of costs and estimated earnings on uncompleted contracts, have been classified
as current. The contract cycle for certain long-term contracts may extend beyond one year; thus, collection of amounts related to
these contracts may extend beyond one year.
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.
33
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 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 engineering and manufacturing of custom products under long-term contracts that
may last from one month to several years, depending on the contract. Revenues from long-term contracts are recognized on the
percentage-of-completion method of accounting. Occasionally a contract may require that we segment the project into specific
deliverables for revenue recognition. Segmenting a contract may result in different interim rates of profitability for each scope of
service than if we had recognized revenue on a combined basis.
Under the percentage-of-completion method of accounting, revenues are recognized as work is performed. 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 or
total labor dollars incurred to date compared to the total estimated costs or total labor dollars estimated at completion. The method
used to determine the percentage of completion is typically the cost method, unless the labor method is a more accurate method of
measuring the progress of the project. Application of the percentage-of-completion method of accounting requires the use of
estimates of costs to be incurred for the performance of the contract. Contract costs include all direct material costs, direct labor
costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs and all costs associated
34
with operation of equipment. 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 effect
of change orders, the availability of materials, the effect of any delays on our project performance and the recoverability of any
claims. Changes in job performance, job conditions, estimated profitability and final contract settlements, including our estimate of
liquidated damages, if any, may result in revisions to costs and income, with their effects being recognized in the period in which the
revisions are determined. 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.
Revenues associated with maintenance, repair and service contracts are recognized when the services are performed. Expenses
related to these types of services are recognized as incurred.
Warranty Costs
We provide for estimated warranty costs with the recognition of revenue based upon historical rates applicable to individual product
lines. In addition, specific provisions are made when the costs of such warranties are expected to exceed accruals. 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. 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. We use
past experience and historical claims to determine the estimated liability. Actual results could differ from our estimate.
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 $6.7 million, $6.9 million and $6.7 million in Fiscal 2018, 2017 and 2016, 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 income (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 is 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 May 2014, the Financial Accounting Standards Board (FASB) issued a new standard on revenue recognition that supersedes
previously issued revenue recognition guidance. This standard provides a five-step approach to be applied to all contracts with
customers and requires expanded disclosures about the nature, amount, timing and uncertainty of revenue (and the related cash
flows) arising from customer contracts, significant judgments and changes in judgments used in applying the revenue model and the
assets recognized from costs incurred to obtain or fulfill a contract. This standard is effective for fiscal years, and interim periods
within those years, beginning after December 15, 2017, which would be our fiscal year ending September 30, 2019. We plan to use
the modified retrospective basis upon adoption which could result in a cumulative effect adjustment as of October 1, 2018, if
material. We have updated our accounting policies and procedures and determined the impact from this new standard on our
contracts outstanding as of October 1, 2018. We have substantially completed our evaluation of the impact of the new standard on
our contracts with customers, including identification of differences that will result from the new requirements. Based on this
evaluation, we estimate that the net cumulative adjustment to retained earnings from adoption will not be material to our
consolidated financial statements. Our disclosures related to revenue recognition will expand to address new quantitative and
35
qualitative requirements regarding the nature, amount and timing of revenue from contracts with customers and additional
information related to contract assets and liabilities.
In November 2015, the FASB issued an amendment to the topic regarding income taxes which requires an entity to separate deferred
income tax liabilities and assets into current and noncurrent amounts in the statement of financial position. Deferred tax liabilities
and assets are classified as current or noncurrent based on the classification of the related asset or liability for financial reporting.
Deferred tax liabilities and assets that are not related to an asset or liability for financial reporting are classified according to the
expected reversal date of the temporary difference. To simplify the presentation of deferred income taxes, the amendments require
that deferred income tax liabilities and assets be classified as noncurrent in a statement of financial position. We have adopted this
topic prospectively in Fiscal 2018 and our statement of financial position reflects this reclassification. We have not retrospectively
adjusted prior periods.
In February 2016, the FASB issued a new topic on leases which requires lessees to recognize lease assets and lease liabilities on the
balance sheet for all leases with terms longer than twelve months. Leases will be classified as either finance or operating, with
classification affecting the pattern of expense recognition in the income statement. A modified retrospective transition approach is
required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period
presented in the financial statements, with certain practical expedients available. The new topic is effective for fiscal years beginning
after December 15, 2018, including interim periods within those fiscal years. This would be our fiscal year ending September 30,
2020. We are still evaluating the potential impact of this topic on our financial statements.
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. This
topic is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, which would be
our fiscal year ending September 30, 2019. We are still evaluating this new topic, but do not expect it to have a material impact on
our statement of cash flows.
In May 2017, the FASB issued a new topic on modification accounting with regards to stock based compensation. This new topic
clarifies when a change to the terms or conditions of a share-based payment award should be accounted for as a modification. An
entity should account for the effects of a modification unless the fair value, vesting conditions and classification, as an equity
instrument or a liability instrument, of the modified award are the same before and after a change to the terms or conditions of the
share-based payment award. This topic is effective for annual reporting periods beginning after December 15, 2017, which is our
fiscal year ending September 30, 2019. We are still evaluating this new topic, but do not expect it to have a material impact on our
consolidated financial position or results of operations.
C. Earnings Per Share
We compute basic earnings per share by dividing net income 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.
The following table reconciles basic and diluted weighted average shares used in the computation of earnings per share for the years
ended September 30, 2018, 2017 and 2016 (in thousands, except per share data):
Year Ended September 30,
2018
2017
2016
Numerator:
Net income (loss) .............................................................................................
$
(7,152 ) $
(9,486 ) $
15,510
Denominator:
Weighted average basic shares ......................................................................... 11,507
—
Dilutive effect of restricted stock units .............................................................
Weighted average diluted shares with assumed conversions ............................ 11,507
11,453
—
11,453
11,400
31
11,431
Net earnings (loss) per share:
Basic earnings (loss) per share ........................................................................
$
(0.62 ) $
Diluted earnings (loss) per share .....................................................................
$
(0.62 ) $
(0.83 ) $
(0.83 ) $
1.36
1.36
36
For the years ended September 30, 2018 and 2017, we incurred net losses and 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):
Balance at beginning of period......................................................................................................... $
Bad debt expense (recovery) ............................................................................................................
Uncollectible accounts written off, net of recoveries .......................................................................
Change due to foreign currency translation .....................................................................................
Balance at end of period ................................................................................................................... $
Inventories
The components of inventories are summarized below (in thousands):
Raw materials, parts and subassemblies ........................................................................................... $
Work-in-progress ..............................................................................................................................
Provision for excess and obsolete inventory ....................................................................................
Total inventories ............................................................................................................................... $
September 30,
2018
2017
179 $
111
(125 )
(8 )
157 $
811
(160 )
(472 )
—
179
September 30,
2018
2017
24,563 $
1,080
(4,291 )
21,352 $
22,100
600
(4,252 )
18,448
Cost and Estimated Earnings on Uncompleted Contracts
The components of costs and estimated earnings and related amounts billed on uncompleted contracts are summarized below (in
thousands):
September 30,
Costs incurred on uncompleted contracts ......................................................................................... $
Estimated earnings ...........................................................................................................................
Less: Billings to date ........................................................................................................................
2018
872,882 $
269,268
1,142,150
(1,102,779 )
Net underbilled position ...................................................................................................................
$
39,371 $
Included in the accompanying balance sheets under the following captions:
Costs and estimated earnings in excess of billings on uncompleted contracts – underbilled ........... $
Billings in excess of costs and estimated earnings on uncompleted contracts – overbilled .............
Net underbilled position ...................................................................................................................
$
82,545 $
(43,174 )
39,371 $
2017
987,164
316,970
1,304,134
(1,278,746 )
25,388
51,554
(26,166 )
25,388
37
Property, Plant and Equipment
Property, plant and equipment are summarized below (in thousands):
Land ........................................................................................................................ $
Buildings and improvements ..................................................................................
Machinery and equipment ......................................................................................
Furniture and fixtures .............................................................................................
Construction in process ...........................................................................................
$
Less: Accumulated depreciation .............................................................................
Total property, plant and equipment, net ................................................................
$
September 30,
Range of
2018
2017
22,207 $
123,320
104,542
3,799
357
254,225 $
(125,461 )
128,764 $
Asset Lives
—
22,441
121,960 3 - 39 Years
106,113 3 - 15 Years
3,806 3 - 10 Years
1,749
256,069
(116,649 )
139,420
—
There were no assets under capital lease as of September 30, 2018 or September 30, 2017. Depreciation expense was $12.7 million,
$12.4 million and $13.0 million for fiscal years 2018, 2017, and 2016, respectively.
Warranty Accrual
Activity in our warranty accrual consisted of the following (in thousands):
Balance at beginning of period......................................................................................................... $
Increase to warranty expense ...........................................................................................................
Deduction for warranty charges .......................................................................................................
Change due to foreign currency translation .....................................................................................
Balance at end of period ................................................................................................................... $
September 30,
2018
2017
3,174 $
2,031
(2,574 )
(27 )
2,604 $
4,639
1,806
(3,314 )
43
3,174
E. Goodwill and Intangible Assets
Our intangible assets consist of goodwill of $1.0 million, which is not being amortized, and purchased technology of $0.5 million,
which is amortized over its estimated useful life. No impairment expense has been recorded for the last three fiscal years.
Intangible assets balances, subject to amortization, at September 30, 2018 and 2017 consisted of the following (in thousands):
Purchased technology............................. $
11,749 $
(11,239 ) $
510 $
11,749 $
(11,033 ) $
716
September 30, 2018
September 30, 2017
Gross
Carrying
Value
Accumulated
Amortization
Net
Carrying
Value
Gross
Carrying
Value
Accumulated
Amortization
Net
Carrying
Value
Amortization of intangible assets recorded for the year ended September 30, 2018 was $0.2 million, and $0.4 million for the
years ended September 30, 2017 and 2016, respectively.
Estimated amortization expense for each of the five subsequent fiscal years is expected to be (in thousands):
Years Ended September 30,
2019......................................................................................................................................................................... $
2020.........................................................................................................................................................................
2021.........................................................................................................................................................................
2022.........................................................................................................................................................................
2023.........................................................................................................................................................................
Total
177
177
156
—
—
On August 7, 2006, we purchased certain assets related to the manufacturing of ANSI medium-voltage switchgear and circuit
breaker business from General Electric Company (GE). In connection with the acquisition, we entered into a 15-year supply
38
agreement with GE pursuant to which GE would purchase from us all of its requirements for ANSI medium-voltage switchgear and
circuit breakers and other related equipment and components (the Products). We recorded an intangible asset related to this supply
agreement. On December 30, 2013, we and GE amended the supply agreement to allow GE to manufacture similar Products for sale
immediately and allow them to begin purchasing Products from other suppliers beginning December 31, 2014. In return, GE paid us
$10 million upon execution of the amended supply agreement and agreed to pay an additional $7 million over three years, beginning
March 2015. The final balance of $2.3 million was received in April 2017. We wrote off the intangible asset related to the original
supply agreement and recorded a deferred credit in the amount of $8.1 million at December 31, 2013, the amount by which the total
proceeds from GE exceeded the unamortized balance of our intangible asset. We amortized this deferred credit over the four-year
life of the agreement and recorded $0.5 million in other income in Fiscal 2018, and $2.0 million in both Fiscal 2017 and 2016.
F. Long-Term Debt
Long-term debt consisted of the following (in thousands):
Industrial development revenue bonds ............................................................................................. $
Less: current portion ........................................................................................................................
Total long-term debt .........................................................................................................................
$
1,600 $
(400 )
1,200 $
2,000
(400 )
1,600
September 30,
2018
2017
The annual maturities of long-term debt as of September 30, 2018, were as follows (in thousands):
Year Ending September 30,
2019........................................................................................................................................................................... $
2020...........................................................................................................................................................................
2021...........................................................................................................................................................................
2022...........................................................................................................................................................................
2023...........................................................................................................................................................................
Total long-term debt maturities .................................................................................................................................
$
Long-Term
Debt
Maturities
400
400
400
400
—
1,600
U.S. Revolver
We have a $75.0 million revolving credit facility (U.S. Revolver) to provide working capital support and letters of credit which
expires June 2022. The amount available under the U.S. Revolver at September 30, 2018 was reduced by $23.1 million for our
outstanding letters of credit. Currently, our U.S. Revolver can only be used for letters of credit until we meet certain financial ratios.
There were no loans outstanding under the U.S. Revolver as of September 30, 2018.
Per the terms of the U.S. Revolver, we are required to maintain cash in a pledged collateral account until we satisfy the following
two financial ratios for two consecutive fiscal quarters: a max leverage ratio and a fixed charge coverage ratio. The max leverage
ratio requires that the ratio of our consolidated funded indebtedness to our consolidated earnings before interest, taxes and
depreciation (EBITDA) for the last four consecutive quarters not exceed 2.75 to 1.00. The fixed charge coverage ratio requires that
the ratio of consolidated EBITDA for the last four fiscal quarters, less income taxes, capital expenditures, principal debt payments
and interest charges be at least 1.25 to 1.00. If we are not in compliance with the these two ratios, we are required to maintain a cash
balance in a pledged cash collateral account equal to 102% of the outstanding amount of any loans and letter of credit obligations
until we meet the aforementioned required ratios. As of September 30, 2018, the balance in the cash collateral account was $25.1
million and is recorded as restricted cash in our Consolidated Balance Sheets. The portion of the cash collateral account associated
with the outstanding letters of credit that are due to expire beyond twelve months has been classified as non-current restricted cash.
As of September 30, 2018, $51.9 million was available for the issuance of letters of credit under the U.S. Revolver, subject to the
cash collateral requirements mentioned above.
The interest rate for amounts outstanding under the U.S. Revolver is a floating rate based upon the higher of the Federal Funds Rate
plus 0.5%, the bank’s prime rate, or the Eurocurrency rate plus 1.00%. Once the applicable rate is determined, a margin ranging up
to 1.25%, is added to the applicable rate.
The U.S. Revolver is collateralized by a pledge of 100% of the voting capital stock of each of our domestic subsidiaries and 65% of
the voting capital stock of each non-domestic subsidiary. The U.S. Revolver provides for customary events of default and carries
39
cross-default provisions with other existing debt agreements. If an event of default (as defined in the U.S. Revolver) occurs and is
continuing, on the terms and subject to the conditions set forth in the U.S. Revolver, amounts outstanding under the U.S. Revolver
may be accelerated and may become immediately due and payable. It also contains financial covenants defining various financial
measures and the levels of these measures with which we must comply, as well as a “material adverse change” clause. A “material
adverse change” is defined as a material change in our operations, business, properties, liabilities or condition (financial or
otherwise) or a material impairment of our ability to perform our obligations under our credit agreements. As of September 30,
2018, we were in compliance with all of the financial covenants of the U.S. Revolver.
Industrial Development Revenue Bonds
We borrowed $8.0 million in October 2001 through a loan agreement funded with proceeds from tax-exempt industrial development
revenue bonds (Bonds). These Bonds were issued by the Illinois Development Finance Authority and were used for the completion
of our Northlake, Illinois facility. Pursuant to the Bond issuance, a reimbursement agreement between us and a major domestic bank
required an issuance by the bank of an irrevocable direct-pay letter of credit (Bond LC), as collateral, to the Bonds’ trustee to
guarantee payment of the Bonds’ principal and interest when due. The Bond LC is subject to both early termination and extension
provisions customary to such agreements. While the Bonds mature in 2021, the reimbursement agreement requires annual
redemptions of $0.4 million that commenced on October 25, 2002. A sinking fund is used for the annual principal payment. The
Bonds bear interest at a floating rate determined weekly by the Bonds’ remarketing agent, which was the underwriter for the Bonds
and is an affiliate of the bank. This interest rate was 1.72% as of September 30, 2018. As of September 30, 2018, we were in
compliance with all of the covenants of the Bonds.
G. Commitments and Contingencies
Long-Term Debt
See Note F herein for a discussion of our long-term debt.
Leases
We lease certain offices, facilities and equipment under operating leases expiring at various dates through 2023. We also sublease
certain facilities that we are no longer occupying. Our sublease terms do not fully cover the existing rental commitments on certain
facilities.
At September 30, 2018, the future minimum annual rental commitments and expected receipts under non-cancelable operating
leases having terms in excess of one year were as follows (in thousands):
Years Ended September 30,
2019................................................................................................................................................... $
2020...................................................................................................................................................
2021...................................................................................................................................................
2022...................................................................................................................................................
2023...................................................................................................................................................
Thereafter ..........................................................................................................................................
Total lease commitments ...................................................................................................................
$
Operating
Leases
Payments
Operating
Sublease
Income
3,002
2,135
2,000
1,875
1,298
—
10,310
$
$
(1,259 )
(38 )
—
—
—
—
(1,297 )
Lease expense and sublease income from third parties was as follows (in thousands):
Rental expense .................................................................................................... $
Sublease income from third parties .....................................................................
Year Ended September 30,
2018
2017
2016
3,432 $
(1,487 )
3,734 $
(1,389 )
4,469
(986 )
In Fiscal 2018, we incurred approximately $0.8 million due to anticipated losses on the sublet of a Canadian facility we exited in a
prior period. In Fiscal 2016, we incurred approximately $0.5 million of restructuring costs related to a Canadian facility that we
leased and exited in the third quarter of Fiscal 2016.
40
Letters of Credit, Bank Guarantees and Bonds
Certain customers require us to post letters of credit, bank guarantees or surety bonds. These security instruments assure that we will
perform under the terms of our contract. In the event of default, the counterparty may demand payment from the bank under a letter
of credit or bank guarantee, or performance by the surety under a bond. To date, there have been no significant expenses related to
security instruments for the periods reported. We were contingently liable for letters of credit and bank guarantees of $26.4 million
as of September 30, 2018. We also had outstanding surety bonds totaling $160.6 million, with additional bonding capacity of $589.4
million available, at September 30, 2018.
We have a $6.5 million facility agreement (Facility Agreement) between Powell (UK) Limited and a large international bank. This
Facility Agreement provides Powell (UK) Limited the ability to enter into bank guarantees as well as forward exchange contracts
and currency options. At September 30, 2018, we had outstanding guarantees totaling $3.3 million under this Facility Agreement
and amounts available under this Facility Agreement were $3.2 million. The Facility Agreement expires in May 2019 and provides
for financial covenants and customary events of default, and carries cross-default provisions with our U.S. Revolver. If an event of
default (as defined in the Facility Agreement) occurs and is continuing, per the terms and subject to the conditions set forth therein,
obligations outstanding under the Facility Agreement may be accelerated and may become or be declared immediately due and
payable. As of September 30, 2018, we were in compliance with all of the financial covenants of the Facility Agreement.
Litigation
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.
Liquidated Damages
Certain of our customer contracts have schedule and performance obligation clauses that, if we fail to meet them, could require us to
pay liquidated damages. Each individual contract defines the conditions under which the customer may make a claim against us. As
of September 30, 2018, our exposure to possible liquidated damages was $2.4 million, of which approximately $0.7 million was
probable. Based on our actual or projected failure to meet these various contractual commitments, $0.7 million has been recorded as
a reduction to revenue. We will attempt to obtain change orders, contract extensions or accelerate project completion which may
resolve the potential for any unaccrued liquidated damage. Should we fail to achieve relief on some or all of these contractual
obligations, we could be required to pay additional liquidated damages, which could negatively impact our future operating results.
H. Income Taxes
The components of the income tax provision (benefit) were as follows (in thousands):
Year Ended September 30,
2018
2017
2016
Current:
Federal ...................................................................................................................
State .......................................................................................................................
Foreign ...................................................................................................................
$
Deferred:
Federal ...................................................................................................................
State .......................................................................................................................
Foreign ...................................................................................................................
973 $
201
449
1,623
(1,834 )
(247 )
(89 )
(2,170 )
Total income tax provision (benefit) ......................................................................
(547 ) $
$
(7,782 ) $
(101 )
350
(7,533 )
392
(515 )
223
100
(7,433 ) $
(1,395 )
449
899
(47 )
1,923
47
360
2,330
2,283
41
Income (loss) before income taxes was as follows (in thousands):
U.S. ........................................................................................................................ $
Other than U.S. .......................................................................................................
(2,103 ) $
(5,596 )
Income (loss) before income taxes .........................................................................
$
(7,699 ) $
2018
2017
(19,932 ) $
3,013
(16,919 ) $
2016
5,087
12,706
17,793
Year Ended September 30,
A reconciliation of the statutory U.S. income tax rate and the effective income tax rate, as computed on earnings before income tax
provision in each of the three years presented in the Consolidated Statements of Operations, was as follows:
Year Ended September 30,
2018
2017
2016
Statutory rate ..........................................................................................................
State income taxes, net of federal benefit ...............................................................
Research and development credit ...........................................................................
Foreign rate differential ..........................................................................................
Foreign withholding ...............................................................................................
Foreign valuation allowance ..................................................................................
NOL carryback impact on deductions ....................................................................
Deferred tax rate differential ..................................................................................
Other ......................................................................................................................
Effective rate ..........................................................................................................
25 %
(2 )
9
1
(3 )
(20 )
—
(4 )
1
7 %
35 %
2
9
2
—
2
(4 )
—
(2 )
44 %
35 %
2
(8 )
(8 )
—
(11 )
—
—
3
13 %
On December 22, 2017, the Tax Cuts and Jobs Act (the Act) was signed into law. The act lowers the corporate tax rate from 35% to
21% effective January 1, 2018. As a result, the U.S. federal statutory rate for Fiscal 2018 is a blended U.S. tax rate of 24.5%.
Our income tax provision (benefit) reflects an effective tax rate on pre-tax results of 7% in Fiscal 2018 compared to 44% and 13% in
Fiscal 2017 and 2016, respectively. The effective rate for Fiscal 2018 was negatively impacted by the relative amounts of
income/loss recognized in various jurisdictions as well as a foreign tax loss which is reserved with a valuation allowance.
Additionally, we recorded deferred tax expense of $0.5 million due to the deferred tax rate differential related to the re-measurement
of our U.S. deferred tax assets under the Act, which were not realized prior to the end of Fiscal 2018. The effective tax rate for Fiscal
2017 was favorably impacted by the lower tax rate in the U.K., the relative amounts of income/loss recognized in the various tax
jurisdictions, the utilization of net operating loss carryforwards in Canada that have been fully reserved with a valuation allowance,
as well as $0.9 million of discrete items recognized during the year, primarily related to the Research and Development Tax Credit
(R&D Tax Credit). The effective tax rate for Fiscal 2016 was favorably impacted by the statutory tax rates in the U.K. and Canada
and the relative amounts of income earned in those jurisdictions, as well as the utilization of net operating loss carryforwards
mentioned above. Additionally, the effective tax rate for Fiscal 2016 was favorably impacted by a $0.8 million discrete item
recorded in the first quarter of Fiscal 2016 related to the retroactive reinstatement of the R&D Tax Credit for the previously expired
period from January 1, 2015 to September 30, 2015.
We have not recorded deferred income taxes on $21.1 million of undistributed earnings of our foreign subsidiaries because of
management’s intent to indefinitely reinvest such earnings. Upon distribution of these earnings in the form of dividends or
otherwise, we may be subject to U.S. income taxes and foreign withholding taxes. It is not practical, however, to estimate the
amount of taxes that may be payable on the eventual remittance of these earnings.
We are subject to income tax in the U.S., multiple state jurisdictions and certain international jurisdictions, primarily the U.K. and
Canada. We do not consider any state in which we do business to be a major tax jurisdiction. We remain open to examination in the
other jurisdictions as follows: Canada 2012 – 2017, United Kingdom 2016 – 2017 and the United States 2013, and 2015 –2017.
42
The net deferred income tax asset was comprised of the following (in thousands):
Current deferred income taxes:
September 30,
2018
2017
Gross assets ......................................................................................................................................
Gross liabilities and valuation allowance .........................................................................................
— $
—
Net current deferred income tax asset .............................................................................................. —
$
Noncurrent deferred income taxes:
Gross assets ...................................................................................................................................... 22,480
Gross liabilities and valuation allowance ......................................................................................... (16,543 )
5,937
5,937 $
Net noncurrent deferred income tax asset (liability) ........................................................................
Net deferred income tax asset ..........................................................................................................
$
3,978
(439 )
3,539
18,559
(18,330 )
229
3,768
The tax effect of temporary differences between U.S. GAAP accounting and federal income tax accounting creating deferred income
tax assets and liabilities was as follows (in thousands):
September 30,
2018
2017
Deferred Tax Assets:
Net operating loss ............................................................................................................................ $
Credit carryforwards ........................................................................................................................
Deferred compensation ....................................................................................................................
Uniform capitalization and inventory ..............................................................................................
Stock-based compensation ...............................................................................................................
Reserve for accrued employee benefits ...........................................................................................
Warranty accrual ..............................................................................................................................
Accrued legal ...................................................................................................................................
Postretirement benefits liability .......................................................................................................
Allowance for doubtful accounts .....................................................................................................
Goodwill ..........................................................................................................................................
Other ................................................................................................................................................
13,444 $
3,987
1,456
1,043
879
791
448
154
112
—
54
112
Deferred tax assets ........................................................................................................................... 22,480
Deferred Tax Liabilities:
Depreciation and amortization .........................................................................................................
(6,946 )
Less: valuation allowance ................................................................................................................
Deferred tax liabilities ..................................................................................................................... (6,946 )
(9,597 )
5,937 $
Net deferred tax asset ......................................................................................................................
$
11,823
3,258
2,009
1,432
1,094
1,208
892
435
264
14
64
44
22,537
(10,002 )
(10,002 )
(8,767 )
3,768
We have established a valuation allowance in the amount of $9.6 million primarily related to the Canadian net deferred tax assets. In
assessing the realizability of net deferred tax assets, 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.
43
A rollforward of the valuation allowance for the past three years is summarized below:
Balance at September 30, 2015 ................................................................................................................................. $
Charged to cost and expenses ....................................................................................................................................
Charged to other accounts .........................................................................................................................................
Balance at September 30, 2016 ................................................................................................................................. $
Charged to cost and expenses ....................................................................................................................................
Charged to other accounts .........................................................................................................................................
Balance at September 30, 2017 ................................................................................................................................. $
Charged to cost and expenses ....................................................................................................................................
Charged to other accounts .........................................................................................................................................
Balance at September 30, 2018 ................................................................................................................................. $
10,056
(1,934 )
317
8,439
(260 )
588
8,767
1,575
(745 )
9,597
A reconciliation of the beginning and ending amount of the unrecognized tax benefits follows (in thousands):
Balance at beginning of period............................................................................... $
Increases related to tax positions taken during the current period..........................
Increases related to tax positions taken during a prior period ................................
Decreases related to expiration of statute of limitations.........................................
Decreases related to settlement with taxing authorities..........................................
Balance at end of period ......................................................................................... $
Year Ended September 30,
2018
2017
2016
1,219 $
180
455
—
—
1,854 $
1,046 $
179
338
—
(344 )
1,219 $
784
293
—
(31 )
—
1,046
Our policy is to recognize interest and penalties related to income tax matters as tax expense. The amount of interest and penalty
expense recorded for the year ended September 30, 2018 was not material.
Due to the expiration of certain federal statutes of limitations and voluntary filings, management believes that, within the next 12
months, it is reasonably possible that the unrecognized tax benefits will decrease by approximately 22%.
Management believes that an adequate provision has been made for any adjustments that may result from tax examinations.
However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in our tax audits are resolved in a
manner not consistent with management’s expectations, we could be required to adjust our provision for income tax in the period
such resolution occurs.
I. Employee Benefit Plans
Retirement Plans
We have defined employee contribution plans for substantially all of our U.S. employees (401(k) plan) and our Canadian employees
(Registered Retirement Savings Plan). We recognized expenses under these plans primarily related to matching contributions of $2.8
million, $2.8 million and $3.9 million in Fiscal 2018, 2017 and 2016, respectively.
Deferred Compensation
We offer a non-qualified deferred compensation plan to a select group of management and highly compensated individuals. The plan
permits the deferral of up to 50% of a participant’s base salary and/or 100% of a participant’s annual incentive bonus. The deferrals
are held in a separate trust, an irrevocable rabbi trust (the Rabbi Trust), which has been established to administer the plan. The Rabbi
Trust is intended to be used as a source of funds to match respective funding obligations to participants. The assets of the trust are
subject to the claims of our creditors in the event that we become insolvent. Consequently, the Rabbi Trust qualifies as a grantor
trust for income tax purposes. We make periodic payments into company-owned life insurance policies held in this Rabbi Trust to
fund the expected obligations arising under this plan. The assets and liabilities of the plan are recorded in other assets and deferred
compensation, respectively, in the accompanying Consolidated Balance Sheets. Changes in the deferred compensation balance are
recorded to compensation expense and reflected within the selling, general and administrative line in the Consolidated Statements of
Operations. The plan is not qualified under Section 401 of the Internal Revenue code. We recorded net compensation expense
44
adjustments of less than $0.1 million related to this plan in Fiscal 2018. At September 30, 2018, total assets held by the trustee were
$6.8 million and the liability was $5.6 million. Of the $6.8 million of assets held by the trustee, $6.7 million is invested in company-
owned life insurance policies and the remainder in mutual funds.
Certain former executives were provided an executive benefit plan which provides for fixed payments upon normal retirement on or
after age 65 and the completion of at least 10 years of continuous employment. The estimated present value of these payments were
accrued over the service life of these individuals, and $0.3 million is recorded in deferred compensation related to this executive
benefit plan. To assist in funding the deferred compensation liability, we invested in company-owned life insurance policies. The
cash surrender value of these policies is presented in other assets and was $3.2 million at September 30, 2018. During the fourth
quarter of Fiscal 2018, we received $1.9 million in proceeds from one of these policies.
Retiree Medical Plan
We have a plan that extends health benefits to retirees that are also available to active employees under our existing health plans.
This plan is unfunded. The plan provides coverage for employees with at least 10 years of service who are age 55 or older but less
than 65. The retiree is required to pay the COBRA rate less a subsidy provided by us based on years of service at the time of
retirement. The unfunded liability is recorded in other long-term liabilities and was $0.9 million and $1.1 million as of
September 30, 2018 and 2017, respectively, and our net periodic postretirement benefit expenses have been less than $0.1 million
for the last three fiscal years. Due to the immateriality of the costs and liabilities of this plan, no further disclosure is being
presented.
J. Stock-Based Compensation
We have the following stock-based compensation plans:
2014 Equity Incentive Plan
In February 2014, our stockholders approved and adopted at the Annual Meeting of Stockholders the 2014 Equity Incentive Plan
(the 2014 Plan) which replaced our 2006 Equity Compensation Plan (2006 Plan). Persons eligible to receive awards under the 2014
Plan include our officers and employees. The 2014 Plan authorizes stock options, stock appreciation rights, restricted stock,
restricted stock units and performance-based awards, as well as certain other awards.
In accordance with the 2014 Plan, the compensation committee has authorized grants of restricted stock units (RSUs) to certain
officers and key employees of the company. The fair value of the RSUs is based on the closing price of our common stock as
reported on the NASDAQ Global Market on the grant dates. Typically, these grants vest over a three-year period from their date of
issuance. Sixty percent of the grant is time-based and vests over a three-year period on each anniversary of the grant date, based on
continued employment. The remaining forty percent of the grant is earned based on the three-year earnings performance of the
Company following the grant date. At September 30, 2018, there were 190,500 RSUs outstanding. The RSUs do not have voting
rights but do receive dividend equivalents upon vesting; additionally, the shares of common stock underlying the RSUs are not
considered issued and outstanding until vested and common stock is issued.
Total RSU activity (number of shares) for the past fiscal year is summarized below:
Outstanding at September 30, 2017 .................................................................................................
Granted ............................................................................................................................................
Vested ..............................................................................................................................................
Forfeited/cancelled ..........................................................................................................................
Outstanding at September 30, 2018 .................................................................................................
Number of
Restricted
Stock
Units
177,737 $
88,000
(51,437 )
(23,800 )
190,500 $
Weighted
Average
Grant Value
Per Share
37.00
29.88
35.11
41.39
33.73
We have reserved 750,000 shares of common stock for issuance under the 2014 Plan. As of September 30, 2018, there were 633,011
shares of common stock left available.
2014 Non-Employee Director Equity Incentive Plan
In February 2014, our stockholders approved and adopted at the Annual Meeting of Stockholders the 2014 Non-Employee Director
Equity Incentive Plan (the 2014 Director Plan). The total number of shares of common stock reserved under the plan is
45
150,000 shares. The plan is administered by the Compensation Committee. Eligibility to participate in the plan is limited to those
individuals who are members of the Board of Directors of the Company and who are not employees of the Company or any affiliate
of the Company.
Under the terms of the 2014 Director Plan, the maximum number of shares that may be granted during any calendar year to any
individual is 12,000 shares. The total number of shares that may be issued for awards to any single participant during a calendar year
for other stock-based awards (excluding stock options and SARs) is 4,000 shares. The Compensation Committee has determined
that each non-employee director will receive 2,000 restricted shares of the Company’s common stock annually. Fifty percent of the
restricted stock granted to each of our non-employee directors vests immediately, while the remaining fifty percent vests on the
anniversary of the grant date. Compensation expense is recognized immediately for the first fifty percent of the restricted stock
granted, while compensation expense for the remaining fifty percent will be recognized over the remaining vesting period based on
the closing price per share on the grant date.
Under this 2014 Director Plan, in February 2018, we issued 6,000 shares of restricted stock to our non-employee directors at a price
of $27.88 per share and in April 2018, we issued 1,000 shares of restricted stock to a single non-employee director at a price of
$27.15. In February 2017, we issued 17,000 shares of restricted stock to our non-employee directors at a price of $34.24 per share.
The total number of shares of common stock available for future awards under the 2014 Director plan was 70,600 shares as of
September 30, 2018.
At September 30, 2018 and 2017, there were 7,000 shares and 16,000 shares of unvested restricted stock outstanding, respectively.
Total compensation expense related to restricted stock grants under all plans was $0.5 million, $0.7 million and $0.7 million for the
years ended September 30, 2018, 2017 and 2016, respectively. Total compensation expense related to RSU’s under all plans was
$2.7 million, $2.0 million and $4.2 million for the years ended September 30, 2018, 2017 and 2016, respectively.
We record the amortization of non-vested restricted stock and restricted stock units as an increase to additional paid-in capital. As of
September 30, 2018 and 2017, amounts of deferred compensation expense not yet recognized related to non-vested stock totaled
$1.2 million and $1.6 million, respectively. As of September 30, 2018, the total weighted average remaining contractual life of our
restricted stock and RSU’s is approximately six months and 1.3 years, respectively.
K. Fair Value Measurements
We measure certain financial assets and liabilities at fair value. Fair value is defined as an “exit price” which represents the amount
that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the
measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market
participants would use in valuing an asset or liability. The accounting guidance requires the use of valuation techniques to measure
fair value that maximize the use of observable inputs and minimize the use of unobservable inputs. As a basis for considering such
assumptions and inputs, a fair value hierarchy has been established that identifies and prioritizes three levels of inputs to be used in
measuring fair value.
The three levels of the fair value hierarchy are as follows:
Level 1 — Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2 — Inputs other than the quoted prices in active markets that are observable either directly or indirectly, including:
quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets
that are not active or other inputs that are observable or can be corroborated by observable market data.
Level 3 — Unobservable inputs that are supported by little or no market data and require the reporting entity to develop its
own assumptions.
46
The following table summarizes the fair value of our assets and liabilities that were accounted for at fair value on a recurring basis
as of September 30, 2018 (in thousands):
Fair Value Measurements at September 30, 2018
Quoted Prices in
Active Markets
for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Fair Value at
September 30,
2018
Assets:
Cash and cash equivalents .....................................................
Short-term investments ..........................................................
Restricted cash .......................................................................
Other assets ...........................................................................
$
36,584 $
13,170
25,141
—
— $
—
—
6,817
— $
—
—
—
36,584
13,170
25,141
6,817
Liabilities:
Deferred compensation ..........................................................
—
5,644
—
5,644
The following table summarizes the fair value of our assets and liabilities that were accounted for at fair value on a recurring basis
as of September 30, 2017 (in thousands):
Fair Value Measurements at September 30, 2017
Quoted Prices in
Active Markets
for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Fair Value at
September 30,
2017
Assets:
Cash and cash equivalents .....................................................
Short-term investments ..........................................................
Restricted cash .......................................................................
Other assets ...........................................................................
$
68,359 $
26,829
24,851
—
— $
—
—
6,442
— $
—
—
—
68,359
26,829
24,851
6,442
Liabilities:
Deferred compensation ..........................................................
—
4,991
—
4,991
Fair value guidance requires certain fair value disclosures be presented in both interim and annual reports. The estimated fair value
amounts of financial instruments have been determined using available market information and valuation methodologies described
below.
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.
Restricted Cash - Restricted cash represents a pledged cash collateral balance which is required under our amended credit agreement
and is held in an interest-bearing savings account. See Note F for further discussion on restricted cash.
Deferred Compensation – We hold investments in an irrevocable Rabbi Trust for our deferred compensation plan. The assets include
both mutual fund investments and company-owned life insurance policies and are included in other assets in the accompanying
Consolidated Balance sheets. Because the mutual funds and company-owned life insurance policies are combined in the plan, they
are therefore categorized as Level 2 in the fair value measurement hierarchy. The deferred compensation liability represents the
investment options that the plan participants have designated to serve as the basis for measurement of the notional value of their
accounts. Because the deferred compensation liability is intended to offset the plan assets, it is therefore also categorized as Level 2
in the fair value measurement hierarchy.
47
L. Geographic Information
Revenues by country represent sales to unaffiliated customers as determined by the ultimate destination of our products and
services, summarized for the last three fiscal years by region in the table below (in thousands):
United States .......................................................................................................... $
Canada ....................................................................................................................
Middle East and Africa ...........................................................................................
Far East ..................................................................................................................
Europe ....................................................................................................................
Mexico, Central and South America ......................................................................
Total revenues.........................................................................................................
$
Year Ended September 30,
2018
335,743 $
42,235
38,490
12,976
10,538
8,734
448,716 $
2017
279,352 $
45,540
26,639
3,877
21,194
19,309
395,911 $
2016
405,298
77,252
40,294
7,895
26,200
8,304
565,243
Long-lived assets:
United States .................................................................................................................................... $
Canada .............................................................................................................................................
United Kingdom ..............................................................................................................................
Total .................................................................................................................................................
$
September 30,
2018
2017
76,016 $
48,126
4,622
128,764 $
82,589
52,122
4,709
139,420
Long-lived assets by country consist of property, plant and equipment, net of accumulated depreciation and are determined
based on the location of the tangible assets.
M. Restructuring and Separation Expenses
In Fiscal 2018, we incurred approximately $0.8 million of restructuring costs due to anticipated losses on the sublet of a Canadian
facility that we exited in a prior period.
In Fiscal 2017, we incurred approximately $1.3 million of restructuring costs, as we continued to reduce our overall cost structure to
better align our costs with future production requirements.
In Fiscal 2016, we incurred approximately $7.9 million of separation costs, of which $3.8 million were separation costs related to
the departure of our former Chief Executive Officer in December 2015. Additionally in Fiscal 2016, we incurred approximately $0.5
million of restructuring costs related to a Canadian facility that we leased and exited in the third quarter of Fiscal 2016.
N. Quarterly Information
The table below sets forth the unaudited consolidated operating results by fiscal quarter for the years ended September 30, 2018 and
2017 (in thousands, except per share data):
Revenues ............................................................. $
Gross profit .........................................................
Net income (loss) ................................................
Earnings (loss) per share:
2018 Quarters
First
90,184 $
10,554
(5,662 )
Second
101,505 $
12,421
(3,330 )
Third
122,130 $
18,375
301
Fourth
134,897 $
24,005
1,539
2018
448,716
65,355
(7,152 )
Basic .................................................................... $
Diluted ................................................................. $
(0.49 ) $
(0.49 ) $
(0.29 ) $
(0.29 ) $
0.03 $
0.03 $
0.13 $
0.13 $
(0.62 )
(0.62 )
48
Revenues ............................................................. $
Gross profit .........................................................
Net income (loss) ................................................
Earnings (loss) per share:
2017 Quarters
First
110,341 $
14,999
(300 )
Second
104,680 $
15,822
(829 )
Third
Fourth
85,927 $
9,054
(3,215 )
94,963 $
10,894
(5,142 )
2017
395,911
50,769
(9,486 )
Basic .................................................................... $
Diluted ................................................................. $
(0.03 ) $
(0.03 ) $
(0.07 ) $
(0.07 ) $
(0.28 ) $
(0.28 ) $
(0.45 ) $
(0.45 ) $
(0.83 )
(0.83 )
The sum of the individual earnings per share amounts may not agree with year-to-date earnings per share as each period’s
computation is based on the weighted-average number of shares outstanding during the period.
O. Subsequent Events
On November 5, 2018, our Board of Directors declared a quarterly cash dividend on our common stock in the amount of $0.26 per
share. The dividend is payable on December 19, 2018 to shareholders of record at the close of business on November 21, 2018.
49
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We have established and maintain a system of disclosure controls and procedures that are designed to provide reasonable assurance
that information required to be disclosed in our reports filed with the SEC pursuant to the Securities Exchange Act of 1934, as
amended (Exchange Act), is recorded, processed, summarized and reported within the time periods specified in the rules and forms
of the SEC and that such information is accumulated and communicated to our management, including our Chief Executive Officer
(CEO) and Chief Financial Officer (CFO), as appropriate, to allow timely decisions regarding required disclosures.
Management, with the participation of our CEO and CFO, has evaluated the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period
covered by this Annual Report on Form 10-K. Based on such evaluation, our CEO and CFO have each concluded that, as of
September 30, 2018, the end of the period covered by this Annual Report on Form 10-K, our disclosure controls and procedures
were effective to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under
the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms
and that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate, to
allow timely decisions regarding required disclosures.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining effective internal control over financial reporting as defined in Rule
13a-15(f) under the Exchange Act. Our system of internal control was designed using a top-down risk-based approach 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. Due to 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 ineffective due to changes in conditions or deterioration in the degree of compliance with the policies or
procedures.
Management of the Company has assessed the effectiveness of our internal control over financial reporting as of September 30,
2018. Management evaluated the effectiveness of our internal control over financial reporting based on the criteria in Internal
Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Based on management’s evaluation, management has concluded that our internal control over financial reporting was
effective at the reasonable assurance level as of September 30, 2018, based on criteria in Internal Control – Integrated Framework
(2013) issued by the COSO.
PricewaterhouseCoopers LLP, an independent registered public accounting firm, has audited and issued their report on the
effectiveness of our internal control over financial reporting as of September 30, 2018, which appears in their report on the financial
statements included herein.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during the last fiscal quarter that have
materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.
50
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this item is incorporated in this Annual Report by reference to our definitive proxy statement pursuant
to Regulation 14A, to be filed with the Securities and Exchange Commission not later than 120 days after the close of our fiscal year
ended September 30, 2018.
We have adopted a Code of Business Conduct and Ethics that applies to all employees, including our executive officers and
directors. A copy of our Code of Business Conduct and Ethics may be obtained at the Investor Relations section of our website,
www.powellind.com, or by written request addressed to the Secretary, Powell Industries, Inc., 8550 Mosley Road, Houston, Texas
77075. We will satisfy the requirements under Item 5.05 of Form 8-K regarding disclosure of amendments to, or waivers from,
provisions of our code of ethics that apply to the chief executive officer, chief financial officer or controller by posting such
information on our website.
Item 11. Executive Compensation
The information required by this item is incorporated in this Annual Report by reference to our definitive proxy statement pursuant
to Regulation 14A, to be filed with the Securities and Exchange Commission not later than 120 days after the close of our fiscal year
ended September 30, 2018.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item is incorporated in this Annual Report by reference to our definitive proxy statement pursuant
to Regulation 14A, to be filed with the Securities and Exchange Commission not later than 120 days after the close of our fiscal year
ended September 30, 2018.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item is incorporated in this Annual Report by reference to our definitive proxy statement pursuant
to Regulation 14A, to be filed with the Securities and Exchange Commission not later than 120 days after the close of our fiscal year
ended September 30, 2018.
Item 14. Principal Accounting Fees and Services
The information required by this item is incorporated in this Annual Report by reference to our definitive proxy statement pursuant
to Regulation 14A, to be filed with the Securities and Exchange Commission not later than 120 days after the close of our fiscal year
ended September 30, 2018.
51
PART IV
Item 15. Exhibits. Financial Statement Schedules
1. Financial Statements. Reference is made to the Index to Consolidated Financial Statements at Item 8 of this Annual Report.
2. Financial Statement Schedule. All financial statement schedules are omitted because they are not applicable or the required
information is shown in the consolidated financial statements or the notes to the consolidated financial statements included
elsewhere in this Annual Report.
3. Exhibits.
Number
Description of Exhibits
3.1 — Certificate of Incorporation of Powell Industries, Inc. filed with the Secretary of State of the State of Delaware on
February 11, 2004 (filed as Exhibit 3.1 to our Form 8-A/A filed November 1, 2004, and incorporated herein by
reference).
3.2 — Amended and Restated By-laws of Powell Industries, Inc. (filed as Exhibit 3.1 to our Form 8-K filed October 12,
2012, and incorporated herein by reference).
10.1 — Description of Supplemental Executive Benefit Plan (filed as Exhibit 10 to our Form 10-K for the fiscal year
ended October 31, 1984, and incorporated herein by reference).
10.2 — Powell Industries, Inc. Directors’ Fees Program (filed as Exhibit 10.7 to our Form 10-K for the fiscal year ended
October 31, 1992, and incorporated herein by reference).
10.3 — Powell Industries, Inc. Executive Severance Protection Plan (filed as Exhibit 10.7 to our Form 10-K for the fiscal
year ended October 31, 2002, and incorporated herein by reference).
10.4 — Powell Industries, Inc. Deferred Compensation Plan (filed as Exhibit 10.9 to our Form 10-K for the fiscal year
ended October 31, 2002, and incorporated herein by reference).
10.5 — Banking facilities between HSBC Bank plc and Switchgear & Instrumentation Limited and Switchgear &
Instrumentation Properties Limited dated September 12, 2005 (filed as Exhibit 10.16 to our Form 10-K for the
fiscal year ended October 31, 2005, and incorporated herein by reference).
10.6 — Lease Agreement between the Company and C&L Partnership, Ltd. dated April 19, 2006 (filed as Exhibit 10.2 to
our Form 8-K filed August 9, 2006, and incorporated herein by reference).
10.7 — Employment Agreement dated as of May 8, 2012 between the Company and Don R. Madison (filed as Exhibit
10.1 to our Form 10-Q for the quarter ended March 31, 2012, and incorporated herein by reference).
10.8 — Employment Agreement dated as of May 8, 2012 between the Company and Milburn E. Honeycutt (filed as
Exhibit 10.2 to our Form 10-Q for the quarter ended March 31, 2012, and incorporated herein by reference).
10.9 — Amended and Restated Credit Agreement dated as of April 26, 2012, between Powell PowerComm Inc., as
Borrower, Powell Industries, Inc., Nextron Limited, PPC Technical Services Inc., as Guarantors, and HSBC Bank
Canada, as Lender (filed as Exhibit 10.4 to our Form 10-Q for the quarter ended March 31, 2012, and
incorporated herein by reference).
10.10 — Stock Purchase Agreement dated as of January 15, 2014, between the Company and Kapsch TrafficCom IVHS,
Inc. (filed as Exhibit 10.1 to our Form 8-K filed January 17, 2014, and incorporated herein by reference).
**10.11 — Amended and Restated Powell Supply Agreement dated as of December 30, 2013, between the Company and
General Electric Company (filed as Exhibit 10.2 to our Form 10-Q filed February 5, 2014 and incorporated
herein by reference).
10.12 — Restated Credit Agreement dated as of December 31, 2013, between the Company and Bank of America, N.A.
(filed as Exhibit 10.3 to our Form 10-Q filed February 5, 2014 and incorporated herein by reference).
52
Number
Description of Exhibits
10.13 — 2014 Equity Incentive Plan (filed as Exhibit 10.2 to our Form 10-Q filed May 7, 2014 and incorporated herein by
reference).
10.14 — Form of Restricted Stock Award Agreement under 2014 Equity Incentive Plan (filed as Exhibit 10.3 to our Form
10-Q filed May 7, 2014 and incorporated herein by reference).
10.15 — Form of Restricted Stock Unit Award Agreement under 2014 Equity Incentive Plan (filed as Exhibit 10.4 to our
Form 10-Q filed May 7, 2014 and incorporated herein by reference).
10.16 — Form of Performance Unit Award Agreement under 2014 Equity Incentive Plan (filed as Exhibit 10.5 to our Form
10-Q filed May 7, 2014 and incorporated herein by reference).
10.17 — Form of Stock Option Award Agreement under 2014 Equity Incentive Plan (filed as Exhibit 10.6 to our Form 10-
Q filed May 7, 2014 and incorporated herein by reference).
10.18 — Form of Stock Appreciation Right Award Agreement under 2014 Equity Incentive Plan (filed as Exhibit 10.7 to
our Form 10-Q filed May 7, 2014 and incorporated herein by reference).
10.19 — 2014 Non-Employee Director Equity Incentive Plan (filed as Exhibit 10.8 to our Form 10-Q filed May 7, 2014
and incorporated herein by reference).
10.20 — Form of Restricted Stock Award Agreement under 2014 Non-Employee Director Equity Incentive Plan (filed as
Exhibit 10.9 to our Form 10-Q filed May 7, 2014 and incorporated herein by reference).
10.21 — First Amendment to Credit Agreement, dated as of March 28, 2014, among Powell Industries, Inc., as Parent,
certain subsidiaries of Powell Industries, Inc. identified therein, as Guarantors, Bank of America, N.A., as
Administrative Agent, Swing Line Lender and L/C issuer, and the Lenders party thereto (filed as Exhibit 10.10 to
our Form 10-Q filed May 7, 2014 and incorporated herein by reference).
10.22 — Renewed banking facilities between HSBC Bank plc and Powell (UK) Limited dated October 20, 2014 (filed as
Exhibit 10.48 to our Form 10-K filed December 3, 2014, and incorporated herein by reference).
10.23 — Second Amendment to Amended Credit Agreement, dated December 31, 2014, among Powell Industries, Inc., as
Parent, certain subsidiaries of Powell Industries, Inc. identified therein, as Guarantors, Bank of America, N.A., as
Administrative Agent, Swing Line Lender and L/C issuer, and the Lenders party thereto (filed as Exhibit 10.1 to
our Form 10-Q filed February 4, 2015 and incorporated herein by reference).
10.24 — Amending Agreement to Amended and Restated Credit Agreement, effective as of March 31, 2015, between
Powell Canada Inc., Powell Industries, Inc., Nextron Limited, PCG Northern Services Inc. and HSBC Bank
Canada (filed as Exhibit 10.1 to our Form 10-Q filed May 6, 2015 and incorporated herein by reference).
10.25 — Severance Agreement and Release effective as of December 24, 2015, between the Company and Michael A.
Lucas. (filed as Exhibit 10.1 to our Form 10-Q filed February 3, 2016 and incorporated herein by reference).
10.26 — Employment Agreement dated September 29, 2016, between the Company and Brett A. Cope (filed as Exhibit
10.1 to our 8-K filed September 30, 2016 and incorporated herein by reference).
10.27
Third Amendment to Credit Agreement, dated June 27, 2017, between Powell Industries, Inc., the subsidiaries of
Powell named therein, Bank of America, N.A., as Administrative Agent, Swingline Lender and L/C issuer and
the Lenders party thereto (filed as Exhibit 10.1 to our Form 8-K filed June 30, 2017 and incorporated herein by
reference).
*21.1 — Subsidiaries of Powell Industries, Inc.
*23.1 — Consent of PricewaterhouseCoopers LLP.
*31.1 — Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a).
*31.2 — Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a).
*32.1 — Certification of Chief Executive Officer Pursuant to Section 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
53
Number
Description of Exhibits
*32.2 — Certification of Chief Financial Officer Pursuant to Section 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS — XBRL Instance Document
101.SCH — XBRL Taxonomy Extension Schema Document
101.CAL — XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF — XBRL Taxonomy Extension Definition Linkbase Document
101.LAB — XBRL Taxonomy Extension Label Linkbase Document
101.PRE — XBRL Taxonomy Extension Presentation Linkbase Document
*
**
Filed herewith.
Portions of this exhibit have been omitted based on a request for confidential treatment pursuant to Rule 24b-2 of the
Securities Exchange Act of 1934. Such omitted portions have been filed separately with the Commission.
Item 16. Form 10-K Summary
None.
54
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
POWELL INDUSTRIES, INC.
/s/ Brett A. Cope
By:
Brett A. Cope
President and Chief Executive
Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant in the capacities and on the date indicated:
Signature
/s/Thomas W. Powell
Thomas W. Powell
/s/Brett A. Cope
Brett A. Cope
/s/Don R. Madison
Don R. Madison
/s/Milburn Honeycutt
Milburn Honeycutt
/s/ Christopher E. Cragg
Christopher E. Cragg
/s/ Perry L. Elders
Perry L. Elders
/s/ Bonnie V. Hancock
Bonnie V. Hancock
/s/ James W. McGill
James W. McGill
/s/ John D. White
John D. White
/s/Richard E. Williams
Richard E. Williams
Date: December 12, 2018
Title
Chairman of the Board
Director
President and Chief Executive Officer
(Principal Executive Officer)
Executive Vice President
Chief Financial and Administrative Officer
(Principal Financial Officer)
Vice President
Chief Accounting Officer
Corporate Controller
(Principal Accounting Officer)
Director
Director
Director
Director
Director
Director
55
CORPORATE INFORMATION
Powell Industries, Inc.
8550 Mosley Road
Houston, Texas 77075
713.944.6900
Corporate Counsel
Winstead PC
600 Travis Street, Suite 5200
Houston, Texas 77002
713.650.8400
Independent Public
Accountants
PricewaterhouseCoopers LLP
1000 Louisiana Street
Suite 5800
Houston TX 77002
713.356.4000
Board of Directors
Thomas W. Powell
Chairman of the Board
Brett A. Cope
Christopher E. Cragg
Perry L. Elders
Bonnie V. Hancock
James W. McGill
John D. White
Richard E. Williams
Officers
Brett A. Cope
President and
Chief Executive Officer
Michael W. Metcalf
Executive Vice President and
Chief Financial Officer
Milburn E. Honeycutt
Vice President, Corporate
Controller and Chief
Accounting Officer
Powell Industries, Inc.
8550 Mosley Road
Houston, Texas 77075
powellind.com
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