What changed in this filing

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Item 7. Management’s Discussion and Analysis

2020-12-09 compared with 2019-12-05 · 126 added, 82 removed, 146 unchanged (59% of the section changed)

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We develop, design, manufacture and service custom-engineered equipment and systems for the distribution, control and monitoring of electrical energy.

Headquartered in Houston, Texas, we serve the oil and gas markets, including onshore and offshore oil and gas production, pipeline, refining and liquid natural gas terminals, as well as petrochemical, electric utility and light traction power.

Headquartered in Houston, Texas, we serve the oil and gas markets, including onshore and offshore oil and gas production, pipeline, refining and LNG terminals, as well as petrochemical, electric utility and light traction power.

Revenues and costs are primarily related to custom engineered-to-order equipment and systems and are accounted for under percentage-of-completion accounting, which precludes us from providing detailed price and volume information.

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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 reduced their capital budgets and cut costs, and in certain instances delayed or canceled projects that we were pursuing.

This decline in projects negatively impacted our results in Fiscal 2018.

However, customers have begun to invest in projects in our key oil and gas and petrochemical markets, and this shift has had a favorable impact on our orders and backlog over recent quarters, resulting in increased revenues in Fiscal 2019.

Within the industrial sector, specifically oil, gas and petrochemical, the demand for our electrical distribution solutions is very cyclical and closely correlated to the level of capital expenditures of our end user customers as well as prevailing global economic conditions.

Beginning in late Fiscal 2018, the combination of a growing global economy, abundant sources of favorably priced natural gas feedstock, and an energy industry focus on transition to natural gas and cleaner-burning fuels drove an increase in capital investment opportunities, specifically across the oil, gas and petrochemical sectors.

We have seen opportunities for natural gas related projects targeting global demand for cleaner-burning fuels.

Additionally, projects within the domestic petrochemical sector have benefited from the low feedstock prices of natural gas.

Specific to natural gas, the business was awarded a substantial contract in the second quarter of Fiscal 2020 that will support the integrated electrical distribution requirements for a large domestic industrial complex.

This specific project will take over three years to design, manufacture, integrate, test and ship.

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

The spread of COVID-19 has created significant uncertainty and economic disruption across the world during the second half of Fiscal 2020 and continuing into Fiscal 2021.

This pandemic has negatively impacted energy demand, which in turn has resulted in considerable volatility across the oil and gas commodity markets.

The demand for our products and services as well as our operations have been negatively impacted by COVID-19, resulting from the associated reduction in oil and gas demand and volatility in commodity prices noted above.

From an operational standpoint, although our facilities are located in areas that have in the past been subject to stay-at-home orders, we have not closed any of our facilities for an extended period of time and have operated as an "essential business" under local government orders.

However, as a result of the uncertainty that our customers are currently experiencing, some projects have been cancelled, and certain of our customers have asked that we delay our manufacturing on their projects as their operations have been negatively impacted by this pandemic and the reduced oil and gas demand.

We have experienced supply disruptions and anticipate that these supply disruptions may continue.

We continue to monitor and work with our suppliers who

have been impacted by this pandemic to ensure that we are able to meet our customer commitments.

We also have reviewed and will continue to review contracts with our suppliers, making adjustments accordingly.

We continue to take the necessary steps to ensure the safety of our employees, customers and vendors.

These steps include, among others, promoting increased social distancing practices and enhanced cleaning efforts in our offices and facilities.

We are utilizing and exploring the use of technology across our operations to further enhance social distancing and improve safety.

These safety precautions have and may continue to have an adverse impact on our costs, efficiency and productivity going forward.

In response to the lower demand across select end markets, we have and will continue to take various actions to reduce costs.

During the third quarter of Fiscal 2020, we reduced our global workforce by approximately 12% resulting in severance costs of $1.4 million.

Additionally, we instituted a temporary furlough program for our salaried workforce in North America which reduced salaried compensation by $1.3 million in the second half of Fiscal 2020.

We have also reduced our capital and discretionary spending in response to current business conditions and will continue to monitor the economic conditions during Fiscal 2021.

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

Results of Operations

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Revenue and Gross Profit

Revenues increased by 15% , or $68.5 million , to $517.2 million in Fiscal 2019 , primarily due to improved market conditions, primarily in our oil and gas markets over the past few quarters.

Domestic revenues increased by 22% , or $72.8 million , to $405.0 million in Fiscal 2019 .

International revenues decreased by 4% to $112.1 million in Fiscal 2019 , primarily due to a slight decrease in export projects from our domestic facilities.

Revenues increased by $1.3 million, to $518.5 million in Fiscal 2020 resulting from the solid backlog position at the beginning of Fiscal 2020 and the improved market conditions across our petrochemical and oil and gas markets beginning in late Fiscal 2018.

Domestic revenues decreased by 2%, or $6.2 million, to $398.8 million in Fiscal 2020.

International revenues increased by 7% to $119.7 million in Fiscal 2020, driven largely by increased end market activity across the Middle East and Asia.

Our international revenues include both revenues generated from our international facilities as well as revenues from export projects generated at our domestic facilities.

Commercial and industrial revenue increased by 21% , or $69.0 million , to $394.2 million in Fiscal 2019 , driven by the strength across the core oil and gas and petrochemical end markets.

Public and private utilities revenue decreased by 5% , or $4.0 million , to $85.0 million in Fiscal 2019 , as we completed various large domestic utility projects in the backlog in Fiscal 2018.

Municipal and transit revenue increased by 10% , or $3.5 million , to $38.0 million in Fiscal 2019 , primarily from project timing and product mix of projects for some of our key municipal customers.

Revenue from our core oil and gas markets decreased by 19%, or $47.1 million, to $195.2 million in Fiscal 2020 while petrochemical revenue increased by 36%, or $33.3 million, to $126.7 million in Fiscal 2020.

The economic impact resulting from the COVID-19 pandemic and associated reduction in global demand across the oil and gas end markets has negatively impacted our orders rate and corresponding revenue.

The partial offset in favorable petrochemical revenues is being generated by the successful execution of previously booked orders from our petrochemical end markets and lower natural gas prices.

Revenue from utility markets increased by 5%, or $3.8 million, to $88.8 million and traction market revenue increased by 58%, or $15.6 million, to $42.4 million in Fiscal 2020, primarily driven by an increase in volume across our international locations.

Revenue from all other markets combined decreased by $4.3 million to $65.4 million in Fiscal 2020.

Gross profit increased by 9%, or $7.6 million, to $94.6 million in Fiscal 2020.

Gross profit as a percentage of revenues increased to 17% in Fiscal 2019 , compared to 15% in Fiscal 2018 , due to improved market conditions and efficiencies from increased volume in our domestic and Canadian manufacturing facilities.

Gross profit as a percentage of revenues increased to 18% in Fiscal 2020, compared to 17% in Fiscal 2019, due to strong margins in backlog as well as cost efficiencies and productivity in our North American manufacturing facilities.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased 5% , or $3.2 million , to $70.0 million in Fiscal 2019 , primarily due to increased personnel costs associated with increased project volume.

Selling, general and administrative expenses, as a percentage of revenues, decreased to 14% in Fiscal 2019 compared to 15% in Fiscal 2018 , primarily due to the increase in revenues and our continued focus on our cost structure.

Selling, general and administrative expenses decreased 3%, or $2.3 million, to $67.7 million in Fiscal 2020, primarily due to decreased personnel costs as a result of workforce reductions and lower travel-related costs resulting from the COVID-19 pandemic.

Selling, general and administrative expenses, as a percentage of revenues, decreased to 13% in Fiscal 2020 compared to 14% in Fiscal 2019, primarily due to our continued focus on aligning our cost structure with anticipated volume.

Insurance Proceeds

In Fiscal 2019 , we settled a 2017 business interruption insurance claim relating to Hurricane Harvey and received proceeds of $1.0 million , which is included within operating income.

Restructuring, Separation and Other Expenses, Net

In Fiscal 2019, we settled a 2017 business interruption insurance claim relating to Hurricane Harvey and received proceeds of $1.0 million, which was included within operating income.

Restructuring and Other, Net

In response to the COVID-19 pandemic, reductions in global oil and gas demand and volatility of commodity prices, we implemented workforce reductions across the business.

As a result, we recorded $1.4 million of separation costs during Fiscal 2020.

In Fiscal 2019, we recorded additional lease expense of $0.7 million related to certain unused facility leases in Canada.

We also recorded income from a recovery of $0.7 million in Fiscal 2019 as a result of a favorable settlement of a claim related to the divestiture of a subsidiary in Fiscal 2014.

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.

We did not record other income in Fiscal 2019 .

In Fiscal 2018, we recorded the final $0.5 million amortization of the deferred gain from the amended supply agreement (see Note F 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.

Income Tax Provision/Benefit

We recorded income tax provision of $2.4 million in Fiscal 2019 , compared to an income tax benefit of $0.5 million in Fiscal 2018 .

The effective tax rate for Fiscal 2019 was 20% compared to an effective tax rate of 7% for Fiscal 2018 .

For Fiscal 2019 , the effective tax rate approximated the U.S.

federal statutory rate due to the benefit of the utilization of net operating loss carryforwards in Canada that were fully reserved with a valuation allowance and the benefit from Research and Development Tax Credit (R&D Tax Credit).

These tax benefits were largely offset by state income tax expense and other non-deductible costs.

Due to the loss position in Fiscal 2018 , the effective tax rate was negatively impacted by foreign tax losses for which no tax benefit was recognized and tax expense of $0.5 million due to the re-measurement of U.S.

deferred tax assets as a result of tax reform.

Net Income/Loss

In Fiscal 2019 , net income of $9.9 million , or $0.85 per diluted share, improved from a net loss of $7.2 million , or $0.62 per diluted share in Fiscal 2018 , primarily due to improved market conditions and efficiencies from increased volume in our domestic and Canadian manufacturing facilities.

The order backlog at September 30, 2019 was $419.0 million , a 61% increase from the $260.9 million at September 30, 2018 , primarily due to increased demand in our core oil and gas and petrochemical markets.

New orders increased by 47% in Fiscal 2019 to $676.1 million , compared to $458.9 million in Fiscal 2018 , primarily due to improved market conditions.

During Fiscal 2020, we recorded other income of $0.5 million related to a death benefit received from our company-owned life insurance policy related to a retired employee.

Income Tax Provision

We recorded an income tax provision of $3.7 million in Fiscal 2020, resulting in an effective tax rate of 18%, compared to an income tax provision of $2.4 million in Fiscal 2019 at an effective tax rate of 20%.

In Fiscal 2020, the effective tax rate was favorably impacted by the current year estimated Research and Development Tax Credit (R&D Tax Credit) as well as the utilization of net operating loss carryforwards in Canada that were fully reserved with a valuation allowance.

Additionally, we reversed a reserve of $1.7 million resulting from a favorable settlement of an IRS audit and the expiration of statutes of limitations.

The effective tax rate for Fiscal 2020 was negatively impacted by the valuation allowance set up against our U.K.

deferred tax assets in the amount of $0.5 million.

The effective tax rate for Fiscal 2019 approximated the U.S.

federal statutory rate as the immaterial losses incurred by various foreign jurisdictions reserved with a valuation allowance had a minimal impact on the effective tax rate.

In Fiscal 2020, net income of $16.7 million, or $1.42 per diluted share, improved from a net income of $9.9 million, or $0.85 per diluted share in Fiscal 2019, primarily from increased gross profit resulting from favorable productivity, as well as lower selling and administrative costs and the favorable impact of the reversal of the reserves for unrecognized tax benefits, which was partially offset by the separation costs incurred in Fiscal 2020.

The order backlog at September 30, 2020 was $476.8 million, a 14% increase from the $419.0 million at September 30, 2019.

The increase in backlog is due in large part to the substantial contract awarded in the second quarter of Fiscal 2020 that will support the integrated electrical distribution requirements for a large domestic industrial complex.

Bookings, net of cancellations and scope reductions, decreased by 15% in Fiscal 2020 to $576.8 million, compared to $676.1 million in Fiscal 2019, primarily due to decreased global demand across our core oil and gas markets.

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 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.

Cyclicality is predominantly driven by macroeconomic variables that directly impact customer demand.

These variables are most often driven by global economic conditions and/or environmental, safety or regulatory changes which may affect the manner in which our customers proceed with capital investments.

Our customers routinely analyze various factors including the demand and price for oil, gas and electrical energy, the overall economic and financial environment, governmental budgets, regulatory actions and environmental concerns throughout the procurement decision process.

These factors influence the release of new capital projects by our customers, which are traditionally awarded in competitive bid situations.

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A significant portion of our revenues has historically been from the oil, gas and petrochemical markets.

Oil and gas commodity price levels have been unstable over the last several years, and our customers delayed some of their major capital investment

Commodity prices have stabilized, and customers continue to invest in projects in our key oil and gas and petrochemical markets, and this shift in market sentiment has had a favorable impact on our orders and backlog over recent quarters.

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 contribute to short-term earnings variability and 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.

The increased orders in Fiscal 2018 and 2019 have led to improvement in revenues and operating results that we anticipate will continue into Fiscal 2020.

We continue to focus on maintaining our cash position, improving efficiencies in production and investing in future business opportunities.

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.

Oil and gas commodity price levels have been unstable over the last several years, and our customers have in certain cases, delayed some of their major capital investment projects.

Beginning in late Fiscal 2018 through the first quarter of Fiscal 2020, our customers' decisions to invest in projects across our key oil and gas and petrochemical markets were influenced to some extent by the stabilization of commodity prices and the increased global demand for cleaner-burning fuels during that period of time.

We believe that this change in market sentiment during that period of time had a favorable impact on our orders and backlog entering Fiscal 2020.

However, the recent declines in oil prices and the global economic impacts from COVID-19 may have a negative impact on our business going forward, as discussed in more detail below.

Specific to the energy industry focus on transition to natural gas and cleaner-burning fuels, the business was awarded a substantial contract in the second quarter of Fiscal 2020 that will support the integrated electrical distribution requirements for a large domestic industrial complex.

This specific project has begun and will take over three years to design, manufacture, integrate, test and ship.

Our operating results are impacted by factors such as the timing of new order awards, customer approval of final engineering and design specifications and delays in customer construction schedules, all of which contribute to short-term earnings variability and the timing of project execution.

Our operating results also have been, and may continue to be, impacted by the timing and resolution of change orders, project close-out and resolution of potential contract claims and liquidated damages, all of which could improve or deteriorate gross margins during the period in which these items are resolved with our customers.

These factors may result in periods of underutilization of our resources and facilities, which may negatively impact our ability to cover our fixed costs.

The increased orders recognized in Fiscal 2018 and 2019 have led to improved revenue and operating results for Fiscal 2020.

We continue to monitor the variables that impact our markets while adjusting to the global conditions in order to maintain a competitive cost and technological advantage in the markets that we serve.

The spread of COVID-19 has created and continues to create significant uncertainty and economic disruption across the world during the second half of Fiscal 2020 and continuing into Fiscal 2021.

This pandemic has negatively impacted global energy demand, which in turn has resulted in considerable volatility across the oil and gas commodity markets.

Certain of our customers have asked that we delay our manufacturing on their projects as their operations have been negatively impacted by these factors.

As a result of these circumstances, we anticipate that a decrease in commercial activity may negatively impact our business, results of operations and cash flows going forward.

We have and may need to continue to adjust our workforce and labor costs to correspond to the reduced customer demand.

We will take prudent measures to maintain our strong liquidity and cash position, which may include reducing our capital expenditures and research and development costs, as well as reducing or eliminating future dividend payments.

However, the extent to which the COVID-19 pandemic specifically will continue to impact our business will depend on numerous factors that are difficult to predict, some of which include:

the duration, spread and severity of the pandemic;

governmental actions in response to the pandemic, including travel restrictions and quarantine or related governmental orders;

any closures of our offices and facilities or those of our suppliers as a result of the pandemic, and how quickly and to what extent normal economic and operating conditions can resume.

Therefore, the magnitude of the impact on our business, results of operations and cash flows is not currently known.

Liquidity and Capital Resources

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Cash, cash equivalents and short-term investments increased to $178.9 million at September 30, 2020, compared to $124.7 million at September 30, 2019.

We also had restricted cash held in a pledged collateral account related to our prior credit agreement of $25.1 million at September 30, 2018.

Our increase in project volume typically requires cash to fund operations.

We believe that our strong working capital position, available borrowings under our credit facility and available cash and short-term investments should be sufficient to finance future operating activities, capital improvements, research and development initiatives and debt repayments for the foreseeable future.

This increase in cash was driven in part by the timing of the contract billing milestones related to our recent contract award for a large domestic industrial project as well as the year-over-year reduction in our accounts receivables balance.

We believe that our strong working capital position, available borrowings under our credit facility and available cash should be sufficient to finance future operating activities, capital improvements, research and development initiatives and debt repayments for the foreseeable future.

On September 27, 2019, we entered into an Amended and Restated Credit Agreement with Bank of America, N.A.

Revolver") which replaced our prior credit agreement.

Revolver is a $75.0 million revolving credit facility, which is available for both borrowings and letters of credit.

Revolver is a $75.0 million revolving credit facility, which is available for both borrowings and letters of credit and expires September 2024.

As of September 30, 2020, there were no amounts borrowed under this facility, and letters of credit outstanding were $38.7 million.

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Total long-term debt, including current maturities, totaled $0.8 million at September 30, 2020 related to outstanding industrial development revenue bonds.

We are required to maintain certain financial covenants, the most significant of which are a consolidated leverage ratio less than 3.0 to 1.0 and a consolidated interest coverage ratio of greater than 3.0 to 1.0.

The consolidated leverage ratio is our most restrictive covenant and a decrease in our earnings before interest, taxes, depreciation and amortization (EBITDA) could restrict our ability to issue letters of credit under the U.S.

For further information regarding our debt, see Notes G and H of Notes to Consolidated Financial Statements.

Approximately $21.7 million of our cash and short-term investments at September 30, 2019 was held outside of the U.S.

Approximately $26.2 million of our cash and cash equivalents at September 30, 2020 was held outside of the U.S.

for international operations.

It is our intention to indefinitely reinvest all current and future foreign earnings internationally in order to ensure sufficient working capital to support our international operations.

In the event that we elect to repatriate some or all of the foreign earnings that were previously deemed to be indefinitely reinvested outside the U.S., under current tax laws we may incur additional tax expense upon such repatriation.

In the event that we elect to repatriate some or all of the foreign earnings that were previously deemed to be indefinitely reinvested outside the U.S., we may incur additional tax expense upon such repatriation under current tax laws.

Operating Activities

Operating activities provided net cash of $68.8 million in Fiscal 2019 and used net cash of $28.5 million in Fiscal 2018 .

Operating activities provided net cash of $72.4 million and $68.8 million in Fiscal 2020 and Fiscal 2019, respectively.

Cash flow from operations is primarily influenced by project volume, the timing of milestone payments from our customers and the payment terms with our suppliers.

The increase in operating cash flows during Fiscal 2019 was primarily due to the completion and cash collection of contractual billing milestones, the collection of accounts receivable and the receipt of a $6.6 million income tax refund.

This increase in operating cash flows was primarily due to the timing of contract billing milestones related to our recent contract award for a large domestic industrial project awarded in the second quarter of Fiscal 2020 as well as a significant reduction in the accounts receivables balance.

Investing Activities

Investing activities provided $3.0 million during Fiscal 2019 compared to $10.4 million in Fiscal 2018 .

The decrease in cash provided by investing activities in Fiscal 2019 was primarily due to a decrease in the net maturities of short-term investments to $7.2 million in Fiscal 2019 , compared to $13.0 million in Fiscal 2018 .

Net purchases of property, plant and equipment during Fiscal 2019 totaled $4.3 million compared to $4.4 million in Fiscal 2018 .

Investing activities used $17.5 million during Fiscal 2020 compared to $3.0 million provided during the same period in Fiscal 2019.

The increase in cash used by investing activities in Fiscal 2020 was primarily due to an increase in short-term investments.

Financing Activities

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Payments Due by Period:

Long-Term Debt Obligations

Net Operating Lease Obligations

Long-Term Debt Obligations Net Operating Lease Obligations Total

Less than 1 year $ 400 $ 1,980 $ 2,380

1 to 3 years 401 2,154 2,555

3 to 5 years — 85 85

More than 5 years — — —

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As of September 30, 2020, the total unrecognized tax benefit related to uncertain tax positions was $1.3 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 $0.9 million due to the expiration of certain statutes of limitations and voluntary filings.

We believe that it is reasonably possible that within the next 12 months, the total unrecognized tax benefits will decrease by approximately $0.1 million due to the settlement with taxing authorities related to voluntary filings.

We are unable to make reasonably reliable estimates regarding the timing of future cash outflows, if any, associated with the remaining unrecognized tax benefits.

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Less than 1 year $ 16,096

1 to 3 years 8,733

More than 3 years 21,088

Total long-term commercial obligations $ 45,917

We also had performance and maintenance bonds totaling $170.5 million that were outstanding at September 30, 2019 .

Performance and maintenance bonds are primarily used to guarantee our contract performance to our customers.

We also had surety bonds totaling $162.4 million that were outstanding at September 30, 2020.

Surety bonds are primarily used to guarantee our contract performance to our customers.

Off-Balance Sheet Arrangements

We had no off-balance sheet arrangements during the periods presented.

We had no significant off-balance sheet arrangements during the periods presented.

Effects of Inflation

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Revenue Recognition

On October 1, 2018, we adopted the new revenue recognition standard using the modified retrospective transition method.

We applied the guidance in the standard to customer contracts that were not substantially complete at that time, and we determined that no adjustment to retained earnings was necessary.

Financial results for reporting periods after October 1, 2018 are reported under the new standard;

however, financial results for prior periods were not adjusted and continue to be presented in accordance with the previous standard.

The majority of our revenues are generated from the manufacturing of custom-engineered products and systems under long-term fixed-price contracts under which we agree to manufacture various products such as traditional and arc-resistant distribution switchgear and control gear, medium-voltage circuit breakers, monitoring and control communications systems, motor control centers and bus duct systems.

Our revenues are primarily generated from the manufacturing of custom-engineered products and systems under long-term fixed-price contracts under which we agree to manufacture various products such as traditional and arc-resistant distribution switchgear and control gear, medium-voltage circuit breakers, monitoring and control communications systems, motor control centers, switches and bus duct systems.

These products may be sold separately as an engineered solution, but are typically integrated into custom-built enclosures which we also build.

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Contract costs include all direct materials, labor, and indirect costs related to contract performance, which may include indirect labor, supplies, tools, repairs and depreciation costs.

We also have contracts to provide value-added services such as field service inspection, installation, commissioning, modification and repair, as well as retrofit and retrofill components for existing systems.

As a practical expedient, if the service contract terms give us the right to invoice the customer for an amount that corresponds directly with the value of our performance completed to date (i.e., a service contract in which we bill a fixed amount for each hour of service provided), then we recognize revenue over time in each reporting period corresponding to the amount with which we have the right to invoice.

We enter into contracts to provide value-added services such as field service inspection, installation, commissioning, modification and repair, as well as retrofit and retrofill components for existing systems.

Our performance obligations are satisfied as the work progresses.

Revenues from our custom-engineered products and value-added services transferred to customers over time accounted for approximately 94% of revenues for Fiscal 2019 .

We also have sales orders for spare parts and replacement circuit breakers for switchgear that are obsolete or that are no longer produced by the original manufacturer.

Revenues from these sales orders are recognized at the time we fulfill our performance obligation to the customer, which is typically upon shipment and represented approximately 6% of revenues for Fiscal 2019 .

Revenues from these sales orders are recognized at a point in time when we fulfill our performance obligation to the customer, which is typically upon shipment.

Additionally, some contracts may contain a cancellation clause that could limit the amount of revenue we are able to recognize over time.

In these instances, revenue and costs associated with these contracts are deferred and recognized at the time the performance obligation is fulfilled.

In these instances, revenue and costs associated with these contracts are deferred and recognized at a point in time when the performance obligation is fulfilled.

Selling and administrative costs incurred in relation to obtaining a contract are typically expensed as incurred.

We periodically utilize a third-party sales agent to obtain a contract and will pay a commission to that agent.

We record the full commission liability to the third-party sales agents at the order date, with a corresponding deferred asset.

As the project progresses, we

record commission expense based on percentage of completion rates that correlate to the project and reduce the deferred asset.

Once we have been paid by the customer, we pay the commission, and the deferred liability is reduced.

Performance Obligations

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These extended warranties qualify as separate performance obligations, and revenue is deferred and recognized over the warranty period.

If we determine during the

evaluation of the contract that there are multiple performance obligations, we allocate the transaction price to each performance obligation using our best estimate of the standalone selling price of each distinct good or service in the contract.

If we determine during the evaluation of the contract that there are multiple performance obligations, we allocate the transaction price to each performance obligation using our best estimate of the standalone selling price of each distinct good or service in the contract.

Remaining unsatisfied performance obligations, which we refer to as backlog, represent the estimated transaction price for goods and services for which we have a material right, but work has not been performed.

As of September 30, 2019 , we had backlog of $419.0 million , of which approximately $345 million is expected to be recognized as revenue within the next twelve months.

Backlog may not be indicative of future operating results as orders may be cancelled or modified by our customers.

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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.

For Fiscal 2019 and Fiscal 2018 , our operating results were positively impacted by $5.1 million and $3.9 million , respectively, as a result of changes in contract estimates related to projects in progress at the beginning of the respective period.

These changes in estimates resulted primarily from favorable project execution and negotiations of variable consideration as well as other changes in facts and circumstances during these periods.

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.

Variable Consideration

It is common for our long-term contracts to contain variable consideration that can either increase or decrease the transaction price.

Due to the nature of our contracts, estimating total cost and revenue can be complex and subject to variability due to change orders, back charges, spare parts, early completion bonuses, customer allowances and liquidated damages.

We estimate the amount of variable consideration based on the expected value method, which is the sum of probability-weighted amount, or the most likely amount method, which uses various factors including experience with similar transactions and assessment of our anticipated performance.

Variable consideration is included in the transaction price if legally enforceable and to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur once the uncertainty associated with the variable consideration is resolved.

Contract Modifications

Contracts may be modified for changes in contract specifications and requirements.

We consider contract modifications to exist when the modification either creates new or changes the enforceable rights and obligations under the contract.

Most of our contract modifications are for goods and services that are not distinct from the existing performance obligation.

Contract modifications result in a cumulative catch-up adjustment to revenue based on our measure of progress for the performance obligation.

Impairment of Long-Lived Assets

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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.

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.

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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.

Estimated costs of warranties are accrued based on historical warranty claim costs in relation to current revenues.

In addition, specific provisions are made when product failures are projected outside historical experience.

Our standard terms and conditions of sale include a warranty for parts and service for the earlier of 18 months from the date of shipment or 12 months from the date of energization, whichever occurs first.

Actual results could differ from our estimates.

Occasionally projects require warranty terms that are longer than our standard terms due to the nature of the project.

Extended warranty terms may be negotiated and included in our contracts.

We use past experience and historical claims to determine the estimated liability.

Actual results could differ from our estimate.

The allocated revenue associated with the extended warranty is deferred and recorded as a contract liability and recognized over the extended warranty period.

Accounting for Income Taxes

22 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis