What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-12-08 compared with 2020-12-09 · 97 added, 144 removed, 128 unchanged (65% of the section changed)

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Risk Factors,” included elsewhere in this Annual Report.

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

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

We develop, design, manufacture and service custom-engineered equipment and systems which (1) distribute, control and monitor the flow of electrical energy and (2) provide protection to motors, transformers and other electrically powered equipment.

We are headquartered in Houston, Texas, and serve the oil and gas and petrochemical markets, which includes onshore and offshore production, LNG facilities and terminals, pipelines, refineries and petrochemical plants.

Additional markets include electric utility and light rail traction power as well as mining and metals, pulp and paper and other municipal, commercial and 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.

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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.

Historically, 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.

Some of these opportunities were for natural gas related projects targeting global demand for cleaner-burning fuels.

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

We began to experience reduced commercial activity in Fiscal 2020 driven in large part by the uncertainties across our industrial end markets in the U.S.

resulting from the COVID-19 pandemic.

Considering the long cycle nature of our business, these cyclical conditions may persist into Fiscal 2022.

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.

The COVID-19 pandemic continues to impact global energy markets.

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

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

As a result, some of our industrial customers are deferring or suspending their planned capital expenditures.

Certain of our customers have asked that we delay or cancel our manufacturing on their projects as their operations have been negatively impacted by this pandemic and the reduced oil and gas demand which has resulted in recognition of cancellation fees based on contract terms and the extent of our progress on the projects.

We continue to work with our key suppliers who have been impacted by this pandemic to ensure that we are able to meet our customer commitments.

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

During Fiscal 2020, we reduced our global workforce and reduced our capital and discretionary spending in response to business conditions.

We continued to operate at these lower thresholds throughout Fiscal 2021 and are consistently monitoring macro-economic conditions as we head into Fiscal 2022.

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.

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Revenue and Gross Profit

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

Revenues decreased by 9%, or $47.9 million, to $470.6 million in Fiscal 2021, due to a decrease in orders as well as project delays and cancellations of potential projects associated with the global economic impact resulting from the COVID-19 pandemic and associated reduction in demand across our industrial end markets.

Domestic revenues decreased by 12%, or $46.6 million, to $351.5 million in Fiscal 2021.

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.

International revenues decreased by 1%, or $1.4 million, to $119.1 million.

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

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

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

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

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

Revenue from our core oil and gas markets (excluding petrochemical) decreased by 4%, or $7.5 million, to $187.7 million while petrochemical revenue decreased by 53%, or $67.7 million, to $59.0 million in Fiscal 2021 as noted above.

Revenue from utility markets increased by 25%, or $22.4 million, to $111.2 million and traction market revenue increased by 39%, or $16.7 million, to $59.1 million in Fiscal 2021.

Revenue from all other markets combined decreased by $11.8 million to $53.6 million in Fiscal 2021.

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

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

The reduction in revenue led to a reduction in gross profit of 21%, or $19.5 million, in Fiscal 2021.

However, gross profit of $75.1 million in Fiscal 2021 benefited from favorable close out gains on certain projects resulting from cost and productivity efficiencies and to a lesser extent from cancellation fees from certain contracts in our North American manufacturing facilities, which was partially offset by international project execution, higher global commodity prices and U.S.

factory underutilization.

Gross profit as a percentage of revenues decreased to 16% in Fiscal 2021, compared to 18% in Fiscal 2020 as a result of the reduction in revenue noted above.

Selling, General and Administrative Expenses

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

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

Insurance Proceeds

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

Selling, general and administrative expenses decreased by 1%, or $0.4 million, to $67.2 million in Fiscal 2021, partially due to the restructuring action taken in Fiscal 2020 as well as lower travel-related costs.

Selling, general and administrative expenses, as a percentage of revenues, increased to 14% in Fiscal 2021, compared to 13% in Fiscal 2020, primarily due to the decrease in revenues.

Restructuring and Other, Net

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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.

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.

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We recorded an income tax provision of $0.5 million in Fiscal 2021, resulting in an effective tax rate of 42%, compared to an income tax provision of $3.7 million in Fiscal 2020 at an effective tax rate of 18%.

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 macroeconomic variables that directly impact customer demand.

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

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

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

Scheduling of projects is matched to customer requirements, and projects typically take a number of months to produce.

Schedules may change during the course of any particular project, and our operating results can, therefore, be impacted by factors outside of our control.

In both Fiscal 2021 and Fiscal 2020, the effective tax rate was negatively impacted by our inability to recognize a tax benefit related to losses incurred in various jurisdictions outside of the United States.

The effective tax rate was also negatively impacted by the valuation allowances set up against our deferred tax assets in Fiscal 2021 and Fiscal 2020 related to Mexico in the amount of $0.1 million and the U.K.

in the amount of $0.5 million.

The 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 provided a tax benefit for Fiscal 2021 and Fiscal 2020.

In Fiscal 2020, we reversed a reserve of $1.7 million resulting from a favorable settlement of an IRS audit and the expiration of statutes of limitations.

In Fiscal 2021, we recorded net income of $0.6 million, or $0.05 per diluted share, compared to net income of $16.7 million, or $1.42 per diluted share in Fiscal 2020, primarily due to a decline in revenues and gross profit resulting from lower orders and project delays caused by the economic impact resulting from the COVID-19 pandemic and the associated reduction in global demand across our industrial end markets.

The order backlog at September 30, 2021 was $414.9 million, a 13% decrease from $476.8 million at September 30, 2020.

Bookings, net of cancellations and scope reductions, decreased by 30% in Fiscal 2021 to $403.9 million, compared to $576.8 million in Fiscal 2020.

The large year-over-year decrease in bookings in Fiscal 2021 was primarily due to the large contract awarded in Fiscal 2020 and decreased global demand across our industrial end markets.

As noted in "Overview" above, the markets in which we participate are capital-intensive and cyclical in nature.

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

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

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

Oil and gas commodity price levels have been unstable over the last several years, and our customers have in certain cases, delayed or cancelled 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 in our key oil and gas and petrochemical markets were influenced to some extent by relative 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.

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

Specific to the energy industry focus on transitioning to natural gas and cleaner-burning fuels, the business was awarded a substantial contract in Fiscal 2020 that will support the integrated electrical distribution requirements for a large domestic industrial complex and should be substantially completed in Fiscal 2022.

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.

These factors may result in periods of underutilization of our resources and facilities, which may negatively impact our ability

to cover our fixed costs.

We will continue to monitor potential labor shortages and increased labor costs and the impact on our operations.

The strong commercial activity and subsequent orders in Fiscal 2018 and 2019 led to solid revenue and operating results for Fiscal 2020.

We began to experience lower commercial activity in Fiscal 2020 driven in large part from the uncertainty resulting from the COVID-19 pandemic, as discussed in "Overview" above.

Considering the long cycle nature of our business, these cyclical conditions may persist into Fiscal 2022.

We will continue to monitor the variables that impact our markets while adjusting to the global conditions in order to maintain competitive costs and technological advantages in the markets that we serve.

The consequences of a prolonged economic decline could include, but are not limited to, a continued reduction in commercial and industrial activity.

Accordingly, the Company cannot reasonably estimate the duration or severity of this pandemic, potential labor shortages, increased labor costs, or the extent to which these disruptions may materially impact our business, results of operations or cash flows.

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

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

the duration, spread and severity of the pandemic;

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

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

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

Liquidity and Capital Resources

As of September 30, 2021, current assets exceeded current liabilities by 2.5 times, and our debt to total capitalization was 0.13%.

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

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

Cash, cash equivalents and short-term investments decreased to $134.0 million at September 30, 2021, compared to $178.9 million at September 30, 2020.

This decrease in cash was primarily driven by the timing of contract billing milestones.

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 and expires September 2024.

We have a credit agreement with Bank of America, N.A.

Revolver") which is a $75.0 million revolving credit facility available for both borrowings and letters of credit and expires September 27, 2024.

On March 12, 2021, we entered into a first amendment to the U.S.

Revolver which, among other things, amended certain terms related to the calculation of the consolidated leverage ratio from gross leverage to net leverage.

As a result of the first amendment, up to $30 million may be deducted from the amount of letters of credit outstanding (not to be less than zero) when calculating the consolidated funded indebtedness which is a component of the consolidated net leverage ratio.

Additionally, we have the option to cash collateralize all or a portion of the letters of credit outstanding, which would favorably impact the consolidated funded indebtedness calculation and the consolidated net leverage ratio.

As of September 30, 2021, there were no amounts borrowed under this facility, and letters of credit outstanding were $34.8 million.

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Total long-term debt, including current maturities, totaled $0.4 million at September 30, 2021 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.

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

Our most restrictive covenant, the consolidated net leverage ratio, is the ratio of earnings before interest, taxes, depreciation, amortization and stock-based compensation (EBITDAS) to funded indebtedness, which includes letters of credit.

An increase in indebtedness or a decrease in EBITDAS could restrict our ability to issue letters of credit or borrow under the U.S.

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

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

for international operations.

Approximately $30.6 million of our cash, cash equivalents and short-term investments at September 30, 2021 was held outside of the U.S.

for our 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.

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Operating Activities

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

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

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

Operating activities used net cash of $30.5 million in Fiscal 2021 and provided net cash of $72.4 million in Fiscal 2020.

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

This decrease in operating cash flows was primarily due to the timing of contract billing milestones and cash used on our large industrial project discussed above.

Investing Activities

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

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

Investing activities used $2.5 million of cash during Fiscal 2021 compared to $17.5 million of cash used in Fiscal 2020.

The decrease in cash used by investing activities in Fiscal 2021 was primarily due to a decrease in net purchases of short-term investments and a decrease in capital expenditures.

Additionally, the proceeds received from a Company-owned life insurance policy related to a retired employee provided investing cash flow in Fiscal 2021.

Financing Activities

Net cash used in financing activities was $13.1 million in Fiscal 2020 and $13.9 million in Fiscal 2019, which primarily consisted of approximately $12 million of dividends paid in each year.

Contractual and Other Obligations

At September 30, 2020, our long-term contractual obligations were limited to debt and leases.

The table below details our commitments by type of obligation, including interest if applicable, and the period that the payment will become due (in thousands).

Payments Due by Period:

Long-Term Debt 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 — — —

Total long-term contractual obligations $ 801 $ 4,219 $ 5,020

As of September 30, 2020, the total unrecognized tax benefit related to uncertain tax positions was $1.3 million.

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

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

Net cash used in financing activities was $13.2 million in Fiscal 2021 and $13.1 million in Fiscal 2020, which primarily consisted of $12.1 million of dividends paid in each year.

Other Commercial Commitments

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Effects of Inflation

We are subject to inflation, which can cause increases in our costs of raw materials, primarily copper, aluminum and steel.

We are subject to inflation, which can cause increases in our costs of labor and raw materials, primarily copper, aluminum and steel.

Fixed-price contracts can limit our ability to pass these increases to our customers, thus negatively impacting our earnings.

Inflation in commodity prices could potentially impact our operations in future years.

Critical Accounting Policies and Estimates

Inflation in commodity prices has negatively impacted our financial results in Fiscal 2021.

Additionally, inflation related to commodity and labor prices may potentially impact our operations in future years.

Critical Accounting Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the U.S.

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There can be no assurance that actual results will not differ from those estimates.

We believe the following accounting policies and estimates to be critical in the preparation and reporting of our consolidated financial statements.

We believe the following accounting estimates to be critical in the preparation and reporting of our consolidated financial statements.

Revenue Recognition

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Some contracts may also include the installation and the commissioning of these enclosures.

Revenue from these contracts is generally recognized over time utilizing the cost-to-cost method to measure the extent of progress toward the completion of the performance obligation and the recognition of revenue over time.

Revenue from these contracts is generally recognized over time utilizing the cost-to-cost method.

Under the cost-to-cost method, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation.

We believe that this method is the most accurate representation of our performance, because it directly measures the value of the services transferred to the customer over time as we incur costs on our contracts.

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

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

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

Our performance obligations are satisfied as the work progresses.

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

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

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

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

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

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

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

As the project progresses, we

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.

Contract Estimates

Actual revenues and project costs may vary from previous estimates due to changes in a variety of factors.

The cost estimation process is based upon the professional knowledge and experience of our engineers, project managers and financial professionals.

Factors that are considered in estimating the work to be completed and ultimate contract recovery include the availability and productivity of labor, the nature and complexity of the work to be performed, the availability of materials, and the effect of any delays on our project performance.

We periodically review our job performance, job conditions, estimated profitability and final contract settlements, including our estimate of total costs and make revisions to costs and income in the period in which the revisions are probable and reasonably estimable.

We bear the risk of cost overruns in most of our contracts, which may result in reduced profits.

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.

See Note E of Notes to Consolidated Financial Statements for disclosures related to changes in contract estimates.

Performance Obligations

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The majority of our contracts have a single performance obligation where multiple engineered products and services are combined into a single, custom-engineered solution.

Our contracts generally include a standard assurance warranty that typically ends 18 months after shipment.

Our contracts include a standard one-year assurance warranty.

Occasionally, we provide service-type warranties that will extend the warranty period.

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

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

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

Our backlog does not include service and maintenance-type contracts for which we have the right to invoice as services are performed.

Contract Estimates

Actual revenues and project costs may vary from previous estimates due to changes in a variety of factors.

The cost estimation process is based upon the professional knowledge and experience of our engineers, project managers and financial professionals.

Variable Consideration

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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.

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.

12 unchanged sentences

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.

Our standard terms and conditions of sale include a warranty for parts and service for one year.

Occasionally, we provide service-type warranties that will extend the warranty period.

Actual results could differ from our estimate.

Projects may require, on occasion, warranty terms that are longer than our standard terms due to the nature of the project.

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

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

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

Accounting for Income Taxes

10 unchanged sentences

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.

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.

1 unchanged sentence

See Note I 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.

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.

Dollar results that arise from such translation, as well as exchange gains and losses on intercompany balances of a long-term investment nature, are included in the cumulative currency translation adjustments in accumulated other comprehensive loss in stockholders’ equity.

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