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Item 8. Financial Statements and Supplementary Data

2022-12-06 compared with 2021-12-08 · 108 added, 139 removed, 800 unchanged (24% of the section changed)

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Financial Statements:

Report of Independent Registered Public Accounting Firm

Report of Independent Registered Public Accounting Firm (PCAOB ID 238 )

Consolidated Balance Sheets as of September 30, 202 2 and 202 1

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Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

Change in Accounting Principle

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

Basis for Opinions

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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.

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.

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Revenue Recognition – Long-term fixed priced contracts

As described in Notes B and E to the consolidated financial statements, the majority of the Company’s total revenue of $470.6 million for the year ended September 30, 2021 was generated from the manufacturing of custom-engineered products and systems under long-term fixed-price contracts.

As described in Notes B and E to the consolidated financial statements, approximately 94% of the Company’s total revenue of $532.6 million for the year ended September 30, 2022 was generated from the manufacturing of custom-engineered products and systems under long-term fixed-price contracts.

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.

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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.

Due to the nature of the 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.

Due to the nature of the 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.

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

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These procedures included testing the effectiveness of controls relating to the revenue recognition process, including controls over the determination of total estimated costs at completion of the performance obligation and determination of total contract price.

The procedures also included, among others, evaluating and testing management’s process for determining the estimated total cost and revenue for a sample of contracts, which included (i) obtaining executed purchase orders and agreements, (ii) evaluating the appropriateness of the method to measure estimated total cost and revenue, (iii) testing the completeness and accuracy of the underlying data used by management, and (iv) evaluating the reasonableness of significant assumptions related to the total estimated costs at completion and liquidated damages used by management and considering the factors that can affect the accuracy of those estimates.

These procedures also included, among others, evaluating and testing management’s process for determining the estimated total cost and revenue for a sample of contracts, which included (i) obtaining executed purchase orders and agreements, (ii) evaluating the appropriateness of the method to measure estimated total cost and revenue, (iii) testing the completeness and accuracy of the underlying data used by management, and (iv) evaluating the reasonableness of significant assumptions related to the total estimated costs at completion and liquidated damages used by management and considering the factors that can affect the accuracy of those estimates.

Evaluating the reasonableness of significant assumptions related to estimated total cost involved assessing management’s ability to reasonably estimate total costs to complete and liquidated damages by testing management’s process to evaluate the remaining direct materials, labor, and indirect costs related to the performance obligation and evaluating the timely identification of circumstances which may warrant a modification to the total estimated costs or liquidated damages.

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Amortization of intangible assets — 157 177

Insurance proceeds — — ( 950 )

Restructuring and other, net — — 1,400

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Other income ( 2,285 ) — ( 506 )

Interest expense 204 228 230

Interest income ( 277 ) ( 981 ) ( 1,103 )

Interest income, net ( 334 ) ( 73 ) ( 753 )

Income before income taxes 9,843 1,092 20,330

Income tax provision 461 3,670 2,444

Income tax provision (benefit) ( 3,894 ) 461 3,670

Net income $ 13,737 $ 631 $ 16,660

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Foreign currency translation adjustments ( 8,689 ) 4,253 60

Loss on cash flow commodity hedge ( 325 ) — —

Postretirement benefit adjustment, net of tax 372 ( 96 ) ( 26 )

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Shares withheld in lieu of employee tax withholding — — ( 629 ) — — — — ( 629 )

Dividends paid — — — ( 11,998 ) — — — ( 11,998 )

Dividends — — — ( 12,066 ) — — — ( 12,066 )

Postretirement benefit adjustment, net of tax of $ 7

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Shares withheld in lieu of employee tax withholding — — ( 632 ) — — — — ( 632 )

Dividends paid — — — ( 12,066 ) — — — ( 12,066 )

Dividends — — — ( 12,142 ) — — — ( 12,142 )

Postretirement benefit adjustment, net of tax of $ 26

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Shares withheld in lieu of employee tax withholding — — ( 675 ) — — — — ( 675 )

Dividends paid — — — ( 12,142 ) — — — ( 12,142 )

Dividends — — 77 ( 12,604 ) — — — ( 12,527 )

Loss on cash flow commodity hedge — — — — — — ( 325 ) ( 325 )

Postretirement benefit adjustment, net of tax of $ 99

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Depreciation and amortization 9,358 10,335 10,538

Gain on sale of division ( 2,006 ) — —

Stock-based compensation 4,090 2,583 3,474

Bad debt expense 48 258 233

Bad debt expense, net 162 48 258

Deferred income taxes ( 4,861 ) ( 995 ) 1,473

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Maturities of short-term investments 26,320 27,688 6,146

Purchases of property, plant and equipment, net ( 2,891 ) ( 5,130 ) ( 4,255 )

Proceeds from sale of division 4,348 — —

Purchases of property, plant and equipment ( 2,451 ) ( 2,931 ) ( 5,163 )

Proceeds from sale of property, plant and equipment 629 40 33

Proceeds from life insurance policy — 474 —

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Our products are used in the oil and gas markets, onshore and offshore production, liquefied natural gas (LNG) facilities and terminals, pipeline, refineries and petrochemical plants.

Additionally, we manufacture products for the electric utility, light rail traction power as well as mining and metals, pulp and paper and other municipal, commercial and industrial markets.

Our product scope includes designs tested to meet both U.S.

and international standards, under both the American National Standards Institute (ANSI) and International Electrotechnical Commission (IEC).

We assist customers by providing value-added services such as spare parts, field service inspection, installation, commissioning, modification and repair, retrofit and retrofill components for existing systems and replacement circuit breakers for switchgear that is obsolete or that is no longer produced by the original manufacturer.

Additionally, we manufacture products for the electric utility, light rail traction power as well as mining and metals, pulp and paper and other municipal, commercial and other industrial markets.

Our product scope includes designs tested to meet both United States (U.S.) and international standards, under both the American National Standards Institute (ANSI) and International Electrotechnical Commission (IEC).

We assist customers by providing field service inspection, installation, commissioning, modification, and repair services, as well as spare parts, retrofit and retrofill components for existing systems and replacement circuit breakers for obsolete switchgear 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.

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References to Fiscal 2022, Fiscal 2021 and Fiscal 2020 used throughout these Notes to Consolidated Financial Statements relate to our fiscal years ended September 30, 2022, 2021 and 2020, respectively.

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

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 the oil and gas commodity markets.

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

Certain of our customers have asked that we delay 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 and review the contracts with our key suppliers who have been impacted by this pandemic to ensure that we are able to meet our customer commitments.

The consequences of a prolonged global 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, or the extent to which the disruption may materially impact our business, results of operations or cash flows.

Impact of Oil and Gas Commodity Market Volatility on Powell

The consequences of a prolonged global macro-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 a potential decline in demand, or the extent to which the disruption 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.

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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 consolidated financial statements

affect revenue recognition and estimated cost recognition on our customer contracts, the allowance for credit losses, provision for excess and obsolete inventory, warranty accruals and income taxes.

The most significant estimates used in our consolidated financial statements affect revenue recognition and estimated cost recognition on our customer contracts, the allowance for credit losses, 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), liquidated damages and other contingent liabilities require judgments regarding the amount of expenses that will ultimately be incurred.

We base our estimates on historical experience, forecasts and various other assumptions, as well as the specific circumstances surrounding these contingent liabilities, in evaluating the amount of liability that should be recorded.

Additionally, the recognition of deferred tax assets requires estimates related to future income and other assumptions regarding timing and future profitability because the ultimate realization of net deferred tax assets is dependent on the generation of future taxable income during periods in which temporary differences become deductible.

Estimates routinely change as new events occur, additional information becomes available or operating environments change.

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Interest received, net of interest expense $ ( 334 ) $ ( 73 ) $ ( 753 )

Income taxes paid (received), net of refunds 1,886 1,770 ( 5,219 )

Income taxes paid, net of refunds 533 1,886 1,770

Non-cash capital expenditures 1,133 226 264

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Of the retained amount at September 30, 2022, $ 6.0 million is expected to be collected in the next twelve months and is recorded in accounts receivable.

The remaining $ 2.2 million is recorded in other assets and is expected to be collected in Fiscal 2023.

The remaining $ 0.9 million is recorded in other assets and is expected to be collected in the fiscal year ending September 30, 2023.

Contract Balances

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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.

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.

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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 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.

We also have contracts to provide field service inspection, installation, commissioning, modification, and repair services, as well as spare parts, retrofill components for existing systems, and replacement circuit breakers for obsolete or out-of-production switchgear no longer produced by the original manufacturer.

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.

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We account for forfeitures as they occur, rather than estimate expected forfeitures.

New Accounting Standards

In February 2016, the Financial Accounting Standards Board (FASB) issued a new topic on leases that requires lessees to recognize lease assets and lease liabilities on the balance sheet for all leases with terms longer than twelve months.

Leases are classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement.

Effective October 1, 2019, we adopted the new lease accounting standard and recorded operating lease assets and operating lease liabilities of approximately $ 7.0 million and determined that no adjustment to retained earnings was necessary.

Financial results for reporting periods after October 1, 2019 are reported under the new standard;

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

Upon adoption, we elected a package of practical expedients which, among other things, allowed for the historical classification of our existing leases to carry forward.

Additionally, we elected to separate non-lease components for our real estate and IT infrastructure asset classes.

All other asset classes account for both lease and non-lease components in the operating lease asset and operating lease liability calculations.

See Note M for further discussion of leases.

In June 2016, the FASB issued a new topic on measurement of credit losses.

The topic introduces an impairment model known as the current expected credit loss (CECL) model that is based on an expected loss methodology rather than an incurred loss methodology for financial instruments.

Under the new topic, an entity recognizes as an allowance its estimate of expected credit losses with the intention of improving financial reporting by requiring timelier recognition of such losses.

We adopted this topic on October 1, 2020 and such adoption did not have a material impact on our consolidated financial statements.

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 (in thousands, except per share data):

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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.

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

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As of September 30, 2022, we had backlog of $ 592.2 million, of which approximately $ 375.0 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

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.

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Contract liabilities ( 79,857 ) ( 42,433 )

Net contract asset (liability) $ 11,766 $ ( 28,450 )

The increase in net contract asset at September 30, 2021 from September 30, 2020 was primarily due to the timing of contract billing milestones and new orders as well as cash used on our large industrial project awarded in Fiscal 2020.

Net contract asset $ 8,494 $ 11,766

The decrease in net contract asset at September 30, 2022 from September 30, 2021 was primarily due to the timing of contract billing milestones and new orders as well as cash used on our large industrial project awarded in Fiscal 2020.

To determine the amount of revenue recognized during the period from contract liabilities, we first allocate revenue to the individual contract liability balance outstanding at the beginning of the period until the revenue exceeds that balance.

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Traction power 44,930 59,106

Commercial and other industrial 56,448 27,065

All others 27,070 26,498

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Our intangible assets consist of goodwill of $ 1.0 million, which is not being amortized.

In Fiscal 2021, our purchased technology was fully amortized.

In Fiscal 2021, our purchased technology was fully amortized and we no longer have any intangible assets subject to amortization.

No impairment expense has been recorded for the last three fiscal years.

Intangible assets balances, subject to amortization, at September 30, 2021 and 2020 consisted of the following (in thousands):

September 30, 2021 September 30, 2020

Value Accumulated

Amortization Net

Value Accumulated

Amortization Net

Purchased technology $ 11,749 $ ( 11,749 ) $ — $ 11,749 $ ( 11,592 ) $ 157

Amortization of intangible assets recorded for the years ended September 30, 2021, 2020 and 2019 was $ 0.2 million, $ 0.2 million and $ 0.2 million, respectively.

Amortization of intangible assets recorded for each of the years ended September 30, 2021 and 2020 was $ 0.2 million.

Long-Term Debt

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Revolver), which is a $ 75.0 million revolving credit facility that is 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.

Revolver states that 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.

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Revolver allows the Company to elect that any borrowing under the facility bears an interest rate based on either the base rate or the eurocurrency rate, in each case, plus the applicable rate.

The base rate is generally the highest of (a) the federal funds rate plus 0.50 %, (b) the Bank of America prime rate or (c) the London Interbank Offered Rate (LIBOR) plus 1.00 %.

The base rate is generally the highest of (a) the federal funds rate plus 0.50 %, (b) the Bank of America prime rate or (c) the London Interbank Offered Rate (LIBOR) successor rate plus 1.00 %.

The applicable rate is generally a range from ( 0.25 )% to 1.75 % depending on the type of loan and the Company's consolidated net leverage ratio.

On December 31, 2021, the Company entered into a LIBOR Transition Agreement with Bank of America that states that LIBOR will be replaced with a successor rate in accordance with 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.

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We borrowed $ 8.0 million in October 2001 through a loan agreement funded with proceeds from tax-exempt industrial development revenue bonds (Bonds) for the completion of our Northlake, Illinois facility.

The Bonds are subject to various covenants, for which we were in compliance at September 30, 2021.

The interest rate of the Bonds was 0.14 % as of September 30, 2021.

On October 1, 2021, the Bonds matured and our final redemption of $ 0.4 million was made.

The Bonds matured on October 1, 2021, and our final payment of $ 0.4 million was made.

Commitments and Contingencies

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We also had surety bonds totaling $ 241.0 million that were outstanding, with additional bonding capacity of $ 359.0 million available, at September 30, 2022.

At present, we have strong surety relationships;

We have strong surety relationships;

however, a change in market conditions or the sureties' assessment of our financial position could cause the sureties to require cash collateralization for undischarged liabilities under the bonds.

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At September 30, 2022, we had outstanding guarantees totaling $ 3.1 million and amounts available under this Facility Agreement were $ 2.5 million.

The Facility Agreement provides for financial covenants and customary events of default, and carries cross-default provisions with our U.S.

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 declared immediately due and payable.

The Facility Agreement provides for customary events of default, and carries cross-default provisions with our U.S.

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 declared immediately due and payable.

Additionally, we are required to maintain cash collateral for guarantees greater than two years .

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( 4,861 ) ( 995 ) 1,473

Total income tax provision $ 461 $ 3,670 $ 2,444

Income (loss) before income taxes was as follows (in thousands):

Total income tax provision (benefit) $ ( 3,894 ) $ 461 $ 3,670

Income before income taxes was as follows (in thousands):

Year Ended September 30,

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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:

income tax rate and the effective income tax rate, as computed on earnings before income tax provision (benefit) in each of the three years presented in the Consolidated Statements of Operations, was as follows:

Year Ended September 30,

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Non-deductible expenses 9 30 1

Impact of U.S.

global intangible taxes and benefits 3 — —

Effective rate ( 40 ) % 42 % 18 %

(1) Certain prior year amounts have been reclassified for consistency with the current year presentation.

Our income tax provision reflects an effective tax rate on pre-tax results of 42 % in Fiscal 2021 compared to 18 % and 20 % in Fiscal 2020 and 2019, respectively.

The reduction in pre-tax book income as compared to prior years caused tax adjustments to yield a greater impact to the effective tax rate in Fiscal 2021.

The effective tax rate of 42 % for Fiscal 2021 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.

The effective tax rate was negatively impacted by the losses recognized in other foreign jurisdictions, primarily in the U.K., that were reserved with a valuation allowance as well as the establishment of a valuation allowance against the deferred tax assets in Mexico in the amount of $ 0.1 million.

The effective tax rate of 18 % for Fiscal 2020 was favorably impacted by the estimated R&D Tax Credit as well as the utilization of net operating loss carryforwards in Canada that were fully reserved with a valuation allowance.

Likewise, the

discrete items recorded in the third quarter of Fiscal 2020 in the amount of $ 1.7 million associated with the release of reserves for unrecognized tax benefits as a result of the expiration of statutes of limitations and the IRS audit settlement favorably impacted the effective tax rate.

(1) Certain prior year amounts have not been reclassified for consistency with the current year presentation.

Our income tax benefit reflects an effective tax rate on pre-tax results of negative 40 % in Fiscal 2022 compared to 42 % and 18 % in Fiscal 2021 and 2020, respectively.

The income tax benefit for Fiscal 2022 was largely a result of the reversal of a valuation allowance on the Canadian deferred tax assets that were previously fully reserved, in addition to the current year estimated Research and Development Tax Credit (R&D Tax Credit).

These items were partially offset by the tax expense related to certain nondeductible expenses, the gain on the disposition of a small, non-core division of our Canadian operations and an inclusion related to U.S.

global intangible income.

The tax provision for Fiscal 2021 and 2020 was favorably impacted by the estimated R&D Tax Credit as well as the utilization of net operating loss carryforwards in Canada that were fully reserved with a valuation allowance.

In Fiscal 2021, the tax provision was negatively impacted by the losses recognized in other foreign jurisdictions, primarily in the United Kingdom (U.K.), that were reserved with a valuation allowance as well as the establishment of a valuation allowance against the deferred tax assets in Mexico.

While in Fiscal 2020, discrete items recorded in the third quarter in the amount of $ 1.7 million associated with the release of reserves for unrecognized tax benefits as a result of the expiration of statutes of limitations and the IRS audit settlement favorably impacted the effective tax rate.

The effective tax rate was negatively impacted by the discrete item recorded in the second quarter of Fiscal 2020 for the valuation allowance against our U.K.

deferred tax assets in the amount of $ 0.5 million as well as by the losses recognized in various foreign jurisdictions that were reserved with a valuation allowance.

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

federal statutory rate as favorable adjustments related to the utilization of net operating loss carryforwards in Canada that were fully reserved with a valuation allowance, and the R&D Tax Credit were largely offset by unfavorable adjustments primarily related to state income taxes and other permanent items.

During our assessment of deferred income taxes, in the second quarter of Fiscal 2020, we recorded a valuation allowance of $ 0.5 million against our U.K.

net deferred tax assets.

Similarly, we recorded a valuation allowance of $ 0.1 million against our Mexican net deferred tax assets during the fourth quarter of Fiscal 2021 as a result of our assessment of deferred income taxes.

We record and maintain valuation allowances against the deferred tax assets of various foreign jurisdictions until sufficient evidence is available to demonstrate that it is more likely than not that the net deferred tax assets will be recognized.

As of each reporting date, management considers new evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets.

During the period ended June 30, 2022, management determined that there was sufficient positive evidence to conclude that Canadian net deferred tax assets of $ 5.9 million were realizable.

This determination was based on current and anticipated market conditions, continued market diversification, operating results over the past three years and anticipated future taxable income from our Canadian operations.

The valuation allowance was released accordingly, and a $ 5.9 million tax benefit and corresponding increase in the deferred tax assets were recorded.

During our assessment of deferred income taxes in Fiscal 2020 and 2021, we recorded a valuation allowance of $ 0.5 million against our U.K.

net deferred tax assets in the second quarter of Fiscal 2020 and a valuation allowance of $ 0.1 million against our Mexican net deferred tax assets in the fourth quarter of Fiscal 2021.

In assessing the realizability of net deferred tax assets, we determined it was more likely than not that the net deferred tax assets may not be realized based upon recent U.K.

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Net deferred tax asset $ 9,161 $ 4,639

As of September 30, 2021, we had tax credit carryforwards of $ 0.1 million not reserved with a valuation allowance that are available to reduce future U.S.

federal tax liabilities.

The majority of these tax credit carryforwards expire beginning in 2031.

In addition, we had international net operating loss carryforwards of $ 0.5 million that were not reserved with a valuation allowance available to offset future taxable income in the respective jurisdictions, with an indefinite carryforward period.

We have established a valuation allowance in the amount of $ 10.5 million primarily related to the Canadian and U.K.

As of September 30, 2022, our tax credit carryforwards are fully reserved with a valuation allowance.

We had deferred tax assets related to international net operating loss carryforwards of $ 7.7 million that were not reserved with a valuation allowance available to offset future tax liabilities in the respective jurisdictions.

The majority of these net operating loss carryforwards are related to our Canadian operations and expire beginning in 2033.

The remaining unreserved carryforwards related to other jurisdictions have an indefinite carryforward period.

We have established a valuation allowance in the amount of $ 3.8 million primarily related to the U.K.

net deferred tax assets.

The net increase in the total valuation allowance during the year was $ 1.5 million which was largely a result of the current year loss recognized in the U.K.

The net decrease in the total valuation allowance during the year was $ 6.7 million which was largely a result of the reversal of the Canadian valuation allowance.

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.

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Management believes that, within the next twelve months, it is reasonably possible that the unrecognized tax benefits will decrease by approximately $ 0.3 million due to the expiration of certain federal statutes of limitations.

We are unable to make

reasonably reliable estimates regarding the timing of future cash outflows, if any, associated with the remaining unrecognized tax benefits for the open periods of Fiscal 2018 – 2021.

We are unable to make reasonably reliable estimates regarding the timing of future cash outflows, if any, associated with the remaining unrecognized tax benefits for the open periods of fiscal years ended September 30, 2019 – 2022.

Management believes that an adequate provision has been made for any adjustments that may result from tax examinations.

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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 deferrals are held in a separate 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.

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Certain former executives were provided an executive benefit plan that 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 was accrued over the service life of these individuals, and $ 0.1 million is recorded in deferred compensation related to this executive benefit plan.

The estimated present value of these payments was accrued over the service life of these individuals, and less than $ 0.1 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.

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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 .

We have an unfunded plan that extends health benefits to retirees that are also available to active employees under our existing health plans.

The current plan provides coverage for employees with at least 10 years of service who are age 55 or older but less than 65 .

Effective January 1, 2023, eligibility requirements to participate in the plan are changing.

At that time, current employees between the ages of 50 to 64 will be eligible to participate in the retiree medical plan once they have completed at least 10 years of service and retire between the ages of 60 and 64 .

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 as of both September 30, 2021 and 2020.

Our net periodic postretirement benefit expenses have been less than $ 0.1 million for the last three fiscal years.

The unfunded liability is recorded in other long-term liabilities and was $ 0.4 million as of September 30, 2022 and $ 0.9 million as of September 30, 2021.

Our net periodic postretirement benefit expenses were $ 0.1 million in Fiscal 2022 and less than $ 0.1 million for both Fiscal 2021 and 2020.

Due to the immateriality of the costs and liabilities of this plan, no further disclosure is being presented.

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Typically, these grants vest over a three-year period from the date of issuance and are a blend of time-based and performance-based shares.

Fifty to 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 to fifty percent of the grant is earned based on the three -year earnings performance of the Company following the grant date.

Fifty 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 fifty percent of the grant is earned based on the three-year earnings and safety performance of the Company following the grant date.

At September 30, 2022, there were 239,862 RSUs outstanding.

The RSUs do not have voting rights but receive dividend equivalents upon vesting.

The RSUs do not have voting rights but do receive dividend equivalents upon vesting which are accrued quarterly.

Additionally, the shares of common stock underlying the RSUs are not considered issued and outstanding until vested and common stock is issued.

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We have reserved 750,000 shares of common stock for issuance under the 2014 Plan.

As of September 30, 2021, there were 471,556 shares of common stock available for future grants.

Restricted Stock

In February 2014, our stockholders approved 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 150,000 shares.

In February 2022, our stockholders approved an amendment to the 2014 Non-Employee Director Equity Incentive Plan (the 2014 Director Plan) that extended the term of the 2014 Director Plan by ten years and increased the number of shares of common stock that may be issued under the 2014 Director Plan by 200,000 shares for a total of 350,000 shares.

The plan is administered by the Compensation Committee.

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The Compensation Committee has determined that each non-employee director will receive 2,400 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.

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 is recognized over the remaining vesting period.

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The total number of shares of common stock available for future awards under the 2014 Director plan was 206,200 shares as of September 30, 2022.

At both September 30, 2021 and 2020, there were 8,400 shares of unvested restricted stock outstanding.

At September 30, 2022 and 2021, there were 7,200 shares and 8,400 shares, respectively, of unvested restricted stock outstanding.

Compensation Expense

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(2) Short-term lease cost includes leases and rentals with initial terms of one year or less.

For the year ended September 30, 2019, rent expense related to operating leases was $ 3.5 million;

however, this amount did not include rent expense related to leases and rentals with initial terms of one year or less, which are included in short-term cost in the table above.

For the year ended September 30, 2019, sublease income from third parties was $ 1.3 million;

however, this amount included common area maintenance charges, which are included in variable lease cost in the table above.

In Fiscal 2019, we recorded additional lease expense of $ 0.7 million related to certain facility leases in Canada that are no longer utilized in our operations.

We recognize operating lease assets and operating lease liabilities representing the present value of the remaining lease payments for leases with initial terms greater than twelve months.

Leases with initial terms of twelve months or less are not recorded in our Consolidated Balance Sheets.

As of September 30, 2021 and 2020, our operating lease assets have been reduced by a lease accrual of $ 0.4 million and $ 0.6 million, respectively, related to certain unused facility leases in Canada.

As of September 30, 2022 and 2021, our operating lease assets have been reduced

by a lease accrual of $ 0.1 million and $ 0.4 million, respectively, related to certain unused facility leases in Canada.

The following table provides a summary of the operating lease assets and operating lease liabilities included in our Consolidated Balance Sheets as of September 30, 2022 and 2021, respectively (in thousands):

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2022 Quarters

Second Third (2)

Revenues $ 106,569 $ 127,854 $ 135,483 $ 162,676 $ 532,582

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Diluted $ ( 0.24 ) $ ( 0.10 ) $ 0.76 $ 0.73 $ 1.15

(1) The results for the first quarter of Fiscal 2021 demonstrated normal seasonality and were negatively impacted by holidays and work schedules related to other quarterly periods.

Gross profit continued to decrease during the first three quarters of Fiscal 2021 as compared to Fiscal 2020 quarterly gross profit 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.

(2) The results for the fourth quarter of Fiscal 2021 were positively impacted by higher volume and favorable productivity across the service and manufacturing entities.

(1) The results for the first quarter of Fiscal 2022 demonstrated normal seasonality and were negatively impacted by holidays and work schedules compared to other quarterly periods.

(2) The results for the third quarter of Fiscal 2022 were positively impacted by the release of a $ 5.9 million Canadian valuation allowance and a $ 2.0 million pre-tax gain on the sale of a non-core business within our Canadian operations.

(3) The results for the fourth quarter of Fiscal 2022 were positively impacted by a $ 2.5 million settlement of a claim for cost overruns from prior years related to a U.S.

based municipal transit project.

2021 Quarters

Third (1) (2)

Fourth (1) (3)

Revenues $ 106,575 $ 118,716 $ 115,813 $ 129,455 $ 470,559

Gross profit 18,271 17,153 17,167 22,472 75,063

Net income 2,775 7,421 3,481 2,983 16,660

Earnings per share:

Net income (loss) ( 364 ) ( 225 ) ( 2,041 ) 3,261 631

Earnings (loss) per share:

Basic $ ( 0.03 ) $ ( 0.02 ) $ ( 0.17 ) $ 0.28 $ 0.05

Diluted $ ( 0.03 ) $ ( 0.02 ) $ ( 0.17 ) $ 0.28 $ 0.05

(1) The results for the first quarter of Fiscal 2020 demonstrated normal seasonality and were negatively impacted by holidays and work schedules related to other quarterly periods.

The results for the second quarter of Fiscal 2020 improved due to the timing of orders and execution of backlog while revenues and gross profit decreased during the third and fourth quarters of Fiscal 2020 due to a decrease in orders resulting from a decline in demand across our industrial end markets, as well as project delays, cancellations and scope reductions associated with the global decline in demand across the oil and gas markets resulting from COVID-19.

(2) The results for the third quarter of Fiscal 2020 were negatively impacted by separation costs of $ 1.4 million as a result of workforce reductions.

(3) The results for the fourth quarter of Fiscal 2020 were positively impacted by other income of $ 0.5 million related to a death benefit received from our company-owned life insurance policy related to a retired employee.

(1) The results for the first quarter of Fiscal 2021 demonstrated normal seasonality and were negatively impacted by holidays and work schedules compared to other quarterly periods.

Gross profit decreased during the first three quarters of Fiscal 2021 as compared to Fiscal 2020 due to a decrease in volume, 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.

(2) The results for the fourth quarter of Fiscal 2021 were positively impacted by higher volume and favorable productivity across the service and manufacturing entities.

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.

On June 30, 2022, we sold a non-core, industrial valve repair and servicing business within our Canadian operations and received proceeds of $ 4.3 million.

We recorded a $ 2.0 million pre-tax gain on this transaction, which has been presented in other income on our Consolidated Statement of Operations for the year ended September 30, 2022.

Separation Costs

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As a result, we recorded $ 1.4 million of separation costs in restructuring and other, net on the Consolidated Statement of Operations during the third quarter of Fiscal 2020.

Subsequent Events

Long-Term Debt Repayment

On October 1, 2021, our long-term debt fully matured and our final bond redemption of $ 0.4 million was made.

See Note G for additional disclosure regarding our industrial revenue development bonds.

Subsequent Event

Quarterly Dividend Declared

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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 8. Financial Statements and Supplementary Data