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Item 7. Management’s Discussion and Analysis

2025-11-19 compared with 2024-11-20 · 81 added, 52 removed, 171 unchanged (44% of the section changed)

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For discussion and analysis of our financial condition and results of operations for Fiscal Year 2024 as compared to Fiscal Year 2023, please refer to Part II, Item 7.

“Management's Discussion and Analysis of Financial Condition and Results of Operations” in our Form 10-K for the fiscal year ended September 30, 2023, filed with the SEC on December 6, 2023.

“Management ’ s Discussion and Analysis of Financial Condition and Results of Operations” in our Form 10-K for the fiscal year ended September 30, 2024, filed with the SEC on November 20, 2024.

Any forward-looking statements made by or on our behalf are made pursuant to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995.

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In Fiscal 2025, we reported revenues of $1.1 billion, net income of $180.7 million, and generated $167.9 million in cash from operating activities.

As of September 30, 2024, we had total assets of $928.2 million.

Our backlog was $1.3 billion as of September 30, 2024, of which approximately $849 million is expected to be recognized as revenue during our fiscal year ending September 30, 2025.

As of September 30, 2025, we had total assets of $1.1 billion.

On August 15, 2025, we completed the previously announced business acquisition of Remsdaq Limited (Remsdaq), a U.K.-based manufacturer of Supervisory Control and Data Acquisition (SCADA) Remote Terminal Units (RTUs) for electrical substation control and automation in generation, transmission and distribution, for a total consideration of £13.6 million Pounds Sterling, or $18.4 million, including cash acquired.

The acquisition advances our key strategic initiative to expand our automation platform capabilities.

We believe the combination of Powell’s hardware and detection sensors with Remsdaq’s SCADA RTUs creates a highly synergistic integration that positions us to effectively meet the growing demand for more sophisticated solutions that enhance utility operational efficiency, system reliability and security.

Business Acquisition of the Notes to Consolidated Financial Statements for additional information.

Our backlog increased to $1.4 billion as of September 30, 2025, of which approximately $824 million is expected to be recognized as revenue during our fiscal year ending September 30, 2026.

Although current commercial activity remains active in most of the markets that we compete in, we remain attentive to the macro environment and geopolitical events that may have an impact on future market activity.

Oil and gas and petrochemical markets.

Our order activity remains strong in these markets.

The North American market is responding to increased international demand for LNG and gas-to-chemical processes utilizing low-cost gas feedstocks.

The North American market is responding to increased international demand for liquefied natural gas (LNG) and gas-to-chemical processes utilizing low-cost gas feedstocks.

We believe the fundamentals of the U.S.

natural gas market, through abundant supply and low cost, will continue to support investments in LNG, related gas processing, and petrochemical processes, and as a result, will continue to sustain our order activity associated with such markets.

In addition to the traditional crude oil refining and other oil and gas downstream processes, we have recently expanded our end markets into hydrogen production, carbon capture as well as alternative fuels, such as biofuels and sustainable aviation fuel, in response to the demand for clean energy.

natural gas market, through abundant supply and low cost, has supported investments in LNG, related gas processing, and petrochemical processes, and as a result, has sustained our order activity associated with such markets, which is evidenced by two large, domestic LNG project awards during the first half of Fiscal 2025.

Other oil and gas end markets have remained active as well, and we secured two large, offshore projects in our core oil and gas end markets during the third quarter of Fiscal 2025.

In addition to the traditional crude oil refining and other oil and gas downstream processes, we have expanded our end markets into hydrogen production, carbon capture as well as alternative fuels, such as biofuels and sustainable aviation fuel, in response to the demand for clean energy.

Electric utility market.

Aligned with our strategy of end-market diversification, we seek to continue our focus and growth in electrical distribution substations, while also addressing a resurgence of power generation investment in this market.

third quarter of Fiscal 2025, we won a project for a new power generation plant, representing the largest electric utility award in the Company’s history.

Commercial and other industrial markets.

We have experienced strong growth in these end markets driven by a mix of factors including increased investment in commercial and light industrial facilities for the production of various goods, the expansion of data centers and cloud computing, as well as the growing demand in industrial applications to support new technologies driving the energy transition.

We are cautiously optimistic regarding the anticipated investment across AI applications that may drive data center growth and subsequently power generation demand.

As a result of a mix of factors we are experiencing steady growth in commercial facilities that provide for the production of various consumer goods and the expansion of data centers that support cloud computing and increasing investments in artificial intelligence.

We are also experiencing increased activity in other industrial end markets.

In the first half of Fiscal 2025, we secured a large mining project for the production of potash, which is expected to be executed in late Fiscal 2027 and beyond.

Additionally, we booked an order for a domestic light rail traction power project in the third quarter of Fiscal 2025, representing the first large traction power project booked in several quarters.

Business Environment

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Fixed-price contracts can limit our ability to pass these increases to our customers, thus negatively impacting our earnings and operations in future periods.

During Fiscal 2024, we experienced commodity price volatility, in addition to the ongoing supply chain delays for specific engineered components that have been persistent.

We are working closely with our suppliers to meet our customer commitments.

In response to the increased cost environment and supply chain challenges, we strive to effectively manage our product pricing, delivery schedules and bid validity dates with our customers, as well as improve factory efficiencies and project execution, and as a result our gross margins have been improved in Fiscal 2024.

During Fiscal 2025, we continued experiencing high volatility in commodity prices, and ongoing supply chain delays for specific engineered components remained a persistent challenge for us.

Moreover, ongoing and recently proposed changes to U.S.

global trade policy, along with potential international retaliatory measures, and concerns over inflation, recession and slowing growth have continued to cause high volatility in global markets and uncertainty around short- and long-term economic impacts in the United States and other markets we serve.

We continue to evaluate and monitor the potential impacts of these changes and measures, including the imposition of tariffs, on our business and operations.

We could potentially face the challenge of increased costs of raw materials and engineered components as well as negative impacts on our margins;

however, it is not possible to predict the impact, if any, of any changes or proposed changes to the U.S.

global trade policy, or any international retaliatory measures, on our business and operations.

In response to the rising cost environment and persistent supply chain challenges, we are taking strategic measures to effectively manage our product pricing, refine delivery schedules, and manage bid validity dates with our customers.

Our supplier engagement includes improving forecasting and negotiating favorable terms that allow us to meet or exceed customer timelines.

Additionally, we remain focused on enhancing factory efficiencies and improving project execution to mitigate risks and maintain customer satisfaction.

On July 4, 2025, President Trump signed into law the One Big Beautiful Bill Act (the OBBBA), which includes a broad range of tax reform provisions affecting businesses.

The OBBBA extends and modifies certain key 2017 Tax Cuts & Jobs Act (TCJA) provisions (both domestic and international) and revamps some of the TCJA’s provisions on the taxation of corporations’ foreign income.

The OBBBA also expands certain Inflation Reduction Act incentives while accelerating the phase-out of others.

We are currently evaluating the impact of the OBBBA on our operations, financial results and liquidity.

Results of Operations

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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.

Revenues increased by 45%, or $313.0 million, to $1.0 billion in Fiscal 2024, primarily driven by the increase in project backlog resulting from large contracts awarded during Fiscal 2023 and strong bookings throughout Fiscal 2024.

Revenues increased by 9%, or $92.0 million, to $1.1 billion in Fiscal 2025, primarily driven by strong project backlog at the end of Fiscal 2024 and strong bookings that continued throughout Fiscal 2025.

Domestic revenues increased by 4%, or $33.7 million, to $880.2 million in Fiscal 2025.

International revenues increased by 17%, or $24.5 million, to $165.8 million in Fiscal 2024.

International revenues increased by 35%, or $58.3 million, to $224.1 million in Fiscal 2025, primarily driven by increased project volume from our Canada operations and increased activity in the Middle East and Africa region.

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

In Fiscal 2024, revenue from our core oil and gas market (excluding petrochemical) increased by 53%, or $144.1 million, to $417.2 million in Fiscal 2024;

petrochemical market revenue increased by 97%, or $91.4 million, to $185.6 million;

revenue from our electric utility market increased by 18%, or $28.1 million, to $186.5 million;

In Fiscal 2025, revenue from our electric utility market increased by 50%, or $92.4 million, to $279.0 million;

commercial and other industrial market revenue increased by 19%, or $28.3 million, to $178.2 million;

and revenue from all other markets combined increased by 23%, or $9.6 million to $51.1 million.

These increases in revenue were driven by improved market conditions in most of our end markets, increased capital spending in our core oil, gas and petrochemical markets, as well as our strategic effort to expand our business into electric utility and commercial and other industrial markets.

Revenue from our light rail traction power market decreased by 22%, or $6.1 million, to $22.0 million in Fiscal 2024 due to less project volume in this market.

and revenue from our light rail traction power market increased by 87%, or $19.2 million, to $41.3 million.

These increases in revenue were primarily driven by our strategic effort to expand our business into electric utility and commercial and other industrial markets and the improved market conditions in these end markets.

Revenue from our petrochemical market decreased by 19%, or $34.4 million, to $151.2 million with the reduction in backlog and bookings in this market and as the business nears completion of the large petrochemical order secured in Fiscal 2023.

Revenue from our oil and gas market (excluding petrochemical) decreased by 3%, or $10.6 million, to $406.6 million and revenue from all other markets combined decreased by 6%, or $3.0 million to $48.1 million in Fiscal 2025 due to less project volume.

For additional information on the markets we serve, see “Markets” in Part I, Item 1 of this Annual Report.

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Gross profit as a percentage of revenues increased to 29% in Fiscal 2025 as compared to 27% in Fiscal 2024.

This increase in gross profit is attributable to the higher volume levels across all of Powell's manufacturing facilities generating favorable volume leverage, strong project execution, and continuing effort to improve factory efficiencies while also managing product pricing that corresponds to current cost levels.

This increase in gross profit was primarily driven by higher revenues and improved gross profit margin due to favorable volume leverage and strong project execution in a stable pricing environment throughout Fiscal 2025.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased by 8%, or $6.1 million, to $84.9 million in Fiscal 2024, primarily due to increased compensation expense and higher spending on infrastructure improvements.

Selling, general and administrative expenses as a percentage of revenues decreased to 8% in Fiscal 2024, compared to 11% in Fiscal 2023, resulting from higher revenues on our existing cost structure.

Selling, general and administrative expenses increased by 12%, or $10.5 million, to $95.4 million in Fiscal 2025, primarily due to higher compensation expense and costs associated with the acquisition of Remsdaq.

Selling, general and administrative expenses as a percentage of revenues increased to 9% in Fiscal 2025, compared to 8% in Fiscal 2024.

Income Tax Provision

We recorded an income tax provision of $52.8 million in Fiscal 2025, resulting in an effective tax rate of 23%, compared to an income tax provision of $46.2 million in Fiscal 2024 at an effective tax rate of 24%.

In Fiscal 2024, the effective tax rate was favorably impacted by the estimated Research and Development (R&D) Tax Credit and tax benefits related to the vesting of restricted stock units.

These items were offset by state income tax expense, certain non-deductible items, and the tax impact of U.S.

global intangible income.

In Fiscal 2023, the effective tax rate approximated the U.S.

federal statutory rate.

The favorable impacts of the estimated R&D Tax Credit and the release of the valuation allowance previously recorded against the U.K.

net deferred tax assets in the amount of $1.9 million were offset by state income tax expense, certain non-deductible items and the tax impact of U.S.

For both Fiscal 2025 and 2024, the effective tax rate was favorably impacted by tax benefits related to the vesting of restricted stock units and the estimated Research and Development Tax Credit, which were offset by state income tax expense and certain non-deductible items.

Additionally in Fiscal 2024, these benefits were offset by an income inclusion related to U.S.

global intangible income.

In Fiscal 2025, we recorded net income of $180.7 million, or $14.86 per diluted share, compared to net income of $149.8 million, or $12.29 per diluted share in Fiscal 2024.

This increase in net income is primarily due to higher revenues coupled with improved gross profit margins, as well as our disciplined cost structure.

The increase in net income was primarily driven by higher revenue and improved gross profit margin in Fiscal 2025.

The order backlog, which is our remaining unsatisfied performance obligations, represents the estimated transaction price for goods and services for which we have a material right, but work has not been performed.

The order backlog at September 30, 2024 was $1.3 billion, consistent with our backlog at September 30, 2023.

Bookings, net of cancellations and scope reductions, decreased by 24% in Fiscal 2024 to $1.1 billion, compared to $1.4 billion in Fiscal 2023.

Despite strong bookings in Fiscal 2024, the decrease in bookings was due to a normalization of the oil and gas sector with fewer large orders awarded in this sector during Fiscal 2024.

The order backlog at September 30, 2025 was $1.4 billion, a 3% increase from our $1.3 billion backlog at September 30, 2024.

This increase was mainly driven by electric utility, commercial and other industrial and light rail traction power markets, partially offset by a decrease in the petrochemical market.

As of September 30, 2025, electric utility and oil and gas (excluding petrochemical) markets each

accounted for 33% of our backlog, the commercial and other industrial market accounted for 15% and the petrochemical and light rail traction power markets each accounted for 8% of our backlog.

Bookings, net of cancellations and scope reductions, increased by 9% in Fiscal 2025 to $1.2 billion, compared to $1.1 billion in Fiscal 2024.

This increase was primarily driven by improved bookings in oil and gas, electric utility and light rail traction power markets, partially offset by decreased net bookings in the petrochemical market.

Liquidity and Capital Resources

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Cash, cash equivalents and short-term investments increased to $475.5 million at September 30, 2025, compared to $358.4 million at September 30, 2024.

This increase in cash, cash equivalents and short-term investments was primarily driven by our improved earnings due to increased project margins and volumes, partially offset by working capital allocated to projects in our order book, capital spending, as well as dividend payments.

The increase in cash, cash equivalents and short-term investments was primarily driven by our strong earnings, partially offset by working capital commitment, cash paid for the Remsdaq acquisition, capital spending, dividend payments, and cash payments related to shares withheld in lieu of employee tax withholding.

We invest our cash, cash equivalents and short-term investments in accordance with the Company’s investment policy approved by the Board of Directors.

We believe that our cash, cash equivalents and short-term investments, as well as available borrowings under our U.S.

credit facility, will be sufficient to support our future operating activities, working capital requirements, payment of dividends and capital spending, as well as research and development initiatives for the next twelve months and beyond.

credit facility, will be sufficient to support our ongoing operating activities, dividend payments and future organic and inorganic business growth, as well as research and development initiatives for the next twelve months and beyond.

As we assess our capital allocation framework relative to our strategic objectives, we will continue to deploy capital to both organic and inorganic initiatives, as well as maintain a prudent approach to other methods that improve shareholder value.

We regularly assess our capital allocation framework.

Our current intention is to prioritize our working capital needs, fund research, capital expenditures and other organic growth opportunities, while also returning capital to shareholders and evaluating strategic inorganic opportunities as they arise.

Our capital allocation plan depends upon a number of factors, including market conditions, our financial position and capital requirements, financial conditions, competing uses for cash, and other factors.

On October 4, 2023, we entered into a third amendment (the Third Amendment) to our credit agreement with Bank of America, N.A.

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As amended by the Third Amendment, the lesser of (a) $60 million, (b) 60% of available cash, and (c) the aggregate face amount of the issued but undrawn letters of credit that are not cash-secured shall be deducted from consolidated funded indebtedness, when calculating the consolidated net leverage ratio.

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.

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.

On June 26, 2024, in connection with the expected discontinuation of the publication of the Canadian Dollar Offered Rate (CDOR), we further amended the U.S.

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Revolver by entering into a conforming changes amendment with Bank of America, N.A.

that added and amended certain terms related to the replacement of the BSBY as a benchmark rate with the Secured Overnight Financing Rate (SOFR) as administered by the Federal Reserve Bank of New York.

that added and amended certain terms related to the replacement of the BSBY as a benchmark rate with the Secured Overnight Financing Rate as administered by the Federal Reserve Bank of New York.

On September 30, 2025, we entered into a fourth amendment to the U.S.

Revolver associated with a reorganization of holding companies of our foreign subsidiaries, replacing the prior share pledge on 65% of the equity interests of Powell Industries International, B.V., with the share pledge on 65% of the equity interest of Powell Industries International Limited.

As of September 30, 2025, there were no amounts borrowed under the U.S.

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Revolver as of September 30, 2025.

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

For further information regarding our debt, see Notes G.

Long-Term Debt and H.

Commitments and Contingencies of Notes to Consolidated Financial Statements.

Approximately $88.9 million of our cash, cash equivalents and short-term investments at September 30, 2025 was held outside of the U.S.

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

The decrease in operating cash flow was primarily due to working capital impact as we allocate capital to the projects in the order book, partially offset by higher net income resulting from increased project volume and improved project margins.

The increase in operating cash flow was primarily driven by improved earnings and a steady allocation of working capital to projects in the order book.

Investing Activities

Investing activities used $21.9 million of cash during Fiscal 2024 and used $26.6 million in Fiscal 2023.

The decrease in cash used in investing activities during Fiscal 2024 was primarily due to lower net purchase of short-term investments, partially offset by higher capital spending on property, plant and equipment in Fiscal 2024.

During Fiscal 2024, our purchase of short-term investments was $9.7 million compared with net purchase of short-term investments of $18.8 million in Fiscal 2023.

In July 2024, we made a cash purchase of land and buildings in Houston, Texas for $5.6 million to help further facilitate executing the current backlog as well as planning for modest future volume growth.

In addition, we acquired intellectual property in December 2023 for a total consideration of $0.5 million, of which $250 thousand was paid in cash.

Investing activities used $8.3 million of cash during Fiscal 2025 and used $21.9 million of cash in Fiscal 2024.

Cash used in investing activities during Fiscal 2025 was primarily attributable to the Remsdaq acquisition and the capital spending on the facility expansion and improvement project at our electrical products facility in Houston.

The cash spending was partially offset by net maturities of short-term investments.

During the fourth quarter of Fiscal 2025, we completed the previously announced business acquisition of Remsdaq for a cash consideration of $10.6 million, net of cash acquired, on the acquisition date, and an additional cash payment of $0.9 million in September 2025, as Remsdaq achieved its financial target.

Business Acquisition of the Notes to Consolidated Financial Statements for additional information.

In Fiscal 2025, the expansion and improvement project at our electrical products facility in Houston was completed and the incremental capacity has been placed into service.

During Fiscal 2024, cash used in investing activities was primarily associated with the net purchase of short-term investments, a cash purchase of land and buildings in Houston, Texas for $5.6 million, and regular capital spending on property, plant and equipment.

Financing Activities

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Planned Capital Spending

We have planned capital spending of approximately $11 million on a facility expansion project at our products factory in Houston.

We expect to complete the expansion project by mid-Fiscal 2025.

We have spent $1.5 million on the expansion project in Fiscal 2024.

In August 2025, we announced a $12.4 million investment to expand production capacity at our Jacintoport manufacturing facility in Houston, Texas.

The investment will add an incremental 335,000 square feet of productive capacity for Power Control Room laydown area, a 62% increase from the current yard capacity.

The investment will also double the length of the existing shoreline bulkhead to 1,150 feet to support increased schedule flexibility and multiple ship lanes for the varied needs and project timelines of our customers.

The incremental capacity is initially expected to support the Company’s oil and gas customers but can be utilized to support each of our market sectors.

Construction is expected to begin in the first quarter of Fiscal 2026 and is expected to be completed in the second half of Fiscal 2026.

Other Commercial Commitments

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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.

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.

Revenue of the Notes to Consolidated Financial Statements for disclosures related to changes in contract estimates.

Variable Consideration

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

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

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

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

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Variations in the actual outcome of these future tax consequences could materially impact our financial position and results of operations.

See Note I of Notes to Consolidated Financial Statements for disclosures related to the valuation allowance recorded in relation to deferred taxes.

Income Taxes of the Notes to Consolidated Financial Statements for disclosures related to the valuation allowance recorded in relation to deferred taxes.

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