The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the accompanying condensed
consolidated financial statements and related notes included elsewhere in this
Quarterly Report on Form 10-Q and with our Annual Report on Form 10-K for the
year ended September 30, 2019, which was filed with the Securities and Exchange
Commission (SEC) on December 5, 2019 and is available on the SEC's website at
www.sec.gov.
Overview
We develop, design, manufacture and service custom-engineered equipment and
systems for the distribution, control and monitoring of electrical energy.
Headquartered in Houston, Texas, we serve the oil and gas markets, including
onshore and offshore oil and gas production, pipeline, refining and liquid
natural gas terminals, as well as petrochemical, electric utility and light
traction power. Revenues and costs are primarily related to custom
engineered-to-order equipment and systems and are accounted for under
percentage-of-completion accounting which precludes us from providing detailed
price and volume information. Our backlog includes various projects that
typically take a number of months to produce.
The markets in which we participate are capital-intensive and cyclical in
nature. Cyclicality is predominantly driven by customer demand, global economic
conditions and anticipated environmental, safety or regulatory changes which
affect the manner in which our customers proceed with capital investments. Our
customers analyze various factors including the demand and price for oil, gas
and electrical energy, the overall economic and financial environment,
governmental budgets, regulatory actions and environmental concerns. These
factors influence the release of new capital projects by our customers, which
are traditionally awarded in competitive bid situations. Scheduling of projects
is matched to the customer requirements and projects typically take a number of
months to produce. Schedules may change during the course of any particular
project, and our operating results can, therefore, be impacted by factors
outside of our control.
Within the industrial sector, specifically oil, gas and petrochemical, the
demand for our electrical distribution solutions is very cyclical and highly
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 and
abundant sources of favorably priced natural gas feedstock drove an increase in
capital investment opportunities, specifically across the oil, gas and
petrochemical sectors. We have seen opportunities for natural gas related
projects targeting global demand for cleaner burning fuels. Additionally,
projects within the domestic petrochemical sector have benefited from the low
feedstock prices of natural gas. Specific to natural gas, the business was
awarded a substantial contract in the second quarter of Fiscal 2020 that will
support the integrated electrical distribution requirements for a large domestic
industrial complex. This specific project will take over three years to design,
manufacture, integrate, test and ship.
Impact of the COVID-19 Pandemic and Oil and Gas Commodity Market Volatility on
Powell
The spread of COVID-19 has created significant uncertainty and economic
disruption across the world during the second half of Fiscal 2020. 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, reductions in oil and gas demand and volatility in
commodity prices noted above.
From an operations 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
our customers are experiencing, 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 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.

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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 is expected to reduce salaried compensation by $1.3 million in the second half of Fiscal 2020. Additionally, we have also reduced our capital and discretionary spending in response to current business conditions. As discussed further under the heading "Outlook" below, it is difficult to predict the economic impact that this pandemic, as well as reduced oil and gas demand and commodity price volatility may have on our business, results of operations and cash flows going forward.



Results of Operations
Quarter Ended June 30, 2020 Compared to the Quarter Ended June 30, 2019
(Unaudited)
Revenue and Gross Profit
Revenues decreased by 13%, or $17.5 million, to $118.1 million in the third
quarter 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 and
cancellations of potential projects associated with the global decline in demand
across the oil and gas markets resulting from COVID-19. Domestic revenues
decreased by 12%, or $12.4 million, to $91.3 million in the third quarter of
Fiscal 2020. International revenues decreased by 16%, or $5.1 million, to $26.8
million in the third quarter of Fiscal 2020 as a result of lower commercial
activity across our international operations. 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 oil and gas end markets decreased by 26%, or $16.5 million, to
$45.9 million in the third quarter of Fiscal 2020 while petrochemical revenue
increased by 39%, or $8.2 million, to $29.3 million in the third quarter of
Fiscal 2020. The decrease in demand across the oil and gas end markets has
negatively impacted our orders rate and revenue. The increase in petrochemical
revenues continues to be driven primarily by execution of previously booked
orders from the petrochemical end markets and lower natural gas prices. Revenue
from utility markets decreased by 37%, or $9.7 million, to $16.7 million and
traction market revenue increased by 23%, or $1.7 million, to $9.1 million in
the third quarter of Fiscal 2020, as the mix of our projects shifts across our
global operating facilities. Revenue from all other markets combined decreased
by $1.2 million to $17.1 million in the third quarter of Fiscal 2020.
Gross profit decreased by 10%, or $2.4 million, to $21.3 million, for the third
quarter of Fiscal 2020 as a result of lower revenues. Gross profit as a
percentage of revenues increased to 18% in the third quarter of Fiscal 2020,
compared to 17% in the third quarter of Fiscal 2019 due to stronger margins in
backlog as well as cost efficiencies, while absorbing the operational challenges
resulting from COVID-19.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased by 9%, or $1.6 million,
to $15.5 million in the third quarter of Fiscal 2020, primarily due to decreased
personnel costs. Additionally, travel related costs have temporarily declined as
a result of COVID-19. Selling, general and administrative expenses, as a
percentage of revenues, was 13% during the third quarter of Fiscal 2020 and
Fiscal 2019, primarily due to our continued focus on our cost structure.
Restructuring and Other, Net
In response to the COVID-19 pandemic, reductions in oil and gas demand and
volatility of commodity prices, we implemented workforce reductions across the
business. As a result, we recorded $1.4 million of separation costs during the
third quarter of Fiscal 2020.
Income Tax Benefit/Provision
We recorded an income tax benefit of $0.6 million in the third quarter of Fiscal
2020, compared to an income tax provision of $0.8 million in the third quarter
of Fiscal 2019. The effective tax rate for the third quarter of Fiscal 2020 was
negative 19%, compared to an effective tax rate of 14% in the third quarter of
Fiscal 2019. For the three months ended June 30, 2020, the effective tax rate
was favorably impacted by the tax benefits related to the Research and
Development Tax Credit (R&D Tax Credit) and the projected utilization of net
operating loss carryforwards in Canada that were fully reserved with a valuation
allowance. In addition, as a result of the expiration of certain U.S. federal
statutes of limitations and the effective settlement of an Internal Revenue
Service (IRS) audit, $1.7 million of reserves for unrecognized tax benefits
related to these matters was released. These benefits were partially offset by
losses recognized in various foreign jurisdictions that were reserved with a
valuation allowance.

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For the third quarter of Fiscal 2019, the effective tax rate was favorably
impacted by the relative amounts of income recognized in various foreign
jurisdictions that were reserved with a valuation allowance.
Net Income
In the third quarter of Fiscal 2020, net income of $3.5 million, or $0.30 per
diluted share, decreased from net income of $5.1 million, or $0.44 per diluted
share, in the third quarter of Fiscal 2019, primarily due to a decline in
revenues and gross profit resulting from lower orders caused by adverse market
conditions as well as $1.4 million of separation costs. This was partially
offset by the favorable impact from the reversal of the reserves for
unrecognized tax benefits as a discrete item in the third quarter of Fiscal
2020.
Backlog
The order backlog at June 30, 2020 was $532.2 million, a decrease of 6% from
$566.4 million at March 31, 2020 and a 31% increase over the $407.0 million
backlog at June 30, 2019. The increase in backlog at June 30, 2020 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. New orders decreased by 44% in the third
quarter of Fiscal 2020 to $81.4 million, compared to $144.8 million in the third
quarter of Fiscal 2019, primarily due to decreased demand from our customers in
our core oil and gas markets.

Nine Months Ended June 30, 2020 Compared to the Nine Months Ended June 30, 2019
(Unaudited)
Revenue and Gross Profit
Revenues increased by 10%, or $35.1 million, to $403.8 million in the nine
months ended June 30, 2020. This increase is attributable to the first half of
Fiscal 2020 revenues and is the result of the solid backlog at the beginning of
Fiscal 2020 driven by the improved market conditions in our petrochemical and
oil and gas markets beginning in late Fiscal 2018. Domestic revenues increased
by 9%, or $27.4 million, to $318.2 million in the nine months ended June 30,
2020. International revenues increased by 10%, or $7.7 million, to $85.6 million
in the nine months ended June 30, 2020, primarily driven by increased activity
in our international operations and end markets. 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 oil and gas markets decreased by 6%, or $10.2 million, to
$157.8 million in the nine months ended June 30, 2020 while petrochemical
revenue increased by 69%, or $43.7 million, to $107.1 million in the nine months
ended June 30, 2020 driven by the previous strength across the core oil and gas
and petrochemical end markets when these projects were awarded in Fiscal 2018
and 2019. Revenue from utility markets decreased by 3%, or $2.1 million, to
$64.0 million and traction market revenue increased by 70%, or $13.0 million, to
$31.4 million in the nine months ended June 30, 2020, primarily driven by our
mix of projects. Revenue from all other markets combined decreased by $9.3
million to $43.5 million in the nine months ended June 30, 2020.
Gross profit increased by 25%, or $14.4 million, to $72.9 million, for the nine
months ended June 30, 2020. Gross profit as a percentage of revenues increased
to 18% in the nine months ended June 30, 2020, compared to 16% in the nine
months ended June 30, 2019 due to strong margins in backlog as well as cost
efficiencies and increased volume in our domestic and international
manufacturing facilities.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by 2%, or $1.1 million,
to $51.4 million in the nine months ended June 30, 2020, primarily due to
increased variable incentive compensation associated with increased project
volume and profitability. Selling, general and administrative expenses, as a
percentage of revenues, decreased to 13% during the nine months ended June 30,
2020, compared to 14% during the nine months ended June 30, 2019, primarily due
to the increase in revenues and our continued focus on our cost structure.
Restructuring and Other, Net
In response to the COVID-19 pandemic, reductions in oil and gas demand and
volatility of commodity prices, we implemented workforce reductions across the
business. As a result, we recorded $1.4 million of separation costs during the
third quarter of Fiscal 2020.
Income Tax Provision
We recorded an income tax provision of $2.1 million in the nine months ended
June 30, 2020, compared to an income tax provision of $1.0 million in the nine
months ended June 30, 2019. The effective tax rate for the nine months ended
June 30, 2020 was 13%, compared to an effective tax rate of 22% for the nine
months ended June 30, 2019. For the nine months ended June 30, 2020, the
effective tax rate was favorably impacted by the current year estimated R&D Tax
Credit as well as the projected utilization of net

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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. 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 UK 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. For the nine months ended June 30, 2019, the effective tax
rate of 22% 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. The effective tax rate
for the nine months ended June 30, 2019 approximated the U.S. federal statutory
rate as the impact from foreign jurisdictions with losses reserved with a
valuation allowance were insignificant.
Net Income
In the nine months ended June 30, 2020, net income of $13.7 million, or $1.17
per diluted share, improved from net income of $3.4 million, or $0.29 per
diluted share, in the nine months ended June 30, 2019 primarily from increased
revenues and gross profit in the first half of Fiscal 2020 and from the
favorable impact from the reversal of the reserves for unrecognized tax benefits
as a discrete item which was partially offset by the separation costs in the
third quarter of Fiscal 2020.
Backlog
The order backlog at June 30, 2020 was $532.2 million, a 27% increase from the
$419.0 million at September 30, 2019. New orders increased by 1% during the nine
months ended June 30, 2020 to $519.5 million, compared to $513.9 million in the
nine months ended June 30, 2019. Backlog and orders benefited from a substantial
contract awarded in the second quarter of Fiscal 2020 that will support the
integrated electrical distribution requirements for a large domestic industrial
complex.
Outlook
The markets in which we participate are capital-intensive and cyclical in
nature. Cyclicality is predominantly driven by customer demand, global economic
conditions and anticipated environmental, safety or regulatory changes which
affect the manner in which our customers proceed with capital investments. Our
customers analyze various factors including the demand and price for oil, gas
and electrical energy, the overall economic and financial environment,
governmental budgets, regulatory actions and environmental concerns. 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.
A significant portion of our revenues have historically been from the oil, gas
and petrochemical markets. Oil and gas commodity price levels have been unstable
over the last several years, and our customers delayed some of their major
capital investment projects. Beginning in late Fiscal 2018, our customers'
decisions to invest in projects in our key oil and gas and petrochemical markets
were influenced somewhat by the stabilization of commodity prices and the
increased global demand for cleaner burning fuels during that period of time. We
believe that change in market sentiment during that period of time had a
favorable impact on our orders and backlog entering Fiscal 2020, although we
anticipate that recent declines in oil prices will negatively impact our
business going forward, as discussed in more detail below. 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.
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 could continue to be, impacted by the timing and resolution
of change orders, project close-out and resolution of potential contract claims
and liquidated damages, all of which could improve or deteriorate gross margins
during the period in which these items are resolved with our customers. These
factors may result in periods of underutilization of our resources and
facilities and negatively impact our ability to cover our fixed costs. The
increased orders in Fiscal 2018 and 2019 have led to improvement in revenues and
operating results for the first half of Fiscal 2020. We continue to monitor the
factors that drive our markets and will continue to strive to maintain our
leadership and competitive advantage in the markets we serve while aligning our
cost structure and workforce with these changing market conditions.
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. This pandemic has negatively impacted 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 this
pandemic, the reduced oil and gas demand and the commodity price volatility.

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As a result of these circumstances, we anticipate that a decrease in commercial activity will negatively impact our business, results of operations and cash flows going forward. We have and may need to continue to adjust our workforce and labor costs to correspond to the reduced customer demand. We will take prudent measures to maintain our strong liquidity and cash position, which may include reducing our capital expenditures and research and development costs, as well as reducing or eliminating future dividend payments. However, the extent to which the COVID-19 pandemic specifically will impact our business will depend on numerous factors that are hard 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 June 30, 2020, current assets exceeded current liabilities by 2.1 times
and our debt to total capitalization was 0.26%.
Cash, cash equivalents and short-term investments increased to $163.4 million at
June 30, 2020, compared to $124.7 million at September 30, 2019. This increase
in cash was primarily driven by the timing of contract billing milestones
related to our recent contract award for a large domestic industrial project. We
believe that our strong working capital position, available borrowings under our
credit facility (U.S. Revolver) and available cash should be sufficient to
finance future operating activities, capital improvements, research and
development initiatives and debt repayments for the foreseeable future.
Our U.S. Revolver is a $75.0 million revolving credit facility, which is
available for both borrowings and letters of credit. As of June 30, 2020, there
were no amounts borrowed under this facility, and letters of credit outstanding
were $33.1 million. As of June 30, 2020, $41.9 million was available for the
issuance of letters of credit and borrowing under the U.S. Revolver. Total
long-term debt, including current maturities, totaled $0.8 million at June 30,
2020 related to outstanding industrial development revenue bonds. For further
information regarding our debt, see Note E of Notes to Condensed Consolidated
Financial Statements.
Approximately $23.7 million of our cash and cash equivalents at June 30, 2020
was held outside of the U.S. for international operations. It is our intention
to indefinitely reinvest all current and future foreign earnings internationally
in order to ensure sufficient working capital to support our international
operations. In the event that we elect to repatriate some or all of the foreign
earnings that were previously deemed to be indefinitely reinvested outside the
U.S., we may incur additional tax expense upon such repatriation under current
tax laws.
Operating Activities
Operating activities provided net cash of $53.4 million during the nine months
ended June 30, 2020 and $33.9 million during the same period in Fiscal 2019.
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 flow was primarily due to the timing
of contract billing milestones related to our recent contract award for a large
domestic industrial project.
Investing Activities
Investing activities used $5.5 million during the nine months ended June 30,
2020 compared to $4.0 million provided during the same period in Fiscal 2019.
The decrease in cash provided by investing activities in the first nine months
of Fiscal 2020 was primarily due to short-term investment activity.
Financing Activities
Net cash used in financing activities was $10.1 million during the nine months
ended June 30, 2020 and $10.5 million during the same period in Fiscal 2019,
which primarily consisted of approximately $9.0 million of dividends paid in
each period.
New Accounting Standards
See Note A of Notes to Condensed Consolidated Financial Statements included in
this report for information on new accounting standards.

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Critical Accounting Policies and Estimates The discussion and analysis of our financial condition and results of operations are based on our condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities known to exist at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. We evaluate our estimates on an ongoing basis, based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. There can be no assurance that actual results will not differ from those estimates. Effective October 1, 2019, we adopted the new lease accounting standard which resulted in changes to our lease policy. See Note I of Notes to Condensed Consolidated Financial Statements for information on the new lease accounting guidance and related disclosures. There have been no other material changes to our critical accounting policies as disclosed in our Annual Report on Form 10-K for the year ended September 30, 2019.

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