POWELL INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. BUSINESS AND ORGANIZATION Cash and Cash Equivalents Supplemental Disclosures of Cash Flow Information (in thousands): B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation Reclassifications Accounts Receivable Use of Estimates Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts Powell Industries, Inc. (we, us, our, Powell or the Company) was  incorporated in the state of Delaware in 2004 as a successor to a  Nevada company incorporated in 1968. The Nevada corporation  was the successor to a company founded by William E. Powell  in 1947, which merged into the Company in 1977. Our major  subsidiaries, all of which are wholly-owned, include: Powell Electrical  Systems, Inc.; Transdyn, Inc.; Powell Industries International, B.V.;  Switchgear & Instrumentation Limited (S&I) and Powell Canada Inc. We develop, design, manufacture and service custom engineered- to-order equipment and systems for the management and control  of electrical energy and other critical processes. Headquartered in  Houston, Texas, we serve the transportation, environmental, energy,  industrial and utility industries.  Financial instruments include cash, cash equivalents, receivables,  payables and debt obligations. Except as described below, due  to the short-term nature of account receivables and account  payables, the book value is representative of their fair value. The  carrying value of debt approximates fair value as interest rates are  indexed to the Federal Funds Rate, the Canadian Prime Rate or the  bank’s prime rate. The consolidated financial statements include the accounts of Powell  and our wholly-owned subsidiaries. All intercompany accounts and  transactions have been eliminated in consolidation. Reclassifications have been made in prior years’ financial statements  to conform and expand the presentation of deferred income taxes  and research and development used in the current year. These  reclassifications have not resulted in any changes to previously  reported net income or cash flows for any periods. The preparation of financial statements in conformity with accounting  principles generally accepted in the United States (U.S. 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 financial statements affect revenue and cost recognition  for construction contracts, the allowance for doubtful accounts,  provision for excess and obsolete inventory, goodwill and other  intangible assets, self-insurance, warranty accruals and income  taxes. The amounts recorded for insurance claims, warranties,  legal, income taxes and other contingent liabilities require judgments  regarding the amount of expenses that will ultimately be incurred.  We base our estimates on historical experience and on various other  assumptions, as well as the specific circumstances surrounding  these contingent liabilities, in evaluating the amount of liability that  should be recorded. Estimates may change as new events occur,  additional information becomes available or operating environments  change. Actual results may differ from our estimates.  Costs and estimated earnings in excess of billings on uncompleted  contracts arise when revenues are recorded on a percentage- of-completion basis but cannot be invoiced under the terms  of the contract. Such amounts are invoiced upon completion of  contractual milestones. Accounts receivable are stated net of allowances for doubtful  accounts. We maintain and continually assess the adequacy of the  allowance for doubtful accounts representing our estimate for losses  resulting from the inability of our customers to pay amounts due to  us. This estimated allowance is based on historical experience of  uncollected accounts, the level of past due accounts, the overall  level of outstanding accounts receivable, information about specific  customers with respect to their inability to make payments and  expectations of future conditions that could impact the collectability  of accounts receivable. Future changes in our customers’ operating  performance and cash flows, or in general economic conditions,  could have an impact on their ability to fully pay these amounts,  which could have a material impact on our operating results.  In most cases, receivables are not collateralized. However, we  utilize letters of credit to secure payment on sales when possible.  At September 30, 2013 and 2012, accounts receivable included  retention amounts of $11.5 million and $8.7 million, respectively.  Retention amounts are in accordance with applicable provisions  of engineering and construction contracts and become due upon  completion of contractual requirements. Approximately $1.0 million  of the retained amount at September 30, 2013, is expected to be  collected subsequent to September 30, 2014. Fair Value of Financial Instruments Cash and cash equivalents include cash on hand, deposits with  banks and highly liquid investments with original maturities of three  months or less. Year Ended September 30, 2013 2012 2011 Cash paid during the period for: Interest, net of interest income  $  164 $  141 $  102 Income taxes, net of refunds 14,783 12,104 3,889 Non-cash capital expenditures 2,807 — — 28