Orion Energy Systems, Inc. — Form 10-Q Summary
Period clarification: The filing covers the quarter and nine months ended December 31, 2017 (fiscal 2018 third quarter), not 2016 Q3 as indicated in the request metadata. Financial statements are unaudited. Orion develops and sells commercial and industrial lighting and energy-management systems, primarily in North America.
Financial performance
| Metric | Three months ended Dec. 31, 2017 | Three months ended Dec. 31, 2016 | Nine months ended Dec. 31, 2017 | Nine months ended Dec. 31, 2016 |
|---|---|---|---|---|
| Revenue | $17.3 million | $20.6 million | $45.2 million | $54.9 million |
| Gross profit / margin | $5.1 million / 29.6% | $6.2 million / 29.9% | $11.4 million / 25.3% | $16.4 million / 29.9% |
| Operating loss | $1.4 million | $1.0 million | $11.4 million | $5.3 million |
| Net loss | $1.4 million | $1.1 million | $11.7 million | $5.0 million |
| Operating cash flow | Not separately provided for quarter | Not separately provided for quarter | $(3.1) million | $0.3 million |
Quarterly diluted loss per share was $0.05, versus $0.04; nine-month diluted loss per share was $0.41, versus $0.18. Nine-month cash used in investing was $0.5 million and cash used in financing was $3.1 million. Cash fell to $10.6 million at December 31, 2017, from $17.3 million at March 31, 2017.
Total assets were $47.0 million and shareholders’ equity was $24.6 million at December 31, 2017. Current assets of $30.7 million exceeded current liabilities of $17.2 million, for reported working capital of $13.4 million. Total debt was approximately $3.8 million, including $3.6 million drawn on the revolving facility. The company reported compliance with its credit covenants and about $0.2 million of additional borrowing availability under the borrowing base.
Changes and operating drivers
- Third-quarter revenue declined 16.3% year over year. Product revenue fell 17.0%, reflecting lower fluorescent sales and a 6.4% decline in LED revenue; management attributed the LED decrease primarily to timing of direct-customer purchases. Service revenue declined 6.5%.
- Nine-month revenue declined 17.6%. LED revenue fell 8.7%, and fluorescent product sales also declined. Service revenue increased 27.5%, mainly due to installation-project timing.
- Nine-month gross margin decreased to 25.3% from 29.9%, with management citing manufacturing under-absorption and more products sourced from third-party manufacturers. Service costs also rose with project timing and costs.
- Distribution Services revenue grew 22.0% for the nine months as sales shifted toward distributors and representative agencies; U.S. Markets revenue fell 61.2%, partly reflecting that channel migration and lower direct-customer sales. Engineered Systems revenue declined 14.5%.
- Inventory declined to $8.8 million from $13.6 million at March 31, 2017, while backlog was $6.8 million, down from $7.3 million. Management generally expects backlog to convert to revenue within one year.
Outlook, risks and unusual items
- Management did not provide specific revenue or earnings guidance. It said it remained optimistic about future performance and targeted breakeven EBITDA excluding employee separation costs through sales-channel execution and cost reductions. The cost plan was expected to generate approximately $6.0 million in annualized savings, including about $1.5 million from fourth-quarter actions; related later-period savings and results are not assured.
- The company recorded $2.0 million of restructuring expense over the nine months, associated with separation agreements for 20 employees. It also recorded a $0.7 million impairment of the Harris trade name in the second quarter after revising its forecast. No impairment was recorded in the December quarter.
- Management cited a fast-changing LED market, pricing pressure, competition, shorter product life cycles and inventory-obsolescence risk. Sales are project-based, with no long-term customer contracts; product mix can materially affect margins. One customer represented 13.4% of quarterly revenue and 11.1% of nine-month revenue. Three customers represented 35.8% of receivables at quarter-end; one supplier accounted for 13.9% of quarterly cost of revenue.
- Liquidity depends on revenue, margins, working-capital management and cost actions. The revolver matures February 6, 2019, is borrowing-base limited, and had little additional borrowing capacity at quarter-end. The filing notes possible negative working-capital cash flows in some interim periods.
- Two material weaknesses in internal control over financial reporting remained at December 31, 2017: project-cost accounting and accounting-close controls, including communication and timely resolution of review matters. Management said remediation was ongoing but had not operated long enough to conclude it was effective; disclosure controls were also deemed ineffective.
- The Tax Cuts and Jobs Act effects were provisionally estimated, including an $11.3 million reduction in deferred tax assets offset by the valuation allowance. The company reported a full valuation allowance against deferred tax assets. A Wisconsin sales-and-use-tax audit was pending; management did not expect a material adverse effect based on information then available.
- A shareholder derivative suit concerning stock-based awards was pending, and the company said it intended to defend it. A separate former-CEO lawsuit had been dismissed by the appeals court on January 11, 2018; any further appeal was uncertain. Management did not believe either matter was reasonably likely to materially affect future continuing results.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied filing is for fiscal 2018 Q3, ended December 31, 2017.
- Track whether revenue, particularly LED sales, and gross margin recover, and whether distribution growth offsets direct-channel declines.
- Assess cash burn, borrowing-base availability and revolver refinancing needs ahead of its February 2019 maturity.
- Verify realization and timing of targeted cost savings, alongside restructuring costs and execution effects.
- Monitor remediation and independent assessment of the disclosed material weaknesses in financial reporting controls.
- Follow customer and supplier concentration, the tax audit, litigation developments and adoption impacts of ASC 606 and lease-accounting standards.