Pioneer Power Solutions, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless noted. Dollar amounts are in millions, except per-share data. The company manufactures and services electrical transmission, distribution and on-site power-generation equipment through T&D Solutions and Critical Power Solutions.
Financial results
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $24.7 | $27.2 |
| Gross profit / margin | $4.1 / 16.6% | $5.2 / 19.1% |
| Operating income | $0.6 | $0.3 |
| Net income (loss) | $5.6 | $(0.6) |
| Basic and diluted EPS | $0.65 | $(0.07) |
| Cash from operating activities | $0.9 | $1.1 |
| Capital expenditures | $0.1 | $0.2 |
Q1 2019 earnings included a $4.2 million gain on the PCPI divestiture and $3.3 million of unrealized mark-to-market income on CleanSpark shares and warrants received in the transaction. These items substantially affected reported net income; the filing does not provide an adjusted earnings measure excluding them.
Changes and operating performance
- Revenue fell 9.1% to $24.7 million. T&D revenue declined 7.6%: transformer sales rose 3.6%, while switchgear revenue dropped 71.0% as customers delayed shipments. Critical Power revenue fell 23.6%, with lower equipment sales and service orders affected by severe winter weather.
- Gross profit declined 20.9%, and gross margin contracted 2.5 percentage points. T&D margin was 17.6% versus 19.6%; Critical Power margin was 4.8% versus 13.5%, reflecting lower sales against relatively fixed costs.
- Operating income improved to $0.6 million, helped by lower operating expenses and a $0.6 million foreign-exchange gain, compared with a $0.1 million loss in Q1 2018. Interest expense declined to $0.5 million from $0.6 million.
- Order backlog was $48.6 million at March 31, 2019, up from $47.5 million at December 31, 2018 and $35.7 million a year earlier. Management said higher backlog increased inventory and related commitments.
Liquidity, debt and cash flow
- At March 31, cash and cash equivalents were $0.2 million; short-term investments were $7.5 million. Working capital was $1.4 million, compared with a $5.5 million deficit at December 31, 2018. The filing reports total debt of $25.7 million, including bank overdrafts.
- Operating activities provided $0.9 million; investing activities used $0.1 million and financing activities used $0.8 million. Cash ended the quarter at $0.2 million.
- Bank of Montreal facilities mature April 1, 2020. The company reported covenant non-compliance at March 31; BMO granted a waiver on May 6, 2019. Management stated that capital resources were expected to fund operations through Q1 2020, but renewal on similar terms, or at all, was uncertain. Credit agreements include subjective acceleration clauses, and failure to obtain future waivers could make debt immediately due.
Transaction, outlook and risks
- On January 22, 2019, Pioneer divested PCPI to CleanSpark in exchange for 1.75 million CleanSpark shares and warrants to buy up to 1 million additional shares. The company recognized a $4.2 million disposal gain and subsequently recorded a $3.3 million unrealized gain as the investment’s fair value rose to $7.5 million.
- Under an 18-month contract manufacturing agreement, Pioneer will make specified products for CleanSpark; pricing is negotiated by order. Pioneer also agreed to a four-year non-compete and non-solicitation arrangement and indemnification relating to the Myers Power litigation.
- No specific financial guidance was provided. Management expected backlog conversion to support working capital improvement and debt reduction, and said no major capital projects or significant replacement spending were planned for 2019. These expectations depend on execution, margins, customer demand and available financing.
- The Myers Power lawsuit remained pending, with trial scheduled for Q4 2019. The plaintiff sought injunctive relief and unspecified damages exceeding $25,000; Pioneer said it intended to contest the case and could not assure an outcome. The filing also cites risks including customer concentration, competitive pricing, input costs, foreign-exchange movements, covenant compliance and key-person dependence.
Key facts for investors to verify
- Whether the CleanSpark securities’ valuation and related noncash gains are sustainable, and the resulting earnings excluding these items.
- Whether switchgear shipment delays reverse, Critical Power margins recover, and backlog converts to revenue at acceptable margins.
- Current covenant compliance, continued BMO waivers, available borrowing capacity and refinancing or renewal before the April 2020 maturity.
- The outcome and financial exposure of the Myers Power litigation, including the company’s indemnity obligations to CleanSpark.
- Cash conversion and working-capital needs as the company fulfills its elevated backlog.