Pioneer Power Solutions, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Unaudited consolidated results; dollar amounts are in millions except per-share data. Pioneer manufactures, sells and services electrical transmission, distribution and on-site power-generation equipment. Its reportable segments are Transmission & Distribution (T&D) Solutions and Critical Power Solutions.
Financial performance and liquidity
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $29.93 | $26.46 | $56.50 | $55.35 |
| Gross profit / margin | $6.13 / 20.5% | $5.07 / 19.2% | $12.04 / 21.3% | $10.64 / 19.2% |
| Operating income (loss) | $1.38 | ($0.69) | $2.48 | ($0.77) |
| Net income (loss) | $0.19 | ($0.82) | $0.76 | ($1.04) |
| Basic and diluted EPS | $0.02 | ($0.11) | $0.09 | ($0.14) |
- Q2 revenue rose 13.1%; first-half revenue increased 2.1%. T&D revenue grew 18.1% in Q2 and 5.2% for the half. Critical Power revenue declined 6.3% and 11.1%, respectively.
- T&D gross margin improved on favorable product mix and lower-cost production of standard transformers. Critical Power margins weakened as delayed customer service-contract starts left fixed costs without expected revenue.
- Operating expenses fell, primarily due to headcount reductions and lower bad-debt and professional-fee costs. Interest expense increased to $0.31 million in Q2 and $0.60 million for the half, reflecting higher average borrowings.
- First-half operating cash flow was negative $12.03 million, versus negative $1.25 million a year earlier. Working-capital changes used approximately $15 million, including increases in receivables and inventory. Investing cash use was $0.31 million; financing provided $15.24 million. Cash ended June at $3.45 million, up from $0.65 million at year-end.
- At June 30, current assets were $51.19 million and current liabilities $44.31 million; working capital was $6.9 million and the current ratio was 1.2. The company reported $26.1 million of total debt and $2.7 million of unused revolving capacity, subject to borrowing restrictions and covenants.
- Inventory increased to $25.87 million from $17.66 million at year-end, and receivables rose to $18.97 million from $14.22 million. A product-financing arrangement used $4.6 million of raw materials as collateral.
Material changes and notable items
- April 2016 amended credit agreements with Bank of Montreal replaced prior arrangements, extended Canadian and U.S. revolving-facility maturities to July 31, 2017, revised covenants and waived certain prior covenant defaults, subject to conditions. The company reported passing covenant tests at June 30. U.S. term debt matures December 2, 2019; certain Canadian facilities include bullet payments due July 31, 2017.
- Delinquent federal payroll taxes arose from obligations not reported or paid between January 2014 and September 2015. Installment agreements cover approximately 97% of the amounts owed. The filing describes approximately $4.6 million of payroll-tax obligations, including about $2.0 million in accrued liabilities and $2.6 million reclassified as long-term. The company continued seeking penalty abatement; it received $0.4 million of interest and penalty waivers during the half.
- Effective tax rates were unusually high at 75.8% for Q2 and 52.1% for the first half, primarily because payroll-tax penalties are nondeductible and intercompany borrowing from Canadian units resulted in dividend tax. Management said rates excluding these items would have been 29.8% and 18.4%, respectively.
- Backlog was $37.80 million at June 30, up from $32.78 million a year earlier, driven by T&D backlog growth; Critical Power backlog declined. Backlog is not a guarantee of future revenue.
- Prior-period expenses were reclassified between cost of goods sold and operating expenses, increasing reported prior-year gross profit by $0.14 million for Q2 and $0.31 million for the half. Certain segment activities were also reclassified for comparability.
Outlook, risks and controls
- No specific financial guidance was provided. Management said working capital, available credit and expected operating cash flows should fund anticipated operations, capital improvements and debt repayments for at least the next 12 months. No major capital projects or significant replacement spending were planned for 2016.
- Management identified demand and competitive pressures, customer concentration (including Hydro-Quebec and Siemens), acquisition integration and growth, raw-material and supply risks, backlog conversion, foreign-exchange exposure, debt and covenant constraints, and dependence on key personnel as risks.
- Material weaknesses in internal control over financial reporting remained unresolved at June 30. Management concluded disclosure controls and procedures were not effective. Remediation included outsourced payroll processing, additional accounting personnel and training, and independent review; the company said remediation was not complete.
- The company reported no material litigation, no defaults upon senior securities, and no material risk-factor changes from its 2015 Form 10-K.
Investor verification points
- Check whether operating cash flow and working-capital use improve, particularly receivables and inventory conversion.
- Verify payroll-tax installment compliance, remaining liabilities, and the outcome of requests for penalty abatement.
- Review credit-facility availability, covenant compliance, refinancing needs and the July 2017 maturities and bullet payments.
- Assess whether Critical Power service-contract delays resolve and whether the larger T&D backlog converts to revenue at sustainable margins.
- Monitor remediation of material control weaknesses and whether future filings report effective controls.
- Evaluate the sustainability of reported profitability given higher interest costs and the unusually high effective tax rate.