PIONEER POWER SOLUTIONS, INC. quarterly report, Q1 FY2015

Pioneer Power Solutions, Inc. — Q1 2015 Form 10-Q

Business context and period. For the three months ended March 31, 2015, Pioneer manufactured, sold and serviced electrical transmission, distribution and on-site power-generation equipment. It reported two segments: Transmission and Distribution Solutions (T&D) and Critical Power Solutions. Unless otherwise indicated, amounts below are in U.S. dollars.

Financial performance

Metric	Q1 2015	Q1 2014
Revenue	$28.9 million	$20.9 million
Gross profit / margin	$5.4 million / 18.7%	$4.9 million / 23.5%
Operating income (loss)	$(0.1) million	$1.0 million
Net income (loss)	$(0.2) million	$0.6 million
Basic and diluted EPS	$(0.03)	$0.08
Cash used in operating activities	$0.5 million	$2.2 million

Revenue grew 38.3%. T&D revenue increased 19.8% to $23.7 million; Critical Power revenue increased to $5.2 million from $1.1 million, principally due to the Titan acquisition. Gross margin fell 4.9 percentage points, mainly from T&D sales mix and material-cost pressures and the lower-margin mix of Critical Power sales. Higher operating costs and acquisition-related amortization contributed to the quarterly loss.

• Segments: T&D operating income was $1.5 million, roughly flat year over year. Critical Power recorded an $0.8 million operating loss versus $33,000 income a year earlier.
• Cash and liquidity: Cash was zero at March 31, down from $3.8 million at year-end. Net working capital was $5.2 million, and current assets were 1.2 times current liabilities. The company reported $5.4 million of unused revolving capacity, subject to covenants and restrictions.
• Debt: Management reported total debt of $14.6 million. The balance sheet also showed $7.3 million drawn on revolving facilities, $1.2 million in bank overdrafts, and $7.3 million of long-term debt including current maturities. The company prepaid approximately $4.0 million of the Canadian-dollar portion of a term facility in March.
• Other comprehensive loss: $1.6 million, including $1.5 million of foreign-currency translation loss.

Material changes and notable items

• Titan, acquired in December 2014, contributed $5.1 million of Q1 revenue, including equipment and service sales. Its acquired intangible assets increased amortization expense.
• Pioneer acquired substantially all Harmonics Holdings’ assets in January for consideration preliminarily valued at $1.2 million, including $0.5 million of deferred seller payments and $0.6 million of forgiven payables and indebtedness. The purchase-price allocation was preliminary; management expected further identification of intangible assets and a possible reduction in goodwill.
• Order backlog was $31.7 million at March 31, down from $36.0 million at December 31, 2014, but up from $25.4 million a year earlier.
• Q1 capital expenditures were approximately $0.2 million; management said no major capital projects were planned for 2015 apart from the ongoing ERP implementation.

Outlook, risks and contingencies

• No quantified revenue or earnings guidance was provided. Management believed working capital, borrowing capacity and operating cash generation should cover anticipated needs and debt repayments for at least 12 months, while noting that facility availability depends on covenant compliance.
• In April, the company committed to wind down Titan Northeast. The unit had Q1 sales of $0.6 million and a pretax loss of approximately $0.1 million; its roughly $4.0 million backlog was to be completed, subcontracted or abandoned during 2015 depending on customer commitments.
• Pioneer was evaluating a repositioning and restructuring plan for Bemag Transformer, expected before the end of Q2 2015. Management anticipated possible restructuring and impairment charges and incremental capital spending.
• The company was in compliance with its stated credit-facility covenants at March 31. A May 2015 amendment to the U.S. facility revised covenant tests and thresholds. Debt covenants, limited cash, foreign-exchange exposure, competition, raw-material costs, and reliance on major customers Hydro-Quebec and Siemens were identified as risks.
• Management concluded disclosure controls were not effective because previously reported material weaknesses remained, involving staffing and entity-level controls, Bemag inventory costing and valuation, and Pioneer Critical Power’s close and reporting processes. Remediation was ongoing.

Important facts for investors to verify

• Whether the company sustains adequate liquidity and remains within borrowing-base and financial-covenant limits given zero quarter-end cash.
• Whether margins and operating performance improve, particularly in Critical Power and the Canadian transformer business.
• The final Harmonics purchase-price allocation and any resulting goodwill or intangible-asset adjustments.
• The execution, costs and backlog impact of the Titan Northeast wind-down and the Bemag restructuring plan.
• Progress in remediating internal-control material weaknesses and the effect of foreign-currency movements on reported results.