Pioneer Power Solutions, Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013; filed November 12, 2013. Financial statements are unaudited. Unless stated otherwise, dollar amounts below are in millions.
Business context
Pioneer manufactures specialty electrical transmission and distribution equipment for utility, industrial and commercial markets, with operations in the U.S., Canada and Mexico. It reports one material operating segment: sales of electrical equipment.
Financial results
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $22.447 | $19.226 | $66.993 | $61.362 |
| Gross profit | $5.899 | $4.218 | $16.559 | $13.571 |
| Gross margin | 26.3% | 21.9% | 24.7% | 22.1% |
| Operating income | $2.293 | $1.162 | $5.854 | $4.049 |
| Continuing-operations earnings | $1.009 | $0.227 | $3.183 | $1.944 |
| Net earnings | $1.009 | $0.227 | $3.183 | $1.783 |
| Diluted EPS from continuing operations | $0.17 | $0.04 | $0.53 | $0.33 |
Revenue rose 16.8% in Q3 and 9.2% for the nine-month period. Liquid-filled transformer sales grew 40.6% in Q3 and 22.2% year to date; dry-type sales declined 8.5% and 5.6%, respectively. Circuit-protection and control equipment contributed $0.850 million in Q3 and $1.362 million year to date. Management attributed growth to utility demand, large liquid-filled transformer orders, and acquisitions.
Gross-margin expansion reflected a richer mix of engineered-to-order products, including larger custom substation transformers, and contribution from circuit-protection and control equipment. SG&A increased 12.3% in Q3 to $3.610 million, but fell as a share of revenue to 16.1% from 16.7%. Nine-month SG&A was $10.662 million, versus $9.767 million.
Cash flow, balance sheet and liquidity
- Cash flow, nine months: Operating activities provided $3.216 million, compared with $1.706 million used in the prior-year period. Investing used $4.102 million, including $2.501 million of property, plant and equipment additions and $1.601 million for acquisitions. Financing provided $3.591 million, including $7.869 million net proceeds from the stock offering.
- Cash and working capital: Cash was $3.290 million at September 30, 2013, versus $0.467 million at December 31, 2012. Net working capital was $13.0 million, and the current ratio was 1.7, up from 1.3.
- Debt: Total debt and capital lease obligations were approximately $12.494 million, including $2.077 million drawn on revolving credit facilities; the filing separately describes total debt including leases as approximately $12.5 million. Canadian-facility borrowings were approximately $10.9 million. There were no borrowings under the U.S. facilities. The company reported compliance with applicable financial covenants.
- Availability: Unused revolving-credit capacity was $9.1 million, subject to borrowing-base availability, covenants and restrictions. Management stated that working capital, available credit and operating cash flow should cover anticipated operating needs, capital improvements and debt payments for at least the next 12 months.
Material changes and notable items
- Acquired Power Systems Solutions assets in March for approximately $1.2 million and acquired Pico Electrical Equipment and Pico Metal Products assets in August in a transaction valued at approximately $0.9 million. These businesses added revenue and goodwill; purchase-price allocations remained subject to refinement.
- Completed a September public offering of 1,265,000 shares at $7.00 per share, generating approximately $7.9 million net proceeds. Shares began trading on Nasdaq under PPSI. Shares outstanding were 7,172,255 at September 30.
- Q3 other expense was $0.236 million; nine-month other expense was $0.403 million. Management cited approximately $0.327 million of 2013 acquisition-related professional fees and costs, with the remainder primarily related to a second-quarter reduction in force in the dry-type transformer business.
- Interest expense declined to $0.226 million in Q3 and $0.594 million year to date, attributed to lower average borrowings and lower marginal rates. The effective tax rate was 44.9% for Q3 and 34.5% for nine months; management cited Canadian distributions and acquisition expenses with limited or deferred tax deductibility. The prior-year nine-month net earnings included a $0.161 million discontinued-operations loss.
Outlook, risks and contingencies
The filing provides no specific revenue, earnings or margin guidance. Backlog was $21.4 million at September 30, down from $23.6 million at December 31, 2012 and $27.7 million a year earlier; most backlog was expected to be delivered within six months, but orders may be delayed or canceled.
Key risks include reliance on major customers Hydro-Quebec and Siemens, competitive and pricing pressure, raw-material cost or supply changes, Canadian-dollar exposure (the company said it had not historically hedged), and dependence on skilled and unionized labor. Bemag’s union agreement had expired in March 2013 and negotiations were ongoing. Other risks include acquisition integration and valuation, restrictive secured-credit covenants, ERP-system implementation, customer collections, and quarterly sales variability. The company disclosed that its chairman-controlled entity beneficially owned approximately 77.9% of outstanding common stock. Management concluded disclosure controls were effective at a reasonable-assurance level and reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether revenue and margin gains persist, particularly given the mix shift toward liquid-filled and engineered products and weakness in dry-type sales.
- Backlog conversion, cancellations, and new orders relative to the year-over-year decline in backlog.
- Acquisition integration, acquired-business profitability, and final purchase-price allocations.
- Debt availability and covenant headroom, including the effect of secured-credit restrictions on future financing and investment.
- Customer concentration, Bemag labor negotiations, foreign-exchange exposure, and the potential dilutive effect of outstanding options and warrants.