Pioneer Power Solutions, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; unaudited consolidated results. The company manufactures specialty electrical equipment, including transformers, and added paralleling switchgear and generator controls through its March 6 acquisition of Power Systems Solutions, Inc. (PSS).
Financial results
| Metric | Q1 2013 | Q1 2012 / comparison |
|---|---|---|
| Revenue | $22.551 million | $20.317 million; up 11.0% |
| Gross profit / margin | $5.081 million / 22.5% | $4.590 million / 22.6% |
| Operating income | $1.499 million | $1.420 million |
| Continuing-operations earnings | $0.913 million; $0.15 per basic and diluted share | $0.839 million; $0.14 per share |
| Net earnings | $0.913 million | $0.756 million, including an $0.083 million discontinued-operations loss |
| Operating cash flow | $(1.600) million | $(2.005) million |
| Investing cash flow | $(1.816) million | $(0.404) million |
| Financing cash flow | $3.171 million | $0.994 million |
Gross margin was nearly unchanged. SG&A rose 8.6% to $3.521 million, while SG&A as a share of revenue declined to 15.6% from 16.0%. Interest expense fell to $0.185 million from $0.213 million; other expense rose to $0.093 million from $0.029 million, principally reflecting PSS acquisition-related professional fees. The effective tax rate was 25.2%, versus 28.8%.
Balance sheet and liquidity
At March 31, 2013, cash was $0.196 million, total assets $55.603 million, and total debt and capital lease obligations $18.929 million, of which $9.756 million was current. Current assets were $29.312 million and current liabilities $23.907 million; working capital was $5.4 million and the current ratio was 1.2, down from $6.9 million and 1.3 at December 31, 2012. Cash declined from $0.467 million at year-end.
Operating cash use reflected approximately $2.7 million of working-capital requirements, including higher receivables and other operating assets. The company funded cash needs in part with increased bank overdrafts and revolving borrowings. It reported $5.3 million of available, unused revolving-credit capacity, subject to covenant and use-of-proceeds restrictions, and stated that working capital, borrowing capacity, and operating cash generation should cover anticipated needs for at least 12 months.
Material changes and management commentary
- Revenue growth was driven by large utility and oil-and-gas orders; liquid-filled transformer sales rose 29%. Dry-type transformer sales fell 3.7%, partly because Q1 2012 included a $0.6 million non-recurring order.
- PSS was acquired for approximately $1.2 million. The new business contributed no material revenue during the quarter. The preliminary purchase-price allocation added $1.068 million of goodwill.
- Capital spending and acquisition payments drove investing outflows: additions to property, plant and equipment were $1.161 million and acquisition cash outlay was $0.655 million. The Canadian dry-type facility expansion has an approximately $1.9 million total budget, expected to be disbursed by year-end 2013.
- Backlog was $24.0 million at March 31, compared with $23.6 million at December 31, 2012 and $24.6 million a year earlier; most orders were expected to ship within six months.
Debt, risks, and other considerations
- Canadian facilities had approximately $12.8 million outstanding; the company reported compliance with their covenants. Jefferson Electric had $4.8 million outstanding on its U.S. revolving facility and was also reported in compliance. That facility’s maturity was October 31, 2013.
- Risks identified include dependence on major customers Hydro-Quebec and Siemens, competition, acquisition integration and growth execution, input-cost and supply-chain pressures, and restrictive debt covenants/refinancing needs.
- Approximately 63% of Q1 revenue was denominated in Canadian dollars. The company did not historically hedge currency exposure; it recorded a $0.061 million foreign-exchange loss versus a $0.072 million gain in Q1 2012. Currency translation reduced other comprehensive income by $0.134 million.
- The filing reports effective disclosure controls as of March 31, 2013 and no material change in internal control over financial reporting during the quarter. Results for the interim period are not necessarily indicative of the full year.
Important facts for investors to verify
- Whether operating cash flow and working capital improve, given low cash and increased short-term borrowing.
- Renewal or refinancing terms for the U.S. revolving facility due October 2013, and continued compliance with all credit covenants.
- Execution and returns from the PSS acquisition and Canadian facility expansion, including final purchase-price allocation and capital spending.
- Backlog conversion, customer concentration, and exposure to Canadian-dollar movements and unhedged foreign-exchange risk.