Pioneer Power Solutions, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; this is an annual report, not a standalone fourth-quarter report. Unless noted, financial amounts below are in U.S. dollars.
Business context
Pioneer manufactures and services specialty electrical transmission and distribution equipment, including transformers and switchgear, and provides onsite backup-power equipment and services. Its two reportable segments are Transmission & Distribution Solutions (T&D) and Critical Power. Operations span the U.S., Canada and Mexico.
Financial results and liquidity
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue | $106.4 million | $114.4 million |
| Gross profit / margin | $19.3 million / 18.1% | $17.7 million / 15.5% |
| Operating loss | $1.9 million | $3.3 million |
| Loss before taxes | $5.4 million | $6.2 million |
| Income tax expense | $0.3 million | $3.0 million |
| Net loss / loss per share | $5.7 million / $0.65 | $9.2 million / $1.06 |
| Cash from operating activities | $2.2 million | $1.7 million |
| Cash and cash equivalents at year-end | $0.2 million | $0.2 million |
- Revenue declined 7.0%. T&D revenue fell 4.3% to $95.0 million; Critical Power revenue fell 24.5% to $11.4 million.
- T&D gross margin improved to 18.7% from 14.9%, primarily because 2017 included inventory write-offs. Critical Power gross margin declined to 13.4% from 19.3% as lower sales left fixed costs relatively unchanged.
- SG&A increased 4.0% to $19.7 million, equal to 18.5% of revenue versus 16.5%. Interest expense rose to $2.7 million from $2.5 million, attributed to higher average borrowings and rates.
- Year-end total debt was reported as $26.3 million, including bank overdrafts; the balance sheet showed $20.8 million in revolving facilities and $3.8 million in term debt before considering overdrafts and other debt classifications. Working capital was in deficit; the balance-sheet figures imply approximately $5.5 million, while MD&A states $5.1 million.
- Unused revolving-credit availability was $0.4 million at year-end, subject to borrowing-base and covenant conditions. Cash from operations improved, but financing activities used $3.4 million. Capital expenditures were $0.6 million.
Material changes and unusual items
- Backlog rose to $47.5 million at year-end from $35.2 million. Management expected most to ship in 2019; orders may be delayed or canceled and backlog is not guaranteed revenue.
- Critical Power equipment revenue decreased 73.2% to $1.6 million, while service revenue increased 6.9% to $9.8 million. Management said it was focusing on the higher-margin service business.
- The company recorded $1.35 million of impairment charges against switchgear-related intangible assets in 2018. No goodwill impairment was recorded in 2018; $1.45 million of goodwill impairment was recorded in 2017.
- The company adopted revenue-recognition and lease accounting standards in 2018. Revenue-standard adoption had no material financial-statement impact; lease adoption increased recorded assets and liabilities and reduced opening retained earnings by about $0.1 million.
- In January 2019, the company entered into a CleanSpark merger involving wholly owned subsidiary Pioneer Critical Power, Inc.; consideration included CleanSpark shares and warrants. The separate PCEP asset-sale agreement was terminated, and the filing says Pioneer would continue to pursue a PCEP sale. Related agreements include an 18-month contract-manufacturing arrangement, a four-year non-compete, and a five-year indemnity concerning the Myers litigation. The transaction perimeter and relationship between these disclosures warrant verification.
Outlook, risks and contingencies
- No quantified earnings or revenue guidance is provided. Management said working capital, borrowing availability and operating cash flows should cover anticipated needs through at least the next 12 months; the notes state capital resources are expected to fund operations through the first quarter of 2020 and emphasize dependence on BMO financing.
- Credit facilities mature April 1, 2020 and are secured by substantially all company assets. The company was out of compliance with financial covenants at December 31, 2018; BMO waived the existing breaches on March 25, 2019. Management cautions that future waivers are not assured and default could make debt immediately due.
- Customer concentration is significant: Siemens represented 17% of 2018 sales and Hydro-Quebec 10%. Neither customer is obligated to maintain historical purchase volumes; the Hydro-Quebec supply agreement was extended through January 31, 2020.
- Other key risks include raw-material costs and availability, competitive pricing, Canadian-dollar exposure, customer demand tied to construction and industrial activity, skilled-labor availability, and reliance on key personnel. Raw materials were approximately 66% of revenue.
- A lawsuit by Myers Power Products alleges misuse of confidential information and seeks injunctive relief and unspecified damages exceeding $25,000. The company denies the allegations; trial was scheduled for the second quarter of 2019. The company agreed to indemnify CleanSpark and the surviving company for specified related claims.
- Management reported disclosure controls and internal control over financial reporting effective at year-end after remediation of prior control deficiencies. The auditor issued an unqualified opinion on the financial statements but did not attest to internal controls.
Important facts for investors to verify
- Reconcile the working-capital deficit figures and review borrowing-base availability, covenant terms, waivers, and the April 2020 facility maturity/refinancing plan.
- Confirm the scope, closing status, consideration, and financial effects of the January 2019 CleanSpark transaction, and distinguish it from the terminated PCEP asset-sale agreement.
- Track backlog conversion, cancellations, customer delivery timing, and whether the improvement in T&D margins is sustainable.
- Monitor Siemens and Hydro-Quebec orders, the Hydro-Quebec contract beyond January 2020, and customer concentration.
- Review the Myers litigation outcome and indemnity exposure, along with any further impairment or liquidity developments.