Pioneer Power Solutions, Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. Amounts are in U.S. dollars; financial statement amounts are in thousands unless noted. The company manufactures specialty electrical transmission and distribution equipment for utility, industrial and commercial markets.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $22.0 million | $21.8 million | $44.5 million | $42.1 million |
| Gross profit | $5.6 million | $4.8 million | $10.7 million | $9.4 million |
| Gross margin | 25.4% | 21.8% | 23.9% | 22.2% |
| Operating income | $2.1 million | $1.5 million | $3.6 million | $2.9 million |
| Continuing-operations earnings | $1.3 million | $0.9 million | $2.2 million | $1.7 million |
| Net earnings | $1.3 million | $0.8 million | $2.2 million | $1.6 million |
| Continuing-operations EPS, diluted | $0.21 | $0.15 | $0.37 | $0.29 |
Revenue grew 0.8% in Q2 and 5.7% in the first half. Gross-margin improvement reflected stronger liquid-filled transformer and engineered-product mix, manufacturing efficiencies, and initial switchgear sales. SG&A rose to $3.5 million in Q2 and $7.1 million in the first half, partly due to the new switchgear business and higher corporate costs. Interest expense declined year over year; other expense increased, including acquisition-related costs and a dry-type transformer workforce reduction. The 2012 comparisons include losses from discontinued operations of $78,000 for Q2 and $161,000 for the first half.
Cash flow, balance sheet and debt
- First-half operating cash flow was $1.2 million, versus cash use of $1.0 million in 2012. Investing cash use was $2.4 million, including $1.7 million of property and equipment additions and $655,000 for an acquisition. Financing provided $1.5 million.
- At June 30, cash was $822,000; current assets were $26.8 million and current liabilities $21.0 million. Working capital was $5.8 million, down from $6.9 million at year-end; the current ratio was 1.3 at both dates.
- Total debt and capital lease obligations were $17.0 million, including $8.5 million current and $8.5 million long-term. The balance sheet also reported $1.1 million of bank overdrafts. Total liabilities were $33.1 million.
- Unused revolving-credit availability was $4.6 million. The company reported compliance with its Canadian and U.S. financial covenants at quarter-end.
- Shareholders’ equity was $19.8 million. The company had 5,907,255 common shares outstanding at June 30 and August 13, 2013.
Material changes and business developments
- On March 6, 2013, the company acquired substantially all assets and assumed certain trade liabilities of Power Systems Solutions, Inc., a switchgear and generator-controls supplier. The transaction was valued at approximately $1.2 million and generated acquisition goodwill; the purchase-price allocation was preliminary.
- First-half liquid-filled transformer sales rose 14.5%, supported by utility and oil-and-gas orders, while dry-type sales declined 4.2%. In Q2, transformer sales fell $0.3 million, partly offset by $0.5 million of switchgear sales.
- On June 28, the company amended and restated its Canadian facilities and entered new U.S. credit facilities with Bank of Montreal. At quarter-end, approximately $10.2 million was outstanding under Canadian facilities and $5.5 million under the U.S. revolving facility; the new $6.0 million U.S. term facility was undrawn.
- First-half capital spending includes expansion of the Canadian dry-type transformer facility. The overall expansion budget, including planned machinery and equipment, was approximately $1.9 million, expected to be spent by year-end 2013.
Outlook, commentary and risks
Management gave no specific revenue or earnings guidance. It said working capital, available borrowing capacity and operating cash generation should meet anticipated operating, capital-improvement and debt-repayment needs for at least the next 12 months. Backlog was $24.4 million at June 30, compared with $23.6 million at December 31, 2012 and $24.3 million a year earlier; most was expected to be delivered within six months, but cancellations or delays could prevent full conversion to revenue.
Key risks include dependence on major customers Hydro-Quebec and Siemens, competitive and pricing pressure, variable demand and product mix, raw-material costs and supply, Canadian-dollar exposure, and the ability to comply with restrictive debt covenants. Approximately 70% of the workforce was unionized; Bemag’s agreement had expired in March 2013 and negotiations were ongoing. The company also cited acquisition integration, skilled-labor availability, ERP implementation, and limited trading liquidity and controlling-stockholder influence as risks. Management reported disclosure controls were effective at the reasonable-assurance level and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether the improved gross margins and liquid-filled transformer demand persist, and whether dry-type sales stabilize.
- Conversion and timing of the $24.4 million backlog, including customer concentration and order-cancellation exposure.
- Acquisition performance, integration costs, and final purchase-price allocation for Power Systems Solutions.
- Available borrowing capacity, covenant headroom, debt repayment requirements, and planned use of the undrawn U.S. term facility.
- Completion costs and timing for the Canadian facility expansion, plus the outcome of Bemag labor negotiations.