Pioneer Power Solutions, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparative period is Q1 2016. Unaudited consolidated results. Dollar amounts below are in millions unless stated otherwise. Pioneer manufactures and services electrical transmission, distribution and backup-power equipment through its T&D Solutions and Critical Power segments.
Financial results
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Revenue | $27.262 | $26.570 |
| Gross profit / margin | $6.116 / 22.4% | $5.859 / 22.1% |
| Operating income | $1.156 | $1.094 |
| Interest expense | $0.508 | $0.285 |
| Other expense | $0.235 | $0.016 |
| Income before taxes | $0.413 | $0.793 |
| Income tax expense / effective rate | $0.280 / 67.8% | $0.224 / 28.2% |
| Net income / diluted EPS | $0.133 / $0.02 | $0.569 / $0.07 |
| Cash from operating activities | $0.978 | $(4.750) |
| Cash used in investing activities | $(0.491) | $(0.149) |
| Cash used in financing activities | $(0.444) | Cash provided: $4.387 |
Revenue grew 2.6%, while net income declined 76.6%. Consolidated operating margin was approximately 4.2% versus 4.1% in Q1 2016. Management attributed lower net income mainly to higher interest, other and income tax expenses. The 2017 tax rate was elevated by deemed dividends from Canadian operations; excluding the effects described by management, the rate was 31.2%.
Segment and operating trends
- T&D Solutions: Revenue rose 5.5% to $23.489 million. Transformer revenue increased 15.8% to $21.284 million, while switchgear revenue fell 43.3% to $2.205 million. Segment operating income was $2.062 million versus $2.047 million; gross margin decreased to 22.6% from 24.3%.
- Critical Power: Revenue decreased 12.4% to $3.773 million as equipment sales fell 37.8%; service revenue increased 23.9%. Gross margin improved to 21.4% from 10.6%, helped by a mix shift toward higher-margin service. The segment still recorded an operating loss of $0.102 million, compared with a $0.133 million loss.
- Backlog was $36.744 million at March 31, down from $38.558 million at December 31, 2016, but above $35.233 million a year earlier. The filing cautions that backlog timing varies and realization is not assured.
- SG&A increased 4.6% to $4.342 million, primarily due to higher professional fees. Restructuring and integration costs were $0.155 million.
Liquidity, debt and balance sheet
- Cash was $0.235 million at March 31, versus $0.246 million at year-end. Working capital was $3.480 million, and the current ratio was approximately 1.1. Inventory rose to $29.828 million from $26.147 million.
- Management reported total debt of $28.276 million, compared with cash of $0.235 million. This includes $19.4 million outstanding under U.S. credit facilities and approximately $4.3 million under Canadian facilities; revolving-credit availability was $2.753 million, subject to covenants and other restrictions.
- Operating cash flow improved by $5.728 million year over year to $0.978 million. Inventory growth used cash, partly offset by collections and increases in accounts payable and accrued liabilities. Capital expenditures were $0.496 million.
- March 2017 amendments increased revolving capacity and extended the U.S. and Canadian revolving-facility maturities to July 31, 2018. The U.S. term facility has a $4.438 million balloon payment due July 31, 2018. The company reported covenant compliance at March 31, 2017, but received a lender waiver for a covenant as of December 31, 2016.
Outlook, risks and unusual items
- No specific revenue or earnings guidance was provided. Management said working capital, available credit and operating cash generation should fund anticipated operating needs, capital improvements and debt repayments for at least the next 12 months; this depends in part on covenant compliance and borrowing availability.
- Management identified risks including demand and competitive pressures, reliance on Siemens for a significant portion of business, raw-material and supply-chain costs, backlog conversion, debt repayment or refinancing, foreign exchange exposure, and key-personnel and acquisition risks. About 30% of Q1 revenue was denominated in Canadian dollars; the company has not historically hedged currency exposure.
- Material weaknesses in internal control over financial reporting remained at March 31, 2017. Management concluded disclosure controls were ineffective; remediation was ongoing and had not been demonstrated to be effective for a sufficient period.
- Prior-period expense classifications were revised: Q1 2016 gross profit decreased by $0.055 million, or 0.21% of sales. The filing links the reclassification to ongoing controls remediation.
- Other expense included $0.188 million of acquisition-related and other costs and $0.047 million of payroll-tax interest and penalties accrued in Q1 2017. In April 2017, the IRS agreed to abate less than $0.100 million of payroll-tax penalties and interest, to be recorded in Q2.
- A California lawsuit by Myers Power Products alleges misuse of confidential information and seeks injunctive relief and unspecified damages. Pioneer said it intends to contest the case; the outcome is uncertain.
- The company has two $0.3 million loans to a renewable-energy project developer outstanding since 2011. It expects full recovery but is evaluating foreclosure or renegotiation; repayment is not expected within 12 months.
Investor verification priorities
- Assess covenant headroom, restricted revolver availability, and the ability to address the July 2018 credit maturities and balloon payment.
- Verify whether the material weaknesses are remediated and whether future filings report effective controls.
- Track cash conversion, inventory buildup, backlog conversion and segment margins, particularly switchgear demand and Critical Power service growth.
- Monitor the payroll-tax abatement accounting, the California litigation, and recoverability of the developer loans.