Pioneer Power Solutions, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Unless otherwise noted, financial amounts below are in millions of U.S. dollars. The company manufactures and services electrical transformers and power-generation equipment. Results are presented for continuing operations; the switchgear business is classified as discontinued operations.
Financial performance and liquidity
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $24.6 | $27.3 | $48.1 | $52.3 |
| Gross profit / margin | $5.2 / 21.2% | $5.8 / 21.3% | $9.6 / 20.0% | $11.4 / 21.8% |
| Operating income | $0.9 | $1.8 | $1.0 | $3.0 |
| Continuing-operations net income (loss) | $(0.1) | $1.7 | $(0.7) | $1.9 |
| Net income (loss), including discontinued operations | $(0.8) | $1.3 | $(1.4) | $1.4 |
| Net income (loss) per diluted share | $(0.09) | $0.15 | $(0.16) | $0.17 |
- For the first half, operating cash flow was negative $1.6 million, versus positive $2.3 million a year earlier. Investing activities used $0.2 million; financing activities provided $1.7 million. Cash ended at $0.3 million.
- At June 30, current assets were $53.2 million and current liabilities $54.4 million, resulting in reported negative working capital of $1.2 million. Unused revolving-credit availability was approximately $0.6 million, subject to covenants and restrictions.
- Borrowings under U.S. and Canadian credit facilities totaled approximately $25.2 million. The company separately reported $3.7 million in short-term product-financing borrowings; its MD&A stated total debt of $34.3 million when including bank overdrafts and discontinued-operation liabilities. The revolving facilities mature April 1, 2020. The company said it was compliant with facility covenants at June 30.
- Total assets were $79.4 million and stockholders’ equity $16.1 million at June 30, compared with $74.3 million and $17.5 million, respectively, at year-end 2017.
Changes versus the prior comparable period
- Continuing-operations revenue declined 9.9% in Q2 and 8.2% in the first half. Transformer revenue fell, which management attributed mainly to delayed customer acceptance of liquid-transformer orders. Critical Power equipment sales dropped sharply, while its service revenue increased.
- First-half gross margin declined 1.8 percentage points to 20.0%. Management cited lower liquid-transformer sales and unfavorable dry-type product mix in T&D, and lower sales against relatively stable fixed costs in Critical Power.
- First-half operating income fell 66.0% to $1.0 million. Higher foreign-exchange losses and interest expense contributed; interest expense rose to $1.4 million from $1.2 million.
- Order backlog at June 30 was $44.6 million, including $36.3 million in continuing operations, compared with total backlog of $39.6 million a year earlier. Backlog can fluctuate and is not a guarantee of future revenue.
Outlook, transactions, risks, and unusual items
- No specific revenue or earnings guidance was provided. Management stated that cash, working capital, available credit and expected operating cash flows should fund anticipated operating needs, capital improvements and debt repayments for at least twelve months from filing. This outlook is qualified by limited cash and borrowing availability.
- The company agreed to sell its PCEP switchgear business to CleanSpark. Closing had not occurred; the termination date was extended to December 31, 2018 to allow more time to satisfy closing conditions. Consideration includes a note tied to working capital, a lease arrangement, CleanSpark shares and warrants; the transaction’s completion and realized value remain uncertain. PCEP reported a Q2 discontinued-operations loss of $0.7 million.
- Management identified ongoing material weaknesses in internal control over financial reporting and concluded that disclosure controls and procedures were not effective at June 30. Remediation efforts included additional accounting personnel and training, plus review by an independent consultant.
- Risks highlighted include reliance on major customers Siemens and Hydro-Québec, market demand and competition, raw-material and labor costs, foreign-exchange exposure, debt covenants and refinancing, backlog conversion, and key-personnel dependence. The company reported a pending lawsuit by Myers Power Products alleging misuse of confidential information; it intends to contest the claims and said the outcome cannot be assured.
- Accounting-standard adoptions included revenue recognition under ASC 606, with no material financial-statement impact reported, and lease accounting. The company said 2018 adoption of the lease standard increased assets and liabilities by approximately $5.3 million and $5.2 million, respectively, at January 1, 2017.
Important facts for investors to verify
- Whether the CleanSpark asset sale closed by the extended December 31, 2018 date, and the value and collectability of its cash, note, equity and warrant consideration.
- Current borrowing availability, covenant compliance, and the company’s ability to refinance or repay facilities maturing in 2020.
- Whether working-capital investment, particularly inventory, converts into cash and whether operating cash flow improves.
- Progress in remediating material weaknesses and the timing of any conclusion that controls are effective.
- Whether transformer order delays resolve, Critical Power equipment sales stabilize, and backlog converts to revenue at sustainable margins.
- Developments in the Myers Power Products litigation and any resulting financial exposure.