Pioneer Power Solutions, Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; this is an annual report, not a standalone fourth-quarter results report. Dollar amounts below are in millions unless stated otherwise. The company manufactures transformers and other electrical distribution equipment and sells, installs and services backup power systems.
Financial performance
| Metric | FY2017 | FY2016 |
|---|---|---|
| Continuing-operations revenue | $101.4 | $99.6 |
| Gross profit / gross margin | $20.0 / 19.7% | $22.1 / 22.2% |
| Operating income | $3.4 | $3.6 |
| Continuing-operations net income (loss) | $(2.7) | $1.5 |
| Net income (loss), including discontinued operations | $(9.3) | $(1.1) |
| Operating cash flow | $1.4 provided | $9.5 used |
| Cash and cash equivalents at year-end | $0.2 | $0.2 |
- Revenue from continuing operations rose 1.8%. T&D transformer revenue increased 6.4% to $86.3 million; Critical Power revenue declined 18.7% to $15.1 million. Within Critical Power, equipment sales fell 42.0% to $5.9 million while service revenue grew 9.6% to $9.2 million.
- Gross margin fell 2.5 percentage points, mainly due to lower dry-type transformer margins and an $873,000 inventory write-off associated with moving production from Canada to Mexico. Critical Power’s margin improved as the company shifted toward higher-margin service work.
- Interest expense increased to $2.3 million from $1.7 million, reflecting higher borrowings. Income tax expense was $3.6 million on $857,000 of pretax continuing income, producing an effective tax rate of 415%; the company cited a valuation allowance, tax reform and anticipated repatriation of foreign subsidiary income.
- Operating cash flow improved from a $9.5 million use to $1.4 million provided, primarily due to deferred taxes and working-capital changes. Capital expenditures were $1.5 million, compared with $0.7 million in 2016.
Liquidity and debt
- At December 31, 2017, working capital was $1.6 million and the current ratio was approximately 1.0, versus $2.4 million and 1.1 in 2016. Cash was $0.2 million.
- The company reported total debt of approximately $29.4 million, including bank overdrafts and discontinued-operation liabilities. It had $3.3 million of available, unused revolving borrowing capacity, subject to borrowing-base availability, covenants and restrictions.
- Bank of Montreal facilities are secured by substantially all company assets and include financial covenants. The company was not in compliance with certain covenants at year-end; BMO waived the year-end 2017 defaults in March 2018. The facilities were extended to April 1, 2020 after year-end. Management’s liquidity assessment and going-concern basis assume continued availability of the facilities and no material adverse developments.
Material changes, outlook and risks
- In the fourth quarter, the company decided to sell its switchgear business, operated through PCEP, and reclassified it as discontinued operations. No definitive sale agreement had been signed; the company had a non-binding letter of intent. The business generated $13.0 million of 2017 revenue and a $6.6 million net loss, versus $15.5 million of revenue and a $2.5 million net loss in 2016. The 2017 results included a $1.4 million goodwill impairment.
- Total backlog was $35.2 million at year-end, down from $38.6 million. Management expected most of it to be delivered in 2018; backlog may be canceled and is not guaranteed revenue. The company reported no major 2018 capital projects planned.
- Management’s stated strategy is to grow engineered transformer offerings and Critical Power service and monitoring work, improve operating efficiencies, and pursue complementary acquisitions. No quantified earnings or revenue guidance is provided.
- Customer concentration is significant: Siemens represented 18% and Hydro-Quebec 11% of 2017 sales. Neither agreement guarantees minimum purchases; the Hydro-Quebec contract was extended to January 31, 2019. The 20 largest customers accounted for about 60% of consolidated revenue.
- Other material risks include volatile demand and margins, raw-material costs, Canadian-dollar exposure, skilled-labor availability, and reliance on secured credit facilities. The Myers Power Products lawsuit alleges misuse of confidential information; the company denies the allegations and intends to contest the case. Damages sought are unspecified.
- Management concluded disclosure controls and internal control over financial reporting were ineffective at year-end because of a material weakness in the financial close and reporting process. The auditor gave an unqualified opinion on the financial statements but was not engaged to audit internal controls.
Key facts for investors to verify
- Progress and terms of any PCEP switchgear sale, including closing conditions, proceeds and potential continuing obligations.
- Subsequent covenant compliance, borrowing availability and cash needs under the BMO facilities extended to April 2020.
- Whether the expected 2018 backlog converts to revenue and whether Siemens and Hydro-Quebec orders remain stable.
- Remediation of the material weakness and any changes to financial reporting controls.
- Final tax effects of the Tax Cuts and Jobs Act and the planned foreign-subsidiary dividend and related withholding and foreign-exchange costs.
- Developments in the Myers Power Products litigation and any resulting financial exposure.