Pioneer Power Solutions, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. The company manufactures specialty electrical transmission and distribution equipment for utility, industrial and commercial markets. Financial amounts below are in U.S. dollars; statements are unaudited and amounts are in thousands unless otherwise stated.
Key financial results
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Revenue | $20,893 | $22,551 |
| Gross profit / gross margin | $4,920 / 23.5% | $5,081 / 22.5% |
| Operating income | $995 | $1,499 |
| Net earnings | $590 | $913 |
| Basic / diluted EPS | $0.08 / $0.08 | $0.15 / $0.15 |
| Cash used in operating activities | $2,150 | $1,600 |
| Cash used in investing activities | $323 | $1,816 |
| Cash provided by financing activities | $1,940 | $3,171 |
At March 31, 2014, total assets were $56.5 million, total liabilities $25.7 million and shareholders’ equity $30.8 million. Cash was zero. Management reported total debt of approximately $10.3 million. Working capital was $13.5 million and the current ratio was 1.8, down from 2.1 at year-end 2013. Available, unused revolving-credit capacity was $10.2 million, subject to covenant and other restrictions.
Material changes and management discussion
- Revenue declined 7.4% year over year. Transformer revenue fell 15.0%; management attributed the decrease to foreign exchange, lower short-cycle standard-product demand, and the absence of a large Canadian oil-and-gas project shipped in Q1 2013. Acquired circuit-protection and control businesses contributed $1.7 million of Q1 2014 sales.
- Gross margin improved to 23.5% from 22.5%, primarily because of a greater mix of engineered-to-order transformers and the contribution of circuit-protection and control sales.
- SG&A rose 12.7% to $4.0 million, reflecting additional acquired-business operating periods and higher corporate personnel, IT and public-company costs. SG&A increased to 19.0% of revenue from 15.6%.
- Operating income declined 33.6% and net earnings declined 35.4%. The company cited lower long-cycle project shipments, currency effects, higher expenses associated with acquisitions and growth investments, and increased share count following the September 2013 offering.
- New orders were $23.1 million, up 2.6% reported (8.1% in constant currency). Backlog was $25.4 million, versus $24.4 million at December 31, 2013 and $24.0 million a year earlier; most backlog was expected to ship within six months.
- Operating cash outflow increased to $2.2 million, principally due to working-capital use, including increased receivables and inventory. Financing inflows included higher overdrafts and revolver borrowings.
Liquidity, debt, outlook and risks
The company reported compliance with its Canadian and U.S. credit-facility covenants at March 31, 2014. Canadian facilities had approximately $7.6 million outstanding; the U.S. revolving facility had approximately $1.6 million outstanding. The facilities impose financial tests and restrictions on debt, liens, investments, distributions and other actions. Management stated that working capital, available borrowing capacity and operating cash generation should be sufficient for anticipated operating needs, capital improvements and debt repayments for at least the next 12 months. The filing provides no quantified earnings or revenue guidance and notes interim results are not necessarily indicative of full-year results.
Key disclosed risks include demand and competitive pressures, dependence on Hydro-Quebec and Siemens for a substantial portion of business, raw-material and supply disruptions, execution and integration of acquisitions, backlog conversion, restrictive debt covenants and refinancing capacity, and Canadian-dollar exchange-rate exposure. Approximately 51% of Q1 2014 revenue was denominated in Canadian dollars; the company said it had not historically hedged currency exposure. It recorded a $45,000 foreign-exchange gain in Q1 2014 versus a $61,000 loss in Q1 2013, while foreign-currency translation reduced other comprehensive income by $676,000.
Other notable items: the company provided $83,000 of financial assistance to a transformer customer through a secured note receivable. A $455,000 acquisition-related seller note was payable in installments through June 19, 2014. The company stated there were no material changes to the risk factors in its 2013 Form 10-K.
Investor facts to verify
- Whether Q2 and subsequent results support backlog conversion and the expected timing of the $25.4 million backlog.
- Receivables, inventory and operating cash flow trends, given zero cash and Q1 working-capital cash use.
- Available borrowing capacity and ongoing compliance with increasingly restrictive U.S. facility covenants.
- Customer concentration, particularly order trends from Hydro-Quebec and Siemens, and the sustainability of acquired-business sales and margins.
- The filing’s controls section says disclosure controls were effective “as of March 31, 2013,” although this is the Q1 2014 report; confirm the intended evaluation date.