Orion Energy Systems, Inc. — Form 10-Q Summary
Period clarification: The request identifies “2019 Q3,” but the supplied filing is for the quarter ended December 31, 2020 (Orion fiscal 2021 third quarter), with comparisons to the quarter and nine months ended December 31, 2019. Figures below are in millions of dollars unless stated otherwise.
Business context and reporting period
Orion provides commercial LED lighting products, turnkey installation and project services, controls and IoT-enabled systems. Its fiscal year ends March 31. The filing is unaudited and covers the three and nine months ended December 31, 2020.
Financial performance and position
| Metric | Three months ended Dec. 31, 2020 | Three months ended Dec. 31, 2019 | Nine months ended Dec. 31, 2020 | Nine months ended Dec. 31, 2019 |
|---|---|---|---|---|
| Revenue | $44.3 | $34.2 | $81.3 | $124.9 |
| Gross profit / margin | $11.0 / 24.9% | $8.3 / 24.2% | $20.9 / 25.7% | $31.3 / 25.1% |
| Operating income / margin | $4.5 / 10.1% | $2.4 / 7.1% | $4.3 / 5.3% | $13.5 / 10.8% |
| Net income | $4.3 | $2.3 | $4.0 | $13.0 |
| Diluted earnings per share | $0.14 | $0.07 | $0.13 | $0.42 |
| Operating cash flow | Not presented by quarter | Not presented by quarter | $(5.6) | $14.3 |
For the third quarter, product revenue was $31.9 million and service revenue was $12.3 million. Cash and cash equivalents were $12.3 million at December 31, 2020, versus $28.8 million at March 31, 2020. Current assets were $56.7 million and current liabilities $33.4 million, for working capital of $23.3 million. The company reported no revolver borrowings and $0.05 million of equipment debt; total liabilities were $37.9 million and shareholders’ equity was $35.8 million.
Material changes versus comparable periods
- Third-quarter revenue rose 29.2% year over year, with product revenue up 23.4% and service revenue up 47.0%. Net income rose 87.3%; gross margin increased 0.7 percentage points.
- Nine-month revenue fell 34.9%, operating income fell 68.2%, and net income fell 69.1%. Management attributed the decline primarily to COVID-related project delays and pauses, including suspended installations for a large national account in the first half of fiscal 2021.
- Nine-month operating cash flow moved from $14.3 million provided to $5.6 million used. Management cited a $13.2 million increase in receivables, a $4.2 million increase in inventory, and a $6.6 million increase in accrued expenses, primarily reflecting timing and anticipated project activity.
- The company reduced its prior revolving-credit balance and entered a new $25 million five-year facility. The prior facility had $10.0 million outstanding at March 31, 2020; the new facility had no borrowings at December 31, 2020.
Outlook, commentary, risks and unusual items
- Management reported a third-quarter rebound, including resumed work for its largest customer and installations for a new large specialty-retail customer. It expected that retail project to generate at least $8 million of product and service revenue in the second half of fiscal 2021, with additional store retrofits expected in fiscal 2022.
- Management said COVID-19 materially reduced revenue and profitability in the first half of fiscal 2021. Some customers continued to delay new awards, and further restrictions, project delays or cancellations could adversely affect results, liquidity and working capital.
- Customer concentration remains substantial: two customers represented 65.1% and 11.1% of third-quarter revenue; one customer represented 55.7% of nine-month revenue. Two customers accounted for 59.3% and 18.0% of receivables at quarter-end.
- Backlog was $21.8 million at December 31, 2020, compared with $19.2 million at March 31, 2020. The company generally expects backlog to convert within a year, but noted COVID-19 could extend that timing.
- The new facility is secured by a first lien on substantially all company assets, has a borrowing base, and includes customary covenants and a springing 1.0-to-1.0 fixed-cost coverage requirement if availability falls below specified thresholds. The requirement was not then in effect. A $0.09 million loss on debt extinguishment reflected write-off of prior facility financing costs.
- Other items to note: the company maintained a full valuation allowance against deferred tax assets while saying a partial release could become possible within 12 months; it reported $0.3 million of gross unrecognized tax benefits. Ordinary-course litigation and a Wisconsin sales-and-use-tax audit were not expected by management to have a material adverse effect. Management reported effective disclosure controls and no material change in internal control during the quarter.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied 10-Q is for December 31, 2020, not 2019.
- Track whether the announced specialty-retail revenue expectation and backlog convert to completed installations, billings and cash collections.
- Monitor customer concentration, receivable collections, accrued project costs and inventory levels, given negative nine-month operating cash flow and reliance on a small number of customers.
- Review the new credit facility’s borrowing-base availability, covenants and fees, especially if liquidity tightens.
- Assess ongoing COVID-related project risks and the potential timing and effect of any deferred-tax-valuation-allowance release.