Pioneer Power Solutions, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Unless noted otherwise, amounts below are in U.S. dollars; financial statement amounts are in millions. The company manufactures and services electrical transformers, power-generation equipment, and related systems. Its continuing reportable segments are Transmission and Distribution Solutions (T&D) and Critical Power. The switchgear business, PCEP, is presented as discontinued operations.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $25.956 | $25.494 | $74.024 | $77.835 |
| Gross profit / margin | $5.141 / 19.8% | $5.012 / 19.7% | $14.771 / 20.0% | $16.403 / 21.1% |
| Operating income | $1.949 | $1.055 | $2.962 | $4.036 |
| Continuing-operations net income (loss) | $0.788 | $(0.219) | $0.128 | $1.683 |
| Net income (loss), including discontinued operations | $0.058 | $(0.795) | $(1.312) | $0.599 |
| Basic and diluted EPS | $0.01 | $(0.09) | $(0.16) | $0.08 |
- Cash flow: Nine-month operating cash flow was $0.567 million, versus cash used of $0.164 million in 2017. Investing used $0.369 million, mainly for capital spending; financing provided $0.167 million. Cash increased to $0.659 million from $0.218 million at year-end 2017.
- Liquidity: Working capital was negative $1.4 million at September 30, versus positive $0.709 million at December 31, 2017. Current assets were $50.826 million and current liabilities $52.239 million (current ratio approximately 0.97).
- Borrowings: Outstanding draws under U.S. and Canadian credit facilities were approximately $18.1 million and $6.0 million, respectively. Short-term product-financing borrowings were $3.17 million. Management cited total debt of $33.6 million including bank overdrafts and liabilities of discontinued operations. Revolving facilities mature April 1, 2020; substantial assets secure the U.S. facilities.
- Backlog: Total backlog was $50.597 million, including $40.971 million for continuing operations and $9.626 million for PCEP.
Material changes versus prior periods
- Q3 revenue increased 1.8%; nine-month revenue declined 4.9%. T&D revenue rose 5.2% in Q3, but was down 1.5% year to date. Critical Power revenue fell 16.6% in Q3 and 24.1% year to date, primarily as equipment sales contracted; service revenue grew 8.2% and 7.2%, respectively.
- Q3 gross margin was broadly steady, while the nine-month margin fell 1.1 percentage points. Management attributed the year-to-date T&D decline mainly to unfavorable dry-type transformer mix, and Critical Power margin pressure to lower sales against comparable fixed costs.
- Operating income improved in Q3 but declined 26.6% for the nine-month period. A larger foreign-exchange gain helped Q3 operating results ($0.889 million versus $0.194 million); nine-month gains were $0.617 million versus $0.465 million.
- Interest expense rose to $0.727 million in Q3 and $2.126 million year to date, attributed to higher average borrowings and increased use of short-term borrowing at higher rates. PCEP reported discontinued-operations losses of $0.730 million in Q3 and $1.440 million year to date.
Outlook, risks, and unusual items
- No specific revenue or earnings guidance is provided. Management said available working capital, credit capacity, operating cash generation, and cash on hand should fund anticipated operating needs, capital improvements, and debt repayments for at least 12 months from filing. It expected working capital and debt levels to improve as backlog is fulfilled and the PCEP sale is completed.
- The proposed PCEP asset sale to CleanSpark had not closed. The parties extended the termination date to December 31, 2018. Consideration includes an 18-month note tied to working capital, equipment rent of $7,500 per month under a three-year lease, 7 million CleanSpark shares, and two five-year warrants. Closing and realization of the consideration remain uncertain.
- The company was out of compliance with financial covenants under both U.S. and Canadian facilities at September 30; BMO granted a waiver on November 7, 2018 for that period. Availability of revolving credit is subject to covenants and restrictions. Management also identified dependence on major customers, raw-material and supply risks, foreign-exchange exposure, competition, and ability to realize backlog as risks.
- Management concluded disclosure controls were not effective at September 30 because previously identified material weaknesses in internal control over financial reporting remained. Remediation efforts included additional staffing and training, with support from an independent consultant.
- A pending lawsuit by Myers Power Products alleges misuse of confidential information and seeks injunctive relief and unspecified damages exceeding $25 million. The company disputes the allegations and intends to contest the case; outcome is uncertain.
Important facts for investors to verify
- Whether the CleanSpark transaction closed by the extended deadline, and the value and collectability of its note, shares, warrants, and lease-related consideration.
- Subsequent covenant compliance, continued lender waivers, available borrowing capacity, and the timing and terms of debt repayment or refinancing.
- Whether the increased backlog converts to revenue and cash on expected terms, given higher inventory and negative working capital.
- Progress in remediating material weaknesses and whether disclosure controls and financial reporting controls become effective.
- The financial exposure, status, and potential impact of the Myers Power Products litigation.