Orion Energy Systems, Inc. — Form 10-Q Summary
Period: Quarter ended June 30, 2020 (Orion fiscal 2021 first quarter), compared with the quarter ended June 30, 2019. The request metadata says “2019 Q1,” but the filing itself is for 2020 Q1; this summary follows the filing. Amounts are in U.S. dollars unless stated otherwise.
Business context
Orion develops, manufactures, sells and installs commercial and industrial LED lighting, controls and energy-management systems, primarily in North America. Revenue is largely project-based. Its reportable segments are Orion Engineered Systems (OES), Orion Distribution Services (ODS) and Orion U.S. Markets (USM).
Financial performance
| Metric | Three months ended June 30, 2020 | Prior-year quarter | Change or context |
|---|---|---|---|
| Total revenue | $10.8 million | $42.4 million | Down 74.5% |
| Product revenue | $9.7 million | $32.3 million | Down 70.0% |
| Service revenue | $1.1 million | $10.0 million | Down 88.9% |
| Gross profit / margin | $2.6 million / 24.4% | $10.3 million / 24.3% | Margin broadly stable despite sharply lower sales |
| Operating income (loss) | $(2.0) million | $4.2 million | Turned to a loss |
| Net income (loss) | $(2.2) million | $4.0 million | Loss of $0.07 per diluted share, versus income of $0.13 |
| Operating cash flow | $(7.7) million | $2.0 million | Cash use reflected working-capital movements and the net loss |
| Capital expenditures | $0.2 million | $0.2 million | Investing cash outflow was $0.2 million |
Operating expenses were $4.7 million, down 23.6% year over year; lower general and administrative and sales and marketing costs partly offset the revenue decline. Income tax expense was $73,000; Orion reported a full valuation allowance against deferred tax assets.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $10.8 million at June 30, 2020, down from $28.8 million at March 31, 2020. The quarter included $10.0 million of revolving-credit repayments and $7.7 million of operating cash use.
- Net working capital was $16.9 million, versus $27.8 million at fiscal year-end. Current assets were $36.5 million and current liabilities $19.6 million.
- There were no revolver borrowings at quarter-end, compared with $10.0 million at March 31. The borrowing base and stated availability were $6.5 million; the facility matures October 26, 2021. Orion reported compliance with its monthly RML covenant.
- Total debt was $60,000, consisting of equipment obligations. The credit facility is secured by substantially all personal property and includes customary covenants and restrictions.
- Backlog was $15.9 million at June 30, down from $18.6 million at March 31. The company generally expects backlog to convert within a year, but said COVID-19 may extend timing.
Material changes and management commentary
- Management attributed the steep revenue decline primarily to COVID-19-related project pauses, including delayed installations for a major national-account customer. That customer represented 77.0% of prior-year-quarter revenue and less than 10% in the current quarter; one customer represented 32.9% of current-quarter revenue.
- OES revenue fell 93.5% to $2.3 million, with a $1.9 million operating loss. ODS revenue rose 79.0% to $6.6 million and generated $0.8 million of operating income. USM revenue fell 50.5% to $1.9 million, with operating income down to $81,000.
- Management expected COVID-19’s economic and regulatory impacts to materially reduce fiscal 2021 revenue and profitability, particularly in at least the first half of the year. The delayed major-customer project was expected to resume in fiscal Q2, but timing and volume remained uncertain. No fiscal 2021 capital-expenditure guidance was provided.
- The company had implemented cost reductions and cash-conservation measures, including headcount reductions, in fiscal Q4 2020; it recorded $0.4 million of restructuring expense then and said substantially all of the accrual had been paid by June 30.
- Management described strategic priorities including executing national-account turnkey projects, developing lighting controls and IoT offerings, pursuing maintenance services and supporting distribution channels. It also said it was exploring acquisitions and expected investment in new offerings to weigh on near-term profitability; success and profitability are not assured.
Risks, contingencies and unusual items
- COVID-19 restrictions, customer closures, reduced site activity, travel limits and project delays or cancellations could further impair revenue, profitability, liquidity and asset values. Management said the overall impact could not be predicted.
- Project-based revenue, customer concentration and advance inventory and working-capital needs expose Orion to significant timing and cancellation risk. Inventory increased $2.6 million during the quarter, while accounts payable and accrued expenses declined.
- One customer’s concentration in accounts receivable was 35.7%; another’s was 13.6%. Three suppliers accounted for 16.1%, 12.5% and 10.0% of cost of revenue, respectively.
- The Manitowoc headquarters building remained classified as held and used; management noted that a sale could result in a non-cash impairment because it was listed below net book value.
- Orion disclosed ordinary-course litigation and a Wisconsin sales-and-use-tax audit; management did not expect either to have a material adverse effect. Gross unrecognized tax benefits were approximately $0.3 million.
- Management reported no material change in market-risk exposures, no off-balance-sheet arrangements, and effective disclosure controls as of June 30, 2020.
Investor verification priorities
- Confirm whether the delayed national-account installations resumed and how much revenue and cash collection they generated.
- Track customer concentration, backlog conversion, cancellations and the mix of turnkey, product and service revenue.
- Assess cash burn, working-capital requirements, borrowing availability and continued compliance with the credit facility’s covenants.
- Monitor inventory levels and potential obsolescence, supplier concentration, and any impairment indicators for the headquarters building or other assets.
- Compare subsequent results with management’s expectation of materially lower fiscal 2021 revenue and profitability; the filing provided no quantified full-year guidance.