Pioneer Power Solutions, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2019; filed August 14, 2019. Unless stated otherwise, financial amounts below are in thousands of dollars. The company manufactures and services electrical distribution and backup-power equipment. Its continuing operations comprised switchgear (T&D Solutions) and Critical Power; liquid-filled and dry-type transformer operations were classified as discontinued operations because their sale was pending.
Financial performance and position
- Second-quarter continuing revenue: $5,360, up 38.3% from $3,877. Switchgear revenue rose to $2,737 from $883, primarily due to shipment timing; Critical Power revenue fell 12.4% to $2,623.
- First-half continuing revenue: $8,378, down 17.2% from $10,122. Switchgear revenue declined 16.9% to $3,810; Critical Power revenue declined 17.5% to $4,568.
- Gross profit and margins: Second-quarter gross profit was $521, versus $193, and gross margin was 9.7%, versus 5.0%. First-half gross profit was $778, down from $1,319, with margin of 9.3%, versus 13.0%. T&D reported negative gross profit in both periods; Critical Power’s gross margin improved.
- Operating results: Continuing-operations operating loss was $1,550 in Q2, roughly flat year over year, and $2,993 for the first half, versus $2,697. Higher corporate overhead, primarily professional fees, weighed on results.
- Net results: Q2 net loss was $4,023, or $0.46 per share, compared with a $796 loss, or $0.09 per share. First-half net income was $1,625, or $0.19 per share, versus a $1,370 loss, or $0.16 per share. First-half continuing operations earned $182; discontinued operations contributed $1,443.
- Unusual non-operating item: A $3,700 Q2 mark-to-market loss on CleanSpark stock and warrants received in the PCPI transaction drove most of the quarter’s larger net loss. The first-half mark-to-market loss was $325; the first-quarter PCPI transaction also generated a $4,207 gain on sale.
- Cash flow and capital spending: Continuing-operations cash from operating activities was $1,407 for the first half, versus $1,615 used in 2018; the filing identifies higher accounts payable and accrued liabilities as a principal source. Investing used $122, mainly capital spending. Financing used $772, chiefly debt repayment. Cash was $490 at June 30, compared with $200 at year-end.
- Liquidity and debt: Balance-sheet current assets were $68,309 and current liabilities $61,058, implying working capital of about $7,251; management reports $7,300 in MD&A, while a note states $6,800. The balance sheet shows approximately $25,063 of debt and overdrafts combined, including $20,982 of revolver borrowings, $3,196 of current term debt and $885 of overdrafts. Credit facilities mature April 1, 2020. Available unused revolver capacity was reported as $115, subject to borrowing-base and covenant restrictions.
- Backlog: Continuing-operations order backlog was $14,964 at June 30, up from $14,150 at March 31. Total backlog including discontinued operations was $50,635.
Material changes and transactions
- On June 28, the company agreed to sell its liquid-filled and dry-type transformer businesses for $60,500 cash plus a $7,500 subordinated seller note, both subject to adjustments. The note bears 4% interest, payable in kind, and matures December 31, 2022. The sale remained subject to closing conditions and financing; shareholder approval was obtained by written consent from holders representing approximately 54.7% of voting power. The switchgear business and Critical Power operations were to be retained.
- At closing, BMO’s existing Canadian and U.S. credit facilities were to be repaid in full. On August 8, after the reporting date, BMO waived June 30 covenant breaches and temporarily increased eligible-receivables availability by up to CAD $1 million, subject to stated time and transaction limits.
- PCPI was sold to CleanSpark in January for CleanSpark shares and warrants. Pioneer retained a five-year indemnity obligation concerning the Myers Power litigation and entered an 18-month contract-manufacturing agreement and a four-year non-compete/non-solicitation agreement.
- A flood at the Reynosa facility damaged inventory. The company recorded an estimated $3,300 inventory write-off and expects $2,400 of insurance proceeds; the net loss recorded in discontinued operations was approximately $913. Both estimates remain subject to revision.
Outlook, risks and contingencies
- Management said capital resources were expected to fund operations through the first quarter of 2020, but the going-concern assessment depends on continued lender support, covenant compliance or waivers, and no material adverse developments. The filing notes subjective acceleration clauses and prior covenant non-compliance; failure to obtain future waivers could make debt immediately due.
- The proposed transformer-business sale had a financing condition and was not assured to close. If terminated in specified circumstances, either party could owe a $4,000 fee; if the buyer received a reverse termination fee, 50% would be remitted to BMO to reduce term debt. Pioneer also faced restrictions on soliciting competing proposals and potential transaction expenses regardless of closing.
- The company cited demand and competitive pressures, raw-material and supply risks, margin and backlog-conversion uncertainty, foreign-exchange exposure, reliance on key personnel, and potential NASDAQ listing risk after the transaction.
- The Myers Power Products lawsuit remained pending, with trial scheduled for the first quarter of 2020. Pioneer intended to contest the case; the filing states that the matter could not be resolved with certainty and that the planned divestiture of PCEP could not be executed until the lawsuit was resolved.
- No specific revenue or earnings guidance was provided. Management reported no major capital projects or significant replacement spending anticipated for 2019.
Important facts for investors to verify
- Whether the transformer-business sale closed, the final cash and seller-note consideration after adjustments, and how proceeds were applied to debt and liquidity.
- Current covenant compliance, availability and maturity terms of BMO facilities, and the company’s financing plan if the sale did not close.
- Reconciliation of the filing’s working-capital figures ($6,800 in a note versus approximately $7,300 in MD&A) and debt descriptions (approximately $25,100 including overdrafts versus a separate MD&A reference to $19,100 including overdrafts).
- Final flood-damage and insurance-recovery amounts, and whether the expected $2,400 proceeds were collected.
- Developments in the Myers Power litigation, related indemnity exposure, and the effect on the transaction and retained business.