Pioneer Power Solutions, Inc. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011. Unless otherwise noted, financial amounts below are in U.S. dollars; statements present amounts in thousands. The company manufactures specialty electrical equipment, principally transformers. Results include Bemag Transformer Inc. from its July 1, 2011 acquisition and classify Pioneer Wind Energy Systems Inc. as discontinued operations.
Financial results and key metrics
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $17.927 million | $13.807 million | $50.065 million | $34.408 million |
| Gross profit / margin | $3.817 million / 21.3% | $3.042 million / 22.0% | $11.689 million / 23.3% | $7.832 million / 22.8% |
| Operating income | $0.874 million | $1.129 million | $3.664 million | $2.929 million |
| Continuing-operations earnings | $0.203 million | $0.658 million | $1.883 million | $1.629 million |
| Net earnings (loss) | $(1.826) million | $0.388 million | $(0.557) million | $2.151 million |
| Continuing-operations diluted EPS | $0.03 | $0.11 | $0.32 | $0.28 |
| Operating cash flow | Not presented by quarter | $(0.158) million | $1.963 million |
Balance sheet and liquidity at September 30: Cash was $0.624 million; total assets $47.105 million; current assets $23.712 million and current liabilities $20.773 million (working capital of approximately $2.939 million). Total debt and capital leases were $16.620 million, including $8.269 million current and $8.351 million long-term. Shareholders’ equity was $14.015 million. Cash increased from $0.516 million at year-end 2010, notwithstanding negative operating and investing cash flows, primarily due to financing inflows and foreign-exchange effects.
Changes versus comparable periods
- Q3 revenue increased 29.8%; nine-month revenue increased 45.5%. Q3 growth reflected higher dry-type transformer sales, including $2.865 million from Bemag, partly offset by lower liquid-filled transformer revenue. Nine-month revenue also benefited from Jefferson Electric organic growth and the acquisition.
- Gross margin declined in Q3, attributed to a greater distribution-channel mix and lower throughput during Bemag integration; nine-month margin improved, mainly from favorable liquid-filled transformer mix.
- Q3 continuing earnings fell from $0.658 million to $0.203 million as interest and other expenses rose and operating margins weakened. Nine-month continuing earnings increased to $1.883 million.
- Net results turned negative because of the wind-energy discontinued-operation loss: $2.029 million in Q3 and $2.440 million for nine months. In the prior-year nine-month period, discontinued operations contributed $0.522 million of earnings.
- Operating cash flow fell to a $0.158 million use, with working-capital needs—including increased receivables and inventory—partly reflecting revenue growth. Investing cash use rose to $8.941 million, including $8.227 million for acquisitions. Financing provided $8.452 million.
Transactions, outlook, and risks
- Acquisitions: Bemag was acquired for approximately $9.1 million, including about $2.8 million of debt repaid at closing. It generated $2.865 million of Q3 revenue but reported a $0.366 million continuing-operations loss for the quarter. Pioneer also acquired Vermont Transformers’ manufacturing equipment for $1.6 million.
- Wind business exit: In September the company committed to divest or wind down Pioneer Wind Energy Systems, citing weak domestic wind-market conditions and inability to secure commercially acceptable outsourced procurement and assembly. The filing reports impairment and exit-related charges; its disclosures differ on their breakdown: the narrative describes $1.2 million of impairment and $0.6 million of anticipated obligations, while a note describes $1.6 million of impairment and $0.2 million of anticipated expenses. Verify the amounts and classification.
- Backlog: $23.4 million at September 30, versus $17.0 million a year earlier and $18.7 million at December 31, 2010. Most was expected to be delivered during 2011; orders may be canceled and backlog is not assured revenue.
- Management outlook: No quantified earnings or revenue guidance is provided. Management stated working capital, available borrowing capacity and operating cash generation should fund anticipated operations, capital improvements and debt repayments for at least 12 months. The company reported no major future capital projects planned for 2011.
- Debt and refinancing: Canadian facilities had approximately $9.5 million outstanding, and the borrowers were reported compliant with financial covenants at quarter-end. Jefferson Electric had approximately $7.0 million outstanding under its U.S. facilities. In November, after quarter-end, its loan maturity was extended to October 31, 2012; the company prepaid $0.25 million and agreed to prepay another $0.75 million by January 31, 2012. The filing cites restrictive covenants and refinancing/liquidity risk.
- Other notable items: Q3 and nine-month other expense included acquisition-related costs and costs from a common-stock offering withdrawn due to market conditions. Q3 interest expense was $0.271 million, versus $0.116 million a year earlier. The company reports foreign-currency exposure and no historical hedging. It completed a one-for-five reverse stock split effective June 20, 2011.
- Principal business risks: Customer concentration (Hydro-Québec represented about 36% of 2010 sales; Siemens 9%), competitive pricing, raw-material costs and supply, acquisition integration, currency movements, covenant compliance, and dependence on skilled labor and key personnel. Approximately 71% of the workforce was unionized.
- Controls and filing status: Management concluded disclosure controls were effective at September 30, 2011 and reported no material quarterly change in internal control over financial reporting. However, the cover page marks “No” to having filed all required Exchange Act reports during the preceding 12 months; investigate the reason and any related compliance implications.
Important facts for investors to verify
- Reconcile the inconsistent discontinued-operations impairment and exit-cost breakdown in the narrative and footnote.
- Review post-quarter Jefferson Electric loan amendments, the required $0.75 million additional prepayment, covenant headroom and remaining borrowing availability.
- Assess whether backlog converts to revenue on schedule, particularly given the filing’s expectation that most orders would be delivered in 2011.
- Evaluate Bemag integration, its reported quarterly loss, and whether acquisition-related operating and financing costs persist.
- Confirm the basis for the “No” response regarding timely filing of required reports, and assess customer concentration and the status of the Hydro-Québec agreements expiring in 2012.