Pioneer Power Solutions, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Unless noted otherwise, financial amounts are in thousands of U.S. dollars. Pioneer manufactures and services electrical transmission, distribution, and on-site power equipment through its T&D Solutions and Critical Power segments.
Financial performance
- Revenue: Q3 revenue was $29.794 million, up 1.4% year over year; nine-month revenue was $87.953 million, up 2.4%. Nine-month T&D revenue rose 5.3% to $76.316 million, while Critical Power revenue declined 13.2% to $11.637 million.
- Profitability: Q3 gross profit fell 16.4% to $5.446 million and gross margin contracted to 18.3% from 22.2%. The company recorded a Q3 net loss of $764, or $0.09 per share, versus net income of $322, or $0.04 per share, in Q3 2016. For nine months, net income was $678, or $0.08 per share, compared with $1.085 million, or $0.12 per share.
- Operating results: Q3 operating income decreased to $599 from $1.212 million. Nine-month operating income was $3.383 million, down 8.3%. Nine-month gross margin declined to 19.9% from 21.7%.
- Cash flow and investment: Operating activities used $473 in the first nine months, compared with $8.860 million used in the prior-year period. Investing activities used $1.225 million, including $1.245 million of capital expenditures. Financing activities provided $2.944 million. Cash at September 30 was $950, versus $246 at year-end 2016.
- Liquidity and debt: Working capital was $168, down from $2.448 million at December 31, 2016; current assets were approximately 1.0 times current liabilities. The company reported total debt of $31.848 million and $1.214 million of available, unused revolving capacity, subject to covenant and other restrictions. Total current liabilities were $51.672 million, versus current assets of $51.840 million.
Changes versus the prior comparable period
- T&D transformer revenue increased, including stronger U.S. dry-type transformer sales; switchgear revenue was lower over the nine-month period. T&D gross margin weakened, primarily due to a write-off of raw materials that were not relocated from Canada during the dry-type transformer relocation.
- Critical Power equipment revenue declined substantially, while service revenue increased. A shift toward higher-margin service work improved Critical Power gross margin.
- Interest expense increased to $1.662 million for nine months from $1.151 million, reflecting higher average borrowings and greater use of short-term borrowing. SG&A before depreciation and amortization declined 4.1% for the nine-month period.
- Q3 tax expense was $530 despite a pretax loss of $234; management attributed the unusually high effective tax rate in part to Canadian tax assessments, dividend income and foreign tax credits, and tax-return true-ups.
Outlook, risks, and unusual items
- Management said working capital, facility borrowing capacity, and expected operating cash generation should fund anticipated operations, capital improvements, and debt repayments for at least the next 12 months. It anticipates approximately $1.0 million of capital expenditures over the next 12 months. No earnings or revenue guidance was provided.
- The company was renegotiating its BMO credit facilities. BMO suspended testing of the current-ratio covenant as of September 30; Pioneer said it complied with the other covenants then required to be tested and expected revised terms to support prospective compliance. U.S. and Canadian revolving facilities mature July 31, 2018; the U.S. term facility includes a $4.438 million balloon payment due that date.
- Backlog was $38.685 million at September 30, down from $41.530 million a year earlier. Backlog is subject to delivery timing and realization risk.
- Management identified continuing material weaknesses in internal control over financial reporting and concluded disclosure controls were not effective. Remediation efforts were ongoing; the company said it could not conclude the weaknesses were remediated until the plan operated for a sufficient period.
- Other notable items: the company accelerated and fully amortized a distributor-territory intangible after terminating a supplier distribution agreement; it continued to accrue interest on past-due payroll-tax obligations; and it received waivers of certain payroll-tax interest and penalties. A California lawsuit alleging misuse of confidential information remained pending; the company said it intended to contest the claims and could not assure an outcome.
- Risks cited include dependence on Siemens for a significant portion of business, competition, raw-material and supply disruptions, foreign-exchange exposure, debt and covenant constraints, customer demand, and reliance on key personnel. The filing reported no material change to previously disclosed risk factors.
Important facts for investors to verify
- Progress and final terms of the BMO credit-facility renegotiation, including covenant compliance, available borrowing capacity, and the July 2018 maturities and balloon payment.
- Whether liquidity and operating cash flow improve, given minimal working capital and the first-nine-month operating cash outflow.
- Whether T&D margins recover after relocation-related inventory write-offs and whether Critical Power service growth offsets equipment declines.
- Remediation of the material weaknesses and any further effects on reporting reliability.
- Developments in the Myers Power Products litigation and the company’s ability to realize its reported backlog.