Pioneer Power Solutions, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. The company manufactures and services electrical transmission, distribution and on-site power-generation equipment. Its reportable segments are Transmission & Distribution Solutions (T&D) and Critical Power Solutions. Unaudited results are not necessarily indicative of the full year.
Financial results
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Revenue | $26.6 million | $28.9 million |
| Gross profit / margin | $5.9 million / 22.3% | $5.6 million / 19.3% |
| Operating income (loss) | $1.1 million | $(0.1) million |
| Interest expense | $0.3 million | $0.2 million |
| Net income (loss) | $0.6 million; $0.07 per diluted share | $(0.2) million; $(0.03) per diluted share |
| Operating cash flow | $(4.8) million | $(0.5) million |
| Capital expenditures | $0.1 million | $0.2 million |
Revenue declined 8.0%. T&D revenue fell 6.3%, including a 15.7% drop in transformer sales, while switchgear revenue nearly doubled, partly reflecting the Pacific Power acquisition. Critical Power revenue fell 16.2%; equipment shipments were delayed by a supplier ERP implementation and two customers delayed service-contract starts. T&D gross margin improved to 24.5% from 20.5%, which management attributed mainly to a favorable product mix and outsourcing standard transformer production to lower-cost Asian facilities. Critical Power gross margin fell to 10.6% from 13.6% as fixed costs were incurred before delayed service revenue.
Lower SG&A—attributed largely to headcount reductions, lower freight and professional fees—also supported the return to operating profit. Operating cash use rose as working capital absorbed approximately $6.7 million, including increased inventory and receivables and lower accounts payable and accrued liabilities.
Balance sheet, liquidity and debt
- At March 31, cash was $0.2 million; current assets were $39.3 million and current liabilities $33.3 million, yielding reported working capital of $6.0 million and a current ratio of 1.2. At December 31, 2015, working capital was negative $3.4 million and the current ratio was 0.9.
- Inventory rose to $20.6 million from $17.7 million; accounts receivable rose to $15.4 million from $14.2 million.
- Management reported total debt of $20.2 million and unused revolving-facility capacity of $2.6 million, subject to borrowing restrictions and covenant compliance. The balance sheet separately reports bank overdrafts of $2.6 million. The filing does not clearly reconcile the relationship between overdrafts and management’s total-debt figure.
- Net cash used in operations and investing was funded chiefly by $4.4 million of financing cash flow; cash declined from $0.6 million to $0.2 million during the quarter.
- Management stated that working capital, available borrowing capacity and operating cash generation should cover anticipated operating needs, capital improvements and debt repayments for at least 12 months. This expectation depends on facility availability and covenant compliance.
Material changes, outlook and notable risks
- Backlog increased to $35.2 million at March 31 from $28.7 million at December 31, 2015, led by T&D backlog of $31.6 million. Critical Power backlog declined to $3.6 million from $4.2 million. Backlog is not a guarantee of future revenue; most is expected to be delivered within 12 months.
- On April 29, 2016, after quarter-end, the company amended and extended certain U.S. and Canadian Bank of Montreal facilities to July 31, 2017. The amendments changed facility sizes, repayment terms and covenants; specified defaults related to 2015 covenant breaches were waived subject to conditions. The U.S. revolving facility increased from $10 million to $14 million, while the Canadian revolving facility decreased from CAD $10 million to CAD $7 million. The U.S. term loan’s final maturity remains December 2, 2019.
- The company had delinquent federal payroll-tax liabilities. April 2016 installment agreements covered approximately 84% of the amounts owed, and $2.8 million was reclassified as long-term at March 31. Agreements for two other divisions and abatement of assessed penalties remained under pursuit. The company received $0.4 million of interest and penalty waivers in Q1.
- Material weaknesses in internal control over financial reporting remained at March 31, 2016, and management said disclosure controls were not effective. Remediation includes outsourced payroll processing, additional accounting staffing and training, and independent review; management said remediation was not complete.
- Management provided no specific earnings or revenue guidance. Key stated risks include demand weakness in commercial construction and industrial, oil-and-gas and mining markets; dependence on major customers Hydro-Quebec and Siemens; competition, raw-material and supply costs, foreign-exchange exposure, debt and covenant constraints, backlog conversion, acquisition integration and control deficiencies.
- Prior-period expense classifications and segment presentation were reclassified for comparability. The filing states the 2015 reclassification increased reported gross profit by $169,000, or 0.6 percentage points of sales.
Investor verification priorities
- Verify the status and terms of the amended credit agreements, conditions attached to covenant waivers, borrowing availability and covenant headroom.
- Track payroll-tax installment payments, remaining divisions’ agreements, potential penalties and the final liability amount.
- Assess whether operating cash flow improves as inventory and receivables are converted to cash, given low cash balances and reliance on borrowing facilities.
- Monitor backlog conversion and the recovery of Critical Power shipments and delayed service contracts, as well as Canadian transformer demand.
- Review progress in remediating material weaknesses and confirm that controls operate effectively over a sufficient period.