Business context and reporting period
Orion Energy Systems, Inc. designs, manufactures, sells and installs LED lighting and related control systems, primarily for commercial and industrial customers in North America. The supplied filing is a Form 10-Q for the quarter ended September 30, 2019 (fiscal 2020 Q2), not 2018 Q2 as indicated in the request metadata. Financial statements are unaudited.
Financial performance
Amounts are in millions of dollars, except per-share data and percentages.
| Metric | Three months ended Sep. 30, 2019 | Three months ended Sep. 30, 2018 | Six months ended Sep. 30, 2019 | Six months ended Sep. 30, 2018 |
|---|---|---|---|---|
| Revenue | $48.3 | $13.2 | $90.7 | $27.0 |
| Gross profit / margin | $12.8 / 26.5% | $2.5 / 19.3% | $23.1 / 25.4% | $6.0 / 22.2% |
| Operating income (loss) | $6.9 | $(2.3) | $11.0 | $(4.9) |
| Net income (loss) | $6.7 | $(2.4) | $10.7 | $(5.1) |
| Diluted earnings (loss) per share | $0.22 | $(0.08) | $0.35 | $(0.18) |
| Cash from operating activities | Not provided for quarter | $8.4 | $(1.1) |
Revenue grew 266% year over year in Q2 and 236% for the first half. Management attributed the increase overwhelmingly to a large national-account retrofit project. Q2 product revenue was $35.6 million and service revenue was $12.8 million. The reported gross-margin improvement reflected increased sales covering fixed costs.
For the six months, investing cash outflow was $0.5 million and financing cash outflow was $5.5 million, primarily reflecting net repayments of $5.4 million on the revolving facility. Cash increased $2.4 million to $11.1 million. Operating cash flow included substantial working-capital movements: receivables rose $12.2 million and inventory rose $4.4 million, partly offset by a $12.7 million increase in accounts payable. Operating cash flow less reported capital expenditures was approximately $8.0 million, calculated from the filing’s six-month figures.
Financial position and material changes
- At September 30, 2019, current assets were $60.6 million and current liabilities were $40.9 million; working capital was $19.7 million. Cash was $11.1 million.
- Total debt was $3.9 million, including $3.8 million outstanding on the revolving credit facility. Borrowing availability was $16.2 million under a $20.0 million borrowing base; the facility matures October 26, 2020. The stated borrowing rate was 6.0%, and Orion reported compliance with its monthly RML covenant.
- Compared with March 31, 2019, accounts receivable increased to $27.0 million from $14.8 million, inventory to $17.6 million from $13.4 million, and accounts payable to $32.4 million from $19.7 million. The company linked these changes to the large customer project, expected sales and payment timing.
- Shareholders’ equity increased to $28.9 million from $18.0 million, primarily reflecting first-half net income. Shares outstanding were 30.2 million at September 30.
- Backlog was $6.8 million at September 30, down from $10.8 million at March 31; the company generally expects backlog to convert to revenue within one year.
Outlook, commentary and risks
- Management said it remained optimistic about near- and long-term performance, but the filing provides no formal quantified full-year revenue or earnings guidance. It expected approximately $110 million in total revenue from a major national-account customer, dependent on purchase orders, with a significant amount expected in fiscal 2020.
- Management’s priorities include executing national-account turnkey retrofits, supporting ESCO and distributor channels, product innovation, and expanding smart-lighting/IoT capabilities. It planned approximately $0.6 million of fiscal 2020 capital expenditures.
- Customer concentration is pronounced: one customer represented 81.1% of Q2 revenue and 79.2% of first-half revenue, and 78.4% of receivables at September 30. Management cautioned that reduced or delayed orders from this customer or other major customers could materially affect results.
- ODS revenue declined 20.9% in Q2 and 46.4% for the first half; USM revenue declined 32.2% in Q2, despite first-half growth. The strong consolidated results were concentrated in OES and the large national-account project.
- Tariffs affect certain sourced products and components. Management cited alternative sourcing, value engineering and pricing actions, and expected a limited adverse effect, while noting future policy changes could have positive or negative consequences.
- The company continued to consider selling or leasing its Manitowoc corporate office property. It remained classified as held and used; a sale would likely result in a non-cash impairment because the property was listed below net book value.
- Orion disclosed ordinary-course litigation whose ultimate impact it could not assess. A Wisconsin sales/use-tax audit remained unresolved but was not expected to materially affect the financial statements or liquidity; a California audit was finalized without material adverse effect.
- Adoption of lease accounting guidance added approximately $0.2 million of lease assets and liabilities, with no retained-earnings or material operating-results impact. Disclosure controls were reported effective.
Important facts for investors to verify
- Whether the large national-account customer issues purchase orders sufficient to support the stated approximately $110 million expected project revenue, and the timing and profitability of execution.
- Customer concentration, collection timing and the recoverability of the sharply higher receivables and inventory balances.
- Whether gross margins and positive operating cash flow persist when project volume or sales mix changes; the filing notes product gross margins can vary materially.
- Backlog conversion and the performance of distribution and U.S. Markets channels, which were weaker in Q2.
- Revolving-credit availability, borrowing-base eligibility, covenant compliance and the October 2020 facility maturity.
- The outcome of the Wisconsin tax audit, ordinary-course litigation and any potential impairment if the Manitowoc property is sold.