Pioneer Power Solutions, Inc. — Q3 2019 Form 10-Q
Period: Three and nine months ended September 30, 2019. Financial amounts below are in millions of U.S. dollars unless stated otherwise.
Business context and significant transactions
Pioneer manufactures and services specialty electrical equipment. Following the August 16, 2019 sale of its liquid-filled and dry-type transformer businesses, continuing operations comprise switchgear (T&D Solutions) and Critical Power. The sold businesses are presented as discontinued operations for all periods shown.
The transformer sale had a stated base purchase price of $68.0 million, including $60.5 million cash and $7.5 million of subordinated seller notes. After adjustments and sale expenses, Pioneer reported net proceeds of $48.5 million; the notes’ carrying value at quarter-end was $6.6 million. Proceeds were used in part to repay all bank credit facilities, which were terminated at closing.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Continuing revenue | $5.57 | $4.57 | $13.95 | $14.69 |
| Gross profit | $0.26 | $0.60 | $1.03 | $1.92 |
| Gross margin | 4.6% | 13.1% | 7.4% | 13.0% |
| Operating loss | $(3.59) | $(1.17) | $(6.58) | $(3.87) |
| Net loss from continuing operations | $(3.25) | $(1.40) | $(3.07) | $(4.37) |
| Income from discontinued operations, net | $10.24 | $1.46 | $11.69 | $3.06 |
| Net income (loss) | $6.99 | $0.06 | $8.62 | $(1.31) |
Q3 continuing revenue rose 21.9%, driven by switchgear shipments, while nine-month revenue fell 5.0%. Q3 switchgear revenue increased 103.8% year over year; Critical Power revenue decreased 9.7%, including lower equipment and service sales. Gross margin contracted sharply; management cited higher costs, with T&D’s nine-month margin also pressured by manufacturing costs and Critical Power’s margins by higher costs.
Operating expenses rose: Q3 SG&A was $3.79 million versus $1.40 million, attributed mainly to one-time executive bonuses and litigation costs. Nine-month SG&A was $7.43 million versus $4.62 million, with higher wages and litigation costs cited. Q3 other expense included a $1.9 million mark-to-market loss on CleanSpark shares and warrants received in the earlier Pioneer Critical Power transaction; the nine-month loss was $2.2 million. Discontinued-operations income included a $17.21 million transformer-sale gain, partly offset by losses from the sold businesses and tax expense. Nine-month continuing results also included a $4.21 million gain on the earlier Pioneer Critical Power transaction.
Cash flow, balance sheet and liquidity
- Cash and cash equivalents were $13.51 million at September 30, 2019, compared with $0.20 million at December 31, 2018; short-term investments were $2.03 million.
- Working capital was $2.7 million, versus a $5.5 million deficit at year-end 2018. Total assets were $40.0 million and stockholders’ equity was $14.5 million.
- No debt remained at quarter-end. Nine-month operating cash flow was negative $2.04 million; investing cash flow was positive $41.78 million, primarily from the divestiture; financing cash flow was negative $26.46 million, primarily reflecting debt repayment.
- Management said cash, excluding the declared dividend payable, was expected to fund ongoing operations for at least 12 months from the report’s issuance. The former credit arrangements were terminated, and future dividends could require additional capital funding.
Outlook, risks and unusual items
- No specific forward financial guidance was provided. Management reported no major capital projects planned for the rest of 2019.
- A $1.37-per-share special dividend, approximately $12.0 million in aggregate, was declared in September but enjoined by a court order on October 4 in the Myers Power Products litigation. The company said the dividend was cancelled in Q4; the order remained in place as of the filing, and the company was contesting it.
- The Myers Power Products case, alleging misuse of confidential business information, sought injunctive relief and unspecified damages. Trial was scheduled for Q1 2020. The company had recorded approximately $1.2 million for expected litigation costs, and the dispute also prevented a sale of PCEP. The filing described uncertainty about the litigation outcome.
- A June 2019 flood damaged inventory at the Reynosa facility. The company estimated $2.4 million of insurance proceeds, had received $0.6 million by quarter-end, and recorded a $1.8 million receivable; estimates may differ from actual recoveries. It also recorded a reserve after determining collection of $2.3 million due from a former Asian manufacturing partner was substantially doubtful.
- Management cited risks including reduced scale and revenue sources after the transformer sale, competition, cost and supply pressures, backlog conversion, key-person dependence, litigation, and possible Nasdaq delisting.
- Backlog at September 30 was $12.55 million, compared with $21.15 million of continuing-business backlog a year earlier; comparisons are affected by the transformer divestiture.
Key facts for investors to verify
- Whether the remaining switchgear and Critical Power businesses can improve margins and operating cash flow.
- Resolution and potential financial impact of the Myers Power Products litigation, including the dividend injunction and its effect on PCEP.
- Collection, valuation and any set-offs or indemnification claims affecting the $6.6 million carrying value of seller notes.
- Actual flood insurance recovery and collection of the amount due from the former manufacturing partner.
- Liquidity after the divestiture, given negative operating cash flow, the terminated credit facilities and the company’s dividend and funding plans.