Pioneer Power Solutions, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Financial statements are unaudited. Unless otherwise noted, amounts below are in millions of U.S. dollars.
Business context
Pioneer manufactures, sells and services electrical transformers, switchgear and on-site power generation equipment. It reports two segments: Transmission and Distribution Solutions (T&D) and Critical Power Solutions. Its operations span the U.S., Canada and Mexico.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $29.4 | $24.9 | $85.9 | $80.3 |
| Gross profit / margin | $6.5 / 22.2% | $5.0 / 20.2% | $18.9 / 22.0% | $15.7 / 19.5% |
| Operating income (loss) | $1.2 | ($3.3) | $3.7 | ($4.1) |
| Net income (loss) | $0.3 | ($3.6) | $1.1 | ($4.6) |
| Diluted earnings (loss) per share | $0.04 | ($0.48) | $0.12 | ($0.62) |
- Revenue increased 17.9% in Q3 and 7.0% for the nine-month period. T&D revenue grew 33.3% in Q3 and 13.3% year to date, while Critical Power revenue declined 31.9% and 17.7%, respectively.
- T&D gross margin improved on product mix, including more higher-margin switchgear and, year to date, lower-cost sourcing of standard transformer products. Critical Power’s Q3 margin rose with a shift toward service revenue, but its nine-month margin declined.
- Operating results improved substantially from 2015, when Q3 included $3.4 million of restructuring, integration and impairment charges. 2016 operating expenses also benefited from restructuring-related cost reductions.
- Interest expense rose to $0.6 million in Q3 and $1.2 million year to date, principally because of higher average borrowings and short-term financing. Nine-month tax expense was $0.9 million, producing a 45.3% effective rate; management cited tax-return true-ups and the U.S. tax impact of intercompany loans, among other factors.
Cash flow, liquidity and debt
- Cash used in operating activities was $8.9 million for the first nine months, versus $3.1 million a year earlier. Working capital used approximately $12.5 million, mainly reflecting increases in receivables and inventory.
- Investing activities used $0.5 million, primarily for capital expenditures. Financing activities provided $9.6 million. Cash at September 30 was $0.8 million.
- Working capital was $6.4 million, compared with negative working capital of $3.4 million at year-end 2015; the current ratio improved to 1.2 from 0.9. Unused revolving capacity was reported at $2.8 million, subject to facility restrictions and covenants.
- Total debt and borrowings, including overdrafts and short-term borrowings, were reported in MD&A at $27.7 million. The balance sheet showed $16.3 million drawn on revolving credit facilities, $4.9 million in short-term borrowings, and $5.5 million of term debt and lease obligations. The company passed its financial covenant tests at September 30.
- Amended credit agreements entered in April 2016 waived certain prior covenant defaults and extended the Canadian and U.S. revolving facility maturities to July 31, 2017. Management said working capital, available credit and operating funds should cover anticipated needs and debt principal payments for at least 12 months.
Changes, outlook and risks
- Backlog was $41.5 million at September 30, up from $28.7 million at December 31, 2015. T&D backlog increased to $36.7 million; Critical Power backlog was $4.8 million. The company cautioned that backlog may vary and is not a guarantee of future revenue.
- Management expected restructuring actions to deliver at least $2.5 million of annual fixed-cost savings when completed. The company reported no formal revenue or earnings guidance.
- Restructuring and integration charges were $0.2 million in the first nine months of 2016; $0.3 million remained accrued at September 30 and was expected to be paid within 12 months. The 2015 plan included consolidating six manufacturing facilities into three and reducing headcount.
- On October 24, 2016, the IRS abated $1.2 million of previously accrued payroll-tax penalties for certain subsidiaries; penalties for Pioneer Critical Power remained under review. Approximately $72,000 of penalty and related interest remained. Delinquent payroll-tax obligations were still outstanding.
- Material weaknesses in internal control over financial reporting remained unresolved, and management concluded disclosure controls were ineffective. Remediation included outsourced payroll processing, accounting hires and additional training and review procedures. The filing also reports expense-classification reclassifications and continued control remediation.
- Key disclosed risks include dependence on major customers Hydro-Quebec and Siemens, debt and covenant constraints, working-capital demands, foreign-exchange exposure, raw-material costs, competition, acquisition integration and reliance on key personnel. The chairman controlled a majority of voting stock. Management reported no material litigation and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether operating cash flow and working-capital trends improve, especially the substantial inventory and receivables build.
- Available borrowing capacity, covenant headroom and the company’s ability to refinance or repay facilities maturing in July 2017.
- Progress in resolving material control weaknesses and the accuracy and comparability of reported expense classifications.
- Whether T&D backlog converts to revenue and whether Critical Power customer delays and lower equipment sales reverse.
- Final IRS treatment of remaining payroll-tax penalties and the timing and amount of all delinquent tax payments.