UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2017
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number: 001-35212
PIONEER POWER SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 27-1347616 | |
| (State of incorporation) | (I.R.S. Employer Identification No.) |
400 Kelby Street, 12th Floor
Fort Lee, New Jersey 07024
(Address of principal executive offices)
(212) 867-0700
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| Non-accelerated filer | ☐ | (Do not check if a smaller reporting company) | |
| Smaller reporting company | ☒ | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares outstanding of the registrant’s common stock, $0.001 par value, as of November 13, 2017 was 8,726,045.
PIONEER POWER SOLUTIONS, INC.
Form 10-Q
For the Quarter Ended September 30, 2017
TABLE OF CONTENTS
PART I – FINANCIAL INFORMATION
PIONEER POWER SOLUTIONS, INC.
Consolidated Statements of (Loss) Income
(In thousands, except per share data)
(Unaudited)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Revenues | $ | 29,794 | $ | 29,389 | $ | 87,953 | $ | 85,889 | ||||||||
| Cost of goods sold | ||||||||||||||||
| Cost of goods sold | 23,475 | 22,872 | 69,547 | 67,248 | ||||||||||||
| Restructuring and integration | 873 | — | 873 | — | ||||||||||||
| Total cost of goods sold | 24,348 | 22,872 | 70,420 | 67,248 | ||||||||||||
| Gross profit | 5,446 | 6,517 | 17,533 | 18,641 | ||||||||||||
| Operating expenses | ||||||||||||||||
| Selling, general and administrative | 5,041 | 5,338 | 14,455 | 14,894 | ||||||||||||
| Restructuring and integration | — | 19 | 160 | 199 | ||||||||||||
| Foreign exchange gain | (194 | ) | (52 | ) | (465 | ) | (142 | ) | ||||||||
| Total operating expenses | 4 ,847 | 5,305 | 14,150 | 14,951 | ||||||||||||
| Operating Income | 599 | 1,212 | 3,383 | 3,690 | ||||||||||||
| Interest expense | 588 | 556 | 1,662 | 1,151 | ||||||||||||
| Other expense | 245 | 264 | 647 | 554 | ||||||||||||
| (Loss) / income before taxes | (234 | ) | 392 | 1,074 | 1,985 | |||||||||||
| Income tax expense | 530 | 70 | 396 | 900 | ||||||||||||
| Net (loss) / income | $ | (764 | ) | $ | 322 | $ | 678 | $ | 1,085 | |||||||
| Net (loss) / income per common share: | ||||||||||||||||
| Basic | $ | (0.09 | ) | $ | 0.04 | $ | 0.08 | $ | 0.12 | |||||||
| Diluted | $ | (0.09 | ) | $ | 0.04 | $ | 0.08 | $ | 0.12 | |||||||
| Weighted average common shares outstanding: | ||||||||||||||||
| Basic | 8,725 | 8,700 | 8,713 | 8,700 | ||||||||||||
| Diluted | 8,725 | 8,708 | 8,727 | 8,708 | ||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
1
PIONEER POWER SOLUTIONS, INC.
Consolidated Statements of Comprehensive (Loss) Income
(In thousands)
(Unaudited)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Net (loss) / income | $ | (764 | ) | $ | 322 | $ | 678 | $ | 1,085 | |||||||
| Other comprehensive (loss) / income | ||||||||||||||||
| Foreign currency translation adjustments | — | (147 | ) | 68 | 445 | |||||||||||
| Amortization of net prior service costs and net actuarial gains / (losses), net of tax | (42 | ) | 32 | (15 | ) | (109 | ) | |||||||||
| Other comprehensive (loss) / income | (42 | ) | (115 | ) | 53 | 336 | ||||||||||
| Comprehensive (loss) / income | $ | (806 | ) | $ | 207 | $ | 731 | $ | 1,421 | |||||||
The accompanying notes are an integral part of these consolidated financial statements.
2
PIONEER POWER SOLUTIONS, INC.
(In thousands, except share data)
| September 30, | December 31, | |||||||
| 2017 | 2016 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | 950 | $ | 246 | ||||
| Accounts receivable, net | 19,255 | 17,508 | ||||||
| Inventories, net | 28,324 | 26,147 | ||||||
| Income taxes receivable | 546 | 72 | ||||||
| Prepaid expenses and other current assets | 2,765 | 2,215 | ||||||
| Total current assets | 51,840 | 46,188 | ||||||
| Property, plant and equipment, net | 7,025 | 6,591 | ||||||
| Deferred income taxes | 5,913 | 5,659 | ||||||
| Other assets | 216 | 830 | ||||||
| Intangible assets, net | 6,783 | 8,168 | ||||||
| Goodwill | 9,972 | 9,972 | ||||||
| Total assets | $ | 81,749 | $ | 77,408 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities | ||||||||
| Bank overdrafts | $ | 1,386 | $ | 1,200 | ||||
| Revolving credit facilities | 20,197 | 17,689 | ||||||
| Short term borrowings | 5,339 | 3,973 | ||||||
| Accounts payable and accrued liabilities | 18,205 | 18,139 | ||||||
| Current maturities of long-term debt | 4,926 | 1,379 | ||||||
| Income taxes payable | 1,619 | 1,360 | ||||||
| Total current liabilities | 51,672 | 43,740 | ||||||
| Long-term debt, net of current maturities | — | 4,005 | ||||||
| Pension deficit | 173 | 172 | ||||||
| Other long-term liabilities | 582 | 892 | ||||||
| Noncurrent deferred income taxes | 1,954 | 2,400 | ||||||
| Total liabilities | 54,381 | 51,209 | ||||||
| Stockholders’ equity | ||||||||
| Preferred stock, $0.001 par value, 5,000,000 shares authorized; none issued | — | — | ||||||
| Common stock, $0.001 par value, 30,000,000 shares authorized; 8,726,045 shares issued and outstanding on September 30, 2017 and 8,699,712 shares issued and outstanding on December 31, 2016 | 9 | 9 | ||||||
| Additional paid-in capital | 23,653 | 23,215 | ||||||
| Accumulated other comprehensive loss | (5,810 | ) | (5,863 | ) | ||||
| Retained earnings | 9,516 | 8,838 | ||||||
| Total stockholders’ equity | 27,368 | 26,199 | ||||||
| Total liabilities and stockholders’ equity | $ | 81,749 | $ | 77,408 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
3
PIONEER POWER SOLUTIONS, INC.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
| Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2017 | 2016 | |||||||
| Operating activities | ||||||||
| Net income | $ | 678 | $ | 1,085 | ||||
| Depreciation | 956 | 1,006 | ||||||
| Amortization of intangible assets | 1,390 | 1,309 | ||||||
| Amortization of debt issuance cost | 185 | 153 | ||||||
| Deferred income taxes | (689 | ) | 206 | |||||
| Change in receivable reserves | 53 | 250 | ||||||
| Change in inventory reserves | 38 | (435 | ) | |||||
| Accrued pension | (24 | ) | (68 | ) | ||||
| Stock-based compensation | 319 | 34 | ||||||
| (Gain) / loss on disposition of fixed assets | (5 | ) | 77 | |||||
| Foreign currency remeasurement (gain) / loss | (40 | ) | 2 | |||||
| Changes in current operating assets and liabilities: | ||||||||
| Accounts receivable | (1,434 | ) | (4,188 | ) | ||||
| Inventories | (1,678 | ) | (8,455 | ) | ||||
| Prepaid expenses and other assets | 76 | (378 | ) | |||||
| Income taxes | (289 | ) | 890 | |||||
| Accounts payable and accrued liabilities | (9 | ) | (348 | ) | ||||
| Net cash used in operating activities | (473 | ) | (8,860 | ) | ||||
| Investing activities | ||||||||
| Additions to property, plant and equipment | (1,245 | ) | (476 | ) | ||||
| Proceeds from sale of fixed assets | 20 | 7 | ||||||
| Net cash used in investing activities | (1,225 | ) | (469 | ) | ||||
| Financing activities | ||||||||
| Increase / (decrease) in bank overdrafts | 162 | (922 | ) | |||||
| Increase / (decrease) of short term borrowings | 1,365 | 4,919 | ||||||
| Borrowings under debt agreement | 31,919 | 30,413 | ||||||
| Repayment of debt | (30,465 | ) | (24,564 | ) | ||||
| Payment of debt issuance costs | (157 | ) | (226 | ) | ||||
| Proceeds from the exercise of options for common stock | 120 | — | ||||||
| Net cash provided by financing activities | 2,944 | 9,620 | ||||||
| Increase in cash and cash equivalents | 1,246 | 291 | ||||||
| Effect of foreign exchange on cash and cash equivalents | (542 | ) | (102 | ) | ||||
| Cash and cash equivalents | ||||||||
| Beginning of period | 246 | 648 | ||||||
| End of period | $ | 950 | $ | 837 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
4
PIONEER POWER SOLUTIONS, INC.
Notes to Consolidated Financial Statements
September 30, 2017 (unaudited)
Overview
Pioneer Power Solutions, Inc. and its wholly-owned subsidiaries (referred to herein as the “Company,” “Pioneer,” “we,” “our” and “us”) manufacture, sell and service a broad range of specialty electrical transmission, distribution and on-site power generation equipment for applications in the utility, industrial, commercial and backup power markets. The Company is headquartered in Fort Lee, New Jersey and operates from thirteen additional locations in the U.S., Canada and Mexico for manufacturing, centralized distribution, engineering, sales and administration.
We have two reportable segments as defined in our Annual Report on Form 10-K for the year ended December 31, 2016, as filed with the Securities and Exchange Commission (the “SEC”) on March 29, 2017: Transmission and Distribution Solutions (“T&D Solutions”) and Critical Power Solutions (“Critical Power”).
Presentation
The accompanying unaudited consolidated financial statements of the Company have been prepared pursuant to the rules of the SEC and reflect the accounts of the Company as of September 30, 2017. Certain information and footnote disclosures, normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”), have been condensed or omitted pursuant to those rules and regulations. We believe that the disclosures made are adequate to make the information presented not misleading to the reader. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to fairly state the financial position, results of operations and cash flows with respect to the interim consolidated financial statements have been included. The results of operations for the interim period are not necessarily indicative of the results for the entire fiscal year. The year-end balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP for a year-end balance sheet.
All dollar amounts (except share and per share data) presented in the notes to our unaudited consolidated financial statements are stated in thousands of dollars, unless otherwise noted. Amounts may not foot due to rounding.
These unaudited consolidated financial statements include the accounts of Pioneer and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. As further described in the two paragraphs below, certain prior year amounts have been reclassified to conform to the current year presentation.
As the Company continues to implement the remediation plans discussed under the heading “Part I – Item 4. Controls and Procedures” of this Quarterly Report on Form 10-Q, the Company has determined that there were inconsistencies in classification of expenses between its business units in the reporting periods prior to December 31, 2016. As a result, the company reclassified certain expenses from operating expenses to cost of goods sold for the year ended December 31, 2016, as previously disclosed in the Annual Report on Form 10-K filed with the SEC on March 29, 2017, and for the three and nine months ended September 30, 2016, resulting in a decrease to gross profit of $18, or negative 0.06% as a percentage of sales for the three months ended September 30, 2016 and, resulting in a decrease to gross profit of $262, or negative 0.30% as a percentage of sales for the nine months ended September 30, 2016, respectively.
These unaudited consolidated financial statements should be read in conjunction with the risk factors and the audited consolidated financial statements and notes thereto of the Company and its subsidiaries included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company’s significant accounting policies are described in Note 2 to the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. There have been no significant changes in the Company’s accounting policies during the third quarter of 2017.
Recent Accounting Pronouncements
Revenue from Contracts with Customers. In May 2014, the FASB issued Accounting Standards Update No. 2014-09 (“ASU 2014-09”), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP.
5
In July 2015, the FASB made a decision to defer the effective date of the new standard for one year and permit early adoption as of the original effective date. The Company is currently reviewing its various revenue streams from its two reportable segments: (i) T&D Solutions and (ii) Critical Power. Concurrently, through the use of various data gathering methods, we are categorizing the types of sales for our business units for the purpose of comparing how we currently recognize revenue and quantifying the impact, if any, that this new standard will have on our consolidated financial statements. The Company plans to elect to apply the modified retrospective approach upon adoption. Additionally, the new guidance requires enhanced disclosures about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts, including revenue recognition policies to identify performance obligations, assets recognized from costs incurred to obtain and fulfill a contract, and significant judgments in measurement and recognition. The Company is determining the impact of adopting Topic 606 on its revenue recognition policies, procedures and control framework and the resulting impact on its consolidated financial position, results of operation and cash flows. The Company is in the process of reviewing revenue sources and evaluating the customer population to determine the appropriate distribution of customer accounts into populations with similar contract terms and performance obligations. We expect to complete this process before the filing of our Form 10-K for the year ended December 31, 2017.
Simplifying the Measurement of Inventory. In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. This standard amends Topic 330, Inventory, which currently requires an entity to measure inventory at the lower of cost or market. Market could be replacement cost, net realizable value, or net realizable value less an approximately normal profit margin. When this standard is adopted, an entity should measure in scope inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The amendments are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The Company adopted ASU No. 2015-11 in 2017 and has reflected the impact in the current year’s consolidated financial statements.
Leases. In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires, among other things, a lessee to recognize a liability representing future lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. For operating leases, a lessee will be required to recognize at inception a right-of-use asset and a lease liability equal to the net present value of the lease payments, with lease expense recognized over the lease term on a straight-line basis. For leases with a term of twelve months or less, ASU 2016-02 allows a reporting entity to make an accounting policy election to not recognize a right-of-use asset and a lease liability, and to recognize lease expense on a straight-line basis. ASU No. 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. Upon adoption, a reporting entity should apply the provisions of ASU 2016-02 at the beginning of the earliest period presented using a modified retrospective approach, which includes certain optional practical expedients that an entity may elect to apply. The Company is evaluating the potential impact of adopting ASU 2016-02 on its consolidated financial statements. It is expected that upon adoption we will show a significant increase in assets and corresponding liabilities.
Share-Based Compensation. In April 2016, the FASB issued ASU No. 2016-09, “Compensation-Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting”. Under ASU No. 2016-09, companies will no longer record excess tax benefits and certain tax deficiencies in additional paid-in capital (“APIC”). Instead, they will record all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement and the APIC pools will be eliminated. In addition, ASU No. 2016-09 eliminates the requirement that excess tax benefits be realized before companies can recognize them. ASU No. 2016-09 also requires companies to present excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity. Furthermore, ASU No. 2016-09 will increase the amount an employer can withhold to cover income taxes on awards and still qualify for the exception to liability classification for shares used to satisfy the employer’s statutory income tax withholding obligation. An employer with a statutory income tax withholding obligation will now be allowed to withhold shares with a fair value up to the amount of taxes owed using the maximum statutory tax rate in the employee’s applicable jurisdiction(s). ASU No. 2016-09 requires a company to classify the cash paid to a tax authority when shares are withheld to satisfy its statutory income tax withholding obligation as a financing activity on the statement of cash flows. Under current GAAP, it was not specified how these cash flows should be classified. In addition, companies will now have to elect whether to account for forfeitures on share-based payments by (1) recognizing forfeitures of awards as they occur or (2) estimating the number of awards expected to be forfeited and adjusting the estimate when it is likely to change, as is currently required. The Amendments of this ASU are effective for reporting periods beginning after December 15, 2016, with early adoption permitted but all of the guidance must be adopted in the same period. The Company adopted ASU No. 2016-09 in 2017. The adoption of the new guidance did not materially affect the Company’s financial position, results of operations or cash flows.
Statement of Cash Flows. In August 2016, the FASB issued ASC Update No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The purpose of Update No. 2016-15 is to reduce the diversity in practice in presentation and classification of the following items within the statement of cash flows: debt prepayments or debt extinguishment costs, settlement of zero coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, distributions received from equity method investments and beneficial interests in securitization transactions. It also addresses classification of transactions that have characteristics of more than one class of cash flows. Update No. 2016-15 is effective for annual periods beginning after December 15, 2017, and a retrospective transition method is required. We do not expect the adoption to have a material impact on our consolidated statements of cash flows for 2016 or 2017.
6
Simplifying the Test for Goodwill Impairment. In January 2017, the FASB issued ASU No. 2017-04, “Simplifying the Test for Goodwill Impairment.” This standard was established to simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Under the amendments in this Update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The FASB also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. Therefore, the same impairment assessment applies to all reporting units. An entity is required to disclose the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The company will early adopt this standard during the fourth quarter of 2017 in conjunction with our goodwill impairment assessment.
3. OTHER EXPENSE
Other expense in the consolidated statements of income for the three and nine months ended September 30, 2017 and 2016, respectively, are as follows:
| Three Months Ended | Nine Months Ending | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Payroll tax interest and penalties accrued | $ | 40 | $ | 68 | $ | 28 | $ | 23 | ||||||||
| Other non-operating expenses | 205 | 196 | 619 | 531 | ||||||||||||
| Other expense | $ | 245 | $ | 264 | $ | 647 | $ | 554 | ||||||||
The Company continues to record interest on past due and unpaid payroll tax obligations. During the nine months ended September 30, 2017 and 2016, the Company received waivers of certain interest and penalties on these obligations totaling $0.1 million and $0.4 million, respectively.
4. INVENTORIES
The components of inventories are summarized below:
| September 30, | ||||||||
|
2017
(Unaudited) |
December 31,
2016 |
|||||||
| Raw materials | $ | 10,116 | $ | 10,175 | ||||
| Work in process | 7,453 | 6,535 | ||||||
| Finished goods | 11,152 | 9,826 | ||||||
| Provision for excess and obsolete inventory | (397 | ) | (389 | ) | ||||
| Total inventories | $ | 28,324 | $ | 26,147 | ||||
Included in raw materials and finished goods at September 30, 2017 and December 31, 2016 are goods in transit of approximately $3.1 million.
At September 30, 2017 and December 31, 2016, raw materials not pledged to our secured creditor were used as collateral to secure short term borrowings under a product financing agreement amounting to $5.3 million and $4.0 million, respectively.
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5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are summarized below:
| September | ||||||||
|
2017 (Unaudited) |
December 31,
2016 |
|||||||
| Land | $ | 50 | $ | 46 | ||||
| Buildings | 2,467 | 2,293 | ||||||
| Machinery and equipment | 10,656 | 9,421 | ||||||
| Furniture and fixtures | 476 | 466 | ||||||
| Computer hardware and software | 1,364 | 1,289 | ||||||
| Leasehold improvements | 715 | 534 | ||||||
| Construction in progress | 18 | 18 | ||||||
| 15,746 | 14,067 | |||||||
| Less: Accumulated depreciation | (8,721 | ) | (7,476 | ) | ||||
| Total property, plant and equipment, net | $ | 7,025 | $ | 6,591 | ||||
Depreciation expense was $1.0 million in the nine months ended September 30, 2017 and 2016.
6. OTHER ASSETS
In December 2011 and January 2012, the Company made two loans, each in the amount of $0.3 million to a developer of a renewable energy project in the U.S. The promissory notes accrue interest at a rate of 4.5% per annum with a final payment of all unpaid principal and interest becoming fully due and payable upon the earlier to occur of (i) the four year anniversary of the issuance date of the promissory notes, or (ii) an event of default. As defined in the promissory notes, an event of default includes, but is not limited to, the following: any bankruptcy, reorganization or similar proceeding involving the borrower, a sale or transfer of substantially all the assets of the borrower, a default by the borrower relating to any indebtedness due to third parties, the incurrence of additional indebtedness by the borrower without the Company’s written consent and failure of the borrower to perform its obligations pursuant to its other agreements with the Company, including its purchase order for pad mount transformers. The principal balance of the loan receivable is outstanding at September 30, 2017 and December 31, 2016. The Company expects to fully recover these amounts. At September 30, 2017, the Company has classified the principal of $0.6 million to other current assets as the Company anticipates the settlement of both notes in the next twelve months based upon negotiations with the debtor.
Included in Other Assets at September 30, 2017 and December 31, 2016 is a customer note receivable of $0.2 million.
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7. GOODWILL AND OTHER INTANGIBLE ASSETS
There were no changes in the carrying values of goodwill for the nine months ended September 30, 2017.
|
T&D
Solutions Segment |
Critical Power
Solutions Segment |
Total
Goodwill |
||||||||||
| Gross Goodwill: | ||||||||||||
| Balance as of January 1, 2017 | $ | 7,978 | $ | 2,970 | $ | 10,948 | ||||||
| No activity | — | — | — | |||||||||
| Balance as of September 30, 2017 | $ | 7,978 | $ | 2,970 | $ | 10,948 | ||||||
| Accumulated impairment losses: | ||||||||||||
| Balance as of January 1, 2017 | $ | (976 | ) | $ | — | $ | (976 | ) | ||||
| No activity | — | — | — | |||||||||
| Balance as of September 30, 2017 | $ | (976 | ) | $ | — | $ | (976 | ) | ||||
| Net Goodwill as of September 30, 2017 | $ | 7,002 | $ | 2,970 | $ | 9,972 | ||||||
Changes in the carrying values of intangible assets for the nine months ended September 30, 2017, were as follows:
|
T&D
Solutions Segment |
Critical Power
Solutions Segment |
Total
Intangible Assets |
||||||||||
| Balance as of January 1, 2017 | 5,565 | 2,603 | 8,168 | |||||||||
| Amortization | (312 | ) | (1,078 | ) | (1,390 | ) | ||||||
| Foreign currency translation | 5 | — | 5 | |||||||||
| Balance as of September 30, 2017 | $ | 5,258 | $ | 1,525 | $ | 6,783 | ||||||
The components of intangible assets as of September 30, 2017 are summarized below:
| Weighted Average Amortization Years | Gross Carrying Amount | Accumulated Amortization | Foreign Currency Translation | Net Book Value | ||||||||||||||||
| Customer relationships | 7 | $ | 7,201 | $ | (4,571 | ) | $ | — | $ | 2,630 | ||||||||||
| Non-compete agreements | 6 | 705 | (459 | ) | — | 246 | ||||||||||||||
| Trademarks | Indefinite | 1,816 | — | — | 1,816 | |||||||||||||||
| Distributor territory license | 4 | 474 | (474 | ) | — | — | ||||||||||||||
| Internally developed software | 7 | 289 | (114 | ) | — | 175 | ||||||||||||||
| Developed technology | 10 | 492 | (135 | ) | — | 357 | ||||||||||||||
| Technology-related industry accreditations | Indefinite | 1,575 | — | (16 | ) | 1,559 | ||||||||||||||
| Total intangible assets | $ | 12,552 | $ | (5,753 | ) | $ | (16 | ) | $ | 6,783 | ||||||||||
The Company accelerated and fully amortized the distributor territory license intangible asset upon the termination of its distribution agreement with a supplier during the quarter ended September 30, 2017.
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8. DEBT
Canadian Credit Facilities
Our Canadian subsidiaries have maintained credit facilities with BMO since October 2009. In June 2011, our wholly owned subsidiary Pioneer Electrogroup Canada Inc. entered into a letter loan agreement with BMO (the “Initial Canadian Facilities”) that replaced and superseded all of our businesses’ prior financing arrangements with the bank.
Our Initial Canadian Facilities originally provided for up to $22.0 million Canadian dollars (“CAD”) (approximately $15.9 million expressed in U.S. dollars) consisting of a $10.0 million CAD demand revolving credit facility (“Facility A”) to finance ongoing operations, a $2.0 million CAD term credit facility (“Facility B”) that financed a plant expansion, and a $10.0 million CAD term credit facility (“Facility C”) that financed a business acquisition and the purchase and expansion of its manufacturing facilities.
The Initial Canadian Facilities required us to comply on a consolidated Canadian basis with various financial covenants, including maintaining a minimum fixed charge coverage ratio, a maximum funded debt to EBITDA ratio and a limitation on funded debt as a percent of capitalization.
Facility A was originally subject to margin criteria and borrowings bore interest at BMO’s prime rate plus 0.50% per annum on amounts borrowed in Canadian dollars, or its U.S. base rate plus 0.50% per annum or LIBOR plus 2.00% per annum on amounts borrowed in U.S. dollars.
Borrowings under Facility B originally bore interest at BMO’s prime rate plus 1.00% per annum with principal repayments becoming due on a five year amortization schedule.
Borrowings under Facility C were repayable according to a five year principal amortization schedule and bore interest at the following rates: if the funded debt to EBITDA ratio is equal to or greater than 2.00, BMO’s prime rate plus 1.25% per annum on amounts borrowed in Canadian dollars, or its U.S. base rate plus 1.25% per annum or LIBOR plus 2.50% per annum on amounts borrowed in U.S. dollars; or, if the funded debt to EBITDA ratio is less than 2.00, BMO’s prime rate plus 1.00% per annum on amounts borrowed in Canadian dollars, or its U.S. base rate plus 1.00% per annum or LIBOR plus 2.25% per annum on amounts borrowed in U.S. dollars. In addition, Facility C was subject to a standby fee which is calculated monthly using the unused portion of the facility at either 0.625% per annum if the funded debt to EBITDA ratio is equal to or greater than 2.00 or 0.5625% per annum if the funded debt to EBITDA ratio is less than 2.00.
In the third quarter of 2015, in connection with an amendment to our United States credit facilities, we elected to prepay $5.0 million Canadian dollars (approximately $4.0 million expressed in U.S. dollars) of Facility C with cash available on hand.
In April 2016, our wholly owned subsidiary, Pioneer Electrogroup Canada Inc. (“PECI”), entered into an Amended and Restated Credit Agreement (“CAD ARCA”) with BMO with respect to our existing Canadian credit facilities (as amended and restated, the “Canadian Facilities”) that replaced and superseded all of our businesses’ prior financing arrangements with the bank. This CAD ARCA extended the maturity date of our Canadian Facilities to July 31, 2017. Additionally, defaults relating to the breach of certain financial covenants under the prior financing arrangements with the bank were waived by BMO. On March 15, 2017, the CAD ARCA was further amended (the “2017 CAD ARCA Amendment”).
Our Canadian Facilities provided for up to $8.2 million CAD (approximately $6.3 million expressed in U.S. dollars) consisting of a revolving $7.0 million CAD Facility A to finance ongoing operations, a $0.5 million CAD Facility B that financed a plant expansion, and a $0.7 million USD Facility C that financed a business acquisition and the purchase and expansion of its manufacturing facilities. The 2017 CAD ARCA Amendment increased the Facility A to $8.0 million CAD, increasing the total amount of loans available under the Canadian Facilities to $9.1 million CAD.
Facility A, as amended and restated, is subject to margin criteria and borrowings bear interest at BMO’s prime rate plus 0.75% per annum on amounts borrowed in Canadian dollars, or its U.S. base rate plus 0.75% per annum or LIBOR plus 2.25% per annum on amounts borrowed in U.S. dollars. Pursuant to the 2017 CAD ARCA Amendment, Facility A will mature on July 31, 2018.
Borrowings under Facility B, as amended and restated, bear interest at BMO’s prime rate plus 1.25% per annum with principal repayments becoming due on a five year amortization schedule. Pursuant to the CAD ARCA, quarterly principal repayments were reduced to $47 CAD, with a balloon payment of $141 CAD due on July 31, 2017. The 2017 CAD ARCA Amendment amended the payment schedules so that the quarterly principal payments of $47 CAD will continue after July 31, 2017 until our borrowings under the facility is fully paid on April 30, 2018.
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Borrowings under Facility C, as amended and restated, bear interest at BMO’s prime rate plus 1.50% per annum on amounts borrowed in Canadian dollars, or its U.S. base rate plus 1.50% per annum or LIBOR plus 2.75% per annum on amounts borrowed in U.S. dollars. Pursuant to the CAD ARCA, a principal repayment of $72 USD was due on June 30, 2016, and the reduced quarterly principal repayments of $36 USD was to be made beginning on October 31, 2016, with a balloon payment of $496 USD due on July 31, 2017. The 2017 CAD ARCA Amendment amended the payment schedules so that the quarterly payments of $36 USD will continue until July 31, 2018, with a balloon payment of $352 due on July 31, 2018.
The CAD ARCA modified financial covenant testing so that testing will be performed on our consolidated financial statements. The financial covenants were changed pursuant to the CAD 2017 Amendment to require certain minimum working capital ratios, minimum EBITDA levels and effective tangible net worth levels for each fiscal quarter, which were further modified by the 2017 CAD ARCA Amendment. On March 6, 2017, we received a waiver from BMO on a certain financial covenant as of December 31, 2016.
We are currently in the process of renegotiating the terms of our credit facilities with BMO. BMO has agreed to suspend testing of the current ratio covenant as of September 30, 2017, due to such ongoing negotiation. We are in compliance with all financial covenants not suspended and required to be tested at September 30, 2017. We anticipate renegotiating our credit facilities on terms that will allow the Company to meet its covenants prospectively.
As of September 30, 2017, we had approximately $6.8 million in U.S. dollar equivalents outstanding under our Canadian Credit Facilities. Our borrowings consisted of approximately $6.2 million outstanding under Facility A, $0.1 million outstanding under Facility B and $0.5 million outstanding under Facility C.
United States Credit Facilities
On December 2, 2014, our existing U.S. credit facilities (the “U.S. Facilities) were amended in order to provide a $5.0 million term loan facility that was used for the acquisition of Titan. The term loan facility had principal repayments becoming due on a five year amortization schedule.
The U.S. Facilities initially required us to comply with a two-step test of financial covenants. First, as measured on a consolidated basis, we were required to comply with a maximum funded debt to adjusted EBITDA ratio of (a) 3.15x for the quarter ended December 31, 2014 and the quarter ending March 31, 2015, (b) 3.25x for the quarter ending June 30, 2015, (c) 3.65x for the quarter ending September 30, 2015, and (d) 2.75x for the quarter ending December 31, 2015 and all testing periods thereafter. Secondly, if the funded debt to adjusted EBITDA tests above are met, and our fixed charge coverage ratio is at or above 1.10x for the quarter ended December 31, 2014, and at or above 1.25x for all testing periods thereafter, then no further compliance tests were required.
Alternatively, we could comply with the financial covenant requirements of the U.S. Facilities if our U.S. operations maintained a maximum funded debt to capitalization ratio and various minimum fixed charge coverage ratios and maximum funded debt to adjusted EBITDA ratios which were set at different thresholds by time period.
Borrowings under the demand revolving credit facility (USD Facility A) bore interest, at our option, at the bank’s prime rate plus 1.00% per annum on U.S. prime rate loans, or an adjusted LIBOR rate plus 2.25% per annum on Eurodollar loans. Borrowings under the term loan facility (USD Facility B) bore interest, at our option, at the bank’s prime rate plus 1.25% per annum on U.S. prime rate loans, or an adjusted LIBOR rate plus 2.50% per annum on Eurodollar loans.
In April 2016, we entered into an Amended and Restated Credit Agreement (“US ARCA”) with BMO with respect to our U.S. Facilities that replaced and superseded all of our businesses’ prior financing arrangements with the bank. Additionally, defaults relating to the breach of certain financial covenants under the prior financing arrangements with the bank were waived by BMO. On March 15, 2017, the US ARCA was further amended (the “2017 US ARCA Amendment”).
Our U.S. Facilities, as amended and restated, provided for up to $19.1 million consisting of a $14.0 million USD Facility A to finance ongoing operations, a $5.0 million USD Facility B that financed the acquisition of Titan, and a new $0.1 million revolving credit facility provided pursuant to a MasterCard is to be used to pay for and temporarily finance our day-to-day business expenses and for no other purpose. The 2017 US ARCA Amendment increased the USD Facility A to $15.0 million, increasing the total amount of loans available under the U.S. Facilities to $20.1 million USD.
USD Facility A continues to bear interest, at our option, at the bank’s prime rate plus 1.00% per annum on U.S. prime rate loans, or an adjusted LIBOR rate plus 2.25% per annum on Eurodollar loans. USD Facility A had a maturity date of July 31, 2017, which was extended to July 31, 2018 pursuant to the 2017 US ARCA Amendment.
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Borrowings under USD Facility B bear interest, at our option, at U.S. base rate plus 1.25% per annum on U.S. prime loans, or an adjusted LIBOR rate plus 2.50% per annum on Eurodollar loans. Pursuant to the US ARCA, our quarterly principal payments were reduced to $31 USD for calendar year 2016, with the original amortization schedule continuing to apply to all quarterly principal payments made after December 31, 2016, and the final maturity date of December 2, 2019. The 2017 US ARCA Amendment reduced the scheduled quarterly principal payments to $31 USD, commencing March 31, 2017, to continue until July 31, 2018, with a balloon payment of $4,438 on July 31, 2018.
The US ARCA modified financial covenant testing so that testing will be performed on our consolidated financial statements. The financial covenants were changed pursuant to the US ARCA to require certain minimum working capital ratios, minimum EBITDA levels and effective tangible net worth levels for each fiscal quarter, which were further modified by the 2017 US ARCA Amendment. On March 6, 2017, we received a waiver from BMO on a certain financial covenant as of December 31, 2016.
We are currently in the process of renegotiating the terms of our credit facilities with BMO. BMO has agreed to suspend testing of the current ratio covenant as of September 30, 2017 due to such ongoing negotiation. We are in compliance with all financial covenants not suspended and required to be tested at September 30, 2017. We anticipate renegotiating our credit facilities on terms that will allow the Company to meet its covenants prospectively.
Our obligations under the U.S. Facilities are guaranteed by all our wholly-owned U.S. subsidiaries. In addition, we and our wholly-owned U.S. subsidiaries granted a security interest in substantially all of our assets, including 65% of the shares of Pioneer Electrogroup Canada Inc. held by us, to secure our obligations for borrowed money under the U.S. Facilities. The U.S. Facilities also restrict our ability to incur indebtedness, create or incur liens, make investments, make distributions or dividends and enter into merger agreements for the sale of any or all our assets.
As of September 30, 2017, we had approximately $18.5 million outstanding under our U.S. Credit Facilities. Our borrowings consisted of approximately $14.0 million outstanding under USD Facility A, and $4.5 million outstanding under USD Facility B.
Nexus Promissory Note
On July 25, 2012, the Company’s Mexican subsidiary, Nexus Magneticos de Mexico, S. de R.L. de C.V. (“Nexus”), entered into a $1.7 million term loan agreement with GE CF Mexico, S.A. de C.V. (“GE Capital Mexico”). The term loan was payable in 60 consecutive monthly installments and bore interest, payable monthly, at a rate of 6.93% per annum. The obligations of Nexus under the term loan were secured by certain machinery and equipment located in Mexico and by a corporate guaranty by the Company. As of September 30, 2017 the balance of the note has been fully repaid, while at December 31, 2016 there was approximately $185 outstanding under the Nexus Promissory Note.
Long-term debt consists of the following:
| September 30, | ||||||||
|
2017
(Unaudited) |
December 31,
2016 |
|||||||
| Term credit facilities, net (a) | $ | 4,923 | $ | 5,194 | ||||
| Nexus promissory note | — | 185 | ||||||
| Capital lease obligations | 3 | 5 | ||||||
| Total debt | 4,926 | 5,384 | ||||||
| Less current portion | (4,926 | ) | (1,379 | ) | ||||
| Total long-term debt | $ | — | $ | 4,005 | ||||
(a) The balances as of September 30, 2017 and December 31, 2016 are net of debt issuance costs of $218 and $245, respectively.
9. PENSION PLAN
The Company’s Canadian subsidiary sponsors a defined benefit pension plan at one of its locations in which a majority of its employees are members. The subsidiary funds 100% of all contributions to the plan. The benefits, or the rate per year of credit service, are established by the Company and updated at its discretion.
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The components of the expense the Company incurred under the pension plan are as follows:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Current service cost, net of employee contributions | $ | 10 | $ | 10 | $ | 35 | $ | 33 | ||||||||
| Interest cost on accrued benefit obligation | 27 | 26 | 79 | 76 | ||||||||||||
| Expected return on plan assets | (44 | ) | (41 | ) | (128 | ) | (121 | ) | ||||||||
| Amortization of transitional obligation | 3 | 3 | 9 | 8 | ||||||||||||
| Amortization of past service costs | 2 | 3 | 6 | 8 | ||||||||||||
| Amortization of net actuarial gain | 12 | 10 | 36 | 28 | ||||||||||||
| Total cost of benefit | $ | 10 | $ | 11 | $ | 37 | $ | 32 | ||||||||
The Company’s policy is to fund the pension plan at or above the minimum level required by law. The Company made $56 and $86 of contributions to its defined benefit pension plan during the nine months ended September 30, 2017 and 2016, respectively. Changes in the discount rate and actual investment returns that are lower than the long-term expected return on plan assets could result in the Company making additional contributions. There were no changes during the current period.
10. STOCKHOLDERS’ EQUITY
Common Stock
The Company had 8,726,045 and 8,699,712 shares of common stock, $0.001 par value per share, outstanding as of September 30, 2017 and December 31, 2016, respectively.
Warrants
As of September 30, 2017 and December 31, 2016, the Company had warrants outstanding to purchase 50,600 shares of common stock with a weighted average exercise price of $7.00 per share. The warrants expire on September 18, 2018. No warrants were exercised during the nine months ended September 30, 2017.
Stock-Based Compensation
A summary of stock option activity under the 2011 Long-Term Incentive Plan as of September 30, 2017, and changes during the nine months ended September 30, 2017, are presented below:
|
Stock
Options |
Weighted
average exercise price |
Weighted
average remaining contractual term |
Aggregate
intrinsic value |
||||||||||||||
| Outstanding as of January 1, 2017 | 247,400 | $ | 8.75 | $ | |||||||||||||
| Granted | 262,000 | 7.30 | |||||||||||||||
| Exercised | (26,333 | ) | 4.55 | ||||||||||||||
| Forfeited | (47,267 | ) | 6.74 | ||||||||||||||
| Outstanding as of September 30, 2017 | 435,800 | $ | 8.35 | 7.7 | $ | 238,140 | |||||||||||
| Exercisable as of September 30, 2017 | 173,800 | 9.94 | 5.0 | 138,580 | |||||||||||||
As of September 30, 2017 there were 237,867 shares available for future grants under the Company’s 2011 Long-Term Incentive Plan.
Stock-based compensation expense recorded for the three and nine months ended September 30, 2017 was approximately $148 and $319, respectively, as compared to the expense of $28 and $34, during the three and nine months ended September 30, 2016, respectively. At September 30, 2017, the Company had total stock-based compensation expense remaining to be recognized in the consolidated statements of income of approximately $339.
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Foreign Currency Translation
Foreign assets and liabilities are translated using the exchange rate in effect at the balance sheet date, and results of operations are translated using an average rate for the period. Translation adjustments are accumulated and reported as a component of accumulated other comprehensive income (loss). The Company had foreign currency translation adjustments resulting in a nominal unrealized loss for the three months ended September 30, 2017 and $147 for the three months ended September 30, 2016. For the nine months ended September 30, 2017 and 2016, the Company had foreign currency translation adjustments resulting in unrealized income of $68 and $445, respectively.
11. BASIC AND DILUTED (LOSS) INCOME PER COMMON SHARE
Basic and diluted income per common share is calculated based on the weighted average number of shares outstanding during the period. The Company’s employee and director stock option awards, as well as incremental shares issuable upon exercise of warrants, are not considered in the calculations if the effect would be anti-dilutive. In periods where the company reported a net loss, diluted net loss per common share is the same as basic net loss per common share for those periods. The following table sets forth the computation of basic and diluted (loss) income per share (in thousands, except per share data):
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Numerator: | ||||||||||||||||
| Net (loss) income | $ | (764 | ) | $ | 322 | $ | 678 | $ | 1,085 | |||||||
| Denominator: | ||||||||||||||||
| Weighted average basic shares outstanding | 8,725 | 8,700 | 8,713 | 8,700 | ||||||||||||
| Effect of dilutive securities - equity based compensation plans | — | 8 | 14 | 8 | ||||||||||||
| Net dilutive effect of warrants outstanding | — | — | — | — | ||||||||||||
| Denominator for diluted net (loss) income per common share | 8,725 | 8,708 | 8,727 | 8,708 | ||||||||||||
| Net (loss) income per common share: | ||||||||||||||||
| Basic | $ | (0.09 | ) | $ | 0.04 | $ | 0.08 | $ | 0.12 | |||||||
| Diluted | $ | (0.09 | ) | $ | 0.04 | $ | 0.08 | $ | 0.12 | |||||||
| Anti-dilutive securities (excluded from per share calculation): | ||||||||||||||||
| Equity based compensation plans | 397 | 173 | 383 | 173 | ||||||||||||
| Warrants | 51 | 51 | 51 | 51 | ||||||||||||
12. BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION
The Company follows ASC 280 - Segment Reporting in determining its reportable segments. The Company considered the way its management team, most notably its chief operating decision maker, makes operating decisions and assesses performance and considered which components of the Company’s enterprise have discrete financial information available. As the Company makes decisions using a manufactured products vs. distributed products and services group focus, its analysis resulted in two reportable segments: T&D Solutions and Critical Power. The Critical Power reportable segment is comprised solely of the Company’s Titan Energy Systems Inc. subsidiary. The T&D Solutions reportable segment is an aggregation of all other Company subsidiaries, together with sales and expenses attributable to the strategic sales group for its T&D Solutions marketing activities.
The T&D Solutions segment is involved in the design, manufacture and distribution of electrical transformers and switchgear used primarily by utilities, large industrial and commercial operations to manage their electrical power distribution needs. The Critical Power segment provides power generation equipment, and aftermarket field-services primarily to help customers ensure smooth, uninterrupted power to operations during times of emergency.
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The following tables present information about segment income and loss:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Revenues | ||||||||||||||||
| T&D Solutions | ||||||||||||||||
| Transformers | $ | 21,548 | $ | 21,110 | $ | 66,198 | $ | 61,605 | ||||||||
| Switchgear | 4,299 | 4,268 | 10,118 | 10,876 | ||||||||||||
| 25,847 | 25,378 | 76,316 | 72,481 | |||||||||||||
| Critical Power | ||||||||||||||||
| Equipment | 1,261 | 1,741 | 4,490 | 7,598 | ||||||||||||
| Service | 2,686 | 2,270 | 7,147 | 5,810 | ||||||||||||
| 3,947 | 4,011 | 11,637 | 13,408 | |||||||||||||
| Consolidated | $ | 29,794 | $ | 29,389 | $ | 87,953 | $ | 85,889 | ||||||||
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Depreciation and Amortization | ||||||||||||||||
| T&D Solutions | $ | 366 | $ | 450 | $ | 1,082 | $ | 1,203 | ||||||||
| Critical Power | 507 | 355 | 1,210 | 1,063 | ||||||||||||
| Unallocated Corporate Overhead Expenses | 17 | 17 | 52 | 51 | ||||||||||||
| Consolidated | $ | 890 | $ | 822 | $ | 2,344 | $ | 2,317 | ||||||||
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Operating Income (Loss) | ||||||||||||||||
| T&D Solutions | $ | 1,442 | $ | 2,002 | $ | 6,207 | $ | 6,083 | ||||||||
| Critical Power | 72 | (10 | ) | (277 | ) | (100 | ) | |||||||||
| Unallocated Corporate Overhead Expenses | (915 | ) | (780 | ) | (2,547 | ) | (2,293 | ) | ||||||||
| Consolidated | $ | 599 | $ | 1,212 | $ | 3,383 | $ | 3,690 | ||||||||
Revenues are attributable to countries based on the location of the Company’s customers:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30 | September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| United States | $ | 20,804 | $ | 20,594 | $ | 59,790 | $ | 59,067 | ||||||||
| Canada | 8,990 | 8,795 | 28,163 | 26,758 | ||||||||||||
| Others | — | — | — | 64 | ||||||||||||
| Total | $ | 29,794 | $ | 29,389 | $ | 87,953 | $ | 85,889 | ||||||||
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying consolidated interim financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and with our Annual Report on Form 10-K for the year ended December 31, 2016, which was filed with the Securities and Exchange Commission on March 29, 2017.
Unless the context requires otherwise, references in this Form 10-Q to the “Company,” “Pioneer,” “we,” “our” and “us” refer to Pioneer Power Solutions, Inc. and its subsidiaries.
Special Note Regarding Forward-Looking Statements
This Form 10-Q contains “forward-looking statements,” which include information relating to future events, future financial performance, financial projections, strategies, expectations, competitive environment and regulation. Words such as “may,” “should,” “could,” “would,” “predicts,” “potential,” “continue,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “estimates,” and similar expressions, as well as statements in future tense, identify forward-looking statements. Forward-looking statements should not be read as a guarantee of future performance or results and may not be accurate indications of when such performance or results will be achieved. Forward-looking statements are based on information we have when those statements are made or management’s good faith belief as of that time with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause such differences include, but are not limited to:
| ● | General economic conditions and their effect on demand for electrical equipment, particularly in the commercial construction market, but also in the power generation, industrial production, data center, oil and gas, marine and infrastructure industries. |
| ● | The effects of fluctuations in sales on our business, revenues, expenses, net income, income (loss) per share, margins and profitability. |
| ● | Many of our competitors are better established and have significantly greater resources, and may subsidize their competitive offerings with other products and services, which may make it difficult for us to attract and retain customers. |
| ● | We depend on Siemens Industry, Inc. (“Siemens”) for a large portion of our business, and any change in the level of orders from Siemens could have a significant impact on our results of operations. |
| ● | The potential loss or departure of key personnel, including Nathan J. Mazurek, our chairman, president and chief executive officer. |
| ● | Our ability to expand our business through strategic acquisitions. |
| ● | Our ability to integrate acquisitions and related businesses. |
| ● | Our ability to generate internal growth, maintain market acceptance of our existing products and gain acceptance for our new products. |
| ● | Unanticipated increases in raw material prices or disruptions in supply could increase production costs and adversely affect our profitability. |
| ● | Restrictive loan covenants and/or our ability to repay or refinance debt under our credit facilities could limit our future financing options and liquidity position and may limit our ability to grow our business. |
| ● | Our ability to realize revenue reported in our backlog. |
| ● | Operating margin risk due to competitive pricing and operating efficiencies, supply chain risk, material, labor or overhead cost increases, interest rate risk and commodity risk. |
| ● | Strikes or labor disputes with our employees may adversely affect our ability to conduct our business. |
| ● | A significant portion of our revenue and expenditures are derived or spent in Canadian dollars. However, we report our financial condition and results of operations in U.S. dollars. As a result, fluctuations between the U.S. dollar and the Canadian dollar will impact the amount of our revenues and net income (loss). |
| ● | The impact of geopolitical activity on the economy, changes in government regulations such as income taxes, duties and tariffs on the importation of products we sell into the United States, climate control initiatives, the timing or strength of an economic recovery in our markets and our ability to access capital markets. |
| ● | Our chairman controls a majority of our voting power, and may have, or may develop in the future, interests that may diverge from yours. |
| ● | Material weaknesses in internal controls. |
| ● | Future sales of large blocks of our common stock may adversely impact our stock price. |
| ● | The liquidity and trading volume of our common stock. |
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The foregoing does not represent an exhaustive list of matters that may be covered by the forward-looking statements contained herein or risk factors that we are faced with that may cause our actual results to differ from those anticipated in our forward-looking statements. Moreover, new risks regularly emerge and it is not possible for us to predict or articulate all risks we face, nor can we assess the impact of all risks on our business or the extent to which any risk, or combination of risks, may cause actual results to differ from those contained in any forward-looking statements. Except to the extent required by applicable laws or rules, we undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. You should review carefully the risks and uncertainties described under the heading “Part II - Item 1A. Risk Factors” in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2016 for a discussion of the foregoing and other risks that relate to our business and investing in shares of our common stock.
Business Overview
We manufacture, sell and service a broad range of specialty electrical transmission, distribution and on-site power generation equipment for applications in the utility, industrial, commercial and backup power markets. Our principal products and services include custom-engineered electrical transformers, switchgear and engine-generator sets and controls, complemented by a national field-service network to maintain and repair power generation assets. We are headquartered in Fort Lee, New Jersey and operate from 13 additional locations in the U.S., Canada and Mexico for manufacturing, service, centralized distribution, engineering, sales and administration.
Description of Business Segments
We have two reportable segments: Transmission & Distribution Solutions (“T&D Solutions”) and Critical Power Solutions (“Critical Power”).
| ● | Our T&D Solutions business provides equipment solutions that help customers effectively and efficiently manage their electrical power distribution systems to desired specifications. The reporting segment is comprised of two primary product categories: electrical transformers and switchgear. These solutions are marketed principally through our Pioneer Transformers Ltd. (“PTL”), Jefferson Electric, Inc. (“Jefferson”), Bemag Transformers, Inc. (“Bemag”), Pioneer Critical Power, Inc. (“PCPI”) and Pioneer Custom Electric Products, Inc. (“PCEP”) brand names. |
| ● | Our Critical Power business provides customers with sophisticated power generation equipment and an advanced data collection and monitoring platform, the combination of which is used to ensure smooth, uninterrupted power to operations during times of emergency. These solutions are marketed by our operations headquartered in Minnesota, currently doing business under the Titan Energy Systems Inc. (“Titan”), as well as the Pioneer Critical Power brand names. |
Foreign Currency Exchange Rates
Although we report our results in accordance with U.S. GAAP and in U.S. dollars, PTL and Bemag are Canadian operations whose functional currency is the Canadian dollar. As such, the financial position, results of operations, cash flows and equity of these operations are initially consolidated in Canadian dollars. Their assets and liabilities are then translated from Canadian dollars to U.S. dollars by applying the foreign currency exchange rate in effect at the balance sheet date, while the results of their operations and cash flows are translated to U.S. dollars by applying weighted average foreign currency exchange rates in effect during the reporting period. The resulting translation adjustments are included in other comprehensive income or loss.
The following table provides actual end of period exchange rates used to translate the financial position of our Canadian operations at the end of each period reported. The average exchange rates presented below, as provided by the Bank of Canada, are indicative of the weighted average rates we used to translate the revenues and expenses of our Canadian operations into U.S. dollars (rates expressed as the number of U.S. dollars to one Canadian dollar for each period reported):
| 2017 | 2016 | ||||||||||||||||||||||||
| Statements of Operations and | Statements of Operations and | ||||||||||||||||||||||||
| Balance Sheet | Comprehensive Income | Balance Sheet | Comprehensive Income | ||||||||||||||||||||||
| End of | Period | Cumulative | End of | Period | Cumulative | ||||||||||||||||||||
| Quarter Ended | Period | Average | Average | Period | Average | Average | |||||||||||||||||||
| March 31 | $ | 0.7519 | $ | 0.7559 | $ | 0.7559 | $ | 0.7700 | $ | 0.7274 | $ | 0.7274 | |||||||||||||
| June 30 | $ | 0.7706 | $ | 0.7436 | $ | 0.7497 | $ | 0.7742 | $ | 0.7760 | $ | 0.7509 | |||||||||||||
| September 30 | $ | 0.8013 | $ | 0.7983 | $ | 0.7652 | $ | 0.7624 | $ | 0.7662 | $ | 0.7560 | |||||||||||||
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Reclassifications
As the Company continues to implement the remediation plans discussed under the heading “Part I – Item 4. Controls and Procedures” of this Quarterly Report on Form 10-Q, the Company has determined that there were inconsistencies in classification of expenses between its business units in the reporting periods prior to December 31, 2016. As a result, the Company reclassified certain expenses from operating expenses to cost of goods sold for the year ended December 31, 2016, as previously disclosed in the Annual Report on Form 10-K filed with the SEC on March 29, 2017, and for the three and nine months ended September 30, 2016, resulting in a decrease to gross profit of $18, or negative 0.06% as a percentage of sales for the three months ended September 30, 2016 and, resulting in a decrease to gross profit of $262, or negative 0.30% as a percentage of sales for the nine months ended September 30, 2016, respectively.
Critical Accounting Policies
The Company’s significant accounting policies are described in Note 2 to the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. There have been no material changes to our critical accounting policies as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016.
RESULTS OF OPERATIONS
Overview of Nine Month Results
Selected financial and operating data for our reportable business segments for the most recent reporting period is summarized below. This information, as well as the selected financial data provided in Note 12 – Business Segment and Geographic Information and in our unaudited Consolidated Financial Statements and related notes included in this Quarterly Report on Form 10-Q, should be referred to when reading our discussion and analysis of results of operations below.
Our summary of operating results during the three and nine months ended September 30, 2017 and 2016 are as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Revenues | ||||||||||||||||
| T&D Solutions | $ | 25,847 | $ | 25,378 | $ | 76,316 | $ | 72,481 | ||||||||
| Critical Power | 3,947 | 4,011 | 11,637 | 13,408 | ||||||||||||
| Consolidated | 29,794 | 29,389 | 87,953 | 85,889 | ||||||||||||
| Cost of sales | ||||||||||||||||
| T&D Solutions | 21,425 | 19,682 | 61,327 | 55,909 | ||||||||||||
| Critical Power | 2,923 | 3,190 | 9,093 | 11,339 | ||||||||||||
| Consolidated | 24,348 | 22,872 | 70,420 | 67,248 | ||||||||||||
| Gross profit | 5,446 | 6,517 | 17,533 | 18,641 | ||||||||||||
| Selling, general and administrative expenses | 4,359 | 4,794 | 12,724 | 13,269 | ||||||||||||
| Depreciation and amortization expense | 682 | 544 | 1,731 | 1,625 | ||||||||||||
| Restructuring and integration | — | 19 | 160 | 199 | ||||||||||||
| Foreign exchange gain | (194 | ) | (52 | ) | (465 | ) | (142 | ) | ||||||||
| Total operating expenses | 4,847 | 5,305 | 14,150 | 14,951 | ||||||||||||
| Operating income | 599 | 1,212 | 3,383 | 3,690 | ||||||||||||
| Interest expense | 588 | 556 | 1,662 | 1,151 | ||||||||||||
| Other expense | 245 | 264 | 647 | 554 | ||||||||||||
| (Loss) income before taxes | (234 | ) | 392 | 1,074 | 1,985 | |||||||||||
| Income tax expense | 530 | 70 | 396 | 900 | ||||||||||||
| Net (loss) / income | $ | (764 | ) | $ | 322 | $ | 678 | $ | 1,085 | |||||||
Backlog
Our backlog is based on firm orders from our customers expected to be delivered in the future, most of which is expected to occur during the next twelve months. Backlog may vary significantly from reporting period to reporting period due to the timing of customer commitments. The time between receipt of an order and actual delivery, or completion, of our products and services varies from one or more days, in the case of inventoried standard products, to three to nine months, in the case of certain custom engineered equipment solutions, and up to one year or more under our service contracts.
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The following table represents the progression of our backlog, by reporting segment, as of the end of the last five quarters:
| September 30, | June 30, | March 31, | December 31, | September 30, | ||||||||||||||||
| 2017 | 2017 | 2017 | 2016 | 2016 | ||||||||||||||||
| T&D Solutions | $ | 28,059 | $ | 29,182 | $ | 31,705 | $ | 34,588 | $ | 36,699 | ||||||||||
| Critical Power | 10,626 | 10,466 | 5,039 | 3,970 | 4,831 | |||||||||||||||
| Total order backlog | $ | 38,685 | $ | 39,648 | $ | 36,744 | $ | 38,558 | $ | 41,530 | ||||||||||
Revenue
The following table represents our revenues by reporting segment and major product category for the periods indicated:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
| 2017 | 2016 | Variance | % | 2017 | 2016 | Variance | % | |||||||||||||||||||||||||
| T&D Solutions | ||||||||||||||||||||||||||||||||
| Transformers | $ | 21,548 | $ | 21,110 | $ | 438 | 2.1 | $ | 66,198 | $ | 61,605 | $ | 4,593 | 7.5 | ||||||||||||||||||
| Switchgear | 4,299 | 4,268 | 31 | 0.7 | 10,118 | 10,876 | (758 | ) | (7.0 | ) | ||||||||||||||||||||||
| 25,847 | 25,378 | 469 | 1.8 | 76,316 | 72,481 | 3,835 | 5.3 | |||||||||||||||||||||||||
| Critical Power | ||||||||||||||||||||||||||||||||
| Equipment | 1,261 | 1,741 | (480 | ) | (27.6 | ) | 4,490 | 7,598 | (3,108 | ) | (40.9 | ) | ||||||||||||||||||||
| Service | 2,686 | |||||||||||||||||||||||||||||||