ORION ENERGY SYSTEMS, INC. The following discussion and analysis of our financial condition and results of operations should be read together with our unaudited Condensed Consolidated Financial Statements and related notes included in this Form 10-Q, as well as our audited Consolidated Financial Statements and related notes included in our Annual Report on Form 10-K for the fiscal year endedMarch 31, 2021 .
Cautionary Note Regarding Forward-Looking Statements
Any statements in this Quarterly Report on Form 10-Q about our expectations, beliefs, plans, objectives, prospects, financial condition, assumptions or future events or performance are not historical facts and are "forward-looking statements" as that term is defined under the federal securities laws. These statements are often, but not always, made through the use of words or phrases such as "believe", "anticipate", "should", "intend", "plan", "will", "expects", "estimates", "projects", "positioned", "strategy", "outlook" and similar words. You should read the statements that contain these types of words carefully. Such forward-looking statements are subject to a number of risks, uncertainties and other factors that could cause actual results to differ materially from what is expressed or implied in such forward-looking statements. There may be events in the future that we are not able to predict accurately or over which we have no control. Potential risks and uncertainties include, but are not limited to, those discussed in "Part I, Item 1A. Risk Factors" in our Annual Report on Form 10-K for the fiscal year endedMarch 31, 2021 . We urge you not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. We do not undertake any obligation to release publicly any revisions to such forward-looking statements to reflect events or uncertainties after the date hereof or to reflect the occurrence of unanticipated events.
Overview
We provide state-of-the-art light emitting diode ("LED") lighting systems,
wireless Internet of Things ("IoT") enabled control solutions, project
engineering, design energy project management and maintenance services. We help
our customers achieve energy savings with healthy, safe and sustainable
solutions that enable them to reduce their carbon footprint and digitize their
business. We research, design, develop, manufacture, market, sell, install, and
implement energy management systems consisting primarily of high-performance,
energy-efficient commercial and industrial interior and exterior LED lighting
systems and related services. Our products are targeted for applications in
three primary market segments: commercial office and retail, area lighting, and
industrial applications, although we do sell and install products into other
markets. Virtually all of our sales occur within North America .
Our lighting products consist primarily of LED lighting fixtures, many of which
include IoT enabled control systems. Our principal customers include large
national account end-users, federal and state government facilities, large
regional account end-users, electrical distributors, electrical contractors and
energy service companies ("ESCOs"). Currently, most of our products are
manufactured at our production facility located in Manitowoc, Wisconsin ,
although as the LED and related IoT market continues to evolve, we are
increasingly sourcing products and components from third parties in order to
provide versatility in our product development.
We have experienced recent success offering our comprehensive project management
services to national account customers to retrofit their multiple locations. Our
comprehensive services include initial site surveys and audits, utility
incentive and government subsidy management, engineering design, and project
management from delivery through to installation and controls integration.
In fiscal 2021, we successfully capitalized on our capability of being a full
service, turnkey provider of LED lighting and controls systems with design,
build, installation and project management services, as we continued a very
large project for a major national account. As a result of this success, we have
begun to evolve our business strategy to focus on further expanding the nature
and scope of our products and services offered to our customers. This further
expansion of our products and services includes pursuing projects to develop
recurring revenue streams, including providing lighting and electrical
maintenance services and utilizing control sensor technology to collect data and
assisting customers in the digitization of this data, along with other potential
services. We also plan to pursue the expansion of our IoT, "smart-building" and
"connected ceiling" and other related technology, software and controls products
and services that we offer to our customers. We currently plan on
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investing significant time, resources and capital into expanding our offerings
in these areas with no expectation that they will result in us realizing
material revenue in the near term and without any assurance they will succeed or
be profitable. In fact, it is likely that these efforts will reduce our
profitability, at least in the near term as we invest resources and incur
expenses to develop these offerings. While we intend to pursue these expansion
strategies organically, we also are actively exploring potential business
acquisitions which would more quickly add these types of expanded and different
capabilities to our product and services offerings. It is possible that one or
more of such potential acquisitions, if successfully completed, could
significantly change, and potentially transform, the nature and extent of our
business.
We generally do not have long-term contracts with our customers that provide us
with recurring revenue from period to period and we typically generate
substantially all of our revenue from sales of lighting and control systems and
related services to governmental, commercial and industrial customers on a
project-by-project basis. We also perform work under master services or product
purchasing agreements with major customers with sales completed on a purchase
order basis. In addition, in order to provide quality and timely service under
our multi-location master retrofit agreements we are required to make
substantial working capital expenditures and advance inventory purchases that we
may not be able to recoup if the agreements or a substantial volume of purchase
orders under the agreements are delayed or terminated. The loss of, or
substantial reduction in sales to, any of our significant customers, or our
current single largest customer, or the termination or delay of a significant
volume of purchase orders by one or more key customers, could have a material
adverse effect on our results of operations in any given future period.
We typically sell our lighting systems in replacement of our customers' existing
fixtures. We call this replacement process a "retrofit". We frequently engage
our customer's existing electrical contractor to provide installation and
project management services. We also sell our lighting systems on a wholesale
basis, principally to electrical distributors and ESCOs to sell to their own
customer bases.
The gross profits of our products and services can vary significantly depending
upon the types of products and services we sell, with margins typically ranging
from 10% to 50%. As a result, a change in the total mix of our sales among
higher or lower margin products and services can cause our profitability to
fluctuate from period to period.
Our fiscal year ends on March 31 . Our current fiscal year ends on March 31, 2022
and is referred to as "fiscal 2022". We refer to our just completed fiscal year,
which ended on March 31, 2021 , as "fiscal 2021", and our prior fiscal year which
ended on March 31, 2020 as "fiscal 2020". Our fiscal first quarter of each
fiscal year ends on June 30 , our fiscal second quarter ends on September 30 , our
fiscal third quarter ends on December 31 and our fiscal fourth quarter ends on
March 31 .
Reportable segments are components of an entity that have separate financial
data that the entity's chief operating decision maker ("CODM") regularly reviews
when allocating resources and assessing performance. Our CODM is our chief
executive officer. Orion has three reportable segments: Orion Engineered Systems
Division ("OES"), and Orion Distribution Services Division ("ODS"), and Orion
U.S. Markets Division ("USM").
Impact of COVID-19
The COVID-19 pandemic has disrupted business, trade, commerce, financial and credit markets, in theU.S. and globally. Our business was adversely impacted by measures taken by government entities and others to control the spread of the virus beginning inMarch 2020 , the last few weeks of our 2020 fiscal year, and continuing most significantly into the second quarter of fiscal 2021. During the second half of fiscal 2021, we experienced a rebound in business. Project installations for our largest customer recommenced, as well installations for a new large specialty retail customer began, with no further significant COVID-19 impacts. However, some customers continue to refrain from awarding new projects and potential future risks remain due to the COVID-19 pandemic, including supply chain disruption for certain components. As a deemed essential business, we provide products and services to ensure energy and lighting infrastructure and we therefore have continued to operate throughout the pandemic. We have implemented a number of safety protocols, including limiting travel and restricting access to our facilities along with monitoring processes, physical distancing, physical barriers, enhanced cleaning procedures and requiring face coverings. 20 -------------------------------------------------------------------------------- As part of our response to the impacts of the COVID-19 pandemic, during the fourth quarter of fiscal 2020 we implemented a number of cost reduction and cash conservation measures, including reducing headcount. While certain restrictions have lessened in certain jurisdictions during fiscal 2021, some restrictions continue. Some customers and projects are in areas where travel restrictions have been imposed, certain customers have either closed or reduced on-site activities, and timelines for the completion of several projects have been delayed, extended or terminated. These modifications to our business practices, including any future actions we take, may cause us to experience reductions in productivity and disruptions to our business routines. In addition, we are required to make substantial working capital expenditures and advance inventory purchases that we may not be able to recoup if our customer agreements or a substantial volume of purchase orders under our customer agreements are delayed or terminated as a result of COVID-19. At this time, it is not possible to predict the overall impact the COVID-19 pandemic will have on our business, liquidity, capital resources or financial results, although the economic and regulatory impacts of COVID-19 significantly reduced our revenue and profitability in the first half of fiscal 2021. If there is a resurgence of the COVID-19 pandemic, our markets and operations could be impacted and there could be a further material adverse financial impact.
Results of Operations - Three Months Ended
The following table sets forth the line items of our Condensed Consolidated
Statements of Operations and as a relative percentage of our total revenue for
each applicable period, together with the relative percentage change in such
line item between applicable comparable periods (dollars in thousands, except
percentages):
Three Months Ended June 30,
2021 2020 2021 2020
% % of % of
Amount Amount Change Revenue Revenue
Product revenue $ 28,246 $ 9,701 191.2 % 80.5 % 89.7 %
Service revenue 6,855 1,110 517.6 % 19.5 % 10.3 %
Total revenue 35,101 10,811 224.7 % 100.0 % 100.0 %
Cost of product revenue 19,433 7,229 168.8 % 55.4 % 66.9 %
Cost of service revenue 5,438 947 474.2 % 15.5 % 8.8 %
Total cost of revenue 24,871 8,176 204.2 % 70.9 % 75.6 %
Gross profit 10,230 2,635 288.2 % 29.1 % 24.4 %
General and administrative expenses 3,111 2,411 29.0 % 8.9 % 22.3 %
Sales and marketing expenses 3,245 1,854 75.0 % 9.2 % 17.1 %
Research and development expenses 456 415 9.9 % 1.3 % 3.8 %
Income (loss) from operations 3,418 (2,045 ) NM 9.7 % (18.9 )%
Other income 1 9 (88.9 )% 0.0 % 0.1 %
Interest expense (19 ) (49 ) (61.2 )% (0.1 )% (0.5 )%
Amortization of debt issue costs (16 ) (61 ) (73.8 )% (0.0 )% (0.6 )%
Income (loss) before income tax 3,384 (2,146 ) NM 9.6 % (19.9 )%
Income tax expense 874 73 1097.3 % 2.5 % 0.7 %
Net income (loss) $ 2,510 $ (2,219 ) NM 7.2 % (20.5 )%
* NM - Not Meaningful
Revenue. Product revenue increased 191.2%, or $18.5 million , for the first
quarter of fiscal 2022 versus the first quarter of fiscal 2021. Service revenue
increased 517.6%, or $5.7 million , for the first quarter of fiscal 2022 versus
the first quarter of fiscal 2021. The increase in product and service revenue
was primarily due to multiple projects put on hold in the prior year period as a
result of COVID-19 concerns, including the projects for one large national
account customer which represented 50.9% of revenue in the first quarter of
fiscal 2022, but less than 10% of revenue in the first quarter of fiscal 2021.
Cost of Revenue and Gross Profit. Gross profit percentage increased to 29.1% of
revenue in the first quarter of fiscal 2022 from 24.4% in the first quarter of
fiscal 2021, due primarily to an improvement in product margin on the coverage
of fixed costs with significantly higher sales volume. Cost of product revenue
increased 168.8%, or $12.2 million , in the first quarter of fiscal 2022 versus
the first quarter of fiscal 2021 due to the increase in our sales. Cost of
service revenue increased 474.2%, or $4.5 million , in the first quarter of
fiscal 2022 versus the first quarter of fiscal 2021 due to the increase in
sales.
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--------------------------------------------------------------------------------Operating Expenses
General and Administrative. General and administrative expenses increased 29.0%, or$0.7 million , in the first quarter of fiscal 2022 compared to the first quarter of fiscal 2021. This comparative increase was primarily due to lower employment costs in fiscal 2021 as a result of COVID-19 related actions.
Sales and Marketing. Sales and marketing expenses increased 75.0%, or
Research and Development. Research and development expenses increased 9.9%, or$41 thousand , in the first quarter of fiscal 2022 compared to the first quarter of fiscal 2021. This comparative increase was primarily due to the timing of testing costs. Interest Expense. Interest expense in the first quarter of fiscal 2022 decreased by 61.2%, or$30 thousand , from the first quarter of fiscal 2021. The decrease in interest expense was primarily due to comparatively lower sales of receivables than in the prior year period.
Orion Engineered Systems Division
Our OES segment develops and sells lighting products and provides construction
and engineering services for our commercial lighting and energy management
systems. OES provides engineering, design, lighting products and in many cases
turnkey solutions for large national accounts, governments, municipalities,
schools and other customers.
The following table summarizes our OES segment operating results (dollars in
thousands):
Three Months Ended June 30,
%
2021 2020 Change
Revenues $ 21,988 $ 2,256 874.6 %
Operating income (loss) $ 1,864 $ (1,850 ) NM
Operating margin 8.5 % (82.0 )%
* NM - Not Meaningful
OES segment revenue in the first quarter of fiscal 2022 increased $19.7 million
from the first quarter of fiscal 2021 due to multiple projects put on hold in
the prior year period as a result of COVID-19, including the projects with one
large national account customer that represented 50.9% in the first quarter of
fiscal 2022 and less than 10% of total revenue in the first quarter fiscal 2021.
The project installations for this customer resumed during the second quarter of
fiscal 2021. This sales increase led to a corresponding increase in operating
income in this segment.
Our ODS segment focuses on selling lighting products through manufacturer representative agencies and a network of North American broadline and electrical distributors and contractors.
The following table summarizes our ODS segment operating results (dollars in
thousands):
Three Months Ended June 30,
%
2021 2020 Change
Revenues $ 9,286 $ 6,629 40.1 %
Operating income $ 2,122 $ 752 182.2 %
Operating margin 22.9 % 11.3 %
ODS segment revenue in the first quarter of fiscal 2022 increased $2.7 million ,
compared to the first quarter of fiscal 2021, primarily due to the impact on
sales volume of COVID-19 in the fiscal 2021 period, and resulted in a
corresponding increase in operating income in this segment based on operating
leverage.
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Orion
Our USM segment sells commercial lighting systems and energy management systems to the wholesale contractor markets. USM customers include ESCOs and contractors.
The following table summarizes our USM segment operating results (dollars in
thousands):
Three Months Ended June 30,
%
2021 2020 Change
Revenues $ 3,827 $ 1,926 98.7 %
Operating income $ 651 $ 81 703.7 %
Operating margin 17.0 % 4.2 %
USM segment revenue in the first quarter of fiscal 2022 increased $1.9 million ,
compared to the first quarter of fiscal 2021, primarily due to the impact of
COVID-19 in the fiscal 2021 period, and resulted in a corresponding increase in
operating income in this segment based on operating leverage.
Liquidity and Capital Resources
Overview
We had approximately$15.9 million in cash and cash equivalents as ofJune 30, 2021 , compared to$19.4 million atMarch 31, 2021 . Our cash position decreased as a result of an increase in accounts receivable of$5.9 million , a decrease in accrued expenses of$3.6 million , and a non-controlling equity investment of$0.5 million , partially offset by net income of$2.5 million , a decrease in revenue earned not billed of$1.9 million , and an increase in accounts payable of$1.4 million . Our future liquidity needs and forecasted cash flows are dependent upon many factors, including our relative revenue, gross profits, cash management practices, cost reduction initiatives, working capital management, capital expenditures, pending or future litigation results and cost containment measures. In addition, we tend to experience higher working capital costs when we increase sales from existing levels.
Cash Flows
The following table summarizes our cash flows for the three months ended
Three Months Ended June 30,
2021 2020
Operating activities $ (2,966 ) $ (7,709 )
Investing activities (656 ) (244 )
Financing activities 92 (10,014 )
Decrease in cash and cash equivalents
Cash Flows Related to Operating Activities. Cash used in operating activities primarily consists of net income (loss) adjusted for certain non-cash items, including depreciation, amortization of intangible assets, stock-based compensation, amortization of debt issue costs, provisions for reserves, and the effect of changes in working capital and other activities. Cash used in operating activities for the first three months of fiscal 2022 was$3.0 million and consisted of our net income adjusted for non-cash expense items of$1.6 million and net cash used in changes in operating assets and liabilities of$7.0 million . Cash used by operating assets and liabilities consisted primarily of an increase in accounts receivable of$5.9 million due to higher sales and the timing of collections, and a decrease in accrued expenses and other of$3.6 million due to timing of invoices received. Cash provided by changes in operating assets and liabilities consisted primarily of a decrease of$1.9 million in revenue earned but not billed and an increase in accounts payable of$1.4 million due to the timing of payments. Cash used in operating activities for the first three months of fiscal 2021 was$7.7 million and consisted of our net loss adjusted for non-cash expense items of$0.7 million and net cash used in changes in operating assets and liabilities of$6.2 million . Cash used by operating assets and liabilities consisted primarily of a decrease of$7.4 million in Accounts payable and 23 -------------------------------------------------------------------------------- Accrued expenses and other based on timing of invoice receipt and payment, and an increase in inventory of$2.6 million based on timing of purchases committed prior to the impact of COVID-19. Cash provided by changes in operating assets and liabilities consisted primarily of a net decrease of$3.7 million in Accounts receivable and Revenue earned but not billed due to the timing on collections compared to decreased sales. Cash Flows Related to Investing Activities. Cash used in investing activities of$0.7 million in the first three months of fiscal 2022 consisted primarily of cash paid for a non-controlling equity stake in ndustrial of$0.5 million and purchases of property and equipment.
Cash used in investing activities of
Cash Flows Related to Financing Activities. Cash provided by financing
activities of
Cash used in financing activities of$10.0 million in the first three months of fiscal 2021 consisted primarily of repayments of$10.0 million on our revolving credit facility. Working Capital Our net working capital as ofJune 30, 2021 was$29.4 million , consisting of$58.0 million in current assets and$28.6 million in current liabilities. Our net working capital as ofMarch 31, 2021 was$26.2 million , consisting of$56.5 million in current assets and$30.4 million in current liabilities. Our current accounts receivable, net balance increased by$5.9 million from the fiscal 2021 year-end primarily due to the timing of invoicing and customer collections. Our accrued expenses decreased from our fiscal 2021 year-end by$3.4 million due primarily to a decrease in accrued project costs. We generally attempt to maintain at least a three-month supply of on-hand inventory of purchased components and raw materials to meet anticipated demand, as well as to reduce our risk of unexpected raw material or component shortages or supply interruptions. Because of recent supply chain challenges, we have been making additional incremental inventory purchases. Our accounts receivables, inventory and payables may increase to the extent our revenue and order levels increase. In addition, in order to provide quality and timely service under our multi-location master retrofit agreements we are required to make substantial working capital expenditures and advance inventory purchases, including purchases to support the provision of products and services to our largest customer. Indebtedness Revolving Credit Agreement
On
The replacement of the Prior Credit Agreement with the Credit Agreement provides us with increased financing capacity and liquidity to fund our operations and implement our strategic plans. The Credit Agreement provides for a five-year$25.0 million revolving credit facility (the "Credit Facility") that matures onDecember 29, 2025 . Borrowings under the Credit Facility are subject to a borrowing base requirement based on eligible receivables, inventory and cash. As ofJune 30, 2021 , the borrowing base supports the full availability of the Credit Facility. As ofJune 30, 2021 , no amounts were borrowed under the Credit Facility.
The Credit Agreement is secured by a first lien security interest in substantially all of our assets.
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--------------------------------------------------------------------------------Backlog
Backlog represents the amount of revenue that we expect to realize in the future as a result of firm, committed purchase orders. Backlog totaled$12.2 million and$19.2 million as ofJune 30, 2021 andMarch 31, 2021 , respectively. We generally expect our backlog to be recognized as revenue within one year, although the COVID-19 pandemic may extend this time period.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Inflation
Our results from operations have not been materially affected by inflation. We are monitoring input costs and cannot currently predict the future impact to our operations by inflation.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States . The preparation of our consolidated financial statements requires us to make certain estimates and judgments that affect our reported assets, liabilities, revenue and expenses, and our related disclosure of contingent assets and liabilities. We re-evaluate our estimates on an ongoing basis, including those related to revenue recognition, inventory valuation, collectability of receivables, stock-based compensation, warranty reserves and income taxes. We base our estimates on historical experience and on various assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates. A summary of our critical accounting policies is set forth in the "Critical Accounting Policies and Estimates" section of our Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year endedMarch 31, 2021 . For the three months endedJune 30, 2021 , there were no material changes in our accounting policies.
Recent Accounting Pronouncements
For a complete discussion of recent accounting pronouncements, refer to Note 3
in the Condensed Consolidated Financial Statements included elsewhere in this
report.
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