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PRXG > SEC Filings for PRXG > Form 10-Q on 14-Aug-2013All Recent SEC Filings

Show all filings for PERNIX GROUP, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for PERNIX GROUP, INC.


14-Aug-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You are cautioned that this Quarterly Report on Form 10-Q and, in particular, the "Management's Discussion and Analysis of Financial Condition and Results of Operations", contains forward-looking statements concerning future operations and performance of the Company within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to market, operating and economic risks and uncertainties that may cause the Company's actual results in future periods to be materially different from any future performance suggested herein. Factors that may cause such differences include, among others: increased competition, increased costs, changes in general market conditions, changes in the regulatory environment, changes in anticipated levels of government spending on infrastructure, and changes in loan relationships or sources of financing, political instability or violence. Such forward-looking statements are made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995.

The following discussion and analysis of the Company's financial condition and results of operations should be read in conjunction with the Company's unaudited condensed consolidated financial statements and the notes thereto included elsewhere in this report and the 2012 annual consolidated financial statements and notes thereto included in the Company's Form 10-K Annual Report filed with the Securities and Exchange Commission.

The financial information discussed in the MD&A includes amounts that may be derived from utilizing certain accounting estimates and assumptions. The following highlights accounting estimates and assumptions which the Company considers to be critical to the preparation of our financial statements because they inherently involve significant judgments and uncertainties. The Company cautions that these estimates are developed based upon available information at the time that the estimate was developed. However, future events rarely develop exactly as forecast, and the best estimates routinely require adjustment as more current information becomes known.

Construction revenues are determined by applying the Percentage of Completion method, which requires the use of estimates on the future revenues and costs of a construction project. Our current projects are design/build contracts with a fixed contract price. These contracts are with the United States Government and include provisions of Termination for Convenience by the party contracting with us; such provisions also allow payment to us for the work performed through the date of termination and recovery of all related settlement expenses in accordance with applicable Federal Acquisition Regulation. Revenues recognized under the Percentage of Completion method require applying a percentage (actual costs incurred through the reporting date divided by the total estimated costs to complete the project) to the fixed contract price. The resultant amount is recorded as revenue for the applicable period. This method of revenue recognition requires us to estimate future costs to complete a project. Estimating future costs requires judgment of the value and timing of material, labor, scheduling, product deliveries, contractual performance standards, liability claims, impact of change orders, contract disputes, warranty expense, as well as productivity. In addition, sometimes clients, vendors and subcontractors will present claims against us for recovery of costs they incurred in excess of what they expected to incur, or for which they believe they are not contractually responsible. In turn, we may present claims to our clients, vendors and subcontractors for costs that we believe were not our responsibility or may be beyond our scope of work. The Company will include costs associated with these claims in the financial information when such costs can be reliably identified and estimated. Similarly, the Company will include in revenue amounts equal to costs for claims, where the outcome is probable that the claim will be found in the favor of the Company. The Company will record a provision for losses when estimated costs exceed estimated revenues.

Our estimates, assumptions and judgments are continually evaluated based on known information and experience. However, the actual amounts could be significantly different from our estimates.

In this report, we use the terms "Pernix Group", "PGI", "the Company", 'we", "us", and "our" to refer to Pernix Group, Inc. and its condensed consolidated subsidiaries. Unless otherwise noted, references to years are for calendar years. We refer to the three months ended June 30, 2013 and 2012 as the "second quarter of 2013" and the "second quarter of 2012", respectively.

Results of Operations for the six months ended June 30, 2013 compared to the six months ended June 30, 2012

Revenues and Gross Profit

Total revenues decreased $25.6 million or 42% to $34.9 million for the six months ended June 30, 2013 compared to the prior year period. The decrease principally reflects lower general construction revenue attributable to the completion of a large project in late 2012 ($35.9 million decrease), partially offset by revenue increases associated with other construction projects ($10.6 million increase) and an increase in Power Generation revenue of $0.4 million.
Gross profit increased 18% or $0.9 million, even in light of lower revenues, as the cost decreases in the construction segment nearly kept pace with the revenue decline and the power segment experienced a significant reduction in costs coupled with a significant revenue increase.

General Construction - Total General Construction revenues decreased $26.1 million to $32.2 million for the six month period ended June 30, 2013 compared to $58.2 million for the prior year period. This decrease is primarily attributable to the 2012 substantial completion of the Baghdad Police Academy Annex ("Shield") project in Iraq which accounted for $35.9 million of the decrease. The Shield project and the Sather project are Iraq based contracts to construct containerized housing that were awarded to Pernix-Serka Joint Venture (PS JV), in April 2011 and January 2012, respectively. This Shield project revenue decrease was partially offset by the $6.6 million and $4.0 million increase in revenues on the Sather and Niger Embassy projects in the first six months of 2013 compared to the prior year period. The Company is keenly focused on its current business development and bidding efforts to rebuild its backlog and to leverage its significant experience in bidding, winning and executing government construction contracts with its strategic partners especially as it pertains to the current federal government contract bidding in the third quarter of 2013.The Company anticipates the pace of activity on current contracts in progress to accelerate in the remainder of 2013 and when coupled with the commencement of substantive work on its new $6.6 million construction contract in Azerbaijan, the Company anticipates generating increased revenue during the third quarter of 2013 compared to earlier 2013 quarters. The Sather, Niger and Baku contracts are currently 71.1%, 30.0% and 0.0% complete, respectively, as of June 30, 2013, and Sather is expected to reach completion sometime in early 2014, while Niger and Baku are expected to reach completion in late 2014.

Construction revenues are generally recorded using the Percentage of Completion method and in 2013 and 2012 related to four contracts with the U.S. Department of State pertaining to the CHU IDIQ Contract for embassy building and rehabilitation Task Orders in Iraq, as well as Department of State projects in Niger during both years as well as in Azerbaijan in 2013 and Fiji during 2012.

Service Fees - Power Generation Plant. Service fees - power generation plant increased $0.4 million (or 19%) to $2.7 million for the six months ended June 30, 2013, from $2.3 million for the six months ended June 30, 2012. The increase reflects the low water levels in Fiji in the current year period that necessitated the generation of more diesel based power compared to hydro based power in the first half of 2013 compared to the prior year period. Fees from our Vanuatu power generation facility were relatively stable in the first half of 2013 compared to the prior year period, as the facility has operated at steady state during both periods.

Costs and Expenses

General Construction Costs - (including Construction Costs - Related Party). Total construction costs, including construction costs - related party, decreased $25.8 million to $28.2 million for the first six months of 2013 compared to the comparable period of 2012, primarily reflecting the completion of the Shield contract work in late 2012. This decrease was partially offset by the increase in costs on the Sather and Niger projects as progress advanced to 71.1% and 30.0% completion during the six month period ended June 30, 2013.

Operations and Maintenance Costs - Power Generation Plant. Operations and maintenance costs - power generation plant decreased 42% or $0.7 million to $0.9 million for the first six months of 2013 compared to the prior year period, primarily reflecting the significant decrease in planned maintenance expense compared to the first half of 2012 when completion of 60,000 hour planned maintenance and partial completion of 48,000 hour planned maintenance on two Fijian engines occurred. No significant maintenance was planned for the six months ended June 30, 2013.

Gross Profit

Gross profit increased by $0.9 million or 18% to $5.8 million for the six months ended June 30, 2013 as compared to the comparable 2012 period. The increase was due primarily to the $1.1 million or 149% gross profit increase from the power segment year over year reflecting the impact of higher diesel based power production in Fiji, coupled with a relatively low level of planned maintenance activity at the Fijian plants in the first half of 2013. This increase more than offset the $0.2 million decrease in the construction segment profit. The Company has benefitted from the balanced approach of engaging in both the power and construction segments and intends to continue this balanced approach through significant business development and strategic relationship efforts in both segments now and in the foreseeable future.

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Operating Expenses

Salaries and Employee Benefits - Salaries and employee benefits increased $0.6 million for the six months ended June 30, 2013 compared to the prior year period reflecting the higher expenses associated with expanding our construction and power segment business development teams and our construction estimating and bidding department as part of our strategy to focus on winning new business while providing the best value to our customers.

General and Administrative Expenses - General and administrative expenses increased $0.3 million in the first six months of 2013 from approximately $1.2 million for the first six months of 2012 primarily due to higher recruiting fees associated with hiring the business development and estimating personnel to support our corporate strategy. Those hired have significant experience and extensive contacts in the construction and power segments.

Other Income (Expense)

Other income decreased by $0.7 million during the first six months of 2013 compared to the comparable period ended June 30, 2012, reflecting the 2012 recognition of the business interruption insurance proceeds received from insurers or claims accepted by insurers in connection with the G8 engine failure that occurred in August 2011, coupled with miscellaneous income from ancillary engine rebuild services provided to an engine manufacturer in Fiji. There was not material insurance or rebuild related income during the first half of 2013.

Pretax Income

Consolidated pretax income from continuing operations decreased $0.6 million to $2.2 million from $2.8 million for the six months ended June 30, 2013 compared to the prior year six month period as the $1.1 million gross profit increase from power related activities was more than offset by the combination of lower other income associated with insurance proceeds recognized in 2012 coupled with the increase in salaries and related recruiting costs incurred as part of our strategy to grow our business and the $0.2 million reduction in construction margin attributed to the completion of the Shield project during late 2012.

Consolidated Net Income / (Loss)

The Company experienced a $1.9 million increase in net income during the first six months of 2013 compared to the prior year period. Net income for the current six month period was $0.2 million compared to the net loss of $1.7 million in the comparable prior year period that included $3.7 million of losses from discontinued operations of TransRadio SenderSysteme, Berlin, A.G. (TransRadio) and Telesource CNMI (TCNMI). In addition to the variances in pretax income cited above, the loss from TransRadio discontinued operations was $1.9 million during the 2012 period and the loss from discontinued operations of TCNMI was $1.8 million, including a deferred tax expense of $1.4 million reflecting the uncertainty arising partially from the potential liability and legal costs incurred and anticipated related to the Koblerville case. The loss per share from discontinued operations was ($0.39) per share for the six months ended June 30, 2012. There were no such losses incurred during 2013. The 2012 period also included a $0.5 million state deferred tax benefit compared to the $0.1 million state deferred tax expense in the first six months of 2013.

Results of Operations for the three months ended June 30, 2013 compared to the three months ended June 30, 2012

Revenues

Total revenues decreased $6.2 million to $17.7 million for the quarter ended June 30, 2013 compared to $23.9 million for the prior year's quarter. This decrease is primarily attributable to the $8.0 million decrease in construction revenue related to the 2012 substantial completion of the Baghdad Police Academy Annex ("Shield") project and a temporary delay in the Sather project, which together more than offset a $1.2 million increase in revenue on the Niger Embassy contract. Sather revenue decreased in light of a temporary delay in early 2013 due to customer driven site logistics. The progress on this project began to increase to normal levels during the second quarter of 2013 and the Company anticipates the Sather project progress to resume its normal pace during the third quarter of 2013. Power revenues increased $0.4 million for the quarter ended June 30, 2013 compared to the prior year period, reflecting higher diesel based power production in Fiji.

General Construction - Construction revenues are generally recorded using the Percentage of Completion method and in 2013 relate to a contract with the U.S. Department of State pertaining to the CHU IDIQ Contract for embassy building and rehabilitation Task Orders in Iraq, as well as a Department of State project in Niger. The decrease in construction revenues of $6.6 million to $16.1 million for the quarter as compared to the prior year period is primarily attributed to the substantial completion of the Shield Project and the aforementioned customer driven slow down on the Sather project. This decrease was partially offset by higher revenue on the task order awarded to PS JV in January 2012 ("Sather"), even though it construction activity at Sather was delayed in the first quarter of 2013 due to an on-site logistics matter that was beyond the control and scope of responsibility of PS JV. Revenue for the Sather contract was $13.4 million for the quarter ended June 30, 2013. The Sather contract was awarded during the first quarter of 2012 and is 71.1% complete as of June 30, 2013. The Niamey, Niger embassy compound project is 30.0% complete as of June 30, 2013 and is expected to be completed in late 2014 with steady progression throughout 2013 and 2014. Construction revenue also reflects the $0.3 million decline in revenue on the U.S. Embassy project in Fiji that was complete by the end of the first quarter of 2012.

Service Fees - Power Generation Plant. Service fees - power generation plant increased $0.4 million for the three months ended June 30, 2013 compared to the prior year quarter as the low water levels in Fiji in the current year quarter necessitated the generation of more diesel based power compared to hydro based power.

Costs and Expenses

General Construction Costs - (including Construction Costs - Related Party). Total construction costs, including construction costs - related party, decreased $6.6 million to $13.7 million for the first quarter of 2013 compared to the comparable quarter of 2012, primarily reflecting the costs in light of the aforementioned activity changes on the Iraq CHU IDIQ Task Order Program awards and related modifications. This decrease is slightly offset by an increase in costs associated with the embassy rehabilitation project in Niger.

Operations and Maintenance Costs - Power Generation Plant. Operations and maintenance costs - power generation plant were relatively stable for the second quarter of 2013 at $0.4 million for both the current and prior year quarters, as no major planned maintenance occurred in either period.

Gross Profit

Gross profit increased by $0.4 million to $3.7 million for the three months ended June 30, 2013 as compared to $3.3 million in the comparable 2012 quarter, due primarily to improved results in the power generation segment driven by higher diesel power generation during the current year period in light of lower water levels in Fiji. Construction profit decreased $0.1 million year over year.

Operating Expenses

Salaries and Employee Benefits. Salaries and employee benefits increased $0.2 million quarter over quarter reflecting the higher expenses associated with hiring senior business development professionals in both segments of our business as well as Construction estimators and support staff to facilitate the Company's new business initiatives. This rate of increase is not expected to continue as the Power segment is staffed as planned at this time and near-term Construction segment hiring, will be primarily to replace professionals who left the Company during the second quarter of 2013.

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General and Administrative Expenses. General and administrative expenses increased $0.2 million in the second quarter of 2013 compared to the first quarter of 2012 reflecting small increases in a number of administrative expenses.

Other Income (Expense)

Other income (expense) was relatively stable during the second quarter of 2013 compared to the comparable period ended June 30, 2012.

Pretax Income

Consolidated pretax income decreased $0.1 million to $1.9 million for the quarter ended June 30, 2013 compared to a pretax income of approximately $2.0 million for the prior year period, due to lower income from construction activities under the IDIQ containerized housing program coupled with higher operating costs that more than offset the increase in power generation margin.

Loss from Discontinued Operations

During the second quarter of 2012, the Company recorded a loss from the discontinued TCNMI operations of $1.5 million, primarily reflecting the uncertainty arising partially from the potential liability and legal costs incurred and anticipated related to the Koblerville case. The loss per share from discontinued operations was ($0.16) per share for the three months ended June 30, 2012. There were no such losses incurred during 2013.

Consolidated Net Income / (Loss)

Consolidated net income was $0.7 million for the second quarter of 2013 compared to the prior year quarter in which the Company had a ($0.7) million loss for the three months ended June 30, 2012. The increase reflects the combination of relatively stable pretax income from continuing operations and the significant increase in profitability associated with having discontinued TCNMI operations in late 2012. The earnings per share improved to $.07 per share for the second quarter of 2013 from a ($.07) loss per share during the second quarter of 2012.

Liquidity and Capital Resources



                                                June 30,      December 31,
                                                  2013            2012
         Cash and cash equivalents          $   19,771,608  $   21,406,898


                                               Six Months      Six Months
                                               Ended June      Ended June
                                                30, 2013        30, 2012
         Cash provided by operating
         activities                         $    2,086,219  $    6,142,131
         Cash (used for) provided by
         investing activities                    (787,346)       1,012,630
         Cash (used for) financing
         activities                            (2,951,613)     (1,660,257)
         Effect of exchange rates on cash         (62,001)         336,742
         (Decrease / increase in cash and
         cash equivalents                   $  (1,714,741)  $    5,831,246

Cash Requirements

We generate cash flow primarily from serving as the general contractor on construction projects for the U.S. Government, through the operation and maintenance of power generation plants, and from financing obtained from third party banks, affiliated parties and through sales of common and preferred stock. Until March 28, 2012, when we sold our interest in TransRadio, we also generally used cash related to the design, manufacture, installation and service associated with that business. In addition, the Company filed a registration statement with the SEC that became effective May 14, 2012 and registered 5,000,000 shares of previously unissued stock in a primary fixed price $5.00 per share offering and 6,245,585 shares on behalf of selling stockholders under a secondary offering. This registration process as it relates to the primary fixed price offering may serve to augment our current sources of capital. Beyond the cash expected to be generated by operations and from third party banks and issuance of additional shares in connection with the registration statement, the Company may seek debt financing or equity based support from its principal stockholders, Ernil Continental and Halbarad Group Ltd., on an as-needed basis only. The Company also sold the radio transmitter segment and TCNMI in 2012 to curtail losses related to the downturn in the European and Middle Eastern economies and to allow Pernix management to focus on the general construction and power segment operations that it intends to grow.

During the first six months of 2013, the $1.6 million decrease in cash primarily reflects cash flows from operations of $2.1 million that was more than offset by the distribution to our PS JV partner of $2.9 million, which represents the partner's portion of earnings of PS JV through 2012, coupled with the cash outlay in connection with the corporate office land and building purchase and improvements of $0.8 million.

It is our opinion that, in the absence of significant unanticipated cash demands, current cash on hand and forecasted cash flow from our operations, combined with equity and debt financing capacity, will provide sufficient funds to meet anticipated operating requirements, capital expenditures, equity investments, and strategic acquisitions. We also believe that collections on the outstanding receivables which are primarily U.S. Government receivables with a timely payment history as well as funds available from various funding sources will permit the construction operations to meet the payment obligations to vendors and subcontractors.

As of June 30, 2013, the Company's total assets exceeded total liabilities by $15.0 million. This was a $1.0 million decrease from December 31, 2012, due primarily to the aforementioned distribution of 2012 earnings to PS JV partner Serka, offset by the net impact of the corporate property purchase and current year earnings.

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