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PRXG > SEC Filings for PRXG > Form 10-Q on 19-Nov-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.


19-Nov-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 September 30, 2013 and 2012 as the "third quarter of 2013" and the "third quarter of 2012", respectively.

Results of Operations for the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012

Revenues and Gross Profit

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The Company earned total revenues of $51.9 million and gross profit of $9.2 million for the nine months ended September 30, 2013. The Company earned total revenues of $91.5 million for the prior year period. The decrease in revenue ($38.9 million or 40.9%) principally reflects lower general construction revenue attributable to the completion of a large project in late 2012 ($49.6 million decrease), partially offset by revenue increases associated with other construction projects ($10.1 million increase) and an increase in Power Generation revenue of $0.7 million. Although revenue decreased 40.9%, gross profit decreased 10.9% or $1.1 million, as the decreases in the construction segment margin were partially offset by the power segment that experienced a significant revenue increase coupled with a significant reduction in costs.

General Construction - The Company earned total General Construction revenues of $51.9 million for the nine month period ended September 30, 2013, compared to $91.5 million for the prior year period. This $39.6 million decrease is primarily attributable to the 2012 substantial completion of the Baghdad Police Academy Annex ("Shield") project in Iraq which accounted for $49.6 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 $3.5 million and $6.2 million increase in revenues on the Sather and Niger Embassy projects in the first nine months of 2013 compared to the prior year period and the revenue on the Baku Azerbaijan embassy upgrade project awarded in 2013 that generated revenue of $0.4 million during the 2013 nine month 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 late 2013. The Sather, Niger and Baku contracts are currently 82.3%, 47.2% and 5.8% complete, respectively, as of September 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 on the embassy upgrade project awarded to PS JV in 2013 at Freetown Sierre Leone Africa will commence in earnest during the fourth quarter of 2013.

Construction revenues are generally recorded using the Percentage of Completion method and in the nine month periods of 2013 and 2012 related primarily to four contracts with the U.S. Department of State. The majority of the revenue for both periods pertains 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 projects in Azerbaijan in 2013 and Fiji during 2012.

Service Fees - Power Generation Plant. Service fees - power generation plant increased $0.7 million (or 17.8%) to $4.4 million for the nine months ended September 30, 2013, from $3.7 million for the nine months ended September 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 nine months of 2013 compared to the prior year period. Fees from our Vanuatu power generation facility increased approximately $0.1 million or 10.2% in the first nine months of 2013 compared to the prior year period, reflecting an increase in man hours at the facility as it continues to operate at steady state.

Costs and Expenses

General Construction Costs - (including Construction Costs - Related Party). Total construction costs, including construction costs - related party, decreased $37.3 million to $45.4 million for the first nine 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, Niger and Baku projects as progress advanced to 82.3%, 47.2% and 5.8% completion during the nine month period ended September 30, 2013.

Operations and Maintenance Costs - Power Generation Plant. Operations and maintenance costs - power generation plant decreased 23.2% or $0.5 million to $1.8 million for the first nine months of 2013 compared to the prior year period, primarily reflecting the significant decrease in planned maintenance expense compared to the first nine months 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 nine months ended September 30, 2013.

Gross Profit

The Company earned gross profit of $9.2 million for the nine month period ended September 30, 2013 compared to $10.3 million for the nine months ended September 30, 2012. The $1.1 million (10.9%) decrease in gross profit was due primarily to the $2.4 million decrease attributable to the construction segment that was partially offset by higher gross profit from the power segment year over year reflecting the impact of higher diesel based power production in

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Fiji, coupled with a relatively low level of planned maintenance activity at the Fijian plants in the nine months of 2013. Although gross profit of the construction segment decreased, the percent of gross profit to revenue increased reflecting the downward revision in costs to complete the Sather project as the project progressed. 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.

Operating Expenses

Salaries and Employee Benefits - Salaries and employee benefits increased $0.8 million or 31.8% for the nine months ended September 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. The Company does not anticipate that this rate of increase will continue as it has the majority of its anticipated team in place.

Professional Fees and Recruiting Fees - Professional fees decreased $0.1 million or 18.9% to $0.6 million and recruiting fees increased $0.2 million year over year, as the Company hired several key executives during the first nine months of 2013 to focus on business development and operational execution in our construction and power segments. These recruiting costs include moving and placement fees and the Company does anticipate that these costs will decrease as the Company has the majority of its anticipated team in place and those hired have significant experience and extensive contacts in the construction and power segments.

General and Administrative Expenses - General and administrative expenses increased $0.2 million in the first nine months of 2013 to approximately $0.9 million. The impact of relatively small increases in a number of expense categories approximately $0.1 million of which we believe to be non-recurring.

Other Income (Expense)

Other income decreased by $0.6 million during the first nine months of 2013 compared to the comparable period ended September 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 no material insurance or rebuild related income during the first nine months of 2013.

Pretax Income

The Company earned consolidated pretax income from continuing operations of $2.8 million for the nine months ended September 30, 2013, compared to $6.4 million for prior year nine month period. The $2.3 million reduction in construction margin is primarily attributable to the completion of the Shield project during late 2012 coupled with the increase in salaries and related recruiting costs incurred as part of our strategy to grow our business. This decrease more than offset the $1.2 million gross profit increase from power related activities. The reduction in other income associated with insurance proceeds recognized in 2012 also contributed to the decrease.

Income Tax Expense

The income tax expense is $5.0 million for the nine months ended September 30, 2013, principally reflecting management's decision to record an increase in the valuation allowance on deferred tax assets. This expense is a non-cash expense and has no impact on the Company's liquidity, cash flows, or on its ability to execute projects or conduct ongoing operations. As a result of the increase in the valuation allowance, the deferred tax assets are fully reserved as of September 30, 2013. Therefore, as of September 30, 2013, future ordinary pretax earnings of up to $69.0 million attributable to Pernix Group, Inc. are expected to have a dollar for dollar additive impact to stockholders' equity due to the utilization of the net operating loss carryforwards which renders unnecessary the payment of cash for U.S. Federal, Illinois and Virginia state income taxes.The need for a valuation allowance increase and / or reduction is assessed each quarter and as such the valuation allowance may be reduced when additional new business, tax planning strategies and other factors support such a reduction from the September 30, 2013 fully reserved status.

Central to management's decision to increase the valuation allowance during the 2013 third quarter was the level of new business and change orders won during the first nine months of 2013 compared to the comparable prior year period. Management believes this decline to be temporary and a common experience in the construction industry.

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Furthermore, the Company has significantly enhanced its bidding and business development infrastructure in both operating segments during 2013.

Management will continue to focus on attracting additional equity over the next several quarters. Our plan calls for additional investment which would result in more cash investment than the Company had prior to the valuation allowance increase. Because the increase in the valuation allowance had no negative impact on cash, liquidity or operations, any additional cash equity investment would result in a net improvement in cash, liquidity and will bolster our already strong ability to execute projects and conduct ongoing operations.

Loss from Discontinued Operations

During the nine months ended September 30, 2012, the Company recorded losses from the discontinued TransRadio and TCNMI operations of $2.7 million or $0.29 per share. There were no such losses from discontinued operations during 2013.

Consolidated Net Income / (Loss)

The Company experienced a $3.9 million decrease in net income during the first nine months of 2013 compared to the prior year period. Net loss for the current nine month period was $4.4 million compared to the net loss of $0.5 million in the comparable prior year period. The 2013 loss largely reflects the aforementioned $5.1 million deferred tax expense recorded in connection with the increase in the valuation allowance against deferred tax assets. This is a non-cash expense. The 2012 results included $2.7 million of losses from discontinued operations of TransRadio SenderSysteme, Berlin, A.G. (TransRadio) and Telesource CNMI (TCNMI), inclusive of 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 ($0.29) per share for the nine months ended September 30, 2012. There were no such losses from discontinued operations incurred during 2013. The 2012 period also included a $0.5 million state deferred tax benefit.

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

Revenues

The Company earned total revenues of $21.4 million for the quarter ended September 30, 2013 compared to $34.7 million for the prior year's quarter. This decrease is primarily attributable to the $13.6 million decrease in construction revenue related to the 2012 substantial completion of the Baghdad Police Academy Annex ("Shield") project and slower activity related to the Sather project, which together more than offset a $3.8 million combined increase in revenue on the Niger Embassy, Baku Azerbaijan and SIEA projects. The Baku project was commenced in the current year third quarter. Power revenues increased $0.2 million or 17% for the quarter ended September 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 $13.6 million to $19.7 million for the quarter as compared to the prior year period is primarily attributed to the substantial completion of the Shield Project. This decrease was partially offset by higher revenue on new projects awarded to PS JV during 2013. The Sather contract was awarded during the first quarter of 2012 and is 82.3% complete as of September 30, 2013. The Niamey, Niger embassy compound project is 47.2% complete as of September 30, 2013 and is expected to be completed in late 2014 with steady progression throughout 2013 and 2014.

Service Fees - Power Generation Plant. Service fees - power generation plant revenue earned was $1.7 million for the three months ended September 30, 2013, an increase of $0.2 million 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 $11.5 million to $17.2 million for the third quarter of 2013 compared to the comparable quarter of 2012, primarily reflecting the costs in light of the aforementioned activity changes on

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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 projects in Niger and the recently awarded project in Baku.

Operations and Maintenance Costs - Power Generation Plant. Operations and maintenance costs associated with our power generation plants were $0.9 million or $0.1 million higher for the third quarter of 2013 compared to the prior year quarter. No major planned maintenance occurred in either period but PFL accrued $0.1 million related to the minor engine failure that occurred during the quarter.

Gross Profit

The Company earned gross profit of $3.3 million for the three months ended September 30, 2013 as compared to $5.3 million in the comparable 2012 quarter, due primarily to lower construction margin that more than offset slightly improved results in the power generation segment due to lower water levels in Fiji. Although gross margin of the construction segment decreased, the percent of gross margin to revenue increased reflecting the downward revision in costs to complete the Sather project as the project progressed.

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 and Construction segments are principally staffed as planned at this time.

Professional Fees, Recruiting Fees and General and Administrative Expenses. Professional and recruiting fees and general and administrative expenses increased $0.1 million in the third quarter of 2013 compared to the third quarter of 2012 reflecting small increases in a number of administrative expenses.

Other Income (Expense)

Other (expense) decreased $0.1 million compared to $0.1 million expense during the third quarter of 2013, reflecting a reduction in 2012 foreign exchange loss attributable to Fijian operations. No significant foreign exchange losses occurred in the current year period.

Pretax Income

The Company earned consolidated pretax income from continuing operations of $1.5 million for the quarter ended September 30, 2013 compared to a pretax income of approximately $3.6 million for the prior year period. The decrease of $2.1 was primarily due to lower income from construction activities under the IDIQ containerized housing program and higher operating costs that more than offset the increase in power generation margin.

Income Tax Expense

The income tax expense amounted to $5.0 million for the three months ended September 30, 2013, principally reflecting management's decision to record an increase in the valuation allowance on deferred tax assets. This expense is a non-cash expense and has no impact on the Company's liquidity, cash flow or its ability to execute projects or conduct ongoing operations. As a result of the increase in the valuation allowance, the deferred tax assets are fully reserved as of September 30, 2013. Therefore, as of September 30, 2013, future ordinary pretax earnings of up to $69.0 million attributable to Pernix Group, Inc. are expected to have a dollar for dollar additive impact to stockholders' equity due to the utilization of the net operating loss carryforwards which renders unnecessary the payment of cash for U.S. Federal, Illinois and Virginia state income taxes. The need for a valuation allowance increase and / or reduction is assessed each quarter and as such the valuation allowance may be reduced if and when additional new business, tax planning strategies and other factors collectively support such a reduction from the September 30, 2013 fully reserved status.

Income from Discontinued Operations

During the third quarter of 2012, the Company recorded income from the discontinued TCNMI operations of $0.1 million or $0.01 per share for the three months ended September 30, 2012. There was no such income from discontinued operations occurred during 2013.

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Consolidated Net Income / (Loss)

Consolidated net loss was $4.6 million for the third quarter of 2013 compared to the prior year quarter in which the Company had $1.2 million of net income for the third quarter ended September 30, 2012. The 2013 loss largely reflects the aforementioned $5.0 million deferred tax expense recorded in connection with the increase in the valuation allowance against deferred tax assets. This is a non-cash expense. In addition, the Company experienced a reduction in PS JV construction income from containerized housing projects coupled with higher operating costs that together more than offset higher power segment margin.

Liquidity and Capital Resources



                                      September      December 31,
                                         30,             2012
                                         2013
Cash and cash equivalents          $   17,845,120  $   21,406,898


                                     Nine Months     Nine Months
                                        Ended           Ended
                                      September       September
                                       30, 2013        30, 2012
Cash provided by operating
activities                         $    4,075,407  $   17,712,266
Cash (used in) provided by
investing activities                    (828,429)         970,911
Cash (used in) financing
activities                            (6,750,991)     (3,167,105)
Effect of exchange rate changes
on cash and cash equivalents             (57,765)         425,162
(Decrease) / increase in cash and
cash equivalents                   $  (3,561,778)  $   15,941,234

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 affiliated parties and third party banks, and from 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. 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 nine months of 2013, the $3.6 million decrease in cash primarily reflects cash flows from operations of $4.1 million that was more than offset by distributions to our PS JV partner of earnings totaling $6.5 million. . . .

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