Orion Energy Systems: Q4 & Fiscal 2017 Results

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MANITOWOC, Wisconsin - Orion Energy Systems, Inc. (OESX), a leading designer and manufacturer of high-performance, energy-efficient LED lighting products, reported results for its fiscal 2017 fourth quarter (Q4’17) and fiscal year ended March 31, 2017. Orion will hold an investor call today at 4:30 p.m. ET (3:30 p.m. CT) to review its results and discuss its plans to drive growth and accelerate its path to profitability. Call details below.

Fiscal 2017 Financial Highlights

    Revenue rose 4% to $70.2M;
    Gross margin expanded 110 basis points to 24.7% versus 23.6% in FY 2016;
    Net loss was $12.3M in FY 2017 compared to $20.1M in FY 2016;
    Cash and cash equivalents were $17.3M at fiscal 2017 year-end; and
    Year-end order backlog rose to $7.3M at FY 2017 year-end versus $5.6M in FY 2016 year-end.

Fiscal 2017 Operational Highlights

    Orion has transitioned its go-to-market strategy from direct sales to an agency driven model, substantially increasing Orion’s market reach. The agent channel delivered 43% of FY 2017 product sales vs. 4% in FY 2016. Orion ended FY 2017 with 42 agents reaching 95% of the U.S. and Canada; it plans to expand to 50 agents, net of turnover, by Q2 of fiscal 2018.
    During FY 2017, Orion launched its ISON™ Class Gen III LED High Bay lighting fixture, the first and only fixture to break the 200 lumen per watt energy efficiency barrier, along with a variety of new products and features tailored for healthcare, food service, agribusiness, extreme temperature environments and other market segments.

Fiscal 2018 Realignment and Cost Reduction Initiatives

    Orion recently announced executive management changes and a companywide realignment focused on cost reductions intended to accelerate the Company's path to profitability, while maintaining its existing sales and product growth strategies.
    Orion expects to trim $3.5 - $4.0 million of annualized costs, or approximately 12-13% versus FY 2017 levels, under its cost reduction plan and will record non-recurring charges related to its cost initiatives totaling $1.5 - $2.0 million, principally in Q1 FY 2018.
    As part of its cost reduction plan, Orion’s executive team and outside directors are reducing their total annual compensation by approximately 35%, compared to FY 2017 levels.

Fiscal 2018 Outlook

Given recent demand fluctuations in the market for retrofit LED lighting and limited visibility on near-term demand trends, management is not providing specific financial guidance for fiscal 2018 at this time. However, management is providing a directional outlook and goals for 2018 as follows. Orion expects the continued execution of its agent-driven sales strategy should enable it to achieve a revenue growth goal of 10-15% for full year FY 2018.

Further, based on this targeted revenue growth goal and the implementation of its cost reduction initiatives, Orion believes it can reach its goals of achieving a 30% gross profit margin and breakeven on an earnings before interest, taxes, depreciation and amortization (EBITDA) basis, by its fiscal 2018 fourth quarter, before non-recurring items. As noted above, Orion expects to record a non-recurring charge of $1.5 - $2.0 million, principally in Q1 FY 2018, related to its cost cutting initiatives.

Orion cautions investors that these are full fiscal year goals and targets, and that Orion’s quarterly and full fiscal year performance could vary materially from these targets. Orion will revisit its FY 2018 directional outlook and financial goals on each quarterly earnings call and update them as appropriate.

CEO Commentary

Mike Altschaefl, Orion’s Board Chair and newly appointed CEO, commented, “I am excited and proud to assume the executive leadership of Orion at a very exciting time in our industry. We are very confident in our refocused plan to build upon our strong platform of customers, products, personnel, technology and our growing base of agent and distribution relationships at the core of Orion’s growth opportunities. Our sales and product growth strategies are not changing. We are renewing our focus on execution, including a reduction in our cost structure that will accelerate Orion’s path to profitability.

“Investments in ramping our sales activities and on-going R&D to maintain our technology leadership will remain key priorities. We have identified approximately $3.5 - $4.0 million in annualized costs to be eliminated in fiscal 2018, including several initiatives already completed. We expect to have a majority of our plan complete by June 30th and the balance by the end of September. Cost reductions will be shared across all levels of the organization, including total executive and board compensation, which we have reduced by approximately 35%, or $1.5 million, compared to FY 2017 levels.

“Considering the strength of our products, reputation, industry position and the expected benefits of our expanded agent network becoming increasingly productive, we feel confident that topline growth of 10-15% remains a realistic goal for fiscal 2018, although likely weighted toward the second half of the year. Based on this anticipated growth trajectory, combined with the execution of our cost reductions, we believe Orion should be on track to reach our goal of EBITDA breakeven by the fourth quarter of fiscal 2018, before taking into account non-recurring items,“ said Altschaefl.

Fiscal 2017 Review

Orion executed well on multiple fronts during fiscal 2017; however, as previously previewed, full year financial performance did not meet the company’s growth expectations, principally due to an unforeseen industry slowdown in demand in Q4 ‘17.

Revenue: Orion’s FY 2017 revenue grew 4% to $70.2M, driven principally by increasing sales volume of LED fixtures, new product offerings and the shift in sales focus from a direct sales model to an agent model that provides much broader reach into national accounts. These factors more than offset (i) the ongoing intended decline in Orion’s legacy fluorescent business, which contracted by $6.1 million in FY 2017 versus FY 2016; (ii) the year-over-year decline in LED component pricing, which reduced Orion’s average selling prices; and (iii) an unanticipated reduction in demand across the industry early in Q4’17.

LED Revenue: LED product sales rose 16.3% to $53.1 million versus $45.7 million in FY 2016, reflecting increasing customer demand for the enhanced performance and energy efficiency of Orion’s LED lighting products, particularly its high-bay LED fixtures. FY 2017 LED lighting product revenue rose to 81.4% of total lighting product sales, a new record for Orion.

Gross Margin: A more favorable product mix and ongoing manufacturing efficiencies contributed to a 110 basis point expansion in Orion’s gross margin from 23.6% in FY 2016 to 24.7% in FY 2017. Orion’s FY 2017 gross margin included the anticipated impact of $2.2 million of non-cash charges to cost of product sales during the fourth quarter. These charges reflected an increase in inventory reserves of $1.7 million and the write-off of $0.5 million of supplies inventory. The increase in inventory reserves reflected the growing customer preference for higher performing LED lighting technologies, which has slowed demand for lower-priced earlier generation lighting solutions, particularly in the retrofit market that is Orion’s focus.

Net Loss: Orion’s FY 2017 net loss was $12.3 million, or $0.44 per basic share, compared to $20.1 million, or $0.73 per basic share, in FY 2016. Orion’s FY 2017 results included a $0.3 million impairment charge related to an intangible asset, and FY 2016 included a $6.0 million impairment charge related to goodwill and long lived assets. The reduced FY 2017 net loss reflects revenue and gross margin improvements and a reduction in general and administrative expense, offset by controlled increases in selling, marketing and R&D expenses.

Operating Cash Flow: Orion used $1.9 million in cash from operating activities in FY 2017, with net loss adjusted for non-cash items, partially offset by improvements in receivables, inventory and other assets.

Balance Sheet: Orion had $17.3 million in cash and cash equivalents and $6.8 million in long-term borrowings at the close of fiscal 2017. Net working capital was $25.5 million as of March 31, 2017, and shareholder equity was $35.5 million, or $1.26 per diluted share (shareholder’s equity divided by 28.2 million weighted-average common shares outstanding, adjusted for share equivalents outstanding, at March 31, 2017)

About Orion Energy Systems

Orion is a leading designer and producer of energy efficient lighting and retrofit lighting solutions for commercial and industrial buildings. Orion manufactures and markets connected lighting systems encompassing LED solid-state lighting and intelligent controls. Orion systems incorporate patented design elements that deliver significant energy, efficiency, optical and thermal performance that drive financial, environmental, and work-space benefits for a wide variety of customers, including nearly 40% of the Fortune 500.
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