Payton in the First Quarter: The Proposed Planar Merger Could Improve Cash Access, but Operations Still Weaken

Payton is showing two very different stories in the first quarter of 2026. Operationally, this is still not a return-to-growth quarter: sales declined, gross margin fell, and operating profit was cut by more than half even after SI was consolidated into the American platform. Backlog rose from $17.4 million at the end of 2025 to $19.3 million at the end of March, but that increase is still not enough to prove that the gap left by the data-center customer and the electric-vehicle slowdown has been filled. Structurally, the negotiation to acquire the public shares of Payton Planar matters more than the quarterly numbers themselves, because it touches the exact bottleneck discussed in the previous cash-access analysis: not every dollar in consolidated cash reaches the Tel Aviv shareholders equally easily. If the merger is completed, the group structure could become simpler and Planar's cash could move closer to the parent-company layer. Still, there is no binding agreement, no approvals yet, and the move does not solve the core business issue: the company still needs to show that SI, backlog and the subcontractor model are restoring profitable growth, not only that the balance sheet keeps buying time.

Company Map

Payton is a holding company that owns about 66.2% of Payton Planar, where almost all of the operating business sits: development, manufacturing and marketing of transformers, mainly planar transformers. The operating chain runs through Payton Planar, Payton America, SI acquired in October 2025, Himag in the UK, and a meaningful supply relationship with PCT, in which Payton Planar indirectly holds 20%.

This is not a technology company that mainly sells promise, and it is not a normal financial holding company. Its economics sit on product engineering, large industrial customers, subcontracted manufacturing in Asia, and working capital that has to stay under control when orders are delayed or a project reaches end of life. That is why a good quarter cannot be measured only by the cash pile. The test is whether backlog is growing again, whether gross margin can hold despite SI and production-mix changes, and whether consolidated cash is truly moving closer to the public shareholders in Tel Aviv.

The current quarter shows progress in only one of those areas. Backlog rose, and the balance sheet remains very strong. But gross margin fell to about 40%, operating profit fell to $1.17 million, and the proposed Planar transaction is still far from completion.

Backlog Does Not Fix the Weak Quarter Yet

The important operating number this quarter is not just the 8.5% revenue decline. It is how that decline moved through the whole income statement. Revenue was $10.65 million, down from $11.65 million in the comparable quarter. Gross profit declined faster, from $5.21 million to $4.26 million, and gross margin fell from about 45% to about 40%. Operating profit dropped from $2.86 million to $1.17 million.

The explanation is not only weaker demand. SI is already consolidated, and it brings lower margins and higher expenses. Development expenses rose 48% to $641 thousand, mainly because the engineering team expanded following SI's consolidation and because of labor costs. Selling and marketing expenses rose 34% to $692 thousand because of the expanded technical marketing team, SI expenses, digital marketing activity, exhibitions and travel. General and administrative expenses also rose 26.6% to $1.76 million.

That means SI still does not look like a driver lifting the quarter. It looks like a layer that expands the cost base while the legacy activity deals with a slowdown. This does not invalidate the strategic logic of the acquisition, but it shifts the burden of proof: over the next few quarters, the company has to show that the American presence creates orders and profitability, not only higher fixed costs.

The Finished Customer Project Has Not Been Fully Replaced

Backlog rose to $19.3 million at the end of March, compared with $17.4 million at the end of 2025, and most of it is expected to be supplied by the end of the fourth quarter of 2026. That is a positive point, especially after backlog was one of the main yellow flags last year. But backlog alone still does not prove that high-quality demand has returned, because the customer map changed in a way that requires caution.

The table explains why the backlog increase is not enough by itself. The main data-center customer fell below the 10% threshold after the key project reached end of life, and the major 2025 automotive customer also fell below that threshold because of weaker electric-vehicle demand. Another automotive customer rose to 13.6% of sales, so the company remains exposed to large customers and projects that can move quickly between quarters.

The supply side is not fully diversified either. One subcontractor in China and the Philippines accounted for 36% of quarterly purchases, and another main subcontractor in China, linked to the indirect PCT holding, accounted for 13.3%. The company currently works with about five subcontractors and believes that finding an alternative would not create a very material extra cost, but in a quarter where profitability is already under pressure, procurement and manufacturing terms remain central to the story.

The Proposed Planar Merger Addresses a Real Bottleneck

The most important event in the quarter came after the balance-sheet date. On April 6, 2026, the company announced negotiations with Payton Planar for a reverse triangular merger, after which the company would hold 100% of Planar and Planar shares would be delisted from Euronext Brussels. The acquisition of the public shares in Planar, about 33.8% of the shares, is being discussed at about EUR 7.38 per share, including dividend amounts if declared or distributed before completion.

This addresses a real issue. As long as Planar has public minority shareholders, the consolidated cash pile is not the same as cash that is immediately accessible to Payton shareholders. A dividend has to be decided at Planar, part of it remains with the minority shareholders, and only then can the cash move up to the parent. Full ownership of Planar could simplify the structure, remove the minority layer and change how the market interprets consolidated cash.

But this is not accessible value yet. The agreement has not been signed, the required corporate approvals have not been received, and there is still no full financing structure or total dollar transaction amount. Even if completed, the transaction solves a structure problem rather than a profitability problem. It can bring cash closer to shareholders, but it does not show that SI is already contributing to profit, that backlog is moving to a stronger run rate, or that gross margin is returning to the 2025 level.

The Balance Sheet Is Strong, but Core Cash Proof Is Thin

The group's liquidity remains unusually strong relative to the size of the business. Cash and short-term deposits totaled $84.2 million at the end of March, compared with $82.8 million at the end of 2025. The operating activity was funded from equity, and the company does not expect to need credit over the coming year to operate the business.

On an all-uses cash flexibility basis, meaning cash after the quarter's actual operating cash, capex, dividends, acquisitions and debt service, the situation is comfortable: operating cash flow of $1.13 million, $187 thousand of property and equipment purchases, no dividend, no acquisition and no debt repayments during the period. But that is not the same as normalized cash generation from the core business. Operating cash flow fell 46.8% from the comparable quarter, and net profit was materially supported by $883 thousand of net finance income, equal to about 76% of operating profit.

Working capital is also less smooth than the balance sheet suggests. Customer balances declined slightly and helped cash flow, but inventory rose by $425 thousand and supplier balances fell by $144 thousand from the beginning of the year. After 2025, when supplier terms were an important part of cash quality, the first quarter does not yet prove that the company can expand backlog and sales without working capital absorbing cash again.

Conclusion

The first quarter does not change the main business conclusion, but it updates the follow-up point. The balance sheet still buys time, and the proposed Planar merger could address a real cash-access bottleneck. On the other hand, the business itself still has to prove recovery: sales declined, margin weakened, SI is increasing expenses, and backlog remains below the level needed to fully offset the pressure from large customers.

In the near term, the market may give more weight to progress on the Planar transaction than to the weak operating quarter, because the move can change the cash-access question for shareholders. But over the next few quarters, that will not be enough. The company needs a binding agreement and approvals for the Planar move, alongside stronger backlog, stable gross margin and clearer SI contribution to revenue and profitability. Without that, the large cash pile remains an important advantage, but not proof that the core business has returned to a stronger track.