Power Solutions International, Inc. — FY 2014 Form 10-K
Business and reporting period. The company designs, manufactures, distributes and supports power systems for industrial OEMs, primarily using natural gas, propane and other fuels. This annual report covers the year ended December 31, 2014; quarterly figures below are for Q4 2014. Unless noted, dollar amounts are in millions.
Financial results and liquidity
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Net sales | $348.0 | $237.8 |
| Gross profit / margin | $67.0 / 19.3% | $44.5 / 18.7% |
| Operating income / margin | $26.0 / 7.5% | $15.0 / 6.3% |
| Income (loss) before tax | $34.5 | $(14.0) |
| Net income (loss) | $23.7 | $(18.8) |
| Basic / diluted EPS | $2.22 / $1.58 | $(1.92) / $(1.92) |
| Cash from operating activities | $(15.7) | $(12.4) |
| Cash from investing activities | $(51.7) | $(6.5) |
| Cash from financing activities | $67.7 | $24.7 |
Revenue rose 46.3%; management attributed $89.7 million of the increase to organic growth, mainly higher heavy-duty power-system volumes, with the balance primarily from acquired 3PI. Gross margin improved, chiefly due to product mix. R&D and engineering expense rose to $16.9 million (4.9% of sales) from $10.4 million (4.4%).
Q4 2014: Sales were $103.9 million versus $61.5 million in Q4 2013; gross profit was $21.1 million versus $11.8 million; operating income was $9.1 million versus $3.9 million; and net income was $10.3 million versus a $3.8 million loss. Q4 gross margin was approximately 20.3%, compared with 19.2% a year earlier. Q4 basic and diluted EPS were $0.96 and $0.48, respectively.
Balance sheet and funding: At year-end, cash was $6.6 million, working capital $115.0 million, and total assets $262.6 million. Revolver borrowings were $78.0 million and term debt was $4.0 million; $21.2 million of revolver availability remained under the then-current facility. The facility was increased to $125 million in February 2015. Operating cash use reflected growth-related working-capital investment, including increases in receivables and inventory; investing cash use included $44.1 million for 3PI and $7.2 million of capital expenditures. The filing states that current liquidity sources are expected to cover anticipated working capital and capital expenditure needs for at least 12 months, subject to business and financing conditions.
Material changes, outlook and risks
- 3PI acquisition: Acquired Professional Power Products, Inc. on April 1, 2014, for consideration valued at approximately $54.5 million after adjustment. 3PI contributed $20.4 million of sales after acquisition and reported an approximately $2.0 million operating loss for that period. The earn-out threshold was not met; reversal of the $3.84 million contingent-consideration liability generated non-cash income.
- Reported earnings include valuation effects: A $6.17 million non-cash gain from revaluing private-placement warrants and the $3.84 million contingent-consideration gain benefited FY 2014 pretax income. These items make reported net income less directly comparable to operating performance. The warrant liability was $11.0 million at year-end and is measured using Level 3 inputs.
- Growth investments and strategy: R&D spending increased to $14.9 million on the company’s separately stated R&D measure. The company highlighted EPA certification of its 8.8-liter engine for on-highway use, a multi-year GM supply agreement for 4.8- and 6.0-liter engines, and joint ventures intended to expand Asian and global power-generation activity. No specific numeric revenue or earnings guidance is provided.
- Key risks: Dependence on a concentrated OEM and supplier base; substantial receivables and inventory; execution and warranty risks for the company’s first internally developed engine and on-highway expansion; acquisition and joint-venture integration; emission certification and regulation; fuel-price economics; and debt covenants and borrowing capacity. Three customers each accounted for more than 10% of 2014 sales. GM and Doosan engines represented approximately 38% and 36% of sales, respectively.
- Other notable disclosures: The company reported no material expected impact from pending litigation. Management and the auditor reported effective internal control over financial reporting, but 3PI was excluded from the year-end control assessment and audit. The auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- How much of sales and operating-income growth is organic, repeatable, and attributable to higher volume rather than acquisition or product mix.
- Whether working-capital needs, especially receivables and inventory, convert to operating cash as growth continues; FY 2014 operating cash flow was negative despite reported net income.
- Whether 3PI can improve profitability and deliver the expected strategic benefits, given its reported post-acquisition operating loss and missed earn-out threshold.
- Current revolver borrowings, borrowing-base availability, covenant compliance and the effect of the February 2015 facility increase; year-end availability was $21.2 million under the prior facility.
- Progress, certification, customer adoption and warranty performance of the internally developed 8.8-liter engine and GM-sourced on-highway products.
- Customer and engine-supplier concentration, and the sensitivity of demand and margins to fuel prices, regulation and product mix.
- The potential volatility of reported earnings from warrant valuation and other non-cash or unusual items.