Power Solutions International, Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013; unaudited. Unless stated otherwise, dollar amounts below are in millions. PSI designs, manufactures, distributes and supports power systems and aftermarket parts for industrial OEMs. It reports one business and geographic segment.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $59.138 | $50.115 | $111.714 | $98.187 |
| Gross profit / margin | $11.184 / 18.9% | $8.832 / 17.6% | $20.353 / 18.2% | $17.061 / 17.4% |
| Operating income | $3.840 | $3.393 | $6.920 | $6.429 |
| Net income (loss) | ($2.100) | $2.961 | ($5.027) | $4.111 |
| Basic and diluted EPS | ($0.23) | $0.33 | ($0.55) | $0.45 |
- Sales increased 18.0% in Q2 and 13.8% for the first six months, driven mainly by higher sales volume and power-generation demand. Gross margin improved, which management attributed primarily to a mix shift toward higher-margin engines.
- Operating expenses rose: Q2 research and development was $2.289 million, selling and service $2.089 million, and general and administrative $2.966 million. For the six months, the respective amounts were $4.060 million, $3.969 million and $5.404 million.
- Net losses largely reflect noncash private-placement warrant revaluation expense: $4.207 million in Q2 and $9.053 million for the six months. The warrant liability was $9.920 million at June 30, versus $3.666 million at year-end 2012. The filing says the valuation is sensitive to the common-stock price and uses Level 3 inputs.
Cash flow, balance sheet and liquidity
- Six-month operating cash flow was a use of $5.206 million, compared with $0.809 million provided in the prior-year period. Investing cash outflow was $2.617 million, principally for property and equipment; financing provided $8.715 million. Cash ended June 30 at $1.435 million.
- Working capital was $60.536 million, up from $49.413 million at December 31, 2012. Inventory rose to $47.932 million from $39.968 million, while accounts receivable fell to $35.062 million from $37.480 million.
- Revolving borrowings were $37.199 million at June 30, compared with $30.942 million at year-end; reported unused and available capacity was $18.3 million. The June 28 refinancing replaced BMO Harris’s $50 million facility with a Wells Fargo revolving facility initially capped at $75 million, with a potential increase to $100 million subject to agreement terms. Maturity is June 28, 2018. Borrowings are secured by substantially all tangible and intangible assets other than real property.
- Management said forecast cash sources were expected to meet working-capital and capital-expenditure needs for at least the next 12 months, subject to business and financing assumptions.
Material changes, outlook and notable items
- Costs increased alongside growth: management cited additional engineering and administrative hiring, higher warranty expense, and increased public-company costs. SAR compensation expense included $241,000 accelerated after a market condition was achieved earlier than expected; restricted-stock awards were also granted in June.
- On July 16, 2013, after quarter-end, PSI sold 1.05 million shares in a public offering at $35 per share. Company proceeds were approximately $34.53 million before estimated offering expenses of about $0.2 million; $25 million was used to repay revolver borrowings. Selling stockholders also sold 955,000 shares, for which PSI received no proceeds.
- PSI committed up to $1.2 million to an Asian-market engine joint venture; it contributed $0.5 million on July 5. The facility was expected to be completed later in 2013, with operations to follow.
- No specific revenue or earnings guidance is provided. Management identified risks including customer and supplier concentration, demand and product-mix fluctuations, inventory exposure, competition, regulatory changes, product-development and on-road expansion execution, and dependence on credit access. It also cited variable sales cycles and potential volatility from warrant valuation.
- Management concluded disclosure controls were not effective at quarter-end because a previously reported material weakness in aftermarket-parts software controls had not yet been remediated. Security rights and database monitoring were added, but management said they had not operated long enough to establish remediation.
- PSI reported ordinary-course legal proceedings and did not expect their resolution to have a material adverse effect. The filing also describes registration-rights liquidated-damages provisions; the relevant Form S-3 was filed and declared effective June 27, 2013.
Most important facts for investors to verify
- Whether sales growth and improved gross margin persist, particularly given customer concentration and product-mix sensitivity.
- The size and valuation assumptions of the private-placement warrant liability, and its effect on reported earnings versus operating performance.
- Actual borrowing-base availability, covenant status and liquidity following the offering-related $25 million debt repayment.
- Progress in remediating the internal-control material weakness and any subsequent assessment of control effectiveness.
- Execution, funding and expected economics of the Asian joint venture, and any further equity issuance, dilution or stock-compensation plan changes.