Power Solutions International, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2012. The company designs, manufactures and supports power systems and aftermarket parts for off-highway industrial OEMs, primarily in North America, with sales also in Asia and Europe. It operates as one business segment. Financial statement amounts below are in millions of dollars except per-share data.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $51.7 | $42.8 | $149.9 | $109.5 |
| Gross profit | $8.4 | $6.6 | $25.5 | $19.0 |
| Gross margin | 16.3% | 15.3% | 17.0% | 17.4% |
| Operating income | $2.9 | $2.3 | $9.3 | $7.2 |
| Net income | $1.8 | $1.9 | $6.0 | $3.5 |
| Basic and diluted EPS | $0.20 | $0.19 | $0.66 | $0.38 |
| Net cash used in operating activities | Not reported by quarter | $(2.6) | $(2.6) | |
| Capital expenditures and other asset purchases | Not reported by quarter | $(2.9) | $(0.7) |
- Third-quarter sales rose 20.8% year over year, mainly from higher power-system volumes; aftermarket sales also increased. Gross profit rose 28.2%, with improved quarterly margin attributed to product mix.
- Nine-month sales increased 36.9%, primarily on volume. Gross profit rose 33.9%, but margin declined from 17.4% to 17.0%, which management attributed to higher labor and overhead costs.
- Quarterly net income was slightly lower despite higher sales and operating income. For the nine months, net income increased substantially. EPS comparisons are affected by the prior-year preferred-stock allocation and changes in the company’s share structure.
- Operating cash flow was negative despite $6.0 million of nine-month net income. Inventory increased $11.2 million and receivables increased $2.3 million, partly offset by a $4.9 million increase in accounts payable. Investing cash outflow was $2.9 million; financing provided $6.2 million.
Financial position and liquidity
- At September 30, 2012, cash was $0.7 million, accounts receivable $31.8 million, inventory $44.6 million, total assets $88.5 million, and stockholders’ equity $21.8 million.
- Revolving-credit borrowings were $29.7 million, with $20.3 million of availability under the $50 million facility. The filing reports compliance with financial covenants at September 30. Long-term debt apart from the revolver was approximately $0.02 million, with $0.02 million current.
- Working capital was $46.8 million, versus $14.2 million at December 31, 2011. Management says $19.7 million of the increase resulted from the March 2012 credit-agreement amendment, which moved the revolver from current liabilities to long-term obligations; inventory growth accounted for another $11.2 million. The comparison therefore does not represent solely an operating improvement.
- The March 20, 2012 amendment increased the credit facility from $35 million to $50 million, extended maturity to March 20, 2017, reduced certain borrowing costs and ended automatic cash sweeps. Management said existing cash sources and borrowing capacity should meet anticipated working-capital and capital-expenditure needs for the next 12 months.
Material changes, outlook and risks
- Research and development expense increased 59.5% in Q3 and 69.7% for the nine-month period, primarily reflecting engine-development work and related staffing. The company is developing its own engines, including its new 8.8-liter engine.
- General and administrative expense rose due to added staff and public-company costs; Q3 also included $0.3 million associated with relocating production, warehousing and administrative offices. Capital spending increased in connection with facility improvements and equipment.
- Other income included noncash gains from revaluing private-placement warrants: $0.6 million for the nine months, reducing the warrant liability to $2.6 million from $3.3 million at year-end. The valuation uses significant unobservable inputs and is subject to estimation uncertainty.
- Inventory growth included engine blocks held ahead of expected demand. Certain customers had payment terms up to 150 days; $3.4 million of receivables at quarter-end was outstanding beyond the company’s usual 30–45-day terms.
- No specific revenue, earnings or margin guidance is provided. Management’s stated liquidity outlook is based on current forecasts and assumptions, not a quantified operating forecast. Results may fluctuate with OEM demand, product and customer mix, emission regulations, pricing, supplier availability, and product or supplier transitions.
- Key disclosed risks include reliance on OEM customers and engine suppliers, substantial inventory exposure, competition, uncertain adoption of alternative-fuel products and the in-house engine, variable sales cycles, potential warranty or product-liability claims, and the need to fund growth. The company also warns that quarterly results can vary and that its common stock may have limited trading liquidity.
- On November 8, 2012, after quarter-end, the credit agreement was amended to permit acquisitions up to $2 million, joint ventures up to $2 million, and annual capital expenditures up to $8 million, subject to stated limitations. The filing reports that pending legal proceedings are not expected to have a material adverse effect.
- Management concluded disclosure controls were effective at a reasonable-assurance level. The company had not yet completed its first annual assessment of internal control over financial reporting and planned to do so for year-end 2012.
Important facts for investors to verify
- Whether elevated inventory converts to sales and cash as anticipated, and whether inventory growth creates obsolescence or write-down risk.
- Whether receivables—including extended-term balances—and supplier payment timing continue to pressure operating cash flow.
- Current revolver availability, borrowing-base constraints, covenant compliance and the terms and limitations of the November 8 amendment.
- Whether sales growth and product mix sustain margins as research, engineering, staffing and facility costs rise.
- The assumptions behind the Level 3 warrant valuation and the potential dilution from the 736,252 shares reserved for outstanding private-placement warrants and other equity awards.
- The outcome of the planned year-end internal-control assessment and any material weaknesses identified.