Power Solutions International, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. Unaudited consolidated results; dollar figures below are in millions unless stated otherwise. The company designs, manufactures, distributes and supports industrial power systems, including alternative-fuel systems and custom power-generation equipment.
Financial results and liquidity
| Metric | Q1 2015 | Q1 2014 | Change / context |
|---|---|---|---|
| Net sales | $86.1 | $66.7 | Up 29.1%; about $13.6 million of growth was organic, primarily from higher volume and heavy-duty power systems. |
| Gross profit / margin | $16.5 / 19.1% | $11.9 / 17.9% | Gross profit up 37.9%; improved mix, including heavy-duty systems, supported margin. |
| Operating expenses | $12.4 | $8.4 | Higher R&D, selling and service, and G&A costs. |
| Operating income / margin | $4.1 / 4.7% | $3.5 / 5.3% | Operating income increased, but operating margin declined. |
| Net income (loss) | $(1.5) | $2.4 | Loss included $3.6 million of noncash warrant revaluation expense. |
| Basic and diluted EPS | $(0.13) | $0.23 basic; $0.19 diluted | Potentially dilutive shares excluded in 2015 because they would have been anti-dilutive. |
| Operating cash flow | $(9.7) | $(10.6) | Cash use was driven chiefly by working-capital needs, particularly inventory. |
| Investing cash flow | $(10.5) | $(0.8) | Included $9.7 million for the Buck’s acquisition and $0.8 million of capital spending. |
| Financing cash flow | $23.9 | $8.7 | Net revolving-credit borrowings funded cash needs and the acquisition. |
Balance sheet at March 31: Cash was $10.2 million; working capital was $138.1 million, versus $115.0 million at year-end 2014. Net inventory rose to $118.1 million from $93.9 million, reflecting growth, the Buck’s acquisition and strategic purchases to support expected sales. Total liabilities were $197.2 million and stockholders’ equity was $89.6 million.
Debt and liquidity: The $125 million revolving facility had $102.4 million outstanding and $21.5 million available, subject to borrowing-base limitations. Term debt was $3.6 million at quarter-end; total revolver and term borrowings were approximately $106.0 million. Revolver borrowings were primarily LIBOR-based; the company estimated that a one-percentage-point rate change would affect annual interest expense by about $1.06 million, based on quarter-end debt. Management stated that forecast liquidity should meet anticipated working-capital and capital-expenditure needs for at least 12 months, subject to business and financing conditions.
Material changes and unusual items
- Q1 2015 included 3PI, acquired April 1, 2014; Q1 2014 did not. Acquisitions accounted for part of sales growth, so reported comparisons are not wholly like-for-like.
- The company acquired Buck’s on March 18, 2015, for an initial cash price of approximately $9.7 million, subject to adjustments. Buck’s makes alternative-fuel industrial engines; purchase accounting remained provisional.
- The $3.6 million increase in the fair value of private placement warrants was recorded as expense. The liability rose to $14.7 million from $11.0 million and is measured using Level 3 inputs. The change was driven principally by the increase in the company’s share price; it was noncash and excluded from taxable income.
- Despite the pretax loss, the company recorded $1.4 million of income tax expense. Excluding warrant revaluation, the reported tax rate would have been 39.1%.
- Operating cash flow remained negative as inventory increased $18.1 million before acquisition effects, and the company paid down $4.8 million of accounts payable. Receivables collections provided a partial offset.
Outlook, financing, risks and contingencies
- The filing provides no specific revenue or earnings guidance. Management cited heavy-duty system demand and product development, including new engines and on-highway applications, while cautioning that quarterly results may vary.
- After quarter-end, the company issued $55 million of unsecured 5.50% Senior Notes due 2018, receiving $53.6 million net of transaction costs, and repaid the term loan. The notes are effectively subordinated to secured debt and carry restrictive covenants. If the company does not certify by March 2017 that it meets specified EBITDA and fixed-charge coverage tests, it may be required to offer to repurchase the notes.
- The credit facility was amended in connection with the notes; while the notes remain outstanding, the revolver is scheduled to mature before the notes’ final maturity or potential special mandatory purchase date. This creates refinancing and concentrated-maturity risk.
- Subsequent acquisitions included Bi-Phase Technologies, acquired May 1 for an initial approximately $3.5 million cash price plus other potential amounts, and a proposed Powertrain Integration acquisition announced May 4, with an initial $21.6 million cash price plus working capital, assumed liabilities and earn-outs. The latter was expected to close in Q2, subject to due diligence.
- Other stated risks include dependence on key OEM customers and suppliers, customer and product concentration, inventory exposure, alternative-fuel market adoption, product development and regulatory uncertainty, acquisition integration, and interest-rate and debt-covenant exposure. Legal proceedings were not expected to have a material adverse effect; the filing disclosed joint-venture funding commitments of up to $1.2 million and $1.0 million. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- How much sales growth and margin performance persist excluding 3PI and other acquisition contributions.
- Whether inventory converts to sales and operating cash flow, particularly after the substantial Q1 inventory build.
- Current revolver availability under the borrowing base, covenant compliance, and the refinancing implications of the amended maturity structure.
- Progress toward the Senior Notes’ 2017 EBITDA and fixed-charge coverage thresholds, and the potential mandatory repurchase obligation.
- Final purchase accounting, total consideration and integration results for Buck’s, Bi-Phase and Powertrain Integration, including any earn-outs.
- The effect of share-price-driven warrant remeasurement on reported earnings and the remaining warrant liability.