Power Solutions International, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Amounts below are in millions of dollars unless stated otherwise. The company designs and sells engineered power systems and engines serving energy, industrial, and transportation markets.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $117.6 | $114.5 | $329.3 | $312.6 |
| Gross profit / margin | $11.3 / 9.6% | $18.2 / 15.9% | $31.6 / 9.6% | $39.7 / 12.7% |
| Operating loss | $(5.7) | $(1.1) | $(35.9) | $(20.2) |
| Net loss | $(7.2) | $(1.5) | $(40.9) | $(19.9) |
| Diluted loss per share | $(0.31) | $(0.06) | $(1.79) | $(0.87) |
| Adjusted EBITDA (non-GAAP) | $(1.5) | $4.3 | $(10.5) | $(1.6) |
For the nine-month period, revenue rose 5%. Transportation and industrial sales increased, while energy sales fell $31.9 million. Q3 revenue increased 3%, with industrial growth more than offsetting lower transportation and energy sales. North America generated 91% of year-to-date revenue.
Gross margin weakened substantially. Management cited material inflation, tariffs and freight costs, unfavorable product mix, and—in Q3—higher warranty expense. Year-to-date warranty costs were $14.8 million, down from $18.2 million, but included $3.8 million of charges for estimates on prior-period warranties. SG&A rose 25% year to date, primarily reflecting $15.2 million of indemnification costs for former officers and employees. Interest expense increased 25% year to date to $5.3 million.
Cash, debt, and liquidity
- At September 30, cash and cash equivalents were $5.0 million, restricted cash was $3.1 million, and total current assets were $222.3 million versus current liabilities of $296.2 million.
- Debt and short-term financing totaled approximately $155.5 million: $130.0 million drawn under the Standard Chartered revolving facility and $25.5 million of other short-term financing. Long-term debt was $0.7 million.
- Operating activities used $39.1 million of cash in the first nine months, compared with $2.3 million used in 2020. Investing activities provided $0.2 million; financing activities provided $22.7 million. Cash, cash equivalents, and restricted cash decreased $16.2 million.
- Inventories increased to $144.8 million from $108.2 million at year-end 2020, while accounts payable increased to $89.7 million from $31.5 million. Management attributed working-capital cash use partly to inventory purchases made to support forecast Q4 sales.
Material developments, outlook, and risks
- Going concern and financing: Management concluded substantial doubt exists about the company’s ability to continue as a going concern within one year after issuance of the financial statements. The $130 million revolving facility is uncommitted, fully drawn, and gives Standard Chartered discretion to demand repayment; it matures March 25, 2022. A Weichai shareholder facility can be used to repay the revolver and expires April 25, 2022. The separate $25 million Weichai facility is uncommitted, subject to Weichai’s approval, and expires May 20, 2022; it was fully drawn as of November 12, 2021. Management said it would seek extensions, replacement financing, or other liquidity, but gave no assurance of success.
- Covenants: The company failed minimum interest-coverage and EBITDA covenants for Q2 and Q3 2021. On November 9, Standard Chartered waived those defaults for a $0.6 million fee. Future covenant compliance and access to financing remain uncertain.
- Operating conditions: Supply shortages and port delays disrupted deliveries; materials, shipping, and tariff costs rose. Management was pursuing price increases and other mitigation measures. Oil-and-gas demand remained challenged, and continued disruption or weak customer orders could materially affect results and liquidity. No quantified earnings or revenue guidance is provided; management’s Q4 sales expectation is reflected in inventory purchases, not a formal forecast.
- Legal and unusual items: Indemnification costs followed exhaustion of the historical $30 million primary directors’ and officers’ insurance coverage in early 2020. Management expected costs related to the USAO trial—which concluded in September 2021—to cease, but could not estimate future indemnification costs for the pending SEC matter. A former executive sought more than $7.2 million in legal-fee advancement; a former employee’s wage demand and related litigation were also disclosed, with no accrual recorded for that matter as of September 30. The company recorded $0.8 million of expense for an expected shortfall on a supplier minimum-purchase commitment.
- Controls: Disclosure controls were not effective as of September 30 because of previously identified material weaknesses in internal control over financial reporting. The SEC extended the remediation deadline to March 31, 2022.
- Other exposures: COVID-19 impacts, supply-chain disruption, warranty estimates, oil-and-gas market conditions, customer and supplier concentration, and the company’s ability to meet legal and financing obligations may affect results. The company also disclosed ongoing BIPA litigation and other legal matters for which losses may be difficult to estimate.
Key investor verification points
- Confirm the status and terms of refinancing, extensions, or repayment plans before the 2022 debt maturities, including whether lender demand rights or covenant issues recur.
- Track unrestricted cash, operating cash burn, inventory and payable movements, and the company’s ability to fund ordinary operations without additional financing.
- Assess whether margin recovery can offset inflation, freight and tariff costs, product mix, and warranty charges; compare reported GAAP results with the company’s non-GAAP adjustments.
- Review progress toward remediating internal-control material weaknesses by the extended March 31, 2022 deadline.
- Monitor the unresolved SEC-related indemnification exposure and other litigation, including whether estimates or accruals change.