Power Solutions International, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited. Financial amounts are in U.S. dollars, generally in thousands unless noted.
Business context and reporting period
PSI designs, manufactures, distributes and supports power systems for industrial OEMs and on-road markets, including alternative-fuel systems and custom-engineered power generation systems. It operates as one business and geographic segment. Q1 2016 results include Powertrain and Bi-Phase, acquired in 2015; Q1 2015 did not include those businesses.
Key financial metrics
| Metric | Q1 2016 | Q1 2015 or prior date |
|---|---|---|
| Net sales | $61.814 million | $86.139 million |
| Gross profit / margin | $4.056 million / 6.6% | $16.457 million / 19.1% |
| Operating income (loss) | $(8.681) million | $4.070 million |
| Net loss | $(5.251) million | $(1.456) million |
| Loss per diluted share | $(0.49) | $(0.13) |
| Cash provided by (used in) operations | $9.995 million | $(9.731) million |
| Cash at period end | $1.495 million | $8.445 million at Dec. 31, 2015 |
| Working capital | $133.706 million | $153.413 million at Dec. 31, 2015 |
| Revolver borrowings | $80.568 million | $97.299 million at Dec. 31, 2015 |
| Senior Notes, net | $53.946 million | $53.820 million at Dec. 31, 2015 |
Operating cash flow improved mainly from collections of receivables and lower inventory, partially offset by payments to suppliers and other liabilities. Investing cash outflow was $0.214 million; financing cash outflow was $16.731 million, principally reflecting net revolver repayments. The company reported $21.1 million of unused and available revolver capacity at quarter-end. Cash plus stated revolver availability was therefore limited relative to its operating needs.
Material changes versus the prior comparable period
- Sales fell $24.325 million, or 28.2%. Management attributed the organic sales decline of $29.1 million primarily to lower oil and gas end-market sales; acquired businesses added $4.8 million of sales.
- Gross profit declined 75.4%, and gross margin contracted to 6.6% from 19.1%. Lower sales, a mix shift away from higher-margin oil and gas products, and weaker absorption of production costs contributed.
- Operating results swung from $4.070 million of income to an $8.681 million loss. Research and development was broadly stable in dollars, while amortization rose to $1.429 million from $0.814 million, largely reflecting acquisition-related intangibles.
- Interest expense increased to $1.421 million from $0.489 million, mainly due to the Senior Notes. The warrant liability generated $1.256 million of noncash income in 2016, compared with $3.614 million of noncash expense in 2015; these fair-value changes affected reported pretax results.
- Operating cash flow turned positive, while cash declined by $6.950 million over the quarter after financing outflows. Receivables and inventory fell, as did accounts payable.
Outlook, commentary, risks and unusual items
- The filing gives no specific sales, earnings or margin guidance. Management cautions that quarterly results may fluctuate and that Q1 results are not necessarily indicative of full-year results.
- On April 1, 2016, after quarter-end, PSI amended the Senior Notes indenture: it eliminated the special mandatory offer to purchase, raised permitted indebtedness temporarily, and increased the notes’ interest rate from 5.50% to 6.50%. PSI paid a $275,000 consent fee. The notes mature May 1, 2018.
- The revolver is secured by substantially all tangible and intangible assets other than real property; borrowing capacity depends partly on eligible receivables and inventory. Senior Notes are unsecured and effectively subordinated to secured debt. Management said funding availability and refinancing terms cannot be assured.
- Management decided to sell an operating facility, reclassified $1.343 million of property to assets held for sale, and expected completion in 2016. No sale outcome is reported here.
- The private placement warrants expired April 29, 2016. Subsequent to quarter-end, 153,916 shares were issued on warrant exercises and PSI received $2.001 million. This creates share dilution; the quarter-end warrant liability was $0.226 million.
- Key business risks include continued weakness in oil and gas demand, customer and supplier concentration, competition, product-mix shifts, inventory exposure, interest-rate and refinancing risk, and execution of acquisitions and on-road or alternative-fuel growth plans. A one-percentage-point change in interest rates was estimated to change annual interest expense by about $805,700 at quarter-end debt levels.
- Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter. Pending legal matters were not expected to have a material adverse effect; federal tax audits for 2013 and state audits for 2011–2012 remained open, with no material outcome expected by management.
Most important facts for investors to verify
- Whether sales and gross margin stabilize, particularly in oil and gas markets, and whether the reported mix and volume pressures persist.
- Whether positive operating cash flow is repeatable after the quarter’s substantial receivables and inventory reductions, given cash of only $1.495 million at quarter-end.
- Revolver borrowing-base availability, covenant compliance, debt maturity and refinancing plans, and the cost impact of the Senior Notes’ 6.50% coupon.
- Whether the planned facility sale closes and what proceeds or operating effects result; also monitor post-quarter warrant exercises and resulting dilution.
- Customer payment terms extending up to 150 days, customer and supplier concentration, inventory quality, and any changes in legal or tax contingencies.