Power Solutions International, Inc. — 2022 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2022, compared with 2021; it does not provide a standalone fourth-quarter results summary. PSI designs, manufactures and sells engines and power systems for power generation, industrial and transportation applications. It reports one operating segment. Weichai owns a majority of PSI’s common stock.
Financial performance and liquidity
| Metric | 2022 | 2021 |
|---|---|---|
| Net sales | $481.3 million | $456.3 million |
| Gross profit / margin | $88.6 million / 18.4% | $41.3 million / 9.0% |
| Operating income (loss) | $24.6 million | $(41.6) million |
| Net income (loss) | $11.3 million | $(48.5) million |
| Diluted EPS | $0.49 | $(2.12) |
| Net cash used in operating activities | $(8.8) million | $(61.5) million |
| Capital expenditures | $1.4 million | $2.0 million |
- Adjusted net income was $15.7 million versus an adjusted net loss of $26.7 million; adjusted EBITDA was $35.8 million versus an adjusted EBITDA loss of $12.4 million. These are non-GAAP measures.
- Operating cash use improved substantially but remained negative despite the return to GAAP profitability. Cash used reflected working-capital movements, including receivables and payables.
- At year-end, cash and cash equivalents were $24.3 million; restricted cash was another $3.6 million. Current assets were $255.3 million and current liabilities $319.3 million.
- Total debt obligations were reported at $211.0 million at December 31, 2022. The balance included $130.0 million outstanding on Standard Chartered’s revolving facility and borrowings from Weichai. The filing also describes total borrowings of $209.8 million in another discussion; investors should reconcile the reported figures and classifications.
- Interest expense rose to $13.0 million from $7.3 million, attributed to higher average debt and higher effective interest rates.
Material changes versus 2021
- Sales increased 5%. Power Systems sales rose $56.4 million and Industrial sales rose $71.4 million, partly offset by a $102.7 million reduction in Transportation sales.
- Gross margin improved by 9.4 percentage points, which management attributed mainly to lower warranty expense, improved product mix and pricing actions. Warranty costs were $6.4 million, down from $22.8 million; the year-end accrued warranty balance was $21.6 million.
- Operating expenses declined $18.9 million, including lower R&D spending and reduced legal costs associated with former officers and employees. Incremental financial reporting, internal-control remediation and investigation/legal expenses were $3.6 million, compared with $19.7 million.
- Sales mix shifted: Transportation declined to 16% of sales from 39%, while Power Systems increased to 37% from 27% and Industrial to 47% from 34%.
- Sales outside the United States represented 27% of revenue, compared with 11% in 2021. Pacific Rim sales increased substantially.
Outlook, risks and unusual items
- Management expected 2023 sales to increase about 3% from 2022, led by strong Power Systems growth, with smaller increases in Industrial and Transportation. It targeted gross margin to remain relatively consistent. These are forward-looking expectations, not assurances.
- Management stated that substantial doubt exists about PSI’s ability to continue as a going concern because of refinancing and liquidity uncertainty. Without additional financing, the company said it expects insufficient cash to repay debt as it falls due.
- After year-end, on March 24, 2023, PSI amended its $130 million uncommitted Standard Chartered facility, extending maturity to the earlier of March 22, 2024 or the bank’s demand. The facility is secured by substantially all company assets, and Standard Chartered retains the right to demand repayment at its discretion. Weichai also extended certain loan maturities; some additional credit remains discretionary.
- Key operating risks include supply-chain delays, inflation and tariffs, higher interest rates, customer and end-market concentration, oil-and-gas market volatility, warranty claims, supplier dependence, emissions regulation and competition. One customer accounted for 19% of 2022 sales; a customer also represented 30% of year-end receivables.
- The loss of the prior GM 6.0L engine offering and the end of related large-customer supply contributed to weaker Transportation sales. Hyster-Yale indicated it would obtain alternative supply for some engines beginning in late 2023, with PSI expecting lower sales volumes to that customer from 2024.
- PSI reported that management considered internal control over financial reporting effective at year-end and that previously identified material weaknesses had been remediated. The SEC’s review of PSI’s compliance with its remediation undertaking remained pending. The auditor expressed an unmodified opinion on the financial statements but highlighted the going-concern uncertainty; the auditor did not audit internal control effectiveness.
- Other material matters include ongoing legal contingencies and indemnification obligations, including an $8.8 million accrued reimbursement to Travelers. The company’s historical primary directors’ and officers’ insurance coverage had been exhausted.
- PSI common stock had been delisted from Nasdaq in 2017 and traded on the OTC Pink marketplace, which the filing notes may have limited liquidity. Weichai held 51.2% of shares as of April 10, 2023.
Important facts for investors to verify
- Reconcile the filing’s $209.8 million and $211.0 million debt disclosures, and confirm current balances, maturity dates, covenant compliance and lender demand rights.
- Assess whether refinancing or other liquidity support was secured after the filing, and whether operating cash flow can improve enough to support debt service and working capital.
- Track actual 2023 sales and margin performance against management’s outlook, particularly Power Systems growth and the effects of transportation customer/supplier changes.
- Review warranty claims, reserves and recoveries, including the assumptions underlying the $21.6 million accrued warranty liability and the auditor’s critical audit matter.
- Confirm the outcome of the SEC’s review of PSI’s control-remediation documentation and monitor whether any control deficiencies recur.
- Monitor outcomes and cash requirements from legal matters and indemnification obligations, as well as OTC trading liquidity and Weichai’s control over corporate decisions.