Power Solutions International, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. PSI designs and manufactures engines, power systems and integrated power-generation systems, serving power systems, industrial and transportation markets. The company reports as one operating segment.
Financial performance and position
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Net sales | $120.5 million | $111.5 million | $219.4 million | $211.6 million |
| Gross profit / margin | $18.3 million / 15.2% | $13.2 million / 11.8% | $35.0 million / 16.0% | $20.3 million / 9.6% |
| Operating income (loss) | $3.2 million | $(14.6) million | $3.5 million | $(30.2) million |
| Net income (loss) | $1.4 million | $(15.6) million | $(1.2) million | $(33.7) million |
| Diluted earnings (loss) per share | $0.06 | $(0.68) | $(0.05) | $(1.47) |
| Interest expense | $2.7 million | $1.5 million | $5.1 million | $3.6 million |
For the first half, operating cash flow was $(30.2) million, capital expenditures were $0.5 million, and financing activities provided $27.9 million, primarily from Weichai shareholder loans. Cash, cash equivalents and restricted cash totaled $6.9 million at June 30, including $3.4 million of unrestricted cash and $3.5 million restricted cash. Total assets were $307.0 million; total liabilities were $350.1 million, and stockholders’ deficit was $43.0 million. Accounts receivable was $86.8 million and inventory was $131.1 million.
Total outstanding debt obligations were $210.6 million, including $130.0 million under the Standard Chartered revolving facility and $79.8 million in other short-term financing. Current liabilities of $324.9 million exceeded current assets of $241.8 million. The filing states that without additional financing PSI expects it will not have sufficient cash to repay debt as it falls due.
Changes versus comparable periods
- Q2 sales rose 8%; first-half sales rose 4%. Growth in power systems and industrial products was partly offset by a steep decline in transportation sales. In the first half, transportation sales fell $60.7 million year over year.
- Margins improved, which management attributed mainly to pricing, product mix and lower first-half warranty expense. First-half warranty costs were $1.9 million versus $7.5 million a year earlier; Q2 warranty costs, however, increased to $2.2 million from $0.7 million, partly because the prior-year quarter included a $3.3 million benefit from adjustments to prior-period warranties.
- Operating expenses fell substantially, chiefly because legal and indemnification costs tied to former officers and employees were much lower than in 2021. Q2 SG&A declined 53%; first-half SG&A declined 42%.
- Higher average debt and interest rates increased interest expense. First-half operating cash use worsened by $16.0 million year over year, with working-capital movements, including receivables and payables, contributing to the outflow.
- Q2 generated GAAP net income, but PSI remained loss-making for the first half. Management-reported non-GAAP Adjusted EBITDA was $6.0 million for Q2 and $9.7 million for the first half, compared with losses of $0.5 million and $9.0 million, respectively, in 2021.
Outlook, risks and unusual items
- Going concern: Management concluded substantial doubt exists about PSI’s ability to continue as a going concern within one year after issuance of the financial statements. The company plans to extend, amend, replace or refinance debt, but gives no assurance it can do so on acceptable terms.
- Debt maturity and availability: The $130 million Standard Chartered facility matures no later than March 24, 2023, but the lender may demand repayment earlier at its discretion. The company reported compliance with applicable financial covenants for Q2. Weichai loan facilities have maturities in 2022 and 2023; several are discretionary or subject to conditions.
- Operating pressures: Supply-chain shortages and shipping bottlenecks delayed customer deliveries; materials and freight costs and tariffs remained elevated. Oil-and-gas-market activity remained below pre-pandemic levels, and management said related sales remained below 2019 levels. Higher LIBOR and SOFR rates may further raise interest expense.
- Warranty exposure: PSI had approximately $2.0 million accrued for a specific warranty matter and said future claims could exceed current estimates, with a potentially material financial-statement impact.
- Controls and compliance: Disclosure controls were ineffective at June 30, 2022 because of previously identified material weaknesses. The SEC extended the deadline for remediation to March 31, 2023. PSI also reported ongoing legal contingencies; certain possible losses could not be reasonably estimated.
- Other developments: PSI settled the SEC matter involving former officers and employees in June 2022, which management said should end related future indemnity costs. On July 7, 2022, a revised Doosan supply agreement removed exclusivity, future minimum-purchase commitments and related penalties, except for the 2021 outstanding balance.
- Guidance: The filing provides no clear numerical revenue or earnings guidance. Management discusses ongoing expense management, pricing and other mitigation efforts, but emphasizes significant uncertainty.
Key facts for investors to verify
- Whether PSI secures refinancing or extensions before debt maturities, and whether the callable Standard Chartered facility remains available.
- Cash availability and working-capital trends, particularly collections, payables and the extent to which restricted cash can be accessed.
- Subsequent warranty claims and any change in the estimated exposure for the specific warranty matter.
- Progress toward remediating material weaknesses by the SEC’s March 31, 2023 deadline, and whether controls are later deemed effective.
- Whether improved margins and lower legal expenses persist, given higher interest expense and the pronounced decline in transportation sales.