Power Solutions International, Inc. — Q3 2022 Form 10-Q
Reporting period: Unaudited quarter and nine months ended September 30, 2022. PSI designs and sells power systems and engines for power systems, industrial, and transportation markets. Unless otherwise noted, amounts are in U.S. dollars.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $124.9 million | $117.6 million | $344.3 million | $329.3 million |
| Gross profit / margin | $24.1 million / 19.3% | $11.3 million / 9.6% | $59.1 million / 17.2% | $31.6 million / 9.6% |
| Operating income (loss) | $7.2 million | $(5.7) million | $10.7 million | $(35.9) million |
| Net income (loss) | $3.2 million | $(7.2) million | $2.0 million | $(40.9) million |
| Diluted EPS | $0.14 | $(0.31) | $0.09 | $(1.79) |
| Interest expense | $3.6 million | $1.6 million | $8.7 million | $5.3 million |
For the nine months, operating cash flow was negative $17.7 million, compared with negative $39.1 million in 2021. Investing cash flow was negative $1.0 million and financing cash flow was positive $29.0 million. Cash, cash equivalents, and restricted cash totaled $20.0 million at quarter-end, including $16.5 million of cash and cash equivalents.
At September 30, 2022, total assets were $311.6 million, total liabilities $351.3 million, and stockholders’ deficit $39.8 million. Current assets of $248.4 million were below current liabilities of $327.0 million. Debt and other financing obligations were approximately $211.7 million; the balance sheet classified $211.0 million as short-term debt.
Material changes versus the prior comparable periods
- Q3 sales increased 6%; nine-month sales increased 5%. Growth in power systems and industrial markets was partly offset by lower transportation sales. Nine-month transportation sales fell $83.1 million.
- Margins improved substantially, which management attributed mainly to pricing actions, better sales mix, and lower warranty costs. Nine-month warranty costs, net of supplier recoveries and other adjustments, were $5.4 million versus $14.8 million in 2021.
- Nine-month operating expenses decreased 28%, primarily reflecting lower legal and indemnification costs and reduced research and development spending. Interest expense rose 66% for the period, reflecting higher average debt and interest rates.
- Despite the return to GAAP profitability, operations used cash. Management attributed the year-over-year improvement in operating cash flow mainly to improved earnings, partly offset by working-capital movements.
Liquidity, outlook, risks, and unusual items
- Going concern and refinancing: Management said substantial doubt exists about PSI’s ability to continue as a going concern within one year after issuance of the financial statements. Without additional financing, PSI expects it cannot repay obligations as they come due. Management planned to seek extensions, amendments, replacement financing, or other liquidity; success is not assured.
- Debt terms and maturities: The $130 million Standard Chartered revolving facility is uncommitted and callable on demand, with stated maturity no later than March 24, 2023. The $50 million Weichai third shareholder loan was due November 30, 2022; other Weichai loans also had 2023 maturities. PSI reported compliance with applicable financial covenants for Q3 2022. Variable rates tied to SOFR and LIBOR had increased, raising interest expense.
- Operations and outlook: The filing provides no specific sales or earnings guidance. Management cited supply-chain and container delays, raw-material shortages, inflation in material and shipping costs, tariffs, and oil-and-gas market activity below pre-pandemic levels. These factors could delay deliveries or reduce future orders. Pricing actions and efforts to obtain tariff exclusions were among its mitigations.
- Warranty and legal exposure: Accrued product warranty liabilities totaled $24.1 million, including approximately $2.0 million for a specific matter where future claims could exceed current estimates and the impact could be material. PSI also reported ongoing legal matters and indemnification obligations; an $8.8 million accrual related to potential reimbursement to Travelers for former executives’ legal fees.
- Controls: Disclosure controls were deemed ineffective at September 30, 2022 because of previously identified material weaknesses in internal control over financial reporting. The SEC extended PSI’s remediation deadline to March 31, 2023.
- Non-GAAP results: Adjusted EBITDA was $9.9 million for Q3 and $19.5 million for the first nine months, versus losses of $1.5 million and $10.5 million, respectively, in 2021. These are non-GAAP measures and should be considered alongside GAAP results.
Important facts for investors to verify
- Whether PSI extended, refinanced, or repaid the callable revolving facility and shareholder loans as they came due, and the resulting cost and availability of liquidity.
- Whether cash generation and working capital improved enough to address the current-liability shortfall and going-concern uncertainty.
- How warranty claims develop, particularly for the identified matter, and whether reserve estimates require material revision.
- Progress toward remediating material weaknesses by the SEC deadline, including whether controls are later assessed as effective.
- Customer concentration and sales mix: one customer represented 22% of Q3 sales and 30% of accounts receivable at quarter-end; transportation sales remained materially lower year over year.