Power Solutions International, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. PSI designs and manufactures engines, power systems and integrated power-generation systems, primarily for OEM customers. It reports as one operating segment. Figures below are in millions of dollars unless stated otherwise.
Financial results and liquidity
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Net sales | $98.9 | $100.2 |
| Gross profit / margin | $16.7 / 16.9% | $7.1 / 7.1% |
| Operating income (loss) | $0.2 | $(15.6) |
| Net loss | $(2.6) | $(18.2) |
| Loss per diluted share | $(0.11) | $(0.79) |
| Operating cash flow | $(17.4) | $5.7 |
| Capital expenditures | $0.1 | $0.6 |
- Cash and cash equivalents were $2.3 million; restricted cash was $3.2 million. Total cash, including restricted cash, was $5.4 million.
- Total debt obligations were approximately $195.8 million. The balance sheet showed $170.0 million of short-term debt and $25.6 million of long-term debt, net of current maturities.
- Current assets were $231.5 million and current liabilities $289.3 million, a working-capital deficit of approximately $57.8 million. Stockholders’ deficit was $44.4 million.
- Management reported non-GAAP adjusted EBITDA of $3.7 million, versus an adjusted EBITDA loss of $8.5 million a year earlier. These non-GAAP measures are not substitutes for GAAP results.
Changes versus prior year
- Sales declined 1% overall, but mix shifted considerably: power systems sales rose to $38.2 million from $25.2 million, and industrial sales rose to $45.8 million from $34.3 million. Transportation sales fell to $14.9 million from $40.7 million, primarily due to lower medium-duty truck and school bus demand.
- Gross margin improved by 9.8 percentage points. PSI attributed the improvement largely to lower warranty expense: warranty costs, net of supplier recoveries, were a $0.3 million benefit versus $6.8 million of costs in Q1 2021. The 2022 result included a $1.4 million favorable estimate change for prior-period warranties, partly attributable to a contract revision.
- Operating expenses fell $6.2 million, including a $4.4 million decrease in SG&A, mainly reflecting lower legal and indemnification costs and lower wages and benefits. Interest expense increased $0.3 million to $2.4 million.
- Operating cash flow deteriorated by $23.1 million year over year despite the smaller net loss. PSI cited lower cash generated from working capital, including lower receivable collections and reduced liabilities, particularly accounts payable.
Outlook, risks and unusual matters
- 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. Without additional financing, the company expects it will not have enough cash to repay debt as it comes due. Its plans include extending, amending or replacing existing debt arrangements or obtaining additional liquidity; success is not assured.
- Debt and liquidity dependence: The $130 million Standard Chartered facility is uncommitted, secured by substantially all company assets and payable on demand at the bank’s discretion; its stated maturity is the earlier of March 24, 2023 or demand. It has minimum EBITDA and interest-coverage covenants for Q2 and Q3 2022. A $40 million Weichai shareholder loan was outstanding at quarter-end and matures November 30, 2022. A further Weichai facility of up to $30 million, subject to Weichai’s discretion, was entered into April 20, 2022. PSI also disclosed covenant-compliance and refinancing uncertainty.
- Operating pressures: Supply shortages, overseas shipping and port delays, inflation in materials and freight, and tariffs affected production and customer deliveries. The company was pursuing price increases and tariff exclusions. Oil-and-gas customer sales improved year over year but remained below 2019 levels; the sector’s spending and rig counts remained below pre-pandemic levels. COVID-19 effects and the war in Ukraine were also identified as risks.
- Controls and compliance: Disclosure controls and procedures were not effective at March 31, 2022 because of previously reported material weaknesses in internal control over financial reporting. The SEC extended the remediation deadline to March 31, 2023. PSI cited ongoing IT-control and warranty-claims process remediation.
- Legal and other contingencies: PSI could not estimate potential future indemnification costs related to a pending SEC matter involving former officers and employees; historical D&O coverage had been exhausted. Other matters include a biometric-information class action, former employees’ incentive-bonus claims for which no accrual was recorded, and other legal matters with potential losses that were generally not estimable. A supplier contract could entail approximately $6.9 million of penalties if PSI stopped purchasing, although the company did not anticipate material penalties based on ongoing discussions.
- PSI provided no quantified sales or earnings guidance in the supplied filing text. It described cost-control actions, prioritization of R&D, and expected annualized savings of about $1.3 million from exiting and subleasing a facility, with about $0.9 million expected in 2022.
Most important facts for investors to verify
- Whether PSI secures refinancing or extensions before the stated debt maturities, and whether the Standard Chartered demand right or Q2–Q3 covenants create an earlier repayment risk.
- Whether operating cash flow and working capital improve, given low unrestricted cash, the working-capital deficit and substantial debt.
- How much of the gross-margin improvement is repeatable versus attributable to favorable warranty estimate changes and contract revisions.
- Progress on material-weakness remediation by the extended SEC deadline, and any further internal-control findings.
- Developments in indemnification obligations and other legal contingencies, including potential losses that PSI says it cannot currently estimate.