Power Solutions International, Inc. — Q1 2021 Form 10-Q
Business context and period. Unaudited results cover the three months ended March 31, 2021, compared with Q1 2020. PSI designs and sells engineered power systems and engines across energy, industrial, and transportation markets; it reports as one operating segment.
Financial results and liquidity
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Net sales | $100.2 million | $105.1 million |
| Gross profit / margin | $7.1 million / 7.1% | $17.7 million / 16.9% |
| Operating loss | $15.6 million | $3.7 million |
| Net loss / diluted loss per share | $18.2 million / $0.79 | $0.7 million / $0.03 |
| Operating cash flow | $5.7 million | $24.3 million |
| Capital expenditures | $0.6 million | $0.8 million |
- At March 31, 2021, cash and cash equivalents were $23.4 million, restricted cash was $3.3 million, and inventory was $109.1 million. Current liabilities were $251.9 million; total liabilities were $291.0 million, exceeding total assets of $279.1 million. Stockholders’ deficit was $11.9 million.
- Revolving borrowings were $130.0 million, fully drawn. The uncommitted facility matures March 25, 2022, is secured by substantially all assets, and permits Standard Chartered to demand repayment at its discretion. A $130.0 million Weichai facility is available solely to repay those borrowings if needed, and expires April 25, 2022.
- Management reported substantial doubt about PSI’s ability to continue as a going concern within one year after issuance, citing refinancing, liquidity, and covenant uncertainties. It plans to seek an extension, replacement financing, or other liquidity; success is not assured.
Material changes versus Q1 2020
- Sales declined 5%. Energy sales fell $24.9 million and industrial sales fell $2.8 million, partly offset by a $22.8 million increase in transportation sales. Energy represented 25% of sales versus 48% a year earlier; transportation rose to 41% from 17%.
- Gross margin contracted 9.8 percentage points. PSI attributed the decline mainly to higher warranty costs, material inflation, unfavorable product mix, and lower volume.
- Warranty costs, net of supplier recoveries, were $6.8 million versus $1.7 million. Charges for revised estimates on preexisting warranties were $4.1 million versus $0.7 million.
- Operating expenses rose 6% to $22.7 million, including higher SG&A, principally from legal and indemnification costs. Interest expense increased to $2.2 million from $1.3 million, partly reflecting financing-cost amortization and debt levels.
- Operating cash flow decreased by $18.6 million year over year. Q1 2021 cash generation included a $24.3 million increase in accounts payable; cash flow also reflected the net loss and other working-capital movements.
- Management reported non-GAAP adjusted net loss of $13.0 million and adjusted EBITDA of negative $8.5 million, versus adjusted net loss of $0.7 million and adjusted EBITDA of positive $2.6 million in Q1 2020. These are company-defined non-GAAP measures.
Outlook, risks, and unusual items
- The filing provides no quantified sales or earnings guidance. Management warned that COVID-19 effects, low oil-and-gas activity, supply shortages and shipping delays, and material-cost inflation could hurt deliveries, orders, results, and liquidity. PSI was pursuing price increases and other cost mitigation where possible.
- PSI recorded a $1.0 million Q1 expense for a supplier minimum-purchase commitment it did not expect to meet in 2021.
- Indemnification costs for former officers and employees were $3.2 million in Q1 2021. The company’s historical primary directors’ and officers’ insurance coverage was exhausted; future costs are to be funded from company resources, and their eventual impact may be material.
- PSI disclosed ongoing litigation and legal matters, including a BIPA class action and a royalty arbitration claim. Recorded estimated liabilities were $0.3 million and $1.5 million, respectively; the filing states that possible losses for certain other matters cannot be reasonably estimated.
- Disclosure controls were not effective as of March 31, 2021 because of previously identified material weaknesses in internal control over financial reporting. The SEC extended the remediation deadline to March 31, 2022.
- Customer and supplier concentration is notable: one customer represented 20% of Q1 sales, and two customers represented 23% and 13% of receivables at quarter-end. One supplier represented 14% of Q1 purchases.
Important facts for investors to verify
- Whether PSI can refinance or extend the fully drawn revolving facility before its maturity, and whether the lender’s demand rights or covenants create nearer-term liquidity risk.
- Whether gross margins and warranty costs improve, including the adequacy of warranty reserves and supplier recoveries.
- Whether the sales mix, oil-and-gas demand, supply-chain constraints, and customer deliveries support a recovery in operating performance and cash flow.
- Progress toward remediating internal-control material weaknesses by the extended SEC deadline, and developments in legal and indemnification exposures.