Business context and reporting period
Power Solutions International, Inc. designs and sells engines, power systems and related components for energy, industrial and transportation markets. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2021. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance and position
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $111.5 | $93.1 | $211.6 | $198.2 |
| Gross profit / margin | $13.2 / 11.8% | $3.8 / 4.1% | $20.3 / 9.6% | $21.5 / 10.8% |
| Operating loss | $(14.6) | $(15.4) | $(30.2) | $(19.1) |
| Net loss | $(15.6) | $(17.7) | $(33.7) | $(18.5) |
| Diluted loss per share | $(0.68) | $(0.78) | $(1.47) | $(0.81) |
| Adjusted EBITDA loss (non-GAAP) | $(0.5) | $(8.6) | $(9.0) | $(6.0) |
- Six-month operating cash flow was $(14.2), versus $4.0 provided in the prior-year period. Investing activities provided $1.0, including a $2.2 joint-venture distribution; financing activities used $2.6. Cash, cash equivalents and restricted cash declined $15.8 to $8.5.
- At June 30, cash and cash equivalents were $5.5 and restricted cash was $2.9. The company had $130.0 of revolving borrowings outstanding, plus $1.0 of long-term debt and finance leases. Current liabilities were $277.6 against current assets of $209.5; stockholders’ equity was a deficit of $27.4.
Material changes versus prior periods
- Q2 sales rose 20%, with transportation up $17.0 and industrial up $6.4, partly offset by energy down $5.0. For the first half, sales rose 7%; transportation increased $39.8 and industrial $3.6, while energy fell $29.9.
- Q2 gross margin improved 7.7 percentage points, chiefly reflecting lower warranty expense, higher volume and manufacturing cost savings. First-half gross margin declined 1.2 percentage points as material, tariff and freight costs and unfavorable product mix outweighed those benefits.
- SG&A increased $8.5 in Q2 and $10.4 for the first half, primarily from legal and indemnification costs, as well as higher wages, benefits and severance. Indemnification costs were $10.5 in Q2 and $13.6 for the first half.
- First-half net loss widened by $15.3, reflecting higher operating expenses, including legal costs, and higher interest expense; the prior-year period also included a larger income tax benefit.
Outlook, risks and unusual items
- Going concern and debt risk: Management stated that substantial doubt exists about the company’s ability to continue as a going concern within one year after issuance of the financial statements. The $130.0 Standard Chartered facility is uncommitted, fully drawn, may be called at the lender’s discretion and matures March 25, 2022. The company failed the facility’s minimum interest-coverage and EBITDA covenants for Q2; an uncured or unwaived default could permit acceleration. The filing reports discussions with the lender, but no cure or waiver.
- Weichai’s $130.0 shareholder loan facility is designated to repay the Standard Chartered facility and expires April 25, 2022. A separate, uncommitted $25.0 Weichai facility was entered into July 14, 2021; $15.0 was outstanding as of August 11, subject to Weichai’s discretionary approval. Management said it would seek amended, extended or replacement financing; success is not assured, and it anticipated insufficient cash to repay existing debt without additional financing.
- Supply-chain shortages and shipping delays, inflation, higher tariffs and weak oil-and-gas demand may affect deliveries, costs and future orders. Management noted improved U.S. rig counts in Q2 but gave no quantified sales or earnings guidance. It also cited continued COVID-19 uncertainty and customer-demand risk.
- Warranty costs were $7.5 for the first half, net of supplier recoveries, versus $15.5 in 2020. Q2 included a $3.3 benefit from revisions to prior-period warranty estimates; first-half prior-warranty adjustments were a $0.8 charge.
- The company recorded a $1.0 expense for an expected shortfall on a supplier minimum-purchase commitment. It settled the Mast Powertrain royalty dispute for $1.5 in July; that liability had already been recorded at June 30.
- Legal exposures include ongoing SEC and USAO matters involving former officers and employees, and indemnification costs funded by company resources after exhaustion of historical primary D&O insurance. Potential future indemnification costs were not estimable. The SEC extended the deadline to remediate remaining internal-control weaknesses to March 31, 2022; disclosure controls remained ineffective at June 30.
Important facts for investors to verify
- Whether the lender waived or the company cured the Q2 covenant breaches, and whether the callable revolving facility was extended, refinanced or repaid before maturity.
- Availability and terms of additional Weichai funding, including any further borrowing approvals and the use and repayment of the $15.0 drawn after quarter-end.
- Cash burn, working-capital needs and the company’s ability to fund operations while maintaining supplier and customer commitments.
- Subsequent legal and indemnification costs, outcomes of SEC/USAO-related matters, and any material effects on liquidity or reported results.
- Progress and evidence of effective remediation of internal-control weaknesses by the extended SEC deadline.
- Whether sales recovery, warranty experience, material and freight costs, tariffs, and oil-and-gas demand develop as management anticipated.