Power Solutions International, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Amounts are in U.S. dollars; financial statement figures are unaudited. PSI designs, manufactures and sells engineered power systems and engines for energy, industrial and transportation markets. It reports one operating segment.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $114.5m | $138.5m | $312.6m | $393.0m |
| Gross profit / margin | $18.2m / 15.9% | $26.9m / 19.4% | $39.7m / 12.7% | $70.2m / 17.9% |
| Operating income (loss) | $(1.1)m | $8.1m | $(20.2)m | $7.3m |
| Net income (loss) | $(1.5)m | $5.8m | $(19.9)m | $0.2m |
| Diluted EPS | $(0.06) | $0.25 | $(0.87) | $0.01 |
| Operating cash flow | Not separately presented for quarter | $(2.3)m | $19.1m |
For the nine months, adjusted EBITDA, a non-GAAP measure, was a loss of $1.6m versus income of $29.4m a year earlier; adjusted net loss was $12.2m versus adjusted net income of $16.5m. Management’s adjustments include legal, financial-reporting and remediation costs, among other items; these measures are not substitutes for GAAP results.
At September 30, cash and cash equivalents were $26.7m and restricted cash was $3.3m. Revolving debt was fully drawn at $130.0m; total debt including finance leases and other debt was approximately $131.0m. Current liabilities of $258.6m exceeded current assets of $230.0m. Total liabilities were $305.0m and stockholders’ equity was $9.0m. Nine-month capital expenditures were $2.0m.
Changes versus prior comparable periods
- Sales fell 17% in Q3 and 20% for the nine months. Energy and industrial sales weakened; transportation sales increased, including stronger medium-duty truck activity.
- Gross margin contracted by 3.5 percentage points in Q3 and 5.2 points for the nine months. Management cited lower volume and operating leverage, unfavorable product mix, and higher warranty costs.
- Nine-month net loss included $8.8m of charges from revised estimates on pre-existing warranties. Net warranty costs were $18.2m versus $7.4m in the prior-year period.
- Operating cash flow declined to an outflow, while cash balances rose mainly through financing. The company drew the full $130m revolving facility in April, refinancing its prior revolver and redeeming $55m of senior notes due June 2020.
Outlook, risks and unusual items
- Going concern and debt covenant: PSI did not meet the credit agreement’s minimum EBITDA requirement for the six and nine months ended September 30. It was negotiating waivers and amendments with its lender. The $130m facility matures March 26, 2021, with a conditional 60-day extension option. Management said it expected insufficient cash to repay the facility at maturity without additional financing and stated that substantial doubt existed about the company’s ability to continue as a going concern within one year. No assurance was given that a waiver, extension, refinancing or other financing would be obtained.
- Market and operating risks: COVID-19, depressed oil prices and low rig counts reduced demand, particularly for energy-related products. Management reported no significant supply-chain interruptions or material order cancellations to date, but warned of possible future effects on orders, operations, liquidity and asset values. Goodwill was not impaired in the March interim assessment, but further impairment remained possible.
- Cost actions: PSI reduced production-facility staffing, temporarily reduced salaried pay, suspended its 401(k) match and deferred some R&D spending. The pay and match measures were scheduled to run through December 31, 2020; management planned to restore them January 1, 2021.
- Legal and warranty exposures: The SEC and U.S. Attorney’s Office investigations were resolved in September 2020; PSI paid the SEC’s $1.7m civil penalty in October and agreed to remediate control deficiencies by April 30, 2021, subject to possible extension. The company’s primary directors’ and officers’ insurance coverage was exhausted, leaving future indemnification costs potentially payable from company resources. Other unresolved matters include a Mast Powertrain arbitration seeking approximately $4.5m in royalties (which PSI disputes), and biometric privacy claims for which outcomes and potential losses were not estimable in the filing.
- Controls and reporting: Management concluded disclosure controls were ineffective at September 30 because of previously reported material weaknesses in internal control over financial reporting. Remediation was ongoing. PSI also revised prior-period stockholders’ equity presentation for an immaterial treasury-stock accounting error; the revision did not affect total equity, earnings or cash flows.
- Guidance: The filing provides no specific numerical revenue or earnings guidance. Management’s outlook is subject to substantial financing, demand, warranty, legal and control-remediation uncertainties.
Important facts for investors to verify
- Whether the lender waived or amended the EBITDA covenant breach, and whether PSI secured an extension, refinancing or replacement for the facility before its March 2021 maturity.
- Available liquidity, including the distinction between unrestricted cash and restricted cash, and the effect of customer prepayments on reported cash.
- Subsequent sales, margins and cash generation by end market, particularly energy and transportation, as well as future warranty claims, estimates and supplier recoveries.
- Progress on internal-control remediation and the SEC’s April 30, 2021 remediation deadline; confirm any extensions or additional deficiencies.
- Developments in the Mast arbitration, biometric privacy claims and uninsured indemnification expenses.