Power Solutions International, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019, compared with fiscal 2018. The request metadata says “2018 Q4,” but the supplied filing is a 2019 annual report, not a 2018 quarterly filing. Filed May 4, 2020. PSI designs and sells emission-certified engines and power systems for energy, industrial and transportation markets.
Financial performance and liquidity
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Net sales | $546.1 million | $496.0 million |
| Gross profit / gross margin | $99.9 million / 18.3% | $58.8 million / 11.8% |
| Operating income (loss) | $17.2 million | $(36.7) million |
| Net income (loss) | $8.2 million | $(54.7) million |
| Diluted earnings (loss) per share | $0.38 | $(2.94) |
| Net cash from (used in) operating activities | $18.2 million | $(6.2) million |
| Capital expenditures | $3.7 million | $3.6 million |
- Sales rose 10%. Energy revenue increased $37.1 million and transportation revenue increased $34.0 million; industrial revenue declined $21.1 million.
- Gross margin improved 650 basis points, attributed mainly to sales growth, favorable mix, pricing actions, lower warranty costs and productivity improvements. Warranty costs, net of recoveries, were $10.1 million versus $18.6 million.
- Operating expenses declined $12.8 million. Incremental financial-reporting and investigation expenses were $15.1 million, down from $24.2 million.
- Adjusted net income was $28.1 million and Adjusted EBITDA was $45.2 million, versus adjusted losses of $13.8 million and Adjusted EBITDA of $4.2 million, respectively, in 2018. These are non-GAAP measures; the filing provides reconciliations.
- At December 31, 2019, cash was just $3,000; total debt obligations were approximately $94.3 million, with $14.9 million of available borrowing capacity under the Wells Fargo facility. Total assets were $313.7 million, total liabilities $285.2 million and stockholders’ equity $28.5 million.
- Subsequent financing: on April 2, 2020, PSI borrowed $95 million under a new secured revolving facility of up to $130 million, repaid the Wells Fargo balance and redeemed $55 million of senior notes. It borrowed the remaining $35 million on April 29; at that date, borrowings were $130 million and cash exceeded $45 million, including $11.8 million of customer prepayments.
Material changes and business developments
- Approximately $30 million of transportation sales were shipments requested by Freightliner in Q4 2019 that had originally been scheduled for the first half of 2020.
- Energy sales were $222.8 million (41% of revenue), industrial $180.1 million (33%) and transportation $143.2 million (26%). North America represented 89% of sales.
- Freightliner and Hyster-Yale accounted for 17% and 13% of 2019 sales, respectively. One customer represented 49% of year-end receivables.
- Weichai exercised its warrant in April 2019, receiving about 4.05 million shares and becoming the controlling shareholder, with approximately 51.5% ownership. PSI’s collaboration agreement with Weichai was extended for three years in March 2020.
- PSI received EPA certifications for additional heavy-duty natural-gas engines and emergency-standby diesel engines in 2019, expanding its energy-market offerings.
Outlook, risks and unusual items
- The filing provides no numerical earnings or revenue guidance. Management cited long-term energy-market growth opportunities but warned that COVID-19, sharply lower oil prices and declining rig counts could materially harm demand, results, liquidity and asset values.
- PSI implemented temporary cost reductions, including shorter production and office schedules, 10%–30% salary reductions, suspension of the 401(k) match, deferred R&D spending, a hiring freeze and limits on travel and discretionary costs.
- Going concern: Management and the auditor stated that substantial doubt exists about PSI’s ability to continue as a going concern, principally because the company may not have sufficient liquidity to repay or refinance its $130 million facility, which matures March 26, 2021. Management planned to seek additional liquidity; success was not assured. The auditor’s financial-statement opinion was unqualified and included a going-concern uncertainty paragraph.
- Controls and reporting: Management concluded disclosure controls and internal control over financial reporting were ineffective at year-end due to material weaknesses, including in revenue accounting, reserves, period-end close, IT controls, data maintenance and segregation of duties. Remediation remained underway. The company also disclosed prior late filings, restatements, and ongoing SEC and U.S. Attorney’s Office investigations.
- Other exposures: Shareholder and other legal matters remain, and some possible losses could not be reasonably estimated. The company said its $30 million primary directors-and-officers insurance coverage was exhausted by April 22, 2020. A BIPA employee biometric-data case was stayed; a separate employment dispute had an agreement in principle to settle for $1.1 million.
- Doosan supply commitments run through 2023 and include annual minimum purchases of $40 million, subject to certain reductions and potential shortfall payments; no shortfall liability was recorded at year-end. GM discontinued the 6.0L engine, and PSI had no agreement for its successor. Hyster-Yale indicated it would source several high-volume engines elsewhere beginning in 2021, with PSI anticipating sales declines.
- PSI common stock was delisted from Nasdaq in 2017 and traded on OTC Pink. Weichai held majority voting control as of the filing date.
Important facts for investors to verify
- Whether PSI can refinance or repay the fully drawn $130 million facility by its March 2021 maturity and maintain covenant compliance.
- How much of 2019 growth and cash generation is sustainable, given the $30 million shipment pull-forward and $11.8 million of customer prepayments reported by April 29, 2020.
- Actual effects of COVID-19, depressed oil prices and rig-count declines on orders, margins, impairments and liquidity.
- Progress in remediating material weaknesses, and any outcomes or financial consequences from the SEC and U.S. Attorney’s Office investigations or remaining litigation.
- Replacement engine supply and customer retention following the GM 6.0L discontinuation and Hyster-Yale’s planned sourcing changes; potential Doosan purchase shortfalls.
- Whether lower warranty costs persist and whether supplier recoveries, warranty reserves and any future impairment charges prove adequate.