Power Solutions International, Inc. — 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. This is an annual filing; the supplied filing text does not provide a clear standalone fourth-quarter income statement or cash flow. Financial amounts below are in U.S. dollars, millions, unless noted otherwise.
Business context
PSI designs, manufactures, distributes and supports customized power systems and aftermarket parts for off-highway industrial equipment manufacturers. Its products include alternative-fuel spark-ignited systems, diesel systems and related components. The company operates as one business and geographic segment. Approximately 91% of 2012 sales were to customers in North America; 69% of sales were from emission-certified products and about 10% from aftermarket parts.
Financial performance and liquidity
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Net sales | $202.342 | $154.969 |
| Gross profit / gross margin | $33.917 / 16.8% | $26.428 / 17.1% |
| Operating income | $12.316 | $9.805 |
| Net income | $6.702 | $4.061 |
| Net cash from (used in) operating activities | ($2.941) | ($0.973) |
| Capital spending, approximately | $3.890 | $1.557 |
Sales rose 30.6%, primarily from higher shipment volume; management attributed about $43.9 million of the increase to volume. Net income margin was approximately 3.3%, compared with 2.6% in 2011. Gross margin eased as material cost increases exceeded price increases. Research and development and engineering expense rose 56.5% to $7.377 million, while selling and service expense declined 11.1% to $5.925 million. General and administrative expense increased 58.3% to $8.299 million, including facility-consolidation costs and higher staffing and public-company costs.
Operating cash use reflected working-capital investment: accounts receivable increased $7.957 million and inventory increased $6.575 million. At year-end, cash was $0.543 million, accounts receivable $37.480 million, inventory $39.968 million and working capital $49.413 million. Management said the $35.234 million year-over-year working-capital increase was substantially affected by reclassifying $19.666 million of revolving borrowings from current to long-term liabilities after a credit-agreement amendment.
Revolving borrowings were $30.942 million at year-end, with $19.1 million of availability under the $50 million facility, which matures March 20, 2017. The facility is secured by substantially all company assets and includes financial and other covenants. The company reported compliance with its financial covenants at December 31, 2012. It reported no material off-balance-sheet arrangements.
Material changes, outlook and risks
- PSI consolidated facilities in Wood Dale, Illinois, capitalized approximately $2.0 million of leasehold improvements and expensed approximately $0.509 million of moving and related costs.
- The credit facility was increased from $35 million to $50 million and extended to 2017; later amendments raised permitted thresholds for specified acquisitions, joint ventures and capital expenditures.
- PSI introduced its internally designed 8.8-liter engine and described plans to develop on-road applications and additional engines. These initiatives are not assured of commercial acceptance; the 8.8-liter engine was new and lacked a performance history.
- Management identified demand for alternative-fuel systems, customer expansion, new products and international markets as growth opportunities, but gave no specific quantitative revenue or earnings guidance.
- Key risks include reliance on major customers and engine suppliers, exposure to changes in industrial demand and fuel economics, material inventory and receivables needs, regulatory certification costs, product warranty and liability exposure, and execution risks in new products and markets. One customer accounted for 16% of 2012 sales; GM, Perkins/Caterpillar and Doosan engines represented approximately 57%, 13% and 15% of sales, respectively.
- Management concluded that disclosure controls and internal control over financial reporting were ineffective at year-end because aftermarket software access and transaction-monitoring controls were inadequate. No resulting financial-statement misstatement was identified. Management expected remediation during 2013; the auditor did not attest to internal-control effectiveness.
- Other unusual items include a $0.448 million expense from revaluation of private-placement warrants, recorded as a liability, and a $0.478 million equity-based compensation charge. The audited financial statements received an unqualified opinion.
Most important facts for investors to verify
- Reconcile the filing’s inconsistent 2011 net-sales figures: the audited statements report $154.969 million, while one MD&A passage states $154.696 million.
- Assess whether sales growth can translate into positive operating cash flow as receivables and inventory expand, including the effect of extended customer payment terms.
- Review borrowing availability, covenant headroom, interest-rate exposure and the impact of the $30.942 million revolving balance.
- Track customer and supplier concentration, particularly the largest customer and dependence on three engine suppliers.
- Confirm remediation and sustained effectiveness of the aftermarket-system controls, and monitor performance, warranty costs and certification progress for the internally developed engine and planned on-road products.
- Consider the warrant liability’s valuation sensitivity, the lack of cash dividends, and concentrated insider ownership; the two Winemaster brothers beneficially owned approximately 78.8% of outstanding shares as of February 28, 2013.