Power Solutions International, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2019. Although the request metadata says 2019 Q1, this filing covers the third quarter and first nine months of 2019. The filing was signed May 4, 2020.
Business context
PSI designs and sells engineered, emissions-certified engines, power systems, and power-generation equipment serving energy, industrial, and transportation markets. It operates as one reporting segment. Weichai exercised its warrant in April 2019, acquired 4.05 million shares, and became the majority shareholder with 51.5% ownership.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $138.5 million | $136.3 million | $393.0 million | $357.8 million |
| Gross profit / margin | $26.9 million / 19.4% | $18.8 million / 13.8% | $70.2 million / 17.9% | $46.7 million / 13.1% |
| Operating income (loss) | $8.1 million | $(6.6) million | $7.3 million | $(20.5) million |
| Net income (loss) | $5.8 million | $(18.8) million | $0.2 million | $(44.8) million |
| Diluted earnings (loss) per share | $0.25 | $(1.01) | $0.01 | $(2.41) |
| Operating cash flow | Not separately reported | Not separately reported | $19.1 million | $(3.7) million |
For the first nine months, adjusted net income was $16.5 million and adjusted EBITDA was $29.4 million, versus adjusted net loss of $5.7 million and adjusted EBITDA of $7.2 million a year earlier. These are non-GAAP measures; reported GAAP net income was only $0.2 million.
At September 30, 2019, cash was $1,000, current assets were $210.5 million, and current liabilities were $181.0 million. Debt comprised $36.8 million outstanding on the revolving facility and $55.0 million of senior notes, plus a small amount of finance leases and other debt. Stockholders’ equity was $20.3 million, compared with a deficit of $18.6 million at December 31, 2018, largely reflecting the warrant exercise. Nine-month capital expenditures were $2.0 million.
Changes and management commentary
- Q3 sales grew 2%; energy sales increased $15.9 million and transportation sales $1.6 million, offset by a $15.3 million decline in industrial sales. Nine-month sales grew 10%, led by energy and transportation.
- Management attributed improved gross profit to product mix, pricing, lower warranty costs, and productivity. Q3 SG&A fell $4.9 million, substantially due to reduced financial-reporting and government-investigation costs.
- The Q3 earnings comparison also benefited from no warrant revaluation loss, versus a $10.2 million loss in Q3 2018. The nine-month 2019 period still included $1.4 million of warrant-related loss, versus $19.2 million in 2018.
- Warranty reserves and costs remained significant. The company recorded $2.7 million of charges in the first nine months for changes in estimates on preexisting warranties and reported $4.1 million in charges related to specific engine-supplier quality issues, for which it was seeking reimbursement.
- Customers and suppliers are concentrated: one supplier accounted for 29% of Q3 purchases; one customer represented 18% of receivables at quarter-end. Several customers individually exceeded 10% of sales.
Liquidity, outlook, risks, and contingencies
- The filing disclosed ineffective disclosure controls and previously identified material weaknesses in internal control over financial reporting. Remediation was ongoing; management did not state that the weaknesses had been fully remedied.
- PSI was cooperating with SEC and U.S. Attorney’s Office investigations concerning historical financial reporting and revenue recognition. The filing said potential sanctions could materially affect the company; possible losses were generally not estimable.
- Other matters included a biometric-privacy class action, an employment dispute, and derivative litigation. The company had accrued litigation amounts and recognized expected insurance recoveries for certain settlements. The Wilkins matter was settled in principle for $1.1 million after the reporting date.
- After September 30, 2019, PSI refinanced its debt: on April 2, 2020, it borrowed $95 million under a new secured facility, repaid the Wells Fargo revolver and redeemed the $55 million notes; it borrowed another $35 million on April 29. At that date, the new $130 million facility was fully drawn and cash exceeded $45 million, including a positive cash effect from customer prepayments.
- Despite that refinancing, management stated that forecasts showed insufficient cash to repay the facility at its March 26, 2021 maturity without additional financing. It concluded that substantial doubt existed about the company’s ability to continue as a going concern within one year after issuance of the financial statements.
- COVID-19 disruption, sharply lower oil prices, and falling rig counts were identified as risks to demand, liquidity, and asset values. PSI reported temporary production-hour and work-week reductions, salary cuts, a hiring freeze, suspended 401(k) matching, and deferred R&D and other spending. No quantified financial guidance was provided.
- The company had six letters of credit totaling $2.5 million and supplier minimum-purchase commitments. A key supplier agreement required annual purchases of $40 million for 2019–2023, subject to specified adjustments.
Investor verification priorities
- Confirm the reporting period: this is the quarter ended September 30, 2019, not Q1 2019.
- Assess the sustainability of improved gross margins and the impact of warranty claims, supplier quality issues, and any recoveries.
- Review the going-concern disclosure, fully drawn replacement credit facility, maturity and covenant requirements, and ability to refinance or repay.
- Track remediation of material weaknesses and the status and potential outcomes of government investigations.
- Evaluate customer, supplier, and energy-market concentration, including COVID-19 and oil-and-gas exposure.