Power Solutions International, Inc. — FY 2018 Form 10-K
Reporting period: Year ended December 31, 2018; filed December 27, 2019. The filing also includes unaudited quarterly information for 2018 and 2017. The company stated it did not otherwise plan to file quarterly reports for those periods.
Business context
PSI designs, manufactures and sells emission-certified engines and power systems for energy, industrial and transportation markets. It operates as one reporting segment. Products use natural gas, propane, gasoline, diesel and other fuels and are sold mainly to original equipment manufacturers.
Financial performance and liquidity
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Net sales | $496.0 million | $416.6 million |
| Gross profit / margin | $58.8 million / 11.8% | $51.0 million / 12.2% |
| Operating loss | $(36.7) million | $(18.0) million |
| Net loss | $(54.7) million | $(47.6) million |
| Basic and diluted loss per share | $(2.94) | $(6.20) |
| EBITDA / Adjusted EBITDA* | $(36.7) million / $4.2 million | $(26.9) million / $7.6 million |
| Cash from operating activities | $(6.2) million | $(7.7) million |
| Cash from investing activities | $(10.2) million | $(5.2) million |
| Cash from financing activities | $16.5 million | $10.6 million |
Balance sheet at December 31, 2018: Cash was $0.1 million; current assets were $216.0 million and current liabilities were $220.6 million. Total debt was approximately $109.6 million, comprising $54.6 million drawn on the revolving facility and $55.0 million of senior notes. Stockholders’ deficit was $18.6 million. Warranty reserves were $23.1 million.
Liquidity update disclosed in the filing: At September 30, 2019, debt under the credit agreement and senior notes was approximately $92 million, with about $20 million of available borrowing capacity. PSI disclosed substantial doubt about its ability to continue as a going concern, citing the need to refinance, extend or repay debt and uncertainty about available liquidity. The auditor’s report also highlighted this going-concern uncertainty.
*Adjusted EBITDA is a non-GAAP measure; PSI reported that it excludes specified items, including warrant valuation changes and restatement-related expenses.
Changes versus the prior comparable period
- Sales increased 19%, with growth in all major end markets; transportation sales rose to $109.2 million from $66.9 million, and energy sales rose to $185.7 million from $159.0 million.
- Gross profit rose with higher sales and improved mix, but gross margin declined 0.4 percentage points. Net warranty costs were $18.6 million, up approximately $13.2 million, including $3.8 million of adjustments to prior-period warranties and $3.0 million related to supplier quality issues.
- Operating loss more than doubled. SG&A rose 35% to $59.6 million, largely reflecting $24.2 million of restatement-related expenses; research, development and engineering costs rose 43% to $28.6 million.
- Net loss widened, although 2017 net loss available to common stockholders included a $37.9 million deemed preferred-stock dividend. The reported per-share comparison is therefore affected by that prior-year item.
- Operating cash use improved by $1.5 million year over year, but remained negative. Higher payables and inventory associated with anticipated demand and GM engine last-time purchases affected working capital.
- Comparability is also affected by adoption of ASC 606 in 2018; 2017 was not restated. PSI said the standard reduced 2018 reported sales by about $2.0 million and increased net loss by about $1.4 million versus the prior revenue method.
Outlook, risks and unusual items
- Management expected 2019 sales to exceed 2018’s $496 million and forecast substantial improvement in gross profit, margins and profitability, citing sales growth, mix, pricing, lower warranty costs, productivity and lower restatement expenses. These are forward-looking expectations, not reported results.
- PSI expected significant professional fees in 2020, particularly legal costs and internal-control remediation, while anticipating aggregate professional fees would be lower than in 2019.
- Key financing risk: the $55 million senior notes were due June 30, 2020, and the Wells Fargo facility’s effective maturity was May 1, 2020 unless extended or refinanced. The company had previously received covenant waivers; continued access to the facility depended on compliance and lender arrangements.
- Financial reporting controls were ineffective at year-end 2018, with material weaknesses involving the control environment, accounting resources and policies, revenue recognition, reserves, close procedures, IT controls and data maintenance. Management described remediation measures, but the weaknesses were not fully remediated. The auditor audited the financial statements, not internal-control effectiveness.
- The SEC and U.S. Attorney’s Office were conducting investigations into prior financial reporting and revenue recognition. PSI was cooperating but could not predict the outcome. Shareholder litigation and other legal matters also remained; possible losses were not always estimable. The company estimated only $1.6 million of remaining availability under its primary D&O insurance coverage as of December 2, 2019.
- PSI’s stock had been delisted from Nasdaq in April 2017 and traded on the OTC market. In April 2019, Weichai exercised its warrant and became the majority shareholder, with 51.5% ownership reported in the filing.
- Customer and supply exposures include GM’s discontinuation of the 6.0-liter engine, for which PSI had no supply agreement for a successor, and Hyster-Yale’s stated plan to obtain alternative supply for several high-volume engines beginning in 2021.
- Other notable items: a $2.2 million impairment of developed technology; a $10.4 million noncash loss from the change in warrant fair value; and $5.6 million paid for emissions-testing assets and facility access.
Important facts for investors to verify
- Current debt maturities, covenant status, refinancing progress and usable borrowing capacity; the filing’s going-concern conclusion makes these central.
- Subsequent operating results and cash generation, including whether management’s 2019 sales and margin outlook was achieved.
- Warranty claims, reserve adequacy, supplier reimbursements and the effect of warranty costs on gross margin.
- Progress in remediating material weaknesses and the status or outcomes of the SEC, USAO and remaining legal matters.
- Customer and supplier developments affecting GM engine availability, Hyster-Yale volumes, and minimum purchase commitments under supplier agreements.
- The effect of Weichai’s controlling ownership, including board rights and any resulting limitations on other shareholders.