Power Solutions International, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited consolidated results. The filing was signed May 4, 2020, and discusses material events occurring after the quarter.
Business context and results
PSI designs, manufactures and sells engineered power systems and engines for industrial, energy and transportation markets. It operates as one reporting segment. Net sales increased 23% to $115.8 million from $94.4 million, with growth across all three end markets. Transportation sales rose to $19.6 million from $10.1 million, energy to $45.6 million from $38.6 million, and industrial to $50.6 million from $45.7 million. North America represented 84% of sales in both periods.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Gross profit / margin | $17.7 million / 15.3% | $9.9 million / 10.5% |
| Operating loss | $(5.6) million | $(10.4) million |
| Net loss | $(2.6) million | $(14.2) million |
| Diluted loss per share | $(0.31) | $(0.77) |
| Operating cash flow | $(0.7) million | $2.3 million |
Management reported adjusted net loss of $0.1 million and adjusted EBITDA of $3.7 million, versus adjusted net loss of $5.6 million and adjusted EBITDA loss of $2.0 million in Q1 2018. These are non-GAAP measures. The GAAP net loss included a $4.4 million noncash gain from revaluing the Weichai warrant; the prior-year period included a $2.5 million loss.
At March 31, 2019, cash was approximately $1,000. Current assets were $218.5 million and current liabilities $235.1 million. Debt totaled approximately $111.6 million: $56.8 million under the revolving facility and $55.0 million of senior notes, plus finance leases and other debt. Available revolver capacity was $4.7 million. Stockholders’ deficit was $21.0 million. Operating cash use reflected working-capital movements, including inventory growth; capital expenditures were $0.8 million.
Material changes, risks and subsequent developments
- Gross margin improved 4.8 percentage points, which management attributed to sales growth and lower warranty costs. Q1 warranty expense was $1.5 million net of recoveries, including a $2.7 million charge for estimates on pre-existing warranties and $1.6 million tied to supplier quality issues for which PSI was seeking reimbursement.
- SG&A rose 21% to $16.1 million, partly due to higher wages and benefits, severance and financial-reporting and investigation costs. Interest expense increased to $2.1 million.
- Weichai exercised its warrant on April 23, 2019, receiving 4,049,759 shares and becoming the majority owner, with 51.5% of outstanding common shares as of that date. The warrant exercise proceeds were $1.6 million.
- PSI disclosed ongoing SEC and U.S. Attorney’s Office investigations related to prior financial reporting, accounting errors and restatements. It was cooperating and discussing potential resolutions; the filing said possible sanctions could materially affect the company. Several securities and derivative matters were settled or had settlements approved, while other litigation remained unresolved or its potential loss could not be estimated.
- Disclosure controls were ineffective at March 31, 2019 because of previously reported material weaknesses. Remediation was ongoing; management reported certain remediation actions completed after quarter-end. The filing also indicated PSI had not filed all required reports during the preceding 12 months.
- Later liquidity and going-concern disclosures: The filing describes a new $130 million secured facility closed April 2, 2020, fully drawn by April 29, with cash above $45 million at that date. Management nevertheless stated substantial doubt existed about the company’s ability to continue as a going concern, citing the facility’s March 2021 maturity, refinancing uncertainty, covenant compliance and liquidity needs. These are subsequent-period developments, not Q1 2019 balances.
- COVID-19, sharply lower oil prices and falling rig counts were identified as significant risks to demand, results and liquidity. PSI reported temporary cost reductions, including shortened production hours and workweeks, salary reductions, a hiring freeze and deferred R&D spending. No quantified forward sales or earnings guidance was provided.
Key facts for investors to verify
- Whether the improved gross margin and adjusted results were sustainable, especially given warranty estimates, supplier-quality claims and the noncash warrant gain.
- Debt maturity, available liquidity, covenant compliance and refinancing capacity; distinguish March 2019 conditions from the 2020 financing and going-concern disclosures.
- Status and potential financial exposure from the SEC/USAO investigations and remaining legal matters.
- Progress in remediating material weaknesses and restoring effective disclosure controls and timely SEC reporting.
- Effects of customer and supplier concentration: one customer generated 17% of Q1 2019 sales, and one supplier accounted for 16% of purchases.