Power Solutions International, Inc. — FY 2015 Form 10-K
Business and period: The company designs, manufactures and distributes customized power systems, primarily for industrial OEMs, using alternative fuels as well as gasoline and diesel. This summary covers the fiscal year ended December 31, 2015; fourth-quarter figures are also shown where available. Unless stated otherwise, financial amounts are in millions of dollars.
Financial performance and liquidity
| Metric | FY 2015 | FY 2014 |
|---|---|---|
| Net sales | $389.4 | $348.0 |
| Gross profit / gross margin | $62.8 / 16.1% | $67.0 / 19.3% |
| Operating income / operating margin | $9.2 / 2.4% | $26.0 / 7.5% |
| Net income | $14.3 | $23.7 |
| Basic / diluted EPS | $1.32 / $0.45 | $2.22 / $1.58 |
| Net cash used in operations | $23.0 | $15.7 |
| Net cash used in investing | $43.6 | $51.7 |
Sales rose 11.9%, but management attributed $55.7 million of growth to acquired businesses, partly offset by a $14.2 million decline in organic sales, principally from lower volume. Gross profit fell 6.3%. Management cited competitive pricing and production inefficiencies in large power-generation systems, weaker mix—particularly in oil and gas end markets—and higher production spending.
Fourth quarter: Sales were $96.7 million versus $103.9 million in Q4 2014. Gross profit was $13.7 million (14.2% margin), versus $21.1 million (20.3%). PSI recorded an operating loss of $0.7 million, compared with operating income of $9.1 million; net income was $1.7 million versus $10.3 million.
Cash, working capital and debt: At year-end, cash was $8.4 million and working capital was $153.4 million, up from $115.0 million. Inventory was $130.3 million and accounts receivable $104.4 million. The company attributed negative operating cash flow mainly to higher receivables and inventory, including strategic engine purchases and acquired inventory. Capital expenditures were $8.2 million; acquisitions used $34.4 million.
Revolver borrowings were $97.3 million, with $27.1 million available at year-end, subject to the borrowing base. PSI issued $55.0 million of 5.50% senior notes due May 2018, receiving $53.5 million net of financing costs, and repaid its $4.0 million term loan. The notes are effectively subordinated to secured debt. The revolving facility matures between March 2017 and January 2018. Notes may become subject to a mandatory purchase offer if required financial certifications are not met in 2017.
Material changes and unusual items
- FY 2015 included three acquisitions: Powertrain Integration, Buck’s and Bi-Phase. Powertrain added $44.2 million of sales from its acquisition date through year-end. FY 2014 included 3PI for most of the year, but not its first quarter.
- Operating expenses increased, including R&D and engineering expense of $21.7 million (up 28.3%) and amortization expense of $4.6 million, largely reflecting acquisitions and product-development investment. R&D spending was approximately $19.1 million, compared with $14.9 million in 2014.
- Net income included a $9.3 million non-cash gain from revaluing private-placement warrants. Such gains and losses vary with the share price and materially affect reported earnings. The filing’s diluted EPS calculation adjusts for this warrant gain; reported FY 2015 diluted EPS was $0.45, versus basic EPS of $1.32.
- FY 2015 income tax benefit was $0.4 million, including the impact of lower taxable income and research tax credits. PSI also recorded a $5.2 million federal tax receivable.
Outlook, commentary and risks
The filing provides no specific numerical revenue or earnings guidance. Management’s strategy emphasizes growing sales to existing and new OEM customers, developing products and on-road applications, expanding internationally and pursuing selective acquisitions. Management expects stricter emissions standards, outsourcing by OEMs and alternative-fuel adoption to support demand, but these are expectations, not assured outcomes.
- Execution and margins: Organic sales declined, gross and operating margins contracted, and operating cash flow remained negative. Inventory and receivables growth heighten the importance of demand forecasting, collections and working-capital management.
- Customer and supplier concentration: Two customers each represented more than 10% of sales. A limited number of engine and component suppliers are important to production; supplier disruptions or changed customer purchasing could materially affect results.
- Product, regulation and end-market risks: The internally developed 8.8-liter engine and expansion into on-road markets carry acceptance, certification, warranty and product-liability risks. Demand also depends on changing emissions rules and relative fuel prices; depressed oil and gas prices may weigh on related markets.
- Debt and financing: Revolver availability depends on eligible collateral and covenants. The notes’ 2017 EBITDA and fixed-charge coverage certification requirements could trigger a mandatory purchase offer. Floating-rate exposure is material; management estimated a 1 percentage-point rate change would affect annual interest expense by approximately $1.0 million at year-end balances.
- Acquisitions and other matters: Integration, earn-out obligations, goodwill and intangible-asset valuation remain considerations. The company reported no expectation that pending legal proceedings would materially affect results or cash flows. It reported effective disclosure controls and internal control over financial reporting; Powertrain was excluded from the control assessment.
Key facts for investors to verify
- Whether organic sales stabilize and acquired businesses contribute profitably, rather than revenue growth masking underlying volume weakness.
- Whether margins recover as production inefficiencies, pricing pressure and product mix evolve.
- How inventory, receivables, collections and operating cash flow develop, including the collectability of extended-term customer balances and the federal tax receivable.
- Current revolver availability, covenant headroom and the company’s ability to meet the 2017 senior-note certification tests and refinance or repay debt as required.
- Customer and supplier exposure, acquisition earn-out payments, goodwill assumptions, and warranty or certification experience for the 8.8-liter engine and on-road products.
- The effect of warrant remeasurement on reported earnings and diluted EPS; compare reported EPS with operating performance and cash generation.