Power Solutions International, Inc. — FY 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing provides annual results; it does not provide a clear standalone fourth-quarter income statement or cash-flow summary. Amounts below are in U.S. dollars.
Business context
PSI designs, manufactures, distributes and supports power systems, primarily for off-highway industrial original equipment manufacturers (OEMs). Its products include natural-gas and propane systems, diesel systems, and aftermarket parts. The company operates as one business segment. Approximately 93% of 2013 sales went to customers in North America, 6% to Asia and 1% to Europe.
Key financial results
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Net sales | $237.842 million | $202.342 million |
| Gross profit / margin | $44.526 million / 18.7% | $33.917 million / 16.8% |
| Operating income / margin | $14.967 million / 6.3% | $12.316 million / 6.1% |
| Net income (loss) | ($18.760 million) | $6.702 million |
| Operating cash flow | ($12.435 million) | ($2.941 million) |
| Investing cash flow | ($6.514 million) | ($3.898 million) |
- Sales rose 17.5%; management attributed most of the increase to higher shipment volume, including growth in heavy-duty power systems. Gross margin improved chiefly because of product mix.
- Operating expenses increased to $29.559 million from $21.601 million, including higher engineering and development spending ($10.439 million, up 41.5%) and general and administrative costs ($11.575 million, up 39.5%).
- The reported net loss chiefly reflects a $28.031 million noncash charge from revaluing private-placement warrants as PSI’s share price increased. The filing reports pretax income of $14.030 million excluding that warrant expense; this is not a reported GAAP net-income measure.
- Operating cash use reflected working-capital investment, notably a $16.018 million inventory increase and a $5.260 million accounts-receivable increase, as well as lower accounts payable. Capital expenditures and other property and equipment purchases were $6.007 million.
- At year-end, cash was $6.306 million, working capital was $77.621 million, and current assets and current liabilities were $110.006 million and $32.385 million, respectively. The revolving credit balance was $17.933 million, down from $30.942 million; $47.9 million of availability was reported under the facility.
Changes, financing and unusual items
- PSI completed a July 2013 public offering: it sold 1.05 million shares at $35 per share and received approximately $34.0 million net of offering costs. Part of the proceeds repaid revolving debt. Selling stockholders sold an additional 955,000 shares; PSI received no proceeds from those shares.
- In June 2013, PSI replaced its BMO facility with a Wells Fargo asset-backed revolving facility initially capped at $75 million, potentially increasable to $100 million subject to agreement terms, and maturing June 28, 2018. Borrowings are secured by substantially all tangible and intangible assets other than real property; covenants and borrowing-base limits apply.
- Investing included a $0.5 million investment in a China joint venture. PSI had committed up to $1.2 million; manufacturing was scheduled to begin in 2014.
- Warrant liability rose to $24.525 million from $3.666 million. The liability is a Level 3 fair-value estimate; its valuation is sensitive to PSI’s share price and other assumptions.
Outlook, risks and other matters
Management said existing cash sources and borrowing access were expected to meet working-capital and capital-expenditure needs for at least the next year, subject to business performance and other assumptions. The filing does not provide a specific numerical earnings or revenue forecast. Stated growth initiatives include expanding existing OEM relationships, developing products and entering on-road and international markets.
- Key execution risks include market acceptance of alternative-fuel systems, the newly developed in-house 8.8-liter engine, and expansion into on-road applications. On-road certification, performance and product-liability costs may be greater than expected.
- Supplier and customer concentration are significant: one customer represented 16% of 2013 sales. General Motors-, Perkins/Caterpillar- and Doosan-powered systems represented approximately 50%, 10% and 25% of sales, respectively.
- Inventory increased materially and depends on demand forecasts. Customer orders are generally purchase-order based, with limited long-term commitments; some customers have payment terms of up to 150 days.
- PSI reported a $1.274 million warranty accrual at year-end. Management did not expect pending ordinary-course legal proceedings to have a material effect. The filing also describes contingent risks involving certification compliance, product liability, intellectual property, liquidity and the China joint venture.
- Management concluded internal control over financial reporting was effective as of December 31, 2013 and said it had remediated a prior weakness in aftermarket-software controls. The independent auditor also gave an unqualified opinion on financial statements and internal controls.
Important facts for investors to verify
- Whether sales growth and improved gross margin continued, particularly in heavy-duty systems, power generation and material handling.
- Whether inventory and receivables convert to cash and whether operating cash flow improves after the 2013 working-capital outflow.
- The remaining warrant terms, potential share dilution, and sensitivity of the warrant liability to share-price movements.
- Progress on the in-house engine, on-road certifications and GM supply arrangements, and the China joint venture’s funding and launch.
- Ongoing customer and engine-supplier concentration, credit-facility availability and covenant headroom.