Power Solutions International, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; comparisons are with Q1 2012 unless otherwise noted. PSI designs, manufactures, distributes and supports power systems and aftermarket parts for industrial OEMs, primarily in North America, with sales also in Asia and Europe.
Financial performance
| Metric | Q1 2013 | Q1 2012 / comparison |
|---|---|---|
| Net sales | $52.576 million | $48.072 million; up 9.4% |
| Gross profit / margin | $9.169 million / 17.4% | $8.229 million / 17.1% |
| Operating income | $3.080 million | $3.036 million |
| Net income (loss) | $(2.927) million; $(0.32) per share | $1.150 million; $0.13 per share |
| Operating cash flow | $(2.381) million | $3.300 million provided |
| Capital expenditures | $0.667 million | $0.345 million |
Sales growth was primarily volume-driven: management attributed approximately $3.789 million of the increase to volume, with power-generation demand and larger systems contributing to growth. Power-system sales rose about $3.688 million and parts sales about $0.816 million. Q1 2013 sales also included $0.284 million of grant revenue related to engine certification and application work. Operating expenses increased to $6.089 million from $5.193 million, including a 38.2% increase in general and administrative expense to $2.438 million, mainly reflecting senior and administrative staffing costs. Interest expense declined to $0.194 million from $0.227 million.
Balance sheet, debt and liquidity
At March 31, 2013, cash was $0.295 million, working capital was $53.831 million, total assets were $91.473 million and stockholders’ equity was $23.268 million. Inventory was $41.546 million, up from $39.968 million at year-end 2012. The revolving credit balance was $31.945 million, compared with $30.942 million at December 31, 2012; reported unused availability was $18.1 million. The $50 million facility is secured by substantially all company assets and matures March 20, 2017. PSI reported compliance with its financial covenants at quarter-end.
Operating cash use reflected, among other items, $4.852 million of cash used to pay accounts payable and a $1.578 million inventory build; collections and the timing of income-tax payments partly offset these uses. Financing activities provided $2.800 million, including $1.797 million from warrant exercises and $1.003 million of net revolver borrowings. Management said its available cash sources were expected to cover working-capital and capital-expenditure needs for at least the next 12 months, subject to business and financing conditions.
Material changes, unusual items and outlook
- The company reported a $4.846 million noncash expense from revaluing private-placement warrants, versus $0.593 million in Q1 2012. This fair-value charge was recorded in other expense and was primarily driven by the rise in PSI’s share price. The warrants were a Level 3 liability; their carrying value rose from $3.666 million at year-end to $7.055 million at March 31, 2013.
- The warrant expense was not deductible for tax purposes. Consequently, PSI recorded a $0.967 million tax provision despite a pretax loss; management said the quarter’s effective tax rate was not meaningful. Its estimated 2013 annual tax rate was 37%, excluding warrant revaluation effects.
- Management expected full-year effective interest to decrease slightly from 2012, holding other factors constant. No specific revenue or earnings guidance was provided.
- PSI had committed up to $1.2 million to a joint venture to manufacture, assemble and sell certain engines in Asia. The facility was expected to be completed in late 2013, with operations to begin shortly thereafter; no payments had been made by quarter-end.
Risks, contingencies and controls
Management cited risks including dependence on major OEM customers and suppliers, concentrated engine-supplier relationships, substantial inventory exposure, competition, changing environmental rules and fuel economics, product-development and commercialization uncertainty, and possible need for additional capital. The company also identified variability from customer and supplier product transitions, pricing changes and seasonal or timing effects. PSI said pending legal proceedings were not expected to have a material adverse effect and reported no material off-balance-sheet arrangements.
A previously disclosed material weakness in controls over aftermarket-parts business-system access and monitoring was not remediated. Management concluded disclosure controls and procedures were ineffective at March 31, 2013, solely due to the remediation status, and said it performed additional post-closing procedures for the reported financial statements.
Important facts for investors to verify
- How much of operating performance and reported net loss reflects core operations versus the volatile, noncash warrant revaluation.
- Whether operating cash flow, inventory levels and accounts-payable payments improve as sales grow, and how much credit availability remains under the borrowing-base terms.
- Progress in remediating the aftermarket-system material weakness and any subsequent changes in control effectiveness.
- Execution, funding and expected economics of the Asian joint venture, as well as the company’s other capital needs.
- Customer and supplier concentration, demand for alternative-fuel systems, and any changes in regulatory, competitive or component-cost conditions.