Power Solutions Announces 4th Quarter & Full Year Results

Source: www.gulfoilandgas.com 3/30/2021, Location: North America

Power Solutions International, Inc., a leader in the design, engineering and manufacture of emission-certified engines and power systems, announced fourth quarter and full year 2020 financial results.

Fourth Quarter 2020 Financial Results
The COVID-19 pandemic has resulted in the implementation of significant governmental measures to control the spread of the virus, including quarantines, travel restrictions, business shutdowns and restrictions on the movement of people in the United States and abroad, and the related decline in oil demand.

The Company has experienced an overall reduction in demand for its products which is, in part, attributable to the impact of the COVID-19 pandemic. This reduction in demand has adversely impacted the Company’s financial results for the fourth quarter and twelve months ended December 31, 2020. Additionally, the Company’s fourth quarter and full year 2020 financial results comparisons were impacted by the inclusion of approximately $30 million of sales associated with the shipment of certain engines within the transportation end market at the request of one of the Company’s customers during the fourth quarter of 2019, which impacted sales volume in 2020.

Sales for the fourth quarter of 2020 were $105.0 million, a decrease of $48.1 million, or 31%, versus the comparable period last year. The sales decrease is comprised of declines of $24.8 million, $19.0 million, and $4.3 million in the energy, transportation and industrial end markets, respectively. Lower energy end market sales were driven by decreased demand for the Company’s power generation products, especially for demand response products and those used within the oil and gas industry.

The decrease in transportation end market sales was primarily due to lower medium duty truck market business, mostly in relation to the aforementioned inclusion of $30 million of sales in the fourth quarter of 2019, which impacted the comparison versus 2020.

Lower transportation end market sales were partly offset by higher sales in the school bus market. The decreased sales within the industrial end market reflect lower demand for products used across various applications, with the largest decrease attributable to those products used in the material handling/forklift markets.

Gross profit decreased by $10.9 million, or 37%, in the fourth quarter of 2020 compared to the same period last year. Gross margin in the fourth quarter of 2020 was 17.9% versus 19.4% last year, primarily due to unfavorable product mix and the impact of lower sales, partly mitigated by lower warranty expenses, cost savings driven by reductions in the production facility workforce and other actions, and favorable tariff costs, among other items.

For the fourth quarter of 2020, warranty costs were $1.3 million (net of supplier recoveries of $2.9 million), including a $0.1 million benefit for adjustments to preexisting warranties, a decrease of $1.4 million compared to warranty costs of $2.6 million for the three months ended December 31, 2019. There were no adjustments to preexisting warranties and no benefit recognized for supplier recoveries in the fourth quarter of 2019.

Operating expenses increased by $0.5 million, or 3%, versus the comparable period in 2019, mostly attributable to higher legal costs related to the Company’s indemnification obligations of former officers and employees as a result of the exhaustion of its directors’ and officers’ insurance during the early part of 2020 and for costs related to the potential settlement of other legal matters. Partly offsetting the increase were lower financial reporting costs and the impact of temporary cost savings actions, among other items.

Net loss was $3.1 million, or a loss of $0.13 per share, versus net income of $8.1 million, or $0.35 per share for the comparable prior year period. Adjusted net income was $1.1 million, or Adjusted earnings per share of $0.05, versus Adjusted net income of $11.6 million, or Adjusted earnings per share of $0.51 for the fourth quarter of 2019. Adjusted earnings before interest, taxes, depreciation and amortization (“Adjusted EBITDA”) was $4.7 million compared to Adjusted EBITDA of $15.8 million for the fourth quarter of 2019.

Full Year 2020 Financial Results
For 2020, net sales of $417.6 million decreased $128.4 million, or 24%, compared to 2019, as a result of sales decreases of $73.5 million, $49.1 million, and $5.9 million in the energy, industrial, and transportation end markets, respectively. Gross margin was 14.0% and 18.3% during 2020 and 2019, respectively. Gross profit decreased during 2020 by $41.4 million compared to 2019, while operating expenses decreased by $2.5 million as compared to 2019. Interest expense decreased by $2.2 million in 2020 versus 2019. The Company recognized a loss of $1.4 million in 2019 as a result of the change in the value of the Weichai Warrant including the impact of the exercise in the second quarter of 2019, as compared to no impact in 2020. Also, the Company recorded an income tax benefit of $3.7 million for 2020 versus income tax expense of $0.4 million for 2019. Collectively, these factors contributed to a $31.2 million decline in net income, which totaled a net loss of $23.0 million in 2020 compared to net income of $8.2 million in 2019. Diluted loss per share was $1.00 in the 2020 period compared to diluted earnings per share of $0.38 in 2019.

Adjusted net loss, which excludes certain items described below that the Company believes are not indicative of its ongoing operating performance, was $11.1 million in 2020 compared to Adjusted net income of $28.1 million in 2019. Adjusted loss per share was $0.48 in 2020 compared to Adjusted earnings per share of $1.30 in 2019. Adjusted EBITDA was $3.0 million in 2020 compared to Adjusted EBITDA of $45.2 million in 2019. Adjusted net loss (income), Adjusted loss (earnings) per share and Adjusted EBITDA are non-GAAP financial measures.

Debt and Liquidity
The Company’s total debt was approximately $131 million at December 31, 2020, while cash and cash equivalents were approximately $21 million. These amounts reflect the net impact of customer prepayments of approximately $9 million. The Company’s fully-drawn, $130 million credit agreement with Standard Chartered Bank (the “Credit Agreement”) included certain financial covenants, including a minimum EBITDA threshold and an interest coverage ratio as further defined in the Credit Agreement. For the three months ended December 31, 2020, the Company was in compliance with these financial covenants. As announced on March 26, 2021, PSI entered into an uncommitted amended and restated $130 million Credit Agreement with Standard Chartered Bank (the “amended Credit Agreement”), which among other items, extended the maturity date to the earlier of March 25, 2022, or the demand of Standard Chartered.

In connection with the execution of the amended Credit Agreement, the Company also entered into an amended and restated shareholder’s loan agreement originally executed with its majority stockholder, Weichai America Corp. in December 2020 (the “First Amended and Restated Shareholder’s Loan Agreement”). The First Amended and Restated Shareholder’s Loan Agreement provides the Company with access of up to $130 million of credit solely for purposes of repaying outstanding borrowings under the amended Credit Agreement. The First Amended and Restated Shareholder’s Loan Agreement expires on April 25, 2022.

With these agreements in place, the Company continues to work with its strategic partner and majority stockholder, Weichai, to explore longer term financing options with its current and other lenders.

Outlook for 2021
The Company expects its sales for the full year of 2021 to be at least 15 percent above 2020 levels as a result of anticipated growth across all of its end markets. The growth is projected to occur in the second, third and fourth quarters of 2021, as compared to the corresponding 2020 quarters. Additionally, profitability is expected to improve during 2021 on a year-over-year basis. Notwithstanding this positive outlook, which is being driven in part by expectations for improved economic conditions within the United States and across various of the Company’s markets, the Company cautions that significant uncertainty still remains as a result of the ongoing COVID-19 pandemic.

Management Comments
Lance Arnett, chief executive officer, commented, “I would like to commend our employees for their considerable resilience during 2020 as we continued to serve our customers in the midst of a difficult environment due to the COVID-19 pandemic. Despite the continuation of challenging conditions across certain areas of our business in the back half of 2020, we saw improved financial results in the second half as compared to the first half, which contributed to positive Adjusted EBITDA for the year. Also, with approximately $21 million of cash, we ended the year with a healthy cash position on our balance sheet.”

“During 2020 we continued to make significant strides in our commercial sales activities and enter 2021 with a broadened product portfolio and a robust funnel of prospective business to support our long-term growth plans. As we look to 2021, we are encouraged by several positive indicators, which are supportive of our expectations for stronger financial results during the year.”


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