Get Started for Free Contexxia identifies hard-to-find pieces of information in SEC filings. No more highlighters, no more redlining, no more poring over huge documents. POWER SOLUTIONS INTERNATIONAL, INC. (1137091) 10-Q published on Jun 29, 2020 at 6:36 pm
Reporting Period: Mar 30, 2020
As previously disclosed on Power Solutions International, Inc.’s, a Delaware corporation (“Power Solutions,” “PSI” or the “Company”) Form 8-K filed with the United States Securities and Exchange Commission (the “SEC”) on May 15, 2020, the filing of this Quarterly Report on Form 10-Q for the period ended March 31, 2020 (the “Quarterly Report”) was delayed due to circumstances related to the novel coronavirus (“COVID-19”) and its impact on the Company’s operations. The disruptions in transportation, staffing, and technology systems to both the Company and the Company’s professional advisors resulted in limited support from the Company’s staff and professional advisors due to the COVID-19 outbreak. In particular, COVID-19 has caused disruptions in the Company’s day-to-day activities and impaired the Company’s ability to perform necessary work on the Quarterly Report and to file the Quarterly Report by its original May 15, 2020 due date. The Company relied on the SEC’s Order Under Section 36 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) Modifying Exemptions From the Reporting and Proxy Delivery Requirements for Public Companies, dated March 4, 2020 and amended March 25, 2020 (Release Nos. 34-88318 and 34-88465) (collectively, the “Order”), to delay the filing of this Quarterly Report. The Company is relying on the Order in filing this Quarterly Report.
On April 2, 2020, the Company closed on its new senior secured revolving credit facility pursuant to that certain credit agreement, dated as of March 27, 2020, by and between the Company and Standard Chartered Bank (“Standard Chartered”) as administrative agent (the “Credit Agreement”). The Credit Agreement allows the Company to borrow up to $130.0 million and matures on March 26, 2021 with an optional 60-day extension, subject to certain conditions and payment of a 0.25% extension fee. Borrowings under the Credit Agreement bear interest at either the base rate as defined in the Credit Agreement or the London Interbank Offered Rate (“LIBOR”) plus 2.00% per annum, and the Company is required to pay a 0.25% commitment fee on the average daily unused portion of the revolving credit facility under the Credit Agreement. The Credit Agreement is secured by substantially all of the Company’s assets and includes certain financial covenants as well as a change of control provision. On April 2, 2020, the Company borrowed $95.0 million under the Credit Agreement and utilized the funds (i) to repay the outstanding balance of $16.8 million on the revolving credit agreement between the Company and Wells Fargo Bank, N.A. (the “Wells Fargo Credit Agreement”), (ii) to fully redeem and discharge $55.0 million in aggregate outstanding principal amount of its unsecured notes due June 2020 (the “Unsecured Senior Notes”) and pay related interest, and (iii) for general corporate purposes. The Wells Fargo Credit Agreement was terminated in connection with repayment of the outstanding balance. The Company will recognize a loss on the extinguishment of the Wells Fargo Credit Agreement and the Unsecured Senior Notes of $0.5 million related to premiums to early retire the Unsecured Senior Notes and unamortized debt issuance costs. The Company will defer debt issuance costs related to the closing of the Credit Agreement of $2.0 million. On April 29, 2020, the Company borrowed an additional $35.0 million under the Credit Agreement, which is the remaining portion of availability, providing the Company with greater financial flexibility. As of May 31, 2020, the Company had borrowings outstanding of $130.0 million under the Credit Agreement and cash and cash equivalents of $35.5 million.
For the three months ended March 31, 2020, the Company’s net sales decreased $10.7 million, or 9%, from the three months ended March 31, 2019 to $105.1 million, as a result of decreased sales of $13.4 million and $1.7 million in the industrial and transportation end markets, respectively, partly offset by a $4.4 million increase in the energy end market. Gross margin for the three months ended March 31, 2020 was 16.9%, an improvement versus 15.3% in the comparable 2019 period. Gross profit was virtually unchanged for the three months ended March 31, 2020, while operating expenses decreased by $1.9 million, as compared to the comparable period in 2019. For the three months ended March 31, 2019, the Company reported a gain of $4.4 million from the change in fair value of the Weichai Warrant. See Note 3. Weichai Transactions, included in Part 1, Item 1. Financial Statements, for additional information. The Weichai Warrant was exercised in April 2019 and, as a result, had no impact on the three months ended March 31, 2020. Interest expense decreased by $0.8 million for the three months ended March 31, 2020 versus the comparable period in 2019. Also, the Company recorded an income tax benefit of $4.0 million for the three months ended March 31, 2020 versus a $0.6 million benefit from the same period last year. Collectively, these factors contributed to a $1.9 million decrease in the net loss, which totaled $0.7 million in the 2020 period compared to a net loss of $2.6 million in the same period of 2019. Diluted loss per share was $0.03 in the 2020 period compared to a diluted loss per share of $0.31 in the comparable 2019 period. Adjusted net loss, which excludes certain items described below that the Company believes are not indicative of its ongoing operating performance, was $0.7 million in the 2020 period, an increase of $0.6 million, compared to an Adjusted net loss of $0.1 million in 2019. Adjusted loss per share was $0.03 in 2020 compared to an Adjusted loss per share of $0.01 in 2019. Adjusted earnings before interest expense, income taxes, depreciation and amortization (“EBITDA”) was $2.6 million in 2020 compared to Adjusted EBITDA of $3.7 million in 2019. Adjusted net loss, Adjusted loss per share and Adjusted EBITDA are non-GAAP financial measures. For a reconciliation of each of these measures to the nearest applicable GAAP financial measure, as well as additional information about these non-GAAP measures, see the section entitled Non-GAAP Financial Measures in this Item 2.
In January 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus (the “COVID-19 outbreak”) and the risks to the international community as the virus spreads globally. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic (the “COVID-19 pandemic”), based on the rapid increase in exposure globally. 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. These factors, in turn, may not only impact the Company’s operations, financial condition, and demand for its goods and services, but its overall ability to react timely to mitigate the impact of the COVID-19 pandemic. The Company has initiated certain contingency actions as a result of the expected significant negative impacts of these factors. As of the date of this Quarterly Report, the Company’s production facility workforce has been reduced to more closely align with current volume trends. Additionally, the Company implemented various temporary cost reduction measures, including reduced pay for salaried employees, suspension of the 401(k) match program, and deferred spending on certain R&D programs, among others. The measures with regard to pay for employees and the Company’s 401(k) plan match are now anticipated to run through September 30, 2020, at which time the Company will assess market conditions. The Company continues to review operating expenses as part of the contingency planning process. The full impact of the COVID-19 pandemic continues to evolve as of the date of this Quarterly Report.
The global economy has experienced substantial turmoil including impacts from the world financial markets which have experienced significant volatility and declines. In addition, as of the date of this Quarterly Report, due to unprecedented decreases in demand and economic uncertainty resulting from the COVID-19 pandemic, crude oil prices have declined precipitously as compared to prices at the end of 2019. A significant portion of the Company’s sales and profitability is derived from the sale of products that are used within the oil and gas industry. While the Company has yet to experience significant supply chain interruptions or material cancellations of orders, the potential impact of future disruptions, continued economic uncertainty, and continued depressed crude oil prices and declining rig count levels may have a significant adverse impact on the timing of delivery of customer orders and the levels of future customer orders. Accordingly, these adverse impacts may result in significantly lower than planned sales and profitability, which could lead to the recognition of material impairments or other related charges.