PSIX - Report from Vista Partners

This is part of a free report from Vista Partners. They seem to provide reports for PSIX, but the reports are full of information that you’d have to scrabble to find elsewhere and I recommend going to the site for the whole thing. This is what I selected.


“Power Solutions International, a Delaware corporation founded in 1985 and located in Wood Dale, IL, is a global leader in the design, engineering and manufacture of emissions-certified, alternative-fuel power systems. It provides integrated turnkey solutions to leading global original equipment manufacturers in the industrial and on-road markets (“industrial OEMs”). Its unique in-house design, prototyping, engineering and testing capacities allows it to customize clean, high-performance engines that run on a wide variety of fuels including natural gas, propane, biogas, diesel and gasoline.

PSIX develops and delivers complete .97 to 22-liters power systems, including the 8.8-liter engine aimed at the industrial and on-road markets, including: medium duty fleets, delivery trucks, school buses and garbage/refuse trucks. Its power systems are currently used worldwide in power generators, forklifts, aerial lifts, and industrial sweepers, as well as in oil and gas, aircraft ground support, agricultural and construction equipment.

PSIX operates primarily through two main subsidiaries: Power Solutions, maker of alternative fuel engines and Power Great Lakes, a diesel engine distributor. PSIX’s products and services are sold predominantly to customers in North America, but they have customers located throughout Asia and Europe. They employ a workforce of over 400.

Outlook: PSIX beat 2013 revenue guidance and achieved 17.5% revenue growth year over year for the year ended December 31, 2013. Revenue guidance in 2013 was to be in a range of $225M to $235M, PSI produced $237.8M of revs. Their 2014 revenue guidance is $310M to $330M. (At the midpoint, that’s up 34.5%. At the high end of the range, which they will probably beat, it’s up about 39%)

PSIX’s growth is driven by the global trend that has shifted towards alternative fuel sources. They provide a wide range of products for industrial OEM applications with each customized to specific OEM requirements ranging from basic to more complex packaged power systems. The company’s wide range of products, which serve a variety of needs and meet numerous different emission standards, should give them a competitive advantage going forward.

PSIX’s new 2.0L and 2.4L engines have been gaining acceptance from forklift manufacturers. They announced a new agreement in February with NACCO Materials Handling Group, the global forklift manufacturer, to supply NACCO with alternatively-fueled power systems.

This deal marked the launch of PSI’s long-term 2.0-liter and 2.4-liter power system program, which should allow them to increase their share of the materials handling market. Furthermore, PSIX believes their 8.8L engine is an attractive offering for both off-road and ultimately on-road applications that will also contribute to future growth. PSI is anticipating new customer wins this year due to these new products that will provide significant revenue growth in 2015 and beyond.

PSIX is one of only a few providers of industrial OEM products, whose products meet, and in many cases are significantly lower than, the emission standards of the EPA and CARB:. their alternative fuel engines range in size from under 1 liter to 22 liters and its power system configurations include any combination of cooling systems, electronic systems, air intake systems, fuel systems, housings, power takeoff systems, exhaust systems, hydraulic systems, enclosures, brackets, hoses, tubes and other assembled componentry.

PSI also provides standardized fuel system and component technology across its entire range of emission-certified power systems. As a result, the Company’s OEM customers are able to focus internal engineering and technical support resources, and train their personnel, on one standardized fuel system: and one set of electronic controls employed throughout the range of power systems they acquire from PSI, and are able to reduce their product design and ongoing product support costs.

The Company believes their broad range of emission-certified, alternative fuel products strategically positions them to capitalize on the cost and packaging disadvantages associated with diesel power systems that are resulting from increased EPA and CARB emission regulations that are taking effect. Given the existing dominance of diesel power systems in the industrial OEM marketplace, even a minor shift in the marketplace from diesel to spark-ignited, alternative fuel power systems will represent a significant growth opportunity for PSI.

Additionally, as international OEMs desire to supply industrial equipment products into the United States and must meet EPA and CARB emission requirements, the Company provides a fast, certain, cost-effective route for these foreign industrial OEMs to meet these emission requirements because PSI holds compliance certificates specific to its power systems. The Company has already secured commercial sales relationships with some of Asia’s largest industrial OEMs, and has begun supplying EPA and CARB compliant power systems to these industrial OEM customers for incorporation into their product lineups.

For nearly 30 years the company has had a history and reputation as a proven supplier of cost-effective, technologically advanced products to the industrial OEM marketplace.

Below we outline the industrial markets the Company is involved in as well as their approximate value in terms of revenue for PSI:

Power Generation (~25% of overall revenue) :
PSI offers EPA and CARB emission-certified 0.97L to 22L spark-ignited power systems that use alternative fuels; these engines are used for stationary emergency and non-emergency power generation products.

Emergency engines are stationary engines which operate solely in emergency situations and during required periodic testing and maintenance. Examples include engines used in generators to produce power for critical networks when electrical power from the local utility provider is interrupted, and stand-by engines that pump water in the event of a fire or flood.

Non-emergency products include prime power generation products, which produce continuous generation of power for an extended period of time, and peak shaving products, which generate power at times of maximum power demand.

PSI currently supplies their power systems to a substantial number of manufacturers of power generation products. PSI believes that their customers choose their power systems because of their broad range of emission-certified, spark-ignited power systems that meet their customers’ needs. Additionally, by using a common fuel system and electronic controls across the company’s range of power systems, PSI provides their customers with the opportunity to support and train their personnel on one standardized fuel system and one set of electronic controls employed throughout the range of products they acquire from PSI.

Material Handling (Forklift Trucks) (~20% of overall revenue) :
PSI is a dominant provider of power systems for use in forklifts; and has gained even further with the introduction of its 2.0L and 2.4L engines specifically targeted for the forklift market. PSI provides spark-ignited power systems for 1.5-10 ton forklifts to some of the largest forklift manufacturers in the world. Alternative fuel power systems (along with electric) make up nearly all of the indoor materials handling market in the United States in order to meet indoor emissions and OSHA requirements. Given the phase in of EPA Tier 4 regulations through 2015, international opportunities in Asia & Europe (where the majority of forklifts still operate on diesel fuel) PSI expects to see growth in demand, and an increase in material handling revenue, to continue.

PSI believes that, in the United States, nearly 100% of the indoor forklift market uses spark-ignited liquid propane gas or electric powered units (with approximately equal market shares), in contrast to Asian and European forklift markets which currently use diesel in excess of 80% of all applications. In connection with the implementation of pending EPA Tier 4 and European Stage IV regulations, and the resulting price increases related to the compliance of diesel engines with these regulations, PSI expects foreign markets for spark-ignited liquid propane gas power systems to grow. PSI expects this growth to drive increased international demand for their power systems.

Oil and Gas (~25% of overall revenue) :
Due to increased focus on fuel costs and emissions, sales of alternative fuel systems into the oil and gas segment have grown substantially for Power Solutions. For oil and gas applications these products are used in the exploration and production of natural gas and crude oil and include engines for oil field pumps, cavity pumps, components, and machinery. The Company believes oil and gas could be a significant growth segment, as producers are increasingly focusing on production costs. In addition, obtaining a diesel generator permit in certain locations can be very difficult and in some instances not possible. This may serve as a catalyst for alternative fuel systems.

Arbor Products (~10% of overall revenue) :
Power Solutions is the market leading provider of engines for grinders and wood chippers with large OEM partners such as Bandit Industries. Today these engines are primarily diesel powered (often by Power Solutions), but over time, the Company believes they may transition to alternative fueled engines in response to the implementation of EPA Tier 4 emissions standards and the resulting increased cost and size of diesel engines.

Aerial Work Platforms (~4% of overall revenue) :
The aerial work platforms market category consists of aerial work platforms, or machines used to provide access to areas typically inaccessible because of their height. Rental companies represent a majority of all purchasers in this industry category. PSI currently sells their liquid propane gas/gasoline dual fuel power systems to aerial work platform OEMs.

As a result of the increase in diesel engine pricing related to the implementation of EPA Tier 4 regulations, PSI expects to see an increase in the number of OEMs in the aerial work platforms market which consider their liquid propane gas and gasoline powered power systems as an alternative to diesel powered power systems.

Industrial Sweepers (~2% of overall revenue) :
Industrial sweepers use spark-ignited gaseous fueled or diesel engines or electric motors. Power Solutions currently supplies 100% of 30 to 80 hp propane or gasoline power systems to OEM customers Tennant, Nilfisk, and PowerBoss for a wide range of indoor cleaning/sweeping applications.

Other Applications:
Other applications for Power Solutions alternative fuel and hybrid power systems include aerial lift equipment, construction, irrigation, airport equipment, agricultural, turf, and welding. Additionally, the Company believes they could see traction going forward from the 8.8L engine in on-road applications.

Other Products:
Other products provided by Power Solutions include:

Power Take Off Clutch Assemblies – PSI designs and manufactures a proprietary Clutch Assembly for use in its arbor products and other industrial applications. This is used to drive separate power to different parts of industrial equipment.

Components, Kits, And Subsystems Customized To OEM Requirements – In addition to the complete fuel systems which Power Solutions provides to its OEM customers, it also supplies many of the components for electronic controls, packaging, cooling systems, and exhaust systems customized for OEM specific requirements.

MasterTrak – This is Power Solutions’ telematics tool allowing industrial equipment users to stay connected to field assets through GPS, remote monitoring, management of maintenance requirements, and two-way communications (similar to GM’s OnStar). MasterTrak is sold to OEM customers as part of a bundled solution and also separately to other industrial customers. This may be a future growth area for Power Solutions.

Aftermarket Parts Sales (~15% of overall revenue) :
Approximately 15% of PSI’s revenue is from aftermarket parts and service. As part of this business, Power Solutions operates its own aftermarket parts and service organization. It also supplies parts for an OEM’s internal aftermarket system and trains its OEM partners and distributors to handle aftermarket repairs. This is a growing and nice recurring revenue component of the business, which also carries higher margins for Power Solutions.

Conclusion (~2% of overall revenue)

Acquisition: Power Solutions acquired Professional Power Products (“PPPI”) for cash and stock on April 1, 2014. PPPI specializes in power generation systems for both standby and prime power applications. Each integrated generator system is a pre-assembled, modular, fully integrated generator set shipped directly to the OEM or end user customer. The PPPI product portfolio also includes switchgear, control panels, load banks, mobile power trailers and UL Listed(R) tanks. For PSI, this means an expanded product offering to 1MW-3MWs, expansion to new applications (i.e. data center, large Oil and Gas), a sizable list of major OEMs customers, additional capabilities, and strong synergies with the rest of its business. PSI will provide intros to Caterpillar dealers for PPPI, as according to the Company, PPPI had only penetrated approximately 30% of the Caterpillar dealer network. Leveraging off each other’s customer relationships is an intention with this acquisition. In 2013, PPPI generated net sales and operating income of approximately $40.3 million and $7.9 million, respectively. PPPI has no debt as of the time of the acquisition according to PSI.

The company has taken advantage of the robust secular trend towards alternative-fuel power systems in industrial markets, along with PSI’s comprehensive product line, seems to position them well for future growth. Sustainable demand for the company’s natural gas (“NG”) engines is driven by a number of factors including:
? _Rising cost of power production from diesel fuel, relative to other alternative fuel sources, such as NG.
? _Tightening of emission standards, with new rules and regulations, from agencies like the EPA and CARB, coming into effect
? _Cheaper and easier for alternative fuel power generators to operate, as well as become compliant with government rules and regulations for emissions governing power generation when compared to diesel power generators; with (1) lower capital cost vs. Tier-4-compliant diesel engines and (2) lower operating cost (price spread of NG vs. diesel fuel). The new product introductions of 2L and 2.4L engines for the forklift markets, the transition from 8.1L Doosan engine to proprietary 8.8L hybrid engines and new alternative fuel engines and hybrid solutions, may drive sales growth and profitability substantially, over the next couple of years.

The Company is planning further expansion of its manufacturing capabilities and its reach into the global market, with the opening of the new production facility in Dalian, China. Also the relatively low price of alternative fuels (when compared with diesel) and increased emissions standards have all contributed to what has been ostensibly a near-perfect business environment for PSI’s business model, and the expanded use of alternative fuels. Management seems to be delivering on its promised sales and profit growth through new product development and expanding end markets.

Last year the company saw its oil and gas sales grow substantially, almost doubling from $31.3 million in 2012 to $60 million in 2013 & it has seen a CAGR of 70% since 2011. With domestic oil production and exploration continuing to boom, PSI seems to have tapped into a large reserve of new potential clients. These oil companies seem to have found PSI’s power generation systems suiting their needs better than much of the competition; many of these customers have oil rigs and are drawn in by the ability to harness the flare gas (which gets its namesake from it often having to be burnt off, like a flare and often ends up as an unused byproduct of oil rigs, this practice offers no real economic utility, beyond being a necessary engineering/ safety practice), which is a substantial advantage over using diesel fuel for their power generation systems. This is especially true considering that for all intents and purposes flare gas ends up being a relatively free source of fuel for power generation; furthermore if flare gas is just arbitrarily burnt off companies could face consequences as there are new guidelines being set for what oil wells can do with their flair gas. The increase in sales in this market was a key factor in the persistently strong growth the Company saw in its heavy-duty power generation systems and aftermarket sales during 2013, and contributed significantly to PSI’s overall sales increase.

Through industrial OEMs outsourcing component products, PSI is able to take advantage of opportunities for component standardization across industry categories, while still providing each industrial OEM with the flexibility to customize as required for particular design and application specifications. PSI aggregates its product development efforts, and can amortize associated costs over its large and diverse OEM customer base and across industry categories. Furthermore, PSI capitalizes on volume, economies of scale and global supply opportunities when sourcing component products. PSI can, therefore, provide their OEM customers with lower cost structures than they would otherwise be able to achieve and help them reduce their part numbers and supply base by consolidating their procurement and assembly efforts down to a single part number product supplied by PSI. PSI’s component sourcing relationships further enable their OEM customers to recognize resource reductions, inventory reductions and engineering support advantages."