Westport Fuel Systems(WPRT) - 2023 Q3 - Quarterly Report

Financial & Operational Highlights Westport achieved record quarterly revenue of $85.0 million with improved gross margin, despite a net loss, driven by strategic advancements in HPDI technology and expanded LPG programs - Revenue growth was driven by increased sales in delayed OEM, electronics, fuel storage, and IAM businesses in Eastern Europe and South America, but was partially offset by lower sales in India's light-duty OEM business and reduced volumes in hydrogen and heavy-duty OEM businesses[2][10] - Signed a non-binding letter of intent with Volvo to establish a joint venture to accelerate the commercialization of Westport's HPDI™ fuel system technology for long-haul and off-road applications[5][8] - Expanded a Euro 7 program to supply LPG fuel systems for a global OEM, which is now forecasted to generate €63 million in revenue from 2025-2028, bringing the total revenue from LPG supply agreements with this OEM to approximately €255 million[8] - Completed a 10:1 share consolidation and settled with Cartesian Capital Group, extinguishing a long-term royalty payable for $8.7 million and releasing the security interest in HPDI 2.0 IP[2] Q2 2023 Key Financial Metrics | Metric | Q2 2023 | Q2 2022 | Change | | :--- | :--- | :--- | :--- | | Revenue | $85.0M | $80.0M | +6% | | Gross Margin | $14.4M (16.9%) | $10.5M (13.1%) | +$3.9M | | Net Loss | $(13.2)M | $(11.6)M | +$1.6M | | Adjusted EBITDA | $(4.0)M | $(4.3)M | +$0.3M | CEO Commentary & Outlook The CEO emphasized solid first-half results and the strategic importance of the Volvo joint venture, anticipating improved performance in H2 2023 driven by new LPG fuel system production and growing demand - Despite expected lower HPDI sales volumes due to a model changeover, the company achieved record revenues and improving gross margins in Q2[4] - The joint venture with Volvo is described as a 'true inflection point' for Westport, validating its HPDI technology and providing it a global audience for decarbonizing long-haul transport[5] - The second half of 2023 will see the start of LPG fuel system production and sales to a global OEM, with an expanded Euro 7 scope, driven by the price advantage of LPG over petrol[6] - The company's diversified business model is positioned to perform well in H2 2023, combining sustainable core businesses with high-growth opportunities[7] Consolidated Financial Performance Westport's Q2 2023 revenue increased 6% to $85.0 million with improved gross margin, though net loss widened to $13.2 million due to a one-time expense, while Adjusted EBITDA slightly improved - The net loss for Q2 2023 included a one-time expense of $2.9 million related to the extinguishment of the Cartesian royalty payable[11] Consolidated Results (Q2 & 1H 2023 vs 2022) | ($ in millions, except per share) | 2Q23 | 2Q22 | % Change | 1H23 | 1H22 | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Revenues | $85.0 | $80.0 | 6% | $167.3 | $156.5 | 7% | | Gross Margin | $14.4 | $10.5 | 37% | $27.7 | $20.4 | 36% | | Gross Margin % | 17% | 13% | - | 17% | 13% | - | | Net Loss | $(13.2) | $(11.6) | (14)% | $(23.8) | $(3.9) | (510)% | | Net Loss per Share | $(0.77) | $(0.68) | (13)% | $(1.39) | $(0.23) | (504)% | | Adjusted EBITDA | $(4.0) | $(4.3) | 7% | $(8.5) | $(10.4) | 18% | Segment Performance In Q2 2023, IAM segment revenue grew 27% to $32.6 million, while OEM revenue slightly declined to $52.4 million, leading to widened OEM operating loss and significant IAM operating income growth Segment Results (Three months ended June 30) | ($ in millions) | Revenue (2Q23) | Revenue (2Q22) | Operating Income (Loss) (2Q23) | Operating Income (Loss) (2Q22) | | :--- | :--- | :--- | :--- | :--- | | OEM | $52.4 | $54.3 | $(7.3) | $(5.6) | | IAM | $32.6 | $25.7 | $1.7 | $0.1 | | Corporate | — | — | $(4.6) | $(5.8) | | Total | $85.0 | $80.0 | $(10.2) | $(11.3) | Original Equipment Manufacturer (OEM) Segment OEM segment revenue slightly decreased to $52.4 million in Q2 2023 due to lower volumes, but gross margin significantly improved to 16% driven by higher-margin sales and engineering services - The revenue decrease was primarily driven by lower sales volumes for the heavy-duty OEM business, reduced sales to customers in India, and lower volumes to hydrogen customers[13] - Gross margin improvement was due to higher spare parts sales, increased unit pricing on HPDI systems, and higher engineering service revenue, which offset higher production and logistics costs[15] - The company remains confident in the OEM outlook, citing the expanded Euro 7 business, higher volumes in delayed OEM, hydrogen growth projects, and the HPDI joint venture with Volvo[17] OEM Segment Financials (Q2 2023 vs Q2 2022) | Metric | Q2 2023 | Q2 2022 | | :--- | :--- | :--- | | Revenue | $52.4M | $54.3M | | Gross Margin | $8.4M | $4.7M | | Gross Margin % | 16% | 9% | Independent Aftermarket (IAM) Segment The IAM segment showed strong Q2 2023 performance, with revenue increasing 27% to $32.6 million, driven by higher sales volumes in key regions, despite a decrease in gross margin percentage - The increase in revenue was primarily driven by higher sales volumes to Africa, Eastern Europe, and South America[19] IAM Segment Financials (Q2 2023 vs Q2 2022) | Metric | Q2 2023 | Q2 2022 | | :--- | :--- | :--- | | Revenue | $32.6M | $25.7M | | Gross Margin | $6.0M | $5.8M | | Gross Margin % | 18% | 23% | Financial Statements The unaudited condensed consolidated financial statements detail the company's financial position and performance, showing decreased cash, extinguished royalty payable, and a wider net loss Condensed Consolidated Balance Sheets As of June 30, 2023, total assets decreased to $377.6 million, primarily due to reduced cash, while total liabilities decreased to $190.8 million, leading to a decrease in total shareholders' equity Balance Sheet Summary (in thousands) | Account | June 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total Current Assets | $243,872 | $277,219 | | Cash and cash equivalents | $52,265 | $86,184 | | Total Assets | $377,631 | $407,451 | | Total Current Liabilities | $132,456 | $135,519 | | Long-term debt | $26,945 | $32,164 | | Long-term royalty payable | $0 | $4,376 | | Total Liabilities | $190,773 | $203,485 | | Total Shareholders' Equity | $186,858 | $203,966 | Condensed Consolidated Statements of Operations For Q2 2023, revenue was $85.0 million, but net loss widened to $13.2 million ($0.77 per share) due to a $2.9 million royalty extinguishment loss and increased operating expenses Statement of Operations Summary (Three months ended June 30, in thousands) | Account | 2023 | 2022 | | :--- | :--- | :--- | | Revenue | $85,022 | $79,964 | | Cost of revenue | $70,653 | $69,457 | | Gross Profit | $14,369 | $10,507 | | Loss from operations | $(10,223) | $(11,325) | | Loss on extinguishment | $(2,909) | $0 | | Net loss for the period | $(13,207) | $(11,579) | | Net loss per share | $(0.77) | $(0.68) | Condensed Consolidated Statements of Cash Flows For the six months ended June 30, 2023, net cash used in operating activities significantly improved to $8.6 million, while investing and financing activities led to a net decrease in cash of $33.9 million, ending with $52.3 million Cash Flow Summary (Six months ended June 30, in thousands) | Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net cash used in operating activities | $(8,628) | $(33,404) | | Net cash (used in) from investing activities | $(7,779) | $25,670 | | Net cash used in financing activities | $(18,467) | $(16,407) | | Net decrease in cash | $(33,919) | $(26,718) | | Cash and cash equivalents, end of period | $52,265 | $98,174 | Non-GAAP Financial Measures Reconciliation The company reconciles non-GAAP measures like EBITDA and Adjusted EBITDA to evaluate operational performance, with Q2 2023 net loss of $13.0 million before taxes reconciling to an Adjusted EBITDA of negative $4.0 million - Management defines Adjusted EBITDA as EBITDA from continuing operations excluding stock-based compensation, unrealized foreign exchange gain or loss, and other non-cash adjustments, used as a long-term indicator of operational performance[26] Adjusted EBITDA Reconciliation (Q2 2023, in millions) | Metric | Amount | | :--- | :--- | | Net loss before income taxes | $(13.0) | | Interest expense (income), net | $(0.1) | | Depreciation and amortization | $3.0 | | EBITDA | $(10.1) | | Stock based compensation | $0.8 | | Unrealized foreign exchange loss | $2.4 | | Adjusted EBITDA | $(4.0) |