WPRT - Westport Fuel Systems - Avoid On Lack Of Near-Term Catalysts

2023-11-13 20:10:30 ET

Summary

• Last week, Westport Fuel Systems Inc. reported third quarter results largely in line with muted expectations.
• However, working capital benefits resulted in cash usage declining quite meaningfully with further improvement expected in Q4.
• Anticipated closing of the proposed HPDI joint venture with Volvo has been delayed into Q2/2024.
• Q4 results will be impacted by a global OEM delaying initial deliveries of LPG systems for Euro 6 vehicle applications into Q1/2024.
• Given the ongoing lack of near-term catalysts, I am reiterating my "Hold" rating on the shares.

Note:

I have covered Westport Fuel Systems Inc. ( WPRT ) previously, so investors should view this as an update to my earlier articles on the company.

Q3 Results Largely In Line With Expectations

Last week, Westport Fuel Systems Inc. or "Westport" reported third quarter results largely in line with muted expectations:

While revenues and gross margins increased on a year-over-year basis, these improvements were largely offset by a substantial step-up in operating expenses.

Closing Of Volvo Joint Venture Delayed

On the conference call , management attributed the increase to higher trade show activity as well as increased consulting and legal expenses in conjunction with the proposed HPDI joint venture with key customer Volvo ( OTCPK:VLVLY , OTCPK:VOLAF , OTCPK:VOLVF ) with the latter expected to continue until terms have been finalized.

Management currently expects the definitive agreement to be signed by the end of January with closing and commencement of operations anticipated in Q2/2024. Upon closing, Westport will receive a $28 million cash payment from Volvo with another $45 million milestone-based earn-outs potentially available to the company over time.

Please note that this represents a delay relative to previously-stated expectations of the joint venture closing " early next year ".

Remember also that the company will be required to fund the joint venture on a pro rata basis thus offsetting the positive impact on liquidity somewhat.

During the questions-and-answers session of the conference call, management stated expectations of the Volvo joint venture achieving cash flow break-even rather " quickly ".

Cash Usage Lowered Significantly

Favorable working capital movements resulted in the company generating $1.1 million in cash from operations in the quarter:

The improvement in cash provided by operating activities was primarily driven by the change in working capital, specifically inventory, accounts receivable and prepaid expenses. As we previously discussed, we built up inventory to manage against supply chain risk as well as shortages of raw materials and other components. We’ve had some success in reducing inventories during the quarter, and we continue to take action to monetize and optimize inventory levels to further free up cash. This will be a net positive for our balance sheet going forward.

However, after accounting for $4.1 million in capital expenditures and net debt repayments of $4.4 million, remainining cash and cash equivalents declined by $8.3 million sequentially to $44.0 million:

On the conference call, CFO Bill Larkin projected the company's year-end cash balance to increase to above $50 million:

Moving forward, we will continue to be prudent in our liquidity management and multiple steps are being taken to do so.

Non-dilutive financing alternatives remain an option as we look to solidify our balance sheet. We continue to do what is necessary to ensure we are adequately and fully capitalized.

Based on the work we have done against some of the initiatives I’ve mentioned here, I expect our cash balance at the end of 2023 to be above $50 million.

After being asked by an analyst during the questions-and-answers session of the conference call, the CFO pointed to additional working capital benefits and potential proceeds from debt financing pursued by the company's European operations.

Restructuring Of Indian Joint Venture

During the quarter, the company agreed to restructure its partnership with Minda in India by reducing its stake in the existing Minda Westport Technologies Ltd. joint venture from 50% to 24%.

Management expects the transaction to close by the end of Q1/2024 with anticipated net proceeds of $3 million and a positive impact on cash usage going forward.

LPG Program Delay To Impact Q4 Results

Looking forward, Q4 will be impacted by a large global OEM customer's decision to delay initial deliveries of LPG systems for Euro 6 vehicle applications into Q1/2024.

Bottom Line

Westport Fuel Systems delivered third quarter results largely in line with muted expectations.

However, the company managed to reduce cash burn quite meaningfully with additional benefits from further working capital releases anticipated for the current quarter.

Moreover, management hinted to a potential debt financing currently pursued by the company's European operations.

Furthermore, the recent restructuring of the Indian operations should also benefit cash flows going forward in addition to one-time cash proceeds of approximately $3 million.

As a result, I do not longer expect Westport Fuel Systems to raise additional equity or issue convertible debt in the near-term.

On the flip side, the company has experienced some delays in closing the proposed joint venture with Volvo and a large-scale LPG program with a global OEM customer with the latter expected to impact Q4 results.

Given the ongoing lack of near-term catalysts, I am reiterating my " Hold " rating on the shares.

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