Earnings Update: Did Westport Innovations Have a Great Quarter or a Bad Quarter?

Westport Innovations  (NASDAQ: WPRT  ) finally reported what looks like a big quarter after a series of rather dismal releases in 2013. The company soundly beat analyst expectations, growing sales almost 40%, increasing gross margins to almost 30%, and cutting its adjusted EBITDA loss to $1.6 million, after averaging more than $9 million per quarter for the past two years. However, there are a few things investors should take note of before deciding what to do. 

Someone's buying natural gas trucks and LNG components

The ISX12 G has been well accepted so far by truckers. Source: Cummins Westport

Sales at CWI, Westport's partnership with engine maker Cummins, were up 79% in the quarter, and the JV shipped 2,480 engines -- some 1,100 more than the year-ago period. In the earnings report, Westport said "the increased quarterly volumes in North America were driven by higher sales in all segments, but mainly in truck applications." This indicates that the ISX12 G -- launched in April 2013 -- is contributing to growth in a big way. 

Additionally, the company's On-Road Systems unit reported strong growth, increasing sales a whopping 277%. The company pointed at three areas of strength:

  • iCE PACK LNG tank systems for heavy trucks.
  • Increased revenue from WiNG sales (formerly BAF)
  • Increased shipments to Volvo for the V60 and V70 bi-fuel station wagon. 

Westport iCE PACK LNG tank system for heavy trucks. Source: Westport


Two steps forward, one step back?

The Applied Technologies unit actually reported a 6% decline in revenue, and management pointed squarely at Italy. However, COO Nancy Gogarty also said that the Chinese and Russian markets both showed strong growth. So it's important to note that the company's expanding footprint into diverse markets is providing protection against exposure to weak markets, such as Italy right now. Gogarty, when talking about the Tata relationship, which should begin paying dividends in coming quarters, said that it's a series of small steps versus one or two giant steps:

But as we talked about with Tata, we have now got the 580 controller on that, and that's a positive step. And we are seeing similar steps along the way. But at this point in time unfortunately we don't have any real giant steps at the moment, but it's a continuation of real strong small steps, and success with multiple OEMs.

Westport LNG tender. Source: Westport

Recently, Westport issued a press release announcing that it was filling an order for four of its LNG tenders, but only one of these shipped in the first quarter. The Off-Road Systems business segment reported revenue growth of 18%, but it was by far the smallest of the operating groups, with only $1.3 million in sales in the quarter. Since LNG tenders are very high revenue products, the shipment of the remaining three units alone would be a massive boost for this business unit.

However, a $200,000 bump in sales, which is less than the LNG tenders are expected to sell for, indicates that there could be some softness in sales of the company's 2.4 liter engine for forklifts and power generation. It's worth paying closer attention to this going forward. There is some potentially great news that isn't getting much attention, though, to address this possible weakness. In the press release, Westport announced that it was partnered with Hyundai to build a natural gas/LPG version of its 3.8 liter industrial engine, taking Westport further upstream in the forklift and off-road engine market for power generation, construction, and oil & gas. 

JV margins are getting squeezed: Will the trend reverse?
CWI recorded a $15 million warranty charge in the quarter, which meant Westport received no income from the JV. According to CFO Bill Larkin, Westport would have received $4 million in profits from the JV if not for this charge. He also noted that the charge was related to the 8.9 liter engine, and not the new 12 liter engine, and that historically the 8.9 liter engine had been very profitable. Historical indications are that this will be a one-time charge, and that coming quarters will indeed profitably contribute to Westport's bottom line. 

WWI, the Chinese joint venture, is another story. WWI has been growing at a very high rate up until this quarter, but margins have been very low. Unfortunately, Westport management doesn't seem to expect this to change, and is deferring to its Chinese partners when it comes to pricing in the Chinese market. However, the addition of the HPDI engines (12 liter in 2015, 10 liter to follow in another year or two) will have a positive impact for Westport.

The reason? Westport Innovations is selling the HPDI components to the JV, so it will collect revenue and profits at the business unit that sells these components to WWI. This is above and beyond the share of profits that the company collects from the WWI joint venture. "Double-dipping," if you will. 

Final thoughts: Cup looks more than half-full 
It's always tough to balance good and not-so-good in an earnings report like this. However, let's take a few things at face value:

  • Management executed on its pledge to narrow adjusted EBITDA losses. 
  • Consolidated revenue grew almost 40%.
  • A lot of partnerships with OEMs are filling the pipeline for continued growth.

However, I think it's fair to say we need to see this kind of forward momentum in a sustained way. One quarter of growth doesn't make a turnaround, but it's definitely a start in the right direction. If you're looking to start a position, it could be a good time to do so -- even with the huge post-earnings pop. This is a better-positioned company than it was a year ago, and the shares are still marked way down. 

 

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Read/Post Comments (9) | Recommend This Article (12)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 06, 2014, at 1:45 PM, GirlsUnder30 wrote:

    There was one member who gave a pretty prophetic analysis of Westport way back when it was $40. link:

    http://caps.fool.com/Blogs/why-is-westport-is-scary-over/730...

  • Report this Comment On May 06, 2014, at 7:38 PM, TMFVelvetHammer wrote:

    Under30,

    I don't think there's much correlation between your reasoning, and the stock's drop in price.

    Today, Westport has 7 commercial OEM agreements, plus 3 private development agreements. Simply put, what's happened with Westport's technology is the opposite of what you expected.

  • Report this Comment On May 07, 2014, at 2:26 PM, GirlsUnder30 wrote:

    TMFVelvetHammer

    Would you like to reconsider your comment?

    1.The delay in market penetration created the pessimism in the stock and this was described.

    2.The upcoming weakness in oil due to increasing pressure from alternative energy was described as was the jockeying for gas properties by big oil.

    3.The future price increases in natural gas and the logic driving these increases were described almost perfectly.

    4. The schedule of nat-gas adoption by the US municipalities was almost dead on.

    5. The plum is not yet fat enough to create the competitve environment described and it is too soon to shout victory for the Westport patents so i don't see how you can honestly characterize my projections as "opposite to what I expected".

  • Report this Comment On May 13, 2014, at 3:12 PM, TMFVelvetHammer wrote:

    Under30,

    Your CAPS Pitch:

    >>1. It appears that they don't fear legal recourse of what is a borderline patent violation of the Westport design. The take from this could be that the patents are not as strong as the market suspects. There has been substantial time now for engineers to have studied them in order to make this assessment.

    2. Competitors will study the Cummins variations and use that information to crowbar their own designs past the Westport patents weakening their advantage further. Any legal wrangling that might occur will be distracting and an impediment to the speed of Westport market penetration which is really bad news.

    3. Electrical motors and hybrids are improving every year and natural gas prices will not always be $2 and those facts keep me from sleeping too comfortably on a Westport pillow. Still, the potential is huge if the governmental pen hits the paper.<<

    Intellectual Property, Hybrids, EVs?

    None of these things have played out like you said in your initial pitch.

    Additionally, the price of natural gas relative to oil has had zero impact on Westport. Neither has anything to do with municipal adoption of natural gas vehicles.

    The commodity cost of natural gas (Henry Hub, NYMEX) plays a very small role in the "at the pump" price of natural gas. About 12 cents per gallon for every dollar. So the NYMEX price could go to $8.50 -- effectively doubling in price -- and CNG would only be about 33 cents per gallon more expensive.

    And that's a double in the price of natural gas.

    NG adoption by municipalities? I don't follow.

    With the exception of a handful of F-Series trucks, Westport isn't in the small vehicle market in the U.S.. The new F150 CNG -- just launched this year -- will change this, but again: new product.

    Again IP: Westport is partnered with 7 OEMs for commercialization, and 2 others in early development.

    How's that calling it too soon? These are long-term agreements, and in an industry that typically prefers to work with specialists versus developing everything in house.

    The real story with Westport's crash was a management team that just didn't know how to or really seem to be concerned with making money. Nancy Gougarty was brought in to change that, and all indications are that she's getting it done.

    Thanks for your comments. I appreciate debating positions.

    -jh

  • Report this Comment On May 14, 2014, at 2:03 PM, GirlsUnder30 wrote:

    TMFVelvetHammer

    The percentage of vehicles running natgas even after assuming those agreements produce results is still miniscule so even if competitors have similar technology (and there is strong indication that there already is), they will not risk introducing it until the market is good and ready for it. Municipalities buy large vehicle fleets and have the financial clout to implement the infrastructure natgas adoption requires so they are an excellent indicator of its market acceptance. If you don't see this point clearly then you need to remove the rose tint from your lenses. The fact that so few cities have switched is a troubling indicator to me. Your arguments infer that potential buyers of natgas vehicles are fuel cost insensitive or indifferent and I know this is a faulty assumption. It's always easy to blame management and think every thing will be fine when they are replaced but natgas adoption is not going to be easy for anyone and that blog with its supporting comments gave a pretty darn good explanation of the reasons. For those curious, the blog referred to is linked below:

    http://caps.fool.com/Blogs/why-is-westport-is-scary-over/730...

    It was written when Westport was around $40 and it deserves at least as many recommendations as this one.

  • Report this Comment On May 14, 2014, at 2:07 PM, GirlsUnder30 wrote:

    TMFVelvetHammer

    Oh, and one more thing: Are you seriously claiming that hybrids and EV's have not become viable competition to natgas vehicles in the consumer market?

  • Report this Comment On May 15, 2014, at 11:46 AM, TMFVelvetHammer wrote:

    Under30:

    I'm not making and claims that hybrids and EVs have not become attractive for consumer autos at all. What I'm stating is that Westport isn't really targeting consumer autos.

    This is a popular misconception of its business model, which is primarily focused on applications that consume a lot of fuel per vehicle. Yes: there are some exceptions to this, like the Volvo C60/C70 station wagon, but that's only available in markets where CNG is a regular and available fuel for autos.

    The Delphi deal will alter this, because Delphi does supply injectors and such to a very large range of vehicle OEMs. But that misses the point:

    Westport hasn't been focusing on the consumer market at all for the past five years. It's focusing on big commercial and industrial applications.

    Besides, what's to say that a hybrid vehicle can't use CNG?

    Oh, and upstream: What's the evidence that there's a "strong indication" that competitors have alternative technology? something like 20 OEMS are buying components from Westport already.

  • Report this Comment On May 15, 2014, at 12:52 PM, GirlsUnder30 wrote:

    TMFVelvetHammer

    I agree that natgas engines are more likely to be successful in commercial vehicles than in consumer autos but that market is still too small for the competition to show their cards. Capstone and its valves are just the tip of the iceberg. Don't get me wrong, I like Westport under $15 and even took a nibble when it was around $23 but I refuse to increase my position until clearer signs start appearing. Hybrid vehicles can use CNG but there would be no point in it if legislation doesn't mandate it and for the time being, they will not. None of what you have stated discredits or otherwise annuls the foresight exhibited in the blog post linked above. The fact that even the low was called in the article comments is remarkable give the enthusiasm for Westport at the time the post was made.

  • Report this Comment On May 15, 2014, at 12:55 PM, GirlsUnder30 wrote:

    ...edit...remarkable given the enthusiasm.

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