When Westport Innovations (NASDAQ: WPRT ) announced that board member Nancy Gougarty would be taking on the role of president and chief operating officer, I viewed the move as a strong positive. Westport's biggest weakness had been limited financial success in commercializing of its industry-leading technology. The company's joint venture with engine maker extraordinaire Cummins (NYSE: CMI ) , and to a lesser extent its Chinese JV with Weichai Power, have been the only profitable parts of its business.
However, recent improvements in the results, coupled with even more changes in the executive suite, point toward a bright -- and profitable -- future ahead.
Coming out of the woods
Last year, things got ugly before they could get better, and Westport reported a $185 million loss in 2013, versus $99 million in 2012:
After hearing for months that Westport was committed to moving toward profitability -- only to see losses nearly double -- the market wasn't happy.
But by digging in a little, we can see that losses in 2013 were heavily compounded by efforts to shift the business to profitable commercialization, and this required some hard (and expensive) decisions, like ending production of the 15 liter HPDI heavy-duty engine. The engine itself was based on a Cummins 15-liter platform, with Westport installing HPDI components and providing warranty support to end users.
Of the $185 million in losses for 2013, $35 million was goodwill impairment, and another $21 million was warranty provisions, related to the discontinuing of this engine. That's 30% of 2013's losses -- not including the operational losses associated with building this engine in-house, at volume levels that didn't make it profitable.
Turning the corner
In the first quarter of 2014, the results finally began improving, again, if you peel back a few layers. While Westport still reported a net loss of $24 million -- a 25% improvement from the year-ago period -- management has told us to watch adjusted EBITDA from operations of its three business units in 2014. The plan, as management has laid it out, is to get these three operating units to EBITDA profitability this year, and then get the consolidated business -- which adds in corporate expense and R&D -- to adjusted EBITDA profitability in 2015.
The result in Q1? Adjusted EBITDA loss from operations fell to $1.6 million last quarter, putting the company well on track to reach EBITDA breakeven in its operating business this year. The consolidated business also moved closer to adjusted EBITDA breakeven, trimming EBITDA losses by $4.2 million overall.
New CFO a strong indication of changing culture
Bill Larkin had been CFO at Westport since 2010 and was CFO of Fuel Systems Solutions before that, so it came as a bit of a surprise when I read that Ashoka Achuthan had been promoted from VP of financial ops, replacing Larkin. Larkin will remain with Westport as VP of corporate development, and it sounds like the idea is to deploy his skill set in an area where he could be a real asset.
VP of Investor Relations Darren Seed introduced me to Achuthan at ACT Expo 2014 last month, and I walked away pretty impressed with both his credentials, and his enthusiasm about the business. Mr. Seed indicated that operational and financial improvements would continue to be a focus, and that people like Gougarty and Achuthan were critical to the company's success. The fact that Achuthan was named CFO certainly supports that. His experience at Siemens automotive, where he helped run a $3 billion business, and then as CFO of CODA Holdings, strongly indicate that this is someone who -- like Gougarty -- understands the world of OEM suppliers for automotive applications, and what it takes to make money in that world.
Competition ramping up, delays in product development still worth watching
With the positive steps, Westport still faces challenges. Cummins announced that it would begin development of its own 15 liter natural gas engine, going it alone versus partnering with Westport. Cummins did recently delayed development, but competition is an eventuality. Cummins is a real behemoth in the diesel engine market, which is the target market for the vast majority of Westport's technology. Factor in the delay of the Volvo 13 liter D13-LNG engine -- the first commercially available HPDI engine -- to late 2015, and it's important to keep an eye on Westport's many development agreements with OEMs.
How dominant is Cummins? It generated $338 million in profits last quarter, which is more than double Westport's total revenue for 2013. Total sales were more than $17 billion last year for this diversified behemoth. While not a given, it's not unreasonable to see Westport and Cummins partner on HPDI for a 9-12 liter engine at some point.
The good news is, Westport has all those OEM agreements in place -- it works with and sells components to more than 20 vehicle OEMS -- and both the Cummins Westport and WeiChai Westport joint ventures, which are actively generating revenues and should contribute profits to Westport this year. In addition, Westport will generate both revenue and profits from HPDI components that it sells to the WWI joint venture, which is expected to begin building and selling HPDI engines late this year.
Final thoughts: Steady progress is key
Westport Innovations isn't a definite winner; the company still spends more money than it makes. Still, take note of two very strong indicators of future success:
- Those 20-plus OEM partners indicate that Westport's technology is superior and worth the cost.
- Leadership's execution on efficiency and profitability is showing in the results so far.
Combined with a stock price that's still very close to its lowest point in three years, and Westport looks pretty compelling today. Does it fit your portfolio? That's your call.
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