The run-up to Westport Innovations Inc.'s (WPRT 1.57%) first-quarter earnings release has been exciting, with the stock gaining nearly 20% over the past week.
Perhaps investors hoped to see signs of a turnaround in the results. Westport declared its quarterly numbers after market close yesterday, and the market isn't disappointed -- the stock is trading nearly 7% higher as of this writing. The excitement isn't unwarranted, because the natural-gas engine specialist's report did show some positive results.
Key joint venture on right track
Westport relies heavily on its joint ventures for whatever it earns today. After showing substantial improvement in profitability in the fourth quarter, its key joint venture with engine giant Cummins continues to exhibit strength. Cummins Westport, or CWI, first-quarter profit jumped to $5.9 million from a loss of $0.8 million in the year-ago quarter. While the venture sold fewer engine units, primarily because of a delayed shipment, gross margin shot up dramatically to 36.4% from only 9.5% last year, confirming that CWI's margin-punishing warranty issues have been resolved.
Unfortunately, performance at Westport's joint venture with Weichai in China was subdued, and is giving out warning signals. Westport's first-quarter earnings from Weichai Westport, or WWI, slipped to only $0.3 million from $0.5 million a year ago. The venture sold only half the number of units versus the first quarter of 2014, primarily due to falling demand for natural-gas engines in the wake of the recent drop in oil prices. On a positive note, WWI's gross margin climbed to 10.2% from 5.6% a year ago, despite lower revenue.
While WWI might face challenges in the near term, the turnaround at CWI is great news for Westport given that it contributes a major chunk to profits. This is the second straight quarter in which the payout from CWI has improved year over year, which is definitely a good sign.
Revenue dips, but losses shrink and cash burn falls
Westport's revenue remained under pressure, falling 30% year over year in the first quarter. But much of the decline was produced by currency headwinds, which is beyond the company's control. In fact, revenue from key market Europe improved roughly 5% in the quarter despite continued weakness on the continent.
But with overall revenue trending down for some quarters, Westport's top challenge now is to reduce cash burn. The company ended the first quarter with $71.3 million in cash and short-term investments, down sharply from $183.9 million at the end of the first-quarter 2014. That might sound alarming, but Westport used only about $10 million in cash for operations in the last quarter compared to burning an average of $24 million every quarter in 2014.
Clearly, Westport's aggressive cost-cutting efforts are showing results. It reduced its first-quarter operating expenses by nearly $13 million year over year. While research and development spending declined $7.5 million as the company continues to prioritize investment programs, its selling, general, and administrative expense was down an impressive 30% over last year thanks to layoffs and restructuring. This cutback in costs helped Westport reduce its core business losses by 28%, to $17.2 million.
In its earnings release, Westport said it still "has a number of options" for improving its cash position further, including rationalization of development projects and divesting "non-core assets" if required. A falling top line is not a deterrent for Westport, as management believes it's on track to turn adjusted consolidated EBITDA positive by the middle of 2016.
Is the worst over?
While it's imperative for Westport's sales to grow for the company to turn profitable, it's encouraging to see management's cost-control efforts bearing fruit. There was no major breakthrough in the first-quarter results, but the recovery in CWI profits and reduction in cash used for operations cannot be ignored.
That said, these improvements, especially in its cash position, need to persist beyond one quarter to confirm Westport's turnaround. If the joint ventures continue to contribute positively to Westport's bottom line even as it curtails spending, the company should have more cash in hand as the year progresses. There's no denying Westport made progress in the first quarter, but perhaps another quarter or two will give better clarity as to whether the company has finally turned the corner.
