Despite Potholes, Westport Innovations Inc. Is Still on the Road

Westport Innovations (WPRT 0.45%) released third-quarter financial results on Nov. 10, reporting a much bigger net loss than was expected, but also making some progress in a few key areas. With its cash and other assets shrinking with each passing quarter, time is of the essence, and the company must turn things around relatively quickly before it runs out of time and money both. 

With that in mind, let's take a close look at the results during the third quarter. 

The numbers 

Data source: Revenue and net income in millions. 

Ugly results indeed, but probably not the best numbers to measure Westport by in its current state. Westport is still in an awkward market development phase, trying to kick-start demand for natural gas engines, particularly in heavy-duty trucking applications. Because of that, it's worth understanding the company's cash and capital consumption rates:

Data source: In millions, at end of quarter. *Defined as current assets minus current liabilities.

Westport continues to consume significant cash and working capital. It has cut costs over the past year, with research and development as well as sales, general, and administrative expenses all down measurably. But the company must get traction with its heavy-duty engine technology and start generating meaningful positive cash flow before it runs out of capital. 

What happened in the quarter

• GAAP loss per share of $0.58. The net loss would have been $0.20 per share, more in line with most expectations, when adjusting for a large goodwill impairment and $5.5 million inventory writedown. But again, EPS is probably not the most important number to watch right now.
• Operating results did improve, with an adjusted EBITDA loss of $9.7 million, compared to $22 million adjusted EBITDA loss last year. 
• Lower operating expenses was a key driver to this improvement, falling $6.5 million, a 20% reduction from last year's Q3. 
• Sales in Europe increased on a constant currency basis, but were flat after currency exchange. 
• Unfortunately, sales in North America fell. Specifically, the Ford (F 0.69%) operation and iCE PACK LNG fuel tank business saw falloffs, leading to a 12% decline in sales. Low oil prices are having an impact on this business. 
• However, sales at the joint venture with diesel engine leader Cummins (CMI -0.25%) are going well. Total units sold increased, and revenue jumped 17%.
• Westport and Cummins also announced the CWI ISL G Near Zero NOx natural gas engine in the quarter, which will begin production next year. This should continue to drive demand, as the engine will be available for newbuild OEMs, and as a replacement engine for existing ISL G-equipped vehicles. 
• Sales at the Chinese joint venture Weichai Westport have fallen off a cliff, with economic factors killing demand. Engine unit sales plummeted and revenue fell 81%.  
• Westport announced that it would merge with Fuel Systems Solutions, Inc. (NASDAQ: FSYS), and has passed several key regulatory steps. The merger is based on the separate core focus of the two companies, with Fuel Systems focused on light-duty and industrial applications, and Westport on medium- and heavy-duty, and off-road applications. The companies expect the combined business will net $30 million in cost benefits by 2018, though much of that is based on initiatives already underway. 
• Westport didn't complete any of the asset sales it announced earlier this year, but said that several would close before year-end. Management expects to generate $50 million in net proceeds. 
• Westport also reported progress in its HPDI 2.0 product development. The company, which is working with Delphi Automotive (DLPH) on commercializing this product, says that things are progressing well and that it will be providing several OEMs with components for development testing in early 2016, and should have actual customer testing underway by mid-year. That puts HPDI 2.0 on track for commercial availability in the second half of 2016. 

What management said 
CEO David Demers on the importance and size of the opportunity for HPDI 2.0 and the size of the OEM customers already involved:

We've concluded commercial negotiations with our lead customers we're making excellent progress with several other OEMs. Collectively this represents over 30% of the global production of diesel truck engines.

Later on the call, management would specify that China and Europe would be the first major commercial markets for HPDI 2.0, indicating that WWI in China, and probably Volvo AB (NASDAQOTH: VOLVY) and Daimler AG (MBGY.Y -1.06%) in Europe would be the first OEMs to bring product to market, as these are the only publicly acknowledged HPDI 2.0 partners. 

Demers on the pending merger with Fuel Systems:

... [P]robably most important, the transaction will combine our technology and expertise in medium- and heavy-duty and high horsepower applications with Fuel Systems' core focus and development efforts in light-duty and industrial applications. The resulting combined company will have unique technological expertise and product development spanning from passenger cars and heavy duty trucks to locomotive marine and stationary power.

Looking ahead 
Westport made some progress in the quarter, but there's still a lot left to accomplish, and the clock is ticking. The Fuel Systems merger should help stabilize things and provide a capital injection, as will the pending asset sales, but the two companies have both been burning through capital over the past couple of years:

FSYS Working Capital (Quarterly) data by YCharts.

The good news is that Fuel Systems has demonstrated it can produce positive cash flows and seems likely to help support Westport's market-building efforts. 

In summary, this quarter may not have really answered any burning questions about Westport's future, but there was some progress.