High-tech natural gas engine expert Westport Innovations (WPRT -3.13%) has been promising to cut costs in an effort to get closer to profitability since last year, and it's looking like we're finally seeing steps in that direction. The company released its financial results for the first quarter on May 7, and touted how much it had cut cash burn from the prior quarter, as well as some notable improvements in its operating expenses, and improvements in the profit margins at both of its major joint engine ventures. And while these are definitely positives, there are other things that bear watching at Westport right now.
Let's take a closer look at the press announcement and financial release. As they say, "the devil's in the details."
Putting cash burn reduction in perspective
The first heading under the actual headline in Westport's earnings release reads, "Cash used in operations drops more than 70% sequentially," and that's definitely a good thing. The reality is, Westport must continue to find ways to cut its operational expenses until sales begin rebounding. With that said, I think it's a good idea to compare costs to last year's Q1 as well as the prior sequential quarter.
Why? In short, because there were a lot of one-time cash charges last quarter that can make the cash spend reduction look better than it may be.
If we take research and development, G&A, and sales and marketing expenses and add them up from both Q1 of 2015 and Q1 of 2014, we get some additional context. Last year, Westport spent $33.2 million on these things, versus $26.3 million in the just-ended quarter. That $6.9 million cut from last year's quarter is good for a 21% reduction in these core cash operations expenses.
Also, let's compare how much cash the company held at the end of the quarter, from this year to last year. Last year, Westport's cash and equivalents decreased $23.6 million by the end of the first quarter. At the end of the same period this year, it decreased by $22.6 million. That's a minimal change in cash burn.
Don't get me wrong: I'm not saying to completely disregard the very real -- and quite valid -- 70% sequential reduction in cash from operations, or the very real improvements the company has made. Just remember that there's always more to know, and it takes time for these things to translate to reduced cash burn. Management reiterated this in the press release, saying that working capital improvements will continue to occur in coming quarters.
Good and bad at joint ventures
I pointed out in the earnings preview that Westport would rely heavily on its joint ventures for cash flows in 2015. And CWI, its JV with engine expert Cummins, delivered in the quarter, with gross margin percent jumping to almost 37% in the quarter, and paying out $5.9 million in proceeds to Westport -- compared to losing money last year after taking a major warranty adjustment. However, revenue fell in the quarter, though the company said it would have been up slightly except for a delay in a major order that will deliver next quarter. Since the company doesn't provide guidance for its JVs, we won't know if that's true until we get next quarter's results.
Weishai Westport, or WWI, the company's Chinese joint venture, saw sales absolutely collapse in the quarter, falling 50%. According to the release, this was driven by two things, both the collapse in energy prices affecting sales, but also the "pull forward" of some emission-compliant systems last quarter. The good news is, even with this major decline in reported revenue, gross margin percent almost doubled to 10.2%, meaning the company only saw a minor decline in income from the JV, from $500,000 a year ago to $300,000 this year.
The bottom line is, Westport is taking steps forward, and cutting costs while also continuing to develop new market-ready products, including a new system for Volvo cars, a system for the just-announced V8 natural gas Ford F150, and a new 6.7-liter engine from its Cummins Westport JV that is in beta testing now.
With that said, the reported 70% sequential reduction in cash used in operations looks nice, but with bigger context it's clear that cash burn remains very important to monitor, and a major risk. With that said, the trends are decidedly positive, and if we can trust what management is telling us (I think we can) that sounds like it will change in coming quarters.
But at the end of the day, sales growth remains the most important thing for Westport's success, and so far that's been slow to develop. Let's hope that changes in coming quarters.