| Summary of Significant Accounting Policies and Other Information | Summary of Significant Accounting Policies and Other Information Nature of Business Operations Power Solutions International, Inc. (“Power Solutions,” “PSI” or “the Company”), a Delaware corporation, is a global producer and distributor of a broad range of high-performance, certified, low-emission power systems, including alternative-fueled power systems for original equipment manufacturers (“OEMs”) of off-highway industrial equipment and certain on-road vehicles and large custom-engineered integrated electrical power generation systems. The Company’s customers include large, industry-leading and multinational organizations. The Company’s products and services are sold predominantly to customers throughout North America as well as to customers located throughout the Pacific Rim and Europe. The Company’s power systems are highly engineered, comprehensive systems which, through the Company’s technologically sophisticated development and manufacturing processes, including its in-house design, prototyping, testing and engineering capabilities and its analysis and determination of the specific components to be integrated into a given power system (driven in large part by emission standards and cost considerations), allow the Company to provide its customers with power systems customized to meet specific OEM application requirements, other technical customers’ specifications and requirements imposed by environmental regulatory bodies. The Company’s power system configurations range from a basic engine integrated with appropriate fuel system components to completely packaged power systems that include any combination of cooling systems, electronic systems, air intake systems, fuel systems, housings, power takeoff systems, exhaust systems, hydraulic systems, enclosures, brackets, hoses, tubes and other assembled componentry. The Company also designs and manufactures large, custom-engineered integrated electrical power generation systems for both standby and prime power applications. The Company purchases engines from third-party suppliers and produces internally designed engines, all of which are then integrated into its power systems. Of the other components that the Company integrates into its power systems, a substantial portion consist of internally designed components and components for which it coordinates significant design efforts with third-party suppliers, with the remainder consisting largely of parts that are sourced off-the-shelf from third-party suppliers. Some of the key components (including purchased engines) embody proprietary intellectual property of the Company’s suppliers. As a result of its design and manufacturing capabilities, the Company is able to provide its customers with a power system that can be incorporated into a customer’s specified application. In addition to the certified products described above, the Company sells diesel, gasoline and non-certified power systems and aftermarket components. Stock Ownership and Control In March 2017, the Company executed a share purchase agreement (the “SPA”) with Weichai America Corp., a wholly owned subsidiary of Weichai Power Co., Ltd. (HK2338, SZ000338) (herein collectively referred to as “Weichai”) . Under the terms of the SPA , Weichai invested $60.0 million in the Company purchasing a combination of newly issued Common and Preferred Stock as well as a stock purchase warrant (the “Weichai Warrant”) . With the exercise of the Weichai Warrant in April 2019, Weichai owns a majority of the outstanding shares of the Company’s Common Stock. As a result, Weichai is able to exercise control over matters requiring stockholders’ approval, including the election of the directors, amendment of the Company’s Charter and approval of significant corporate transactions. This control could have the effect of delaying or preventing a change of control of the Company or changes in management and will make the approval of certain transactions impractical without the support of Weichai. Weichai also entered into an Investor Rights Agreement (the “Rights Agreement”) with the Company upon execution of the SPA . The Rights Agreement provides Weichai with representation on the Company’s Board of Directors (the “Board”) and management representation rights. Weichai currently has three representatives on the Board . According to the Rights Agreement , once Weichai exercised the Weichai Warrant and became the majority owner of the Company’s outstanding shares of Common Stock calculated on a fully diluted as-converted basis (excluding certain excepted issuances), the Company became required to appoint to the Board an additional individual designated by Weichai, or such additional number of individuals so that Weichai designees shall constitute the majority of the directors serving on the Board . As of the date of this filing, Weichai has not designated an additional representative to the Board . According to the Rights Agreement , during any period when the Company is a “controlled company” within the meaning of the NASDAQ Stock Market (“NASDAQ”) Listing Rules, it will take such measures as to avail itself of the “controlled company” exemptions available under Rule 5615 of the NASDAQ Listing Rules of Rules 5605(b), (d) and (e). Going Concern Considerations On April 2, 2020, the Company closed on its new senior secured revolving credit facility pursuant to that certain credit agreement, dated as of March 27, 2020, between the Company and Standard Chartered Bank (“Standard Chartered”) , as administrative agent (the “Credit Agreement”) . The Credit Agreement , which allows the Company to borrow up to $130.0 million , matures on March 26, 2021 with an optional 60 -day extension subject to certain conditions and payment of a 0.25% extension fee. Significant uncertainties exist about the Company’s ability to refinance, extend, or repay its outstanding indebtedness, maintain sufficient liquidity to fund its business activities, and maintain compliance with the covenants and other requirements under the Credit Agreement . Based on the Company’s current forecasts, without additional financing, the Company anticipates that it will not have sufficient cash and cash equivalents to repay the Credit Agreement by March 26, 2021 . Management plans to seek additional liquidity from its current or other lenders before March 26, 2021 . There can be no assurance that the Company’s management will be able to successfully complete a financing on acceptable terms or repay this outstanding indebtedness, when required or if at all. The consolidated financial statements included in this Form 10-K do not include any adjustments that might result from the outcome of the Company’s efforts to address these issues. Furthermore, if the Company cannot raise capital on acceptable terms, it may not, among other things, be able to do the following: • continue to expand the Company’s research and product investments and sales and marketing organization; • expand operations both organically and through acquisitions; and • respond to competitive pressures or unanticipated working capital requirements. Additionally, as discussed in Note 14. Subsequent Events , in January 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus (the “COVID-19 outbreak”) and the risks to the international community as the virus spreads globally. In March 2020, the WHO classified the COVID-19 outbreak as a global pandemic (the “COVID-19 pandemic”), based on the rapid increase in exposure globally. The potential impact of future disruptions, continued economic uncertainty, and continued depressed crude oil prices and declining rig count levels may have a material adverse impact on the results of operations, financial position, and liquidity of the Company. The Company’s management has concluded that, due to uncertainties surrounding the Company’s future ability to refinance, extend, or repay its outstanding indebtedness, maintain sufficient liquidity to fund its business activities, and maintain compliance with the covenants and other requirements under the Credit Agreement , substantial doubt exists as to its ability to continue as a going concern within one year after the date that these financial statements are issued. The Company’s plans to alleviate the substantial doubt about its ability to continue as a going concern may not be successful, and it may be forced to limit its business activities or be unable to continue as a going concern, which would have a material adverse effect on its results of operations and financial condition. The consolidated financial statements included herein have been prepared assuming that the Company will continue as a going concern and contemplating the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. The Company’s ability to continue as a going concern is dependent on generating profitable operating results, having sufficient liquidity, maintaining compliance with the covenants and other requirements under the Credit Agreement and refinancing or repaying the indebtedness outstanding under this agreement. Basis of Presentation and Consolidation The Company is filing this Form 10-Q for the three and six months ended June 30, 2019, which contains unaudited consolidated financial statements as of and for the three and six months ended June 30, 2019 and 2018. The consolidated financial statements include the accounts of Power Solutions International, Inc. and its wholly owned subsidiaries and majority-owned subsidiaries in which the Company exercises control. The foregoing financial information was prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) and rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for interim financial reporting. All intercompany balances and transactions have been eliminated in consolidation. Certain information and note disclosures normally included in the Company’s annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. The accompanying consolidated financial statements have been prepared in accordance with accounting policies described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 ("the 2018 Annual Report") , which should be read in conjunction with the disclosures therein. The Company’s significant accounting policies are described in the aforementioned 2018 Annual Report . Included below are certain updates to those policies. The accompanying interim financial information is unaudited; however, the Company believes the financial information reflects all adjustments (consisting of items of a normal recurring nature) necessary for a fair presentation of financial position, results of operations and cash flows in conformity with U.S. GAAP. Operating results for interim periods are not necessarily indicative of annual operating results. The Company operates as one business and geographic operating segment. Operating segments are defined as components of a business that can earn revenues and incur expenses for which discrete financial information is available that is evaluated on a regular basis by the chief operating decision maker (“CODM”) . The Company’s CODM is its principal executive officer, who decides how to allocate resources and assess performance. A single management team reports to the CODM , who manages the entire business. The Company’s CODM reviews consolidated statements of operations to make decisions, allocate resources and assess performance, and the CODM does not evaluate the profit or loss from any separate geography or product line. Reclassifications Certain amounts recorded in the prior-period consolidated financial statements presented have been reclassified to conform to the current-period financial statement presentation. These reclassifications had no effect on previously reported results of operations. Concentrations The following table presents customers individually accounting for more than 10% of the Company’s net sales: For the Three Months Ended June 30, For the Six Months Ended June 30, 2019 2018 2019 2018 Customer A 17 % 15 % 17 % 17 % Customer B 12 % 11 % ** ** Customer C ** 11 % ** 11 % The following table presents customers individually accounting for more than 10% of the Company’s accounts receivable: As of June 30, As of December 31, 2019 2018 Customer A 19 % 15 % Customer B 12 % 25 % Customer C 11 % ** The following table presents suppliers individually accounting for more than 10% of the Company’s purchases: For the Three Months Ended June 30, For the Six Months Ended June 30, 2019 2018 2019 2018 Supplier A 13 % 18 % 15 % 17 % Supplier B 16 % 14 % 13 % 15 % Supplier C 10 % ** 11 % ** ** Less than 10% of the total Use of Estimates The preparation of consolidated financial statements in conformity with U.S. GAAP requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates and assumptions include the valuation of allowances for uncollectible receivables, inventory reserves, warranty reserves, stock-based compensation, evaluation of goodwill, other intangibles, plant and equipment for impairment, and determination of useful lives of long-lived assets. Actual results could materially differ from those estimates. Research and Development Research and development (“R&D”) expenses are expensed when incurred. R&D expenses consist primarily of wages, materials, testing and consulting related to the development of new engines, parts and applications. These costs were $5.6 million and $6.5 million for the three months ended June 30, 2019 and 2018 , respectively. These costs were $11.5 million and $12.1 million for the six months ended June 30, 2019 and 2018 , respectively. Insurance Recoveries The Company records insurance recoveries related to amounts recorded as estimated losses on events covered by the Company’s insurance policies when management determines that the recovery is probable and the amount can be reasonably determined. As of June 30, 2019 and December 31, 2018 , the Company had recorded assets related to insurance recoveries of $11.9 million and $16.0 million , respectively, primarily related to litigation reserves and related legal fees. Inventories The Company’s inventories consist primarily of engines and parts. Engines are valued at the lower of cost plus estimated freight-in or net realizable value. Parts are valued at the lower of cost or net realizable value. Net realizable value approximates replacement cost. Cost is principally determined using the first-in, first-out method and includes material, labor and manufacturing overhead. It is the Company’s policy to review inventories on a continuing basis for obsolete, excess and slow-moving items and to record valuation adjustments for such items in order to eliminate non-recoverable costs from inventory. Valuation adjustments are recorded in an inventory reserve account and reduce the cost basis of the inventory in the period in which the reduced valuation is determined. Inventory reserves are established based on quantities on hand, usage and sales history, customer orders, projected demand and utilization within a current or future power system. Specific analysis of individual items or groups of items is performed based on these same criteria, as well as on changes in market conditions or any other identified conditions. Inventories consist of the following: (in thousands) As of June 30, As of December 31, Inventories 2019 2018 Raw materials $ 82,837 $ 90,877 Work in process 3,802 2,390 Finished goods 28,010 18,077 Total inventories 114,649 111,344 Inventory allowance (4,893 ) (5,730 ) Inventories, net $ 109,756 $ 105,614 Activity in the Company’s inventory allowance was as follows: (in thousands) For the Six Months Ended June 30, Inventory Allowance 2019 2018 Balance at beginning of period $ 5,730 $ 6,227 Charged to expense 41 433 Write-offs (878 ) (1,653 ) Balance at end of period $ 4,893 $ 5,007 Other Accrued Liabilities Other accrued liabilities consisted of the following: (in thousands) As of June 30, As of December 31, Other Accrued Liabilities 2019 2018 Accrued product warranty $ 15,078 $ 9,767 Litigation reserves * 7,485 16,139 Contract liabilities 4,689 4,897 Accrued compensation and benefits 6,590 4,520 Operating lease liabilities 3,889 — Accrued interest expense 830 1,175 Other 6,723 9,202 Total $ 45,284 $ 45,700 * As of June 30, 2019 , litigation reserves primarily consisted of accruals related to ongoing government investigations and for the settlement of the Federal Derivative Litigation and the Cohen matter. As of December 31, 2018 , litigation reserves primarily consisted of accruals for the settlement of the Securities Litigation, Federal Derivative Litigation, and the Cohen matter. The Company concluded that insurance recovery was probable related to $4.9 million and $14.0 million of the litigation reserves at June 30, 2019 and December 31, 2018 , respectively, and recognized full recovery of the amounts in Prepaid expenses and other current assets . See Note 9. Commitments and Contingencies for additional information. Warranty Costs The Company offers a standard limited warranty on the workmanship of its products that in most cases covers defects for a defined period. Warranties for certified emission products are mandated by the U.S. Environmental Protection Agency (the “EPA”) and/or the California Air Resources Board (the “CARB”) and are longer than the Company’s standard warranty on certain emission related products. The Company’s products also carry limited warranties from suppliers. The Company’s warranties generally apply to engines fully manufactured by the Company and to the modifications the Company makes to supplier base products. Costs related to supplier warranty claims are generally borne by the supplier and passed through to the end customer. Warranty estimates are based on historical experience and represent the projected cost associated with the product. A liability and related expense are recognized at the time products are sold. The Company adjusts estimates when it is determined that actual costs may differ from initial or previous estimates. Accrued product warranty activities are presented below: (in thousands) For the Six Months Ended June 30, Accrued Product Warranty 2019 2018 Balance at beginning of period $ 23,102 $ 12,628 Current year provision 4,585 4,995 Changes in estimates for preexisting warranties * 2,730 3,842 Payments made during the period (4,454 ) (3,665 ) Balance at end of period 25,963 17,800 Less: current portion 15,078 9,972 Noncurrent accrued product warranty $ 10,885 $ 7,828 * Change in estimates for preexisting warranties reflect changes in the Company’s estimate of warranty costs for products sold in prior periods. Such adjustments typically occur when claims experience deviates from historic and expected trends. The Company’s warranty liability is generally affected by failure rates, repair costs and the timing of failures. Future events and circumstances related to these factors could materially change the estimates and require adjustments to the warranty liability. In addition, new product launches require a greater use of judgment in developing estimates until historical experience becomes available. In the first quarter of 2019 , the Company recorded a charge for changes in estimates of preexisting warranties of $2.7 million or $0.14 per diluted share. Recently Issued Accounting Pronouncements – Adopted In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases , which created Accounting Standards Codification (“ASC”) Topic 842, Leases, and superseded the existing guidance in ASC 840, Leases. See Note 7. Leases , for the required disclosures related to the adoption of ASC 842. Recently Issued Accounting Pronouncements – Not Yet Adopted In August 2018, the FASB issued ASU 2018-15, Intangibles – Goodwill and Other – Internal Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract . This guidance requires the use of existing accounting guidance applicable to software developed for internal use to be applied to cloud computing service contracts’ implementation costs. The costs capitalized would be amortized over the life of the agreement, including renewal option periods likely to be used. This guidance is effective for fiscal 2020, with early adoption permitted. The Company will adopt the standard effective January 1, 2020 on a prospective basis and does not anticipate that this guidance will have a material impact on its Consolidated Balance Sheet and Consolidated Statement of Operations. In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement: Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, which both reduces and expands selected disclosure requirements. The principal changes expected to impact the Company’s disclosure are requirements to disclose the range and weighted average of each of the significant unobservable items and the way the weighted average of a range is calculated for items in the “table of significant unobservable inputs.” The guidance also requires disclosure of changes in unrealized gains and losses in other comprehensive income and removes requirements regarding, among other items, disclosure of the valuation process for Level 3 measurements. This guidance is effective for fiscal 2020. The Company plans to implement the guidance when it becomes effective and does not currently anticipate that this guidance will have a material impact on its Consolidated Balance Sheet and Consolidated Statement of Operations. In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other: Simplifying the Test for Goodwill Impairment , which eliminated the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. The ASU is effective for annual and interim impairment tests performed in periods beginning after December 15, 2019; early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017. The amendments in this ASU are to be applied on a prospective basis. The Company currently plans on adopting the guidance on January 1, 2020 when it becomes effective and does not expect the guidance to have a material impact on its financial statements. In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments, which applies primarily to the Company’s accounts receivable impairment loss allowances. The guidance provides a revised model whereby the current expected credit losses are used to compute impairment of financial instruments. The new model requires evaluation of historical experience and various current and expected factors, which may affect the estimated amount of losses and requires determination of whether the affected financial instruments should be grouped in units of account. The guidance, as originally issued, was effective for fiscal years beginning after December 15, 2019. In November 2019, the FASB issued ASU 2019-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842) Effective Dates , which deferred the effective dates of these standards for certain entities. Based on the guidance, the effective date of ASU 2016-13 is deferred for the Company until fiscal year 2023. The Company currently plans to adopt the guidance on January 1, 2023 when it becomes effective. The Company is continuing to assess the impact of the standard on its financial statements. |
