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Description of the company and summary of significant accounting policies | 12 Months Ended
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Dec. 31, 2015
Accounting Policies [Abstract] |
Description of the company and summary of significant accounting policies | 1. Description of the company and summary of significant accounting policies Description of the company and nature of business operations Nature of business operations Power Solutions International, Inc., a Delaware corporation (“Power Solutions International”, “PSI” or the “Company”) is a global producer and distributor of a broad range of high performance, certified low emission power systems, including alternative fuel power systems for original equipment manufacturers of off-highway industrial equipment (“industrial OEMs”) and certain on-road vehicles and large custom-engineered integrated electrical power generation systems. The Company’s customers include large, industry-leading and/or 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 operates as one business and geographic operating segment. The Company’s power systems are highly engineered, comprehensive systems which, through its 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 restrictions required, or desired, to be met), allow the Company to provide its customers with power systems customized to meet specific industrial OEM application requirements, other technical specifications of customers, 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 purchases engines from third party suppliers and produces internally-designed engines, all of which are then integrated into the Company’s 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 the Company 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 comprehensive power system which can be incorporated, using a single part number, directly into a customer’s specified application. Capitalizing on its expertise in developing and manufacturing emission-certified power systems and its access to the latest power system technologies, the Company believes that it is able to provide complete “green” power systems to industrial OEMs at a low cost and with fast design turnaround. In addition to the certified products described above, the Company sells diesel, gasoline and non-certified power systems and aftermarket components. Basis of presentation The consolidated financial statements of Power Solutions International, Inc. present information in accordance with generally accepted accounting principles in the U.S. (“GAAP”), have been prepared pursuant to the rules and regulations of the SEC and, in the opinion of management present fairly the consolidated financial position, results of operations and cash flows of the Company and its wholly-owned subsidiaries for the periods presented. Reclassification 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. Principles of consolidation The consolidated financial statements presented herein include the accounts of Power Solutions International, Inc. and its direct and indirect wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Use of estimates The preparation of consolidated financial statements in conformity with GAAP requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could materially differ from those estimates. Revenue recognition The Company recognizes revenue upon transfer of title and risk of loss to the customer, which is typically when products are shipped, provided there is persuasive evidence of an arrangement, the sales price is fixed or determinable and management believes collectability is reasonably assured. As of December 31, 2015 and December 31, 2014, the Company had recognized revenue associated with approximately $21.4 million and $3.2 million of undelivered product, respectively. In certain circumstances, the Company recognizes revenue before delivery has occurred. In such circumstances, among other things, risk of ownership has passed to the buyer, the buyer has made a written fixed commitment to purchase the finished goods, the buyer has requested the finished goods be held for future delivery as scheduled and designated by them, and no additional performance obligations exist by the Company. The Company anticipates the collection of any unpaid balances during 2016. The Company did not enter into any bill and hold arrangements during 2013. The Company classifies shipping and handling charges billed to customers as revenue. Shipping and handling costs paid to others are classified as a component of cost of sales when incurred. Accounts receivable and allowance for doubtful accounts Accounts receivable are due under normal trade terms generally requiring payment within 30 to 45 days from the invoice date. A limited number of customers have terms which may extend up to 150 days from the invoice date. The carrying amount of accounts receivable is reduced by a valuation allowance that reflects management’s best estimate of the amounts that will not be collected. Management specifically reviews all past due accounts receivable balances and, based on historical experience and an assessment of current creditworthiness, estimates the portion, if any, of the balance that will not be collected. The activity in the Company’s allowance for doubtful accounts as of December 31, was as follows:
|  | 2015 |  |  | 2014 |
Balance at beginning of year |  | $ | 652 |  |  | $ | 452 |
Charged to expense |  |  | 641 |  |  |  | 204 |
(Write-offs), net of recoveries |  |  | (356 | ) |  |  | (4 | )
Balance at end of year |  | $ | 937 |  |  | $ | 652 |
Inventories, net Inventories consist primarily of engines and parts. Engines are valued at the lower of cost, plus estimated freight-in, or market value. Parts are valued at the lower of cost (first-in, first-out) or market value. When necessary, the Company writes down inventory for an estimated amount equal to the difference between the cost of the inventory and the estimated realizable value. Additionally, an inventory allowance is provided based upon the Company’s estimation of future demand for the quantity of inventory on hand. In determining an estimate of future demand, multiple factors are taken into consideration, including, but not limited to: (i) customer purchase orders and customer forecasted demand; (ii) historical sales/usage for each inventory item; and (iii) utilization within a current or anticipated future power system. Inventories consisted of the following as of December 31:
|  | 2015 |  |  | 2014 |
Raw materials |  | $ | 104,433 |  |  | $ | 87,133 |
Work in process |  |  | 6,401 |  |  |  | 1,752 |
Finished goods |  |  | 21,853 |  |  |  | 6,777 |
Total inventories |  |  | 132,687 |  |  |  | 95,662 |
Inventory allowance |  |  | (2,340 | ) |  |  | (1,759 | )
Inventories, net |  | $ | 130,347 |  |  | $ | 93,903 |
The activity in the Company’s inventory allowance as of December 31 was as follows:
|  | 2015 |  |  | 2014 |
Balance at beginning of year |  | $ | 1,759 |  |  | $ | 1,510 |
Charged to expense |  |  | 945 |  |  |  | 679 |
Write-offs |  |  | (364 | ) |  |  | (430 | )
Balance at end of year |  | $ | 2,340 |  |  | $ | 1,759 |
Long-lived assets Long-lived assets, such as property, plant and equipment and land, are evaluated for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. If such review indicates that the carrying amount of long-lived assets is not recoverable, the carrying amount of such assets is reduced to fair value. There were no adjustments to the carrying values of long-lived assets during the years ended December 31, 2015 or 2014. Goodwill and other intangibles Goodwill represents the excess of purchase price and related costs over the values assigned to the net tangible and identifiable intangible assets of businesses acquired. In accordance with ASC 350, Intangibles —Goodwill and Other Intangibles, goodwill is not amortized, but instead is tested for impairment annually, or more frequently if circumstances indicate a possible impairment may exist. Absent any interim indicators of impairment, the Company tests for goodwill impairment on a specified date of each year, October 1. In accordance with ASC 350, Intangibles — Goodwill and Other Intangibles, the Company amortizes its intangible assets with finite lives using an accelerated method over their respective estimated useful lives and will review for impairment whenever impairment indicators exist. The Company’s intangible assets consist of backlog, customer relationships, developed technology and trade names and trademarks. Warranty costs The Company offers a standard limited warranty on the workmanship of certain of its products that in most cases covers defects for a defined period. Warranties for certified emission products are mandated by the Environmental Protection Agency (“EPA”) and/or the California Air Resources Board (“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. Costs related to supplier warranty claims are borne by the supplier; the Company’s warranties apply only to the modifications made to supplier base products. The Company’s management estimates and records a liability, and related charge to income, for the warranty program at the time products are sold to customers. Estimates are based on historical experience and reflect management’s best estimates of expected costs at the time products are sold. The Company makes adjustments to estimates in the period in which it is determined that actual costs may differ from initial or previous estimates. The activity in the Company’s warranty liability as of December 31 was as follows:
|  | 2015 |  |  | 2014 |
Balance at beginning of year |  | $ | 3,094 |  |  | $ | 1,274 |
Acquisitions |  |  | 631 |  |  |  | 1,600 |
Charged to expense |  |  | 428 |  |  |  | 2,020 |
Payments |  |  | (1,726 | ) |  |  | (1,800 | )
Balance at end of year |  | $ | 2,427 |  |  | $ | 3,094 |
Other accrued liabilities Other accrued liabilities consisted of the following as of December 31:
|  | 2015 |  |  | 2014 |
Due to former owners |  | $ | 8,788 |  |  | $ | — |
Warranty |  |  | 2,427 |  |  |  | 3,094 |
Customer deposits |  |  | 3,606 |  |  |  | 385 |
Other |  |  | 4,354 |  |  |  | 3,263 |
Balance at end of year |  | $ | 19,175 |  |  | $ | 6,742 |
Private placement warrants The Company’s private placement warrants are accounted for as a liability, in accordance with ASC 480-10-25-14, Distinguishing Liabilities from Equity. ASC 480-10-25-14 states that, if an entity must or could settle an instrument by issuing a variable number of its own shares, and, as in this case, the obligation’s monetary value is based solely or predominantly on variations in the fair value of the company’s equity shares, but moves in the opposite direction, then the obligation to issue shares is to be recorded as a liability at the inception of the arrangement, and is adjusted with subsequent changes in the fair value of the underlying stock. The effect of the change in value of the obligation is reflected as “Private placement warrant (income) expense” in the Company’s consolidated statements of operations. See Note 7, “Fair value of financial instruments,” for detail describing the valuation approach for the Private Placement Warrants. Research & development and engineering costs The Company expenses research & development and engineering costs when incurred. Research & development costs classified within research & development and engineering expenses in the consolidated statements of operations, consist primarily of wages, materials, testing and consulting related to the development of new engines, parts and applications relating to the alternative fuel market across all markets with an emphasis on the industrial and on-road markets. These costs approximated $19.1 million, $14.9 million and $9.4 million for the years ended December 31, 2015, 2014, and 2013, respectively. Share-based compensation The Company accounts for share-based compensation expense for awards granted to employees for service over the service period based on the grant date fair value. Fair value of financial instruments The Company’s financial instruments include accounts receivable, accounts payable, revolving line of credit, term debt and private placement warrants. The carrying amounts of accounts receivable and accounts payable approximate fair value because of their short-term nature. The carrying value of the revolving line of credit and term debt approximate fair value because the interest rates fluctuate with market interest rates or the fixed rates are based on current rates offered to the Company for debt with similar terms and maturities. Based upon the Company’s current credit agreement with Wells Fargo Bank, National Association, using the Company’s balances and interest rates as of December 31, 2015, and holding other variables constant, an increase by a factor of 10 of the interest rates for the next 12 month period charged by the bank to the Company would decrease the Company’s pre-tax earnings and cash flow by approximately $179,000. The fair value of the private placement warrants is described below in Note 7, “Fair value of financial instruments.” Self-funded insurance The Company is self-insured for certain costs of its employee benefit plans, although the Company obtains third-party insurance coverage to limit its exposure. The Company maintains a stop-loss insurance policy with individual and aggregate stop-loss coverage. Income taxes The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. The Company records net deferred tax assets to the extent it believes these assets will more likely than not be realized. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. As of December 31, 2015 and 2014, the Company had not recorded a deferred tax asset valuation allowance. The Company records uncertain tax positions in accordance with ASC 740, Income Taxes, on the basis of a two-step process whereby (1) it determines whether it is more likely than not that the tax positions will be sustained based on the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, the Company recognizes the largest amount of tax benefit that is greater than 50 percent likely to be realized upon ultimate settlement with the related tax authority. As of December 31, 2015 and 2014, the Company had an unrecognized tax benefit of $1,055,000 and $740,000, respectively, for uncertain tax positions including interest and penalties. The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense. Concentrations The Company generally maintains cash balances in various accounts at one financial institution in the Midwest. As of December 31, 2015 and 2014, the Company maintained cash in a non-interest bearing account at a financial institution. At December 31, 2015 and 2014, cash accounts were insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per institution and per depositor. The Company’s cash balances exceeded the FDIC maximum insured amounts in both 2015 and 2014. The Company is exposed to potential credit risks associated with its accounts receivable. The Company performs ongoing credit evaluations of its customers and generally does not require collateral on its accounts receivable. For certain non-U.S. trade receivables, the Company obtains trade credit insurance or requires letters of credit for those non-U.S. accounts for which trade credit insurance is not available or is insufficient. The Company has not experienced significant credit-related losses to date. Three customers (“Customer A”, “Customer B” and “Customer C”) individually accounted for more than 10% of the Company’s sales during one or more years from 2013 through 2015. Customer A represented 12%, 11% and 16% of consolidated net sales in 2015, 2014 and 2013, respectively. Customer B represented 16% and 11% of consolidated net sales in 2015 and 2014, respectively, and less than 10% of consolidated net sales in 2013. Customer C represented less than 10% of consolidated net sales in 2015 and 2013, respectively, and 11% of consolidated net sales in 2014. Five customers (“Customer A, “Customer B,” “Customer C,” all referred to above, “Customer D” and “Customer E”) individually accounted for more than 10% of consolidated accounts receivable at December 31, 2015 or 2014. At December 31, 2015 and December 31, 2014, Customer A represented 13% of consolidated accounts receivable and less than 10% of consolidated accounts receivable, respectively. At December 31, 2015 and 2014, Customer B represented less than 10% of consolidated accounts receivable and 14% of consolidated accounts receivable, respectively. At December 31, 2015 and 2014, Customer C represented less than 10% of consolidated accounts receivable and 17% of consolidated accounts receivable, respectively. At December 31, 2015 and 2014, Customer D represented less than 10% of consolidated accounts receivable and 11% of consolidated accounts receivable, respectively. Customer E represented 14% and 11% of consolidated accounts receivable in 2015 and 2014, respectively. Two suppliers (“Supplier A” and “Supplier B”) individually accounted for more than 10% of the Company’s purchases during the years from 2013 through 2015. Supplier A accounted for 21%, 15% and 30% of the Company’s purchases in 2015, 2014 and 2013, respectively. Supplier B accounted for 11%, 27% and 15% of the Company’s purchases in 2015, 2014 and 2013, respectively.

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