Restatement of Previously Issued Consolidated Financial Statements

12 Months Ended

Dec. 31, 2017

Accounting Changes and Error Corrections [Abstract]

Restatement of Previously Issued Consolidated Financial Statements

The Company has restated its previously reported consolidated financial statements for the years ended December 31, 2015 and 2014. The restatement adjustments resulted in a cumulative net reduction to stockholders’ equity of $21.4 million and $4.3 million as of December 31, 2015 and 2014, respectively, and a reduction in previously reported net income by $17.2 million and $2.2 million for the years ended December 31, 2015 and 2014, respectively. The Company has also restated the December 31, 2013 retained earnings balance to recognize corrected items discussed below that relate to prior periods. Except as otherwise specified, all information presented in the consolidated financial statements and the related notes include all such restatements.

Summary of Restatement Items

During the Company's comprehensive internal review of its accounting practices as well as its previously issued consolidated financial statements, the Company identified the following categories which required restatement or reclassification and were comprised of a number of related adjustments that have been aggregated for disclosure purposes:

The following table sets forth the effects of the restatement adjustments on revenue and pretax income (loss) in the Consolidated Statements of Operations for the years ended December 31, 2015 and 2014. Due to the substantial number of restatement adjustments, each of the restatement categories listed in the table below may represent multiple related adjustments that have been aggregated for disclosure purposes.



(in thousands)	For the Year Ended December 31,
	2015						2014
	Net Sales			Income (Loss) Before Income Taxes			Net Sales			Income (Loss) Before Income Taxes
Previously reported	$	389,446		$	13,890		$	347,995		$	34,539
Restatement adjustments:
Revenue recognition adjustments	(27,059		)	(9,215		)	(415		)	(2,700		)
Product development cost	—			(1,001		)	—			(2,397		)
Inventory valuation	—			(1,069		)	—			38
Impairment of long-lived assets	—			(11,733		)	—			(310		)
Product warranty	—			(2,484		)	—			591
Accrued liabilities	—			(1,106		)	—			591
Purchase accounting	—			—			—			(845		)
Equity investment	—			125			—			(286		)
Net restatement adjustments	(27,059		)	(26,483		)	(415		)	(5,318		)
Restated	$	362,387		$	(12,593	)	$	347,580		$	29,221

Revenue Recognition Adjustments

The Company did not have effective internal controls to ensure that all relevant supporting documentation related to information impacting revenue recognition was communicated and/or factored into the evaluation and determination of the accounting for revenue recognition. The Company reevaluated the application and conclusion of revenue recognition requirements on a significant number of transactions during the restatement periods. Procedures included reviewing supporting documentation as well as inquiry and forensic searches of emails and other communications. Based on the procedures performed, the Company concluded that there were numerous errors related to previous revenue recognition, including timing, amounts and classification of revenue recognized. These errors were generally related to the failure to meet all revenue recognition criteria, or, in some instances, there was insufficient supporting documentation for the original conclusions. In addition, there were instances in which additional information or side agreements were identified that contradicted the Company’s original accounting conclusions.

The Company recorded adjustments to reduce revenue by $27.1 million and $0.4 million in 2015 and 2014, respectively. The adjustments resulted in net decreases to income (loss) before taxes of $9.2 million and $2.7 million in 2015 and 2014, respectively.

The adjustments included the impact of correcting the Company’s revenue recognition for certain transactions in which revenue was previously recognized for undelivered products (“bill and hold transactions”). The Company determined that the transactions did not satisfy revenue recognition requirements for bill and hold transactions.

For transactions with a certain customer, the Company originally recognized revenue on a net basis. It was determined that the associated revenue should have been recognized on a gross basis, as the Company was the primary obligor in the arrangements. The adjustments to correct the presentation resulted in increases of revenue and cost of sales of $6.5 million and $7.9 million in 2015 and 2014, respectively.

Product Development Costs

The Company previously capitalized certain product development costs. The costs included R&D and engineering costs and emission certification costs. The Company concluded that these costs did not meet the applicable criteria for capitalization and should have been expensed as incurred, and as a result it recorded net adjustments of $1.0 million and $2.4 million in 2015 and 2014, respectively, to expense the costs in the proper periods.

Inventory Valuation

The Company did not have appropriate processes to evaluate and estimate the Company’s reserves for excess and obsolete inventory at lower of cost or market. It was concluded that the previous process was based on unsupportable general assumptions that did not appropriately reflect the expected future utilization of existing inventory on hand, considering the effects of known changes in the business or business outlook. The Company subsequently developed a robust review process that identifies inventory items that may be potentially obsolete, damaged or in excess of market demand. Underlying assumptions in the refined process were developed based on current and historical consumption data, and reserve estimates were established based on those assumptions and other relevant factors. As a result, the Company recognized a charge of $1.1 million to increase the Company’s inventory valuation reserves in 2015. In addition, it was determined that there were errors in the determination of the Company’s finished goods inventory valuation related to the capitalization of overhead costs. As a result, the Company recorded an immaterial adjustment to increase inventory and a corresponding benefit in 2014.

Impairment of Long-Lived Assets

The Company historically performed its annual goodwill impairment assessment based on one reporting unit, which represented the Company as a whole. It was determined that subsequent to the acquisition of 3PI in 2014, the Company should have been performing separate goodwill impairment assessments for the 3PI reporting unit. During the Company’s 2015 annual goodwill impairment assessment for the 3PI reporting unit, it was determined that the goodwill was impaired, and a charge of $11.6 million was recognized.

It was also determined that the Company did not have adequate internal controls to identify and evaluate potential impairments of long-lived assets, including the identification and write-offs of abandoned capital projects. It was determined that certain capital projects were abandoned during the impacted periods and that the Company should have recognized impairment charges of $0.1 million and $0.3 million in 2015 and 2014, respectively.

Product Warranty

The Company’s process to estimate its product warranty accrual was not designed to sufficiently factor in actual warranty claims experience. In addition, the model was not designed to adequately address the impacts of new-product offerings, with different warranty periods and risk profiles. With the introduction of engines that the Company fully manufactured as well as the introduction of engines supplied to the transportation market in 2015, the Company’s warranty costs have increased significantly, and there has also been increased volatility in warranty claims experience. The existing model did not adequately address these risks and deviations in experience from previous expectations. The Company's methodology used in its former warranty estimation model was determined to be incorrect; therefore, a more robust warranty estimation model was developed, and the Company recorded adjustments to recognize a charge of $2.5 million to increase the warranty accrual in 2015 and a benefit of $0.6 million to reduce the warranty accrual in 2014.

Accrued Liabilities

Certain transactions had been recorded to the wrong accounts, in the wrong periods, or could not be supported. Some accounts were not reconciled or had been classified inconsistently for reporting purposes. Certain estimate-based accruals, such as medical accruals, workers' compensation accruals, credit memo reserves and freight accruals, were not sufficiently documented and/or supportable. Various corrections and reclassifications were required to report balances at the correct amounts, in the correct periods or within the correct financial statement captions.

Purchase Accounting

The Company identified errors in the previous accounting for certain business acquisitions in 2015 and 2014, primarily related to the Company’s acquisition of 3PI. A measurement period adjustment recorded in 2014 to increase the opening balance of accrued warranties was determined to be an error. The adjustment was made to accrue for costs incurred subsequent to the acquisition of 3PI and anticipated future costs associated with out-of-policy warranty claims. Prior to the acquisition, 3PI did not historically incur costs associated with out-of-policy warranty claims. It was determined that the charges represented period costs, as they were reflective of post-acquisition management decisions and did not represent an assumed obligation as of the acquisition date. As a result, $0.8 million of warranty charges were recognized in 2014, and the related goodwill was decreased by the same amount.

In addition, it was concluded that the initial fair values of certain long-lived assets in the 3PI acquisition were not properly stated as the assets were impaired. As a result, the Company decreased the value of long-lived assets and increased goodwill by $0.7 million.

Equity Investment

The Company had an investment in an unconsolidated entity that was previously accounted for under the cost method. The Company’s ownership interest was approximately 9%, and it maintained two positions on the unconsolidated entity's five-member board. Based on the Company’s ownership percentage and board positions, it was concluded that the Company had significant influence over the operations of the unconsolidated entity, and, accordingly, it should have been accounted for under the equity method. Under the equity method, the Company’s initial investment should have been recorded at cost, with the carrying amount adjusted to recognize the Company’s share of the unconsolidated entity's earnings or losses.

Consolidated Statements of Operations Impact

The following table presents the effect of the restatement adjustments and reclassifications on the Consolidated Statement of Operations for 2015:



(in thousands, except for per share data)	Year Ended December 31, 2015
	Previously Reported			Restatement Adjustments and Reclassifications				Restated

Net sales	$	389,446		$	(27,059	)		$	362,387
Cost of sales	326,612			(15,464		)		311,148
Gross profit	62,834			(11,595		)		51,239
Operating expenses:
Research, development and engineering expenses	21,681			1,893				23,574
Selling, general and administrative expenses	27,376			1,461				28,837
Asset impairment charge	—			11,686				11,686
Amortization of intangible assets	4,582			—				4,582
Change in fair value of contingent consideration	—			(23		)	—	(23		)
Total operating expenses	53,639			15,017				68,656
Operating income (loss)	9,195			(26,612		)		(17,417		)
Other (income) expense:
Interest expense	4,327			(7		)		4,320
Contingent consideration	48			(48		)		—
Gain from change in fair value of warrants	(9,299		)	(1		)		(9,300		)
Loss on debt extinguishment and modifications	—			12				12
Other expense, net	229			(85		)		144
Total other income	(4,695		)	(129		)		(4,824		)
Income (loss) before income taxes	13,890			(26,483		)		(12,593		)
Income tax benefit	(388		)	(9,314		)		(9,702		)
Net income (loss)	$	14,278		$	(17,169	)		$	(2,891	)

Weighted-average common shares outstanding:
Basic	10,808			—				10,808
Diluted	11,074			(83		)		10,991
Earnings (loss) per common share:
Basic	$	1.32		$	(1.59	)		$	(0.27	)
Diluted	$	0.45		$	(1.56	)		$	(1.11	)

The following table presents the effect of the restatement adjustments and reclassifications on the Consolidated Statement of Operations for 2014:



(in thousands, except for per share data)	Year Ended December 31, 2014
	Previously Reported			Restatement Adjustments and Reclassifications			Restated
	Previously Reported			Restatement Adjustments and Reclassifications			Restated
Net sales	$	347,995		$	(415	)	$	347,580
Cost of sales	280,950			2,590			283,540
Gross profit	67,045			(3,005		)	64,040
Operating expenses:
Research, development and engineering expenses	16,900			2,405			19,305
Selling, general and administrative expenses	23,088			54			23,142
Asset impairment charge	—			310			310
Amortization of intangible assets	1,013			—			1,013
Change in fair value of contingent consideration	—			(3,840		)	(3,840		)
Total operating expenses	41,001			(1,071		)	39,930
Operating income	26,044			(1,934		)	24,110
Other expense (income):
Interest expense	1,331			11			1,342
Contingent consideration	(3,840		)	3,840			—
Gain from change in fair value of warrants	(6,169		)	(1		)	(6,170		)
Other expense (income), net	183			(466		)	(283		)
Total other income	(8,495		)	3,384			(5,111		)
Income before income taxes	34,539			(5,318		)	29,221
Income tax expense	10,813			(3,069		)	7,744
Net income	$	23,726		$	(2,249	)	$	21,477

Weighted-average common shares outstanding:
Basic	10,707			(2		)	10,705
Diluted	11,132			(1		)	11,131
Earnings (loss) per common share:
Basic	$	2.22		$	(0.21	)	$	2.01
Diluted	$	2.13		$	(0.75	)	$	1.38

Consolidated Balance Sheets Impact

The following table sets forth the effects of the restatement adjustments and reclassifications adjustments on the Company's Consolidated Balance Sheet as of December 31, 2015:



(in thousands)	As of December 31, 2015
	Previously Reported			Restatement Adjustments and Reclassifications			Restated
ASSETS
Current assets
Cash and cash equivalents	$	8,445		$	—		$	8,445
Accounts receivable, net	104,365			(33,833		)	70,532
Income tax receivable	5,230			35			5,265
Inventories, net	130,347			31,748			162,095
Prepaid expenses and other current assets	4,288			(1,585		)	2,703
Total current assets	252,675			(3,635		)	249,040
Property, plant and equipment, net	26,001			(3,192		)	22,809
Intangible assets, net	31,745			—			31,745
Goodwill	41,466			(11,631		)	29,835
Deferred income taxes	819			16,838			17,657
Other noncurrent assets	7,230			(4,479		)	2,751
TOTAL ASSETS	$	359,936		$	(6,099	)	$	353,837

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	76,078		$	3,745		$	79,823
Contingent consideration	8,788			(513		)	8,275
Other accrued liabilities	14,396			3,450			17,846
Total current liabilities	99,262			6,682			105,944
Revolving line of credit	97,299			—			97,299
Warrants	1,482			—			1,482
Long-term debt, less current maturities, net	53,820			(15		)	53,805
Other noncurrent liabilities	1,776			8,658			10,434
TOTAL LIABILITIES	$	253,639		$	15,325		$	268,964

STOCKHOLDERS’ EQUITY
Preferred stock	$	—		$	—		$	—
Common stock	12			(1		)	11
Additional paid-in capital	75,179			8,198			83,377
Retained earnings	35,356			(22,419		)	12,937
Treasury stock, at cost	(4,250		)	(7,202		)	(11,452		)
TOTAL STOCKHOLDERS’ EQUITY	106,297			(21,424		)	84,873
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	359,936		$	(6,099	)	$	353,837

The following table sets forth the effects of the restatement adjustments and reclassifications on the Company's Consolidated Balance Sheet as of December 31, 2014:



(in thousands)	As of December 31, 2014
	Previously Reported			Restatement Adjustments and Reclassifications			Restated
ASSETS
Current assets
Cash and cash equivalents	$	6,561		$	—		$	6,561
Accounts receivable, net	81,740			(5,474		)	76,266
Inventories, net	93,903			12,347			106,250
Prepaid expenses and other current assets	4,801			39			4,840
Deferred income taxes	3,998			4,554			8,552
Total current assets	191,003			11,466			202,469
Property, plant and equipment, net	20,892			(2,938		)	17,954
Intangible assets, net	21,392			(200		)	21,192
Goodwill	23,546			(132		)	23,414
Deferred income tax asset	—			13			13
Other noncurrent assets	5,804			(3,901		)	1,903
TOTAL ASSETS	$	262,637		$	4,308		$	266,945

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	60,877		$	6,836		$	67,713
Current maturities of long-term debt	1,667			—			1,667
Other accrued liabilities	13,504			4,678			18,182
Total current liabilities	76,048			11,514			87,562
Revolving line of credit	78,030			—			78,030
Deferred income taxes	3,241			(3,241		)	—
Warrants	11,036			—			11,036
Long-term debt, less current maturities, net	2,361			—			2,361
Other noncurrent liabilities	1,122			351			1,473
TOTAL LIABILITIES	$	171,838		$	8,624		$	180,462

STOCKHOLDERS’ EQUITY
Preferred stock	$	—		$	—		$	—
Common stock	12			(1		)	11
Additional paid-in capital	73,959			7,787			81,746
Retained earnings	21,078			(5,250		)	15,828
Treasury stock, at cost	(4,250		)	(6,852		)	(11,102		)
TOTAL STOCKHOLDERS’ EQUITY	90,799			(4,316		)	86,483
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	262,637		$	4,308		$	266,945

Consolidated Statements of Changes in Stockholders’ Equity Impact

The following table sets forth the effect of the restatement adjustments on the components of total stockholders, equity as of December 31, 2013:



(in thousands)	As of December 31, 2013
	Previously Reported			Restatement Adjustments			Restated
Preferred stock	$	—		$	—		$	—
Common Stock	11			—			11
Additional paid-in capital	57,308			4,622			61,930
Accumulated deficit	(2,649		)	(3,079		)	(5,728		)
Treasury stock, at cost	(4,250		)	(4,435		)	(8,685		)
Total stockholders' equity	$	50,421		$	(2,891	)	$	47,530

The following table summarizes the effects of the restatement on the Company's Consolidated Statements of Changes in Stockholders’ Equity as of December 31, 2015 and 2014:



(in thousands)	Year Ended December 31,
	2015			2014
Stockholders' equity, as previously reported	$	106,297		$	90,799
Effect of restatement adjustments on net income/retained earnings	(21,424		)	(4,316		)
Stockholders' equity, restated	$	84,873		$	86,483

Consolidated Statements of Cash Flows Impact

The following table includes comparison of selected previously reported and restated information from the Company's Consolidated Statements of Cash Flows for 2015 and 2014:



(in thousands)	For the Year Ended December 31,
	2015						2014
	Previously Reported			Restated			Previously Reported			Restated
	Previously Reported			Restated			Previously Reported			Restated
Net cash used in operating activities	$	(23,049	)	$	(22,815	)	$	(15,685	)	$	(15,094	)
Net cash used in investing activities	(43,570		)	(43,805		)	(51,713		)	(52,322		)
Net cash provided by financing activities	68,503			68,504			67,653			67,671
Increase in cash	1,884			1,884			255			255
Cash at beginning of year	6,561			6,561			6,306			6,306
Cash at end of year	$	8,445		$	8,445		$	6,561		$	6,561

Pre-2014 Restatement Adjustments

Retained earnings as of December 31, 2013 were adjusted to correct the cumulative effect of errors in 2013 and prior periods. The errors, on a pretax basis, primarily related to the accounting treatment for capitalized product development costs that resulted in a charge of $3.6 million, increase in inventory valuation reserve of $1.5 million, accrued liability benefit of $0.3 million and equity investment benefit of $0.3 million, as described above.

Under the provisions of the Company’s incentive compensation plan (the 2012 Plan), new awards were to be issued from the Company’s available treasury stock. The Company previously accounted for the 2012 Plan related stock issuances, net of shares used to satisfy tax withholdings, as new-share issuances. Treasury stock has been adjusted to reflect the issuance of the shares from treasury stock as well as the effect of the tax withholdings. In addition, activity in subsequent periods was restated to reflect the proper accounting treatment for similar transactions.

The following table sets forth the effect of the restatement adjustments on the components of total stockholders' equity as of December 31, 2013:



(in thousands)	As of December 31, 2013
Stockholders' Equity	Previously Reported			Restatement Adjustments			Restated
Common stock	$	11		$	—		$	11
Additional paid-in capital	57,308			4,622			61,930
Accumulated deficit	(2,648		)	(3,079		)	(5,649		)
Treasury stock, at cost	(4,250		)	(4,435		)	(8,685		)
Total	$	50,421		$	(2,891	)	$	47,607