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Summary of Significant Accounting Policies and Other Information | 6 Months Ended
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Jun. 30, 2023
Organization, Consolidation and Presentation of Financial Statements [Abstract] |
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 Weichai America Corp., a wholly-owned subsidiary of Weichai Power Co., Ltd. (HK2338, SZ000338) (herein together referred to as “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 directors, amendment of the Company’s Certificate of Incorporation (the “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 Share Purchase Agreement (the “SPA”) by and between the Company and Weichai. The Rights Agreement provides Weichai with representation on the Company’s Board of Directors (the “Board”) and management representation rights. Weichai currently has four representatives on the Board, which constitutes the majority of the directors serving on 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 Uncertainties exist about the Company’s ability to refinance, extend, or repay its outstanding indebtedness and maintain compliance with the covenants and other requirements under the Company’s debt arrangements, however the Company’s cash flows have continued to increase during the first half of 2023. As of June 30, 2023 and December 31, 2022, the Company’s total outstanding debt obligations under the Third Amended and Restated Uncommitted Revolving Credit Agreement (the “Credit Agreement”), its second Amended Shareholder's Loan Agreement, its third Amended Shareholder's Loan Agreement, its fourth Amended Shareholder's Loan Agreement and for finance leases and other debt were $190.3 million and $211.0 million in the aggregate, respectively, and its cash and cash equivalents were $27.8 million and $24.3 million, respectively. See Note 6. Debt, for further information regarding the terms and conditions of the Company’s debt agreements. Without additional financing, the Company anticipates that it will not have sufficient cash and cash equivalents to repay amounts owing under its existing debt arrangements as they become due. In order to provide the Company with a more permanent source of liquidity, management plans to seek an extension and amendment and/or replacement of its existing debt agreements or seek additional liquidity from its current or other lenders before the maturity dates in the second half of 2023 and 2024. There can be no assurance that the Company’s management will be able to successfully complete an extension and amendment of its existing debt agreements or obtain new financing on acceptable terms, when required or if at all. These consolidated financial statements 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; •continue to fund and expand operations both organically and through acquisitions; and •respond to competitive pressures or unanticipated working capital requirements. Macroeconomic volatility and uncertainties further increase the potential for continued supply chain disruptions, economic uncertainty, and unfavorable oil and gas market dynamics which may continue to have a material adverse impact on the results of operations, financial position and liquidity of the Company. Lastly, national inflationary pressures have continued to cause interest rates to increase. As a result, the Company’s interest expense has increased and is subject to further increases. Accordingly, the above challenges may continue to have a material adverse impact on the Company’s future results of operations, financial position, and liquidity. The Company’s management has concluded that, due to uncertainties surrounding the Company’s future ability to refinance, extend and amend, or repay its outstanding indebtedness under its existing debt arrangements, maintain compliance with the covenants and other requirements under the Credit Agreement and other outstanding debt in the future, 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 other outstanding debt, in the future, and extending and amending, refinancing or repaying the indebtedness outstanding under the Company’s existing debt arrangements. Basis of Presentation and Consolidation The Company is filing this Form 10-Q for the quarterly period ended June 30, 2023, which contains unaudited condensed consolidated financial statements as of June 30, 2023 and for the three and six months ended June 30, 2023 and 2022. The condensed 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 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 unaudited Condensed Consolidated Financial Statements have been prepared in accordance with the instructions to Form 10-Q and Article 8 of Regulation S-X and include all of the information and disclosures required by U.S GAAP for interim financial reporting. These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements of the Company and related footnotes for the year ended December 31, 2022, included in the 2022 Annual Report filed with the SEC on April 14, 2023 (the “2022 Annual Report”). The Company’s significant accounting policies are described in the aforementioned 2022 Annual Report. 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. Segments The Company operates as one business and geographic operating segment. Operating segments are defined as components of a business that can earn revenue 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. 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,
|  | 2023 |  | 2022 |  | 2023 |  | 2022
Customer A |  | 14 | % |  | 18 | % |  | 15 | % |  | 17 | %
Customer B |  | 10 | % |  | ** |  | 11 | % |  | **
The following table presents customers individually accounting for more than 10% of the Company’s accounts receivable:
|  | As of June 30, 2023 |  | As of December 31, 2022
Customer A |  | 23 | % |  | 30 | %
Customer B |  | 14 | % |  | **
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,
|  | 2023 |  | 2022 |  | 2023 |  | 2022
Supplier C |  | ** |  | 14 | % |  | 10 | % |  | **
**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, property, 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 $4.7 million and $4.5 million for three months ended June 30, 2023 and 2022, respectively. These costs were $9.3 million and $9.1 million for the six months ended June 30, 2023 and 2022, respectively. From time to time, the Company enters into agreements with its customers to fund a portion of the research, development and engineering costs of a particular project. These reimbursements are accounted for as a reduction of the related research, development and engineering expenses. Restricted Cash Restricted cash consists of funds that are contractually restricted as to usage or withdrawal due to required minimum levels of cash collateral for letters of credits and contractual agreements with customers. As of June 30, 2023 and December 31, 2022, the Company had restricted cash of $3.8 million and $3.6 million, respectively, which includes $1.3 million restricted cash held in escrow which could be required to be refunded to a customer if conditions occur as defined in such certain agreement with such customer. The Company has not recognized revenue associated with the restricted cash. The deferred revenue is included within Noncurrent Contract Liabilities on the Consolidated Balance Sheet. 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 consisted of the following:
(in thousands) Inventories |  | As of June 30, 2023 |  | As of December 31, 2022
Raw materials |  | $ | 92,363 |  |  | $ | 101,566 |
Work in process |  | 1,516 |  |  | 3,073 |
Finished goods |  | 25,038 |  |  | 19,825 |
Total inventories |  | 118,917 |  |  | 124,464 |
Inventory allowance |  | (5,702) |  |  | (3,904) |
Inventories, net |  | $ | 113,215 |  |  | $ | 120,560 |
Activity in the Company’s inventory allowance was as follows:
(in thousands) |  | For the Six Months Ended June 30,
Inventory Allowance |  | 2023 |  | 2022
Balance at beginning of period |  | $ | 3,904 |  |  | $ | 3,370 |
Charged to expense |  | 2,179 |  |  | 163 |
Write-offs |  | (381) |  |  | (592) |
Balance at end of period |  | $ | 5,702 |  |  | $ | 2,941 |
Other Accrued Liabilities Other accrued liabilities consisted of the following:
(in thousands) Other Accrued Liabilities |  | As of June 30, 2023 |  | As of December 31, 2022
Accrued product warranty |  | $ | 12,100 |  |  | $ | 13,037 |
Litigation reserves * |  | 2,202 |  |  | 2,102 |
Contract liabilities |  | 2,399 |  |  | 2,256 |
Accrued compensation and benefits |  | 6,186 |  |  | 7,299 |
Accrued interest expense |  | 6,692 |  |  | 5,257 |
Other |  | 3,790 |  |  | 4,158 |
Total |  | $ | 33,369 |  |  | $ | 34,109 |
*As of June 30, 2023 and December 31, 2022 litigation reserves related to various ongoing legal matters including associated legal fees. 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. 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. The Company has approximately $1.2 million accrued for a specific warranty-related matter as of June 30, 2023. During the first quarter, the Company concluded it is reasonably possible that future warranty claims for this matter may exceed current estimates that are based upon historical claims experience. The impa ct could be material to the financial statements. Accrued product warranty activities are presented below:
(in thousands) |  | For the Six Months Ended June 30,
Accrued Product Warranty |  | 2023 |  | 2022
Balance at beginning of period |  | $ | 21,550 |  |  | $ | 32,947 |
Current period provision * |  | 3,491 |  |  | 4,170 |
Changes in estimates for preexisting warranties ** |  | 5,662 |  |  | 115 |
Payments made during the period |  | (8,477) |  |  | (11,442) |
Balance at end of period |  | 22,226 |  |  | 25,790 |
Less: current portion |  | 12,100 |  |  | 15,682 |
Noncurrent accrued product warranty (included with Other Noncurrent liabilities) |  | $ | 10,126 |  |  | $ | 10,108 |
*Warranty costs for claims received, net of supplier recoveries, and other adjustments, were a cost of $8.5 million and a cost of $1.9 million for the six months ended June 30, 2023 a nd 2022, respectively. Supplier recoveries were $0.7 million and $2.1 million for the six months ended June 30, 2023 and 2022, respectively. **Changes 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 historical and expected trends. During the six months ended June 30, 2023, the Company recorded a cost for changes in estimates of preexisting warranties of $5.7 million, or $0.25 per diluted share. During the six months ended June 30, 2022, the Company recorded a cost of $0.1 million, or $0.01 per diluted share, which includes a favorable experience for preexisting warranties attributable to a contract revision executed during the quarter ended March 31, 2022. Recently Issued Accounting Pronouncements – Adopted In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326). The standard replaces the incurred loss impairment methodology under current U.S. GAAP with a methodology that reflects expected credit losses and requires the use of a forward-looking expected credit loss model for accounts receivables, loans, and other financial instruments. The standard requires a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The new standard is effective for non-public companies, and public business entities that meet the definition of a smaller reporting company as defined by the SEC, for interim and annual periods beginning after December 15, 2022. The Company adopted this guidance effective January 1, 2023. The adoption of the standard did not have a material impact on the Company’s consolidated financial statements.

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- Definition The entire disclosure for the organization, consolidation and basis of presentation of financial statements disclosure, and significant accounting policies of the reporting entity. May be provided in more than one note to the financial statements, as long as users are provided with an understanding of (1) the significant judgments and assumptions made by an enterprise in determining whether it must consolidate a VIE and/or disclose information about its involvement with a VIE, (2) the nature of restrictions on a consolidated VIE's assets reported by an enterprise in its statement of financial position, including the carrying amounts of such assets, (3) the nature of, and changes in, the risks associated with an enterprise's involvement with the VIE, and (4) how an enterprise's involvement with the VIE affects the enterprise's financial position, financial performance, and cash flows. Describes procedure if disclosures are provided in more than one note to the financial statements. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Topic 235 -Name Accounting Standards Codification -Publisher FASB -URI https://asc.fasb.org//235/tableOfContent Reference 2: http://fasb.org/us-gaap/role/ref/legacyRef -Topic 275 -Name Accounting Standards Codification -Publisher FASB -URI https://asc.fasb.org//275/tableOfContent Reference 3: http://fasb.org/us-gaap/role/ref/legacyRef -Topic 810 -Name Accounting Standards Codification -Publisher FASB -URI https://asc.fasb.org//810/tableOfContent Reference 4: http://fasb.org/us-gaap/role/ref/legacyRef -Topic 205 -Name Accounting Standards Codification -Publisher FASB -URI https://asc.fasb.org//205/tableOfContent + Details
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