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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
psilogo.jpg
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2023    
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________to________
Commission file number 001-35944
POWER SOLUTIONS INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware33-0963637
(State or Other Jurisdiction of Incorporation or Organization)(I.R.S. Employer Identification No.)
201 Mittel Drive, Wood Dale, IL
60191
(Address of Principal Executive Offices)(Zip Code)
(630) 350-9400
(Registrant’s Telephone Number, Including Area Code)
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each ClassTrading Symbol(s)Name of Each Exchange on Which Registered
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $0.001 per share
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes       No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes       No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐   No
As of August 7, 2023, there were 22,968,522 outstanding shares of the Common Stock of the registrant.
1


TABLE OF CONTENTS
Page
PART I – FINANCIAL INFORMATION
Forward-Looking Statements
Item 1.Financial Statements
Consolidated Balance Sheets as of June 30, 2023 (Unaudited) and December 31, 2022
Consolidated Statements of Operations for the three and six months ended June 30, 2023 and 2022 (Unaudited)
Consolidated Statements of Stockholders’ Deficit for the three and six months ended June 30, 2023 and 2022 (Unaudited)
Consolidated Statements of Cash Flows for the six months ended June 30, 2023 and 2022 (Unaudited)
Notes to Consolidated Financial Statements (Unaudited)
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.Quantitative and Qualitative Disclosures About Market Risk
Item 4.Controls and Procedures
PART II – OTHER INFORMATION
Item 1.Legal Proceedings
Item 1A.Risk Factors
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.Defaults Upon Senior Securities
Item 4.Mine Safety Disclosures
Item 5.Other Information
Item 6.Exhibits
Signatures




FORWARD-LOOKING STATEMENTS
Certain statements contained in this Quarterly Report on Form 10-Q for the three months ended June 30, 2023 (the “Quarterly Report”) that are not historical facts are intended to constitute “forward-looking statements” entitled to the safe-harbor provisions of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements may involve risks and uncertainties. These statements often include words such as “anticipate,” “believe,” “budgeted,” “contemplate,” “estimate,” “expect,” “forecast,” “guidance,” “may,” “outlook,” “plan,” “projection,” “should,” “target,” “will,” “would” or similar expressions, but these words are not the exclusive means for identifying such statements. These forward-looking statements include statements regarding Power Solutions International, Inc.’s, a Delaware corporation (“Power Solutions,” “PSI” or the “Company”), projected sales, potential profitability and liquidity, strategic initiatives, future business strategies, warranty mitigation efforts and market opportunities, improvements in its business, improvement of product margins, and product market conditions and trends. These statements are not guarantees of performance or results, and they involve risks, uncertainties and assumptions. Although the Company believes that these forward-looking statements are based on reasonable assumptions, there are many factors that could affect the Company’s results of operations and liquidity and could cause actual results, performance or achievements to differ materially from those expressed in, or implied by, the Company’s forward-looking statements.
The Company cautions that the risks, uncertainties and other factors that could cause its actual results to differ materially from those expressed in, or implied by, the forward-looking statements include, without limitation, the factors discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, and from time to time in the Company’s subsequent filings with the United States Securities and Exchange Commission (the “SEC”); the impact of the macro-economic environment in both the U.S. and internationally on our business and expectations regarding growth of the industry; uncertainties arising from global events (including the Russia-Ukraine conflict), natural disasters or pandemics, and their impact on material prices; the effects of strategic investments on our operations, including our efforts to expand our global market share and actions taken to increase sales growth; the ability to develop and successfully launch new products; labor costs and other employment-related costs; loss of suppliers and disruptions in the supply of raw materials; the Company’s ability to continue as a going concern; the Company’s ability to raise additional capital when needed and its liquidity; uncertainties around the Company’s ability to meet funding conditions under its financing arrangements and access to capital thereunder; the potential acceleration of the maturity at any time of the loans under the Company’s uncommitted senior secured revolving credit facility through the exercise by Standard Chartered Bank of its demand right; the impact of rising interest rates; changes in economic conditions, including inflationary trends in the price of raw materials; our reliance on information technology and the associated risk involving potential security lapses and/or cyber-attacks; the ability of the Company to accurately forecast sales, and the extent to which sales result in recorded revenues; changes in customer demand for the Company’s products; volatility in oil and gas prices; the impact of U.S. tariffs on imports, the impact of supply chain interruptions and raw material shortages, including compliance disruptions such as the Uyghur Forced Labor Prevention Act (the “UFLPA” or the “Act”) delaying goods from China; the potential impact of higher warranty costs and the Company’s ability to mitigate such costs; any delays and challenges in recruiting and retaining key employees consistent with the Company’s plans; any negative impacts from delisting of the Company’s common stock par value $0.001 (the “Common Stock”) from the NASDAQ Stock Market (“NASDAQ”) and any delays and challenges in obtaining a re-listing on a stock exchange.
The Company’s forward-looking statements are presented as of the date hereof. Except as required by law, the Company expressly disclaims any intention or obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise.
AVAILABLE INFORMATION
The Company is subject to the reporting and information requirements of the Exchange Act, and as a result, it is obligated to file annual, quarterly and current reports on Form 8-K, proxy and information statements and other information with the SEC. The Company makes these filings available free of charge on its website (http://www.psiengines.com) as soon as reasonably practicable after it electronically files them with, or furnishes them to, the SEC. Information on the Company’s website does not constitute part of this Quarterly Report. In addition, the SEC maintains a website (http://www.sec.gov) that contains the annual, quarterly and current reports on Form 8-K, proxy and information statements, and other information the Company electronically files with, or furnishes to, the SEC.
3


PART I – FINANCIAL INFORMATION
Item 1.    Financial Statements.
POWER SOLUTIONS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par values)As of June 30, 2023 (unaudited)As of December 31, 2022
ASSETS
Current assets:
Cash and cash equivalents$27,782 $24,296 
Restricted cash3,760 3,604 
Accounts receivable, net of allowances of $8,012 and $4,308 as of June 30, 2023 and December 31, 2022, respectively; (from related parties $2,000 and $2,325 as of June 30, 2023 and December 31, 2022, respectively)
78,196 89,894 
Income tax receivable555 555 
Inventories, net113,215 120,560 
Prepaid expenses and other current assets18,616 16,364 
Total current assets242,124 255,273 
Property, plant and equipment, net13,816 13,844 
Right-of-use assets, net25,005 13,282 
Intangible assets, net4,787 5,660 
Goodwill29,835 29,835 
Other noncurrent assets2,020 2,019 
TOTAL ASSETS$317,587 $319,913 
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable (to related parties $24,400 and $23,358 as of June 30, 2023 and December 31, 2022, respectively)
$71,697 $76,430 
Current maturities of long-term debt134 130 
Revolving line of credit110,000 130,000 
Finance lease liability, current85 90 
Operating lease liability, current2,753 2,894 
Other short-term financing (from related parties $79,820 and $75,020 as of June 30, 2023 and December 31, 2022, respectively)
79,820 75,614 
Other accrued liabilities (to related parties $6,587 and $5,232 as of June 30, 2023 and December 31, 2022, respectively)
33,369 34,109 
Total current liabilities297,858 319,267 
Deferred income taxes1,365 1,278 
Long-term debt, net of current maturities (from related parties $4,800 as of December 31, 2022, respectively)
160 5,029 
Finance lease liability, long-term136 170 
Operating lease liability, long-term23,316 10,971 
Noncurrent contract liabilities2,836 3,199 
Other noncurrent liabilities12,041 10,371 
TOTAL LIABILITIES$337,712 $350,285 
STOCKHOLDERS’ DEFICIT
Preferred stock – $0.001 par value. Shares authorized: 5,000. No shares issued and outstanding at all dates.
$ $ 
Common stock – $0.001 par value; 50,000 shares authorized; 23,117 shares issued; 22,953 and 22,951 shares outstanding at June 30, 2023 and December 31, 2022, respectively
23 23 
Additional paid-in capital157,831 157,673 
Accumulated deficit(176,955)(187,096)
Treasury stock, at cost, 164 and 166 shares at June 30, 2023 and December 31, 2022, respectively
(1,024)(972)
TOTAL STOCKHOLDERS’ DEFICIT(20,125)(30,372)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT$317,587 $319,913 
See Notes to Consolidated Financial Statements
4


POWER SOLUTIONS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share amounts)For the Three Months Ended June 30,For the Six Months Ended June 30,
2023202220232022
Net sales
(from related parties $1,000 and $75 for the three months ended June 30, 2023 and June 30, 2022, respectively, $2,100 and $513 for the six months ended June 30, 2023 and June 30, 2022, respectively)
$121,865 $120,479 $238,334 $219,426 
Cost of sales
(from related parties $600 and $69 for the three months ended June 30, 2023 and June 30, 2022, respectively, and $1,500 and $410 for the six months ended June 30, 2023 and June 30, 2022, respectively)
94,911 102,158 187,911 184,388 
Gross profit26,954 18,321 50,423 35,038 
Operating expenses:
Research, development and engineering expenses4,662 4,554 9,266 9,113 
Selling, general and administrative expenses10,550 9,995 20,455 21,380 
Amortization of intangible assets437 531 873 1,072 
Total operating expenses15,649 15,080 30,594 31,565 
Operating income11,305 3,241 19,829 3,473 
Interest expense4,645 2,670 9,310 5,115 
Income (Loss) before income taxes6,660 571 10,519 (1,642)
Income tax expense (benefit)243 (787)378 (401)
Net income (loss)$6,417 $1,358 $10,141 $(1,241)
Weighted-average common shares outstanding:
Basic22,952 22,927 22,952 22,927 
Diluted22,966 22,940 22,967 22,927 
Earnings (Loss) per common share:
Basic$0.28 $0.06 $0.44 $(0.05)
Diluted$0.28 $0.06 $0.44 $(0.05)
See Notes to Consolidated Financial Statements
5


POWER SOLUTIONS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
(UNAUDITED)
(in thousands)For the Three Months Ended
Common StockAdditional Paid-in CapitalAccumulated DeficitTreasury StockTotal Stockholders’ Deficit
Balance at March 31, 2023$23 $157,742 $(183,372)$(972)$(26,579)
Net income— — 6,417 — 6,417 
Stock-based compensation expense— 89 — (52)37 
Balance at June 30, 2023$23 $157,831 $(176,955)$(1,024)$(20,125)
Balance at March 31, 202223 157,639 (200,965)(1,116)(44,419)
Net income— — 1,358 — 1,358 
Stock-based compensation expense— 50 — — 50 
Common stock issued for stock-based awards, net— — — (2)(2)
Balance at June 30, 2022$23 $157,689 $(199,607)$(1,118)$(43,013)

(in thousands)For the Six Months Ended
Common StockAdditional Paid-in CapitalAccumulated DeficitTreasury StockTotal Stockholders’ Deficit
Balance at December 31, 2022$23 $157,673 $(187,096)$(972)$(30,372)
Net income— — 10,141 — 10,141 
Stock-based compensation expense— 158 — (52)106 
Balance at June 30, 2023$23 $157,831 $(176,955)$(1,024)$(20,125)
Balance, December 31, 2021$23 $157,436 $(198,366)$(1,116)$(42,023)
Net loss— — (1,241)— (1,241)
Stock-based compensation expense— 253 — 253 
Common stock issued for stock-based awards, net— — — (2)(2)
Balance at June 30, 2022$23 $157,689 $(199,607)$(1,118)$(43,013)
See Notes to Consolidated Financial Statements
6


POWER SOLUTIONS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)For the Six Months Ended June 30,
20232022
Cash provided by (used in) operating activities
Net income (loss)$10,141 $(1,241)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Amortization of intangible assets873 1,072 
Depreciation1,975 2,393 
Stock-based compensation expense106 253 
Amortization of financing fees694 1,283 
Deferred income taxes87 (225)
Increase in allowance for obsolescence1,798  
Other adjustments, net(6)482 
Changes in operating assets and liabilities:
Accounts receivable11,697 (21,706)
Inventory5,547 11,048 
Prepaid expenses, right-of-use assets and other assets510 (1,600)
Accounts payable(5,433)(17,406)
Accrued expenses(1,754)4,175 
Other noncurrent liabilities339 (8,721)
Net cash provided by (used in) operating activities26,574 (30,193)
Cash used in investing activities
Capital expenditures(1,254)(508)
Net cash used in investing activities(1,254)(508)
Cash (used in) provided by financing activities
Repayments of short-term debt and lease liabilities(20,100)(165)
Proceeds from short-term financings 29,820 
Repayment of short-term financings(594) 
Payments of deferred financing costs(984)(1,786)
Other financing activities, net (2)
Net cash (used in) provided by financing activities(21,678)27,867 
Net increase (decrease) in cash, cash equivalents, and restricted cash3,642 (2,834)
Cash, cash equivalents, and restricted cash at beginning of the period27,900 9,732 
Cash, cash equivalents, and restricted cash at end of the period$31,542 $6,898 
(in thousands)As of June 30,
20232022
Reconciliation of cash, cash equivalents, and restricted cash to the Consolidated Balance Sheets
Cash and cash equivalents$27,782 $3,448 
Restricted cash3,760 3,450 
Total cash, cash equivalents, and restricted cash$31,542 $6,898 
See Notes to Consolidated Financial Statements
7


POWER SOLUTIONS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1.    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.
8


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
9


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,
2023202220232022
Customer A14 %18 %15 %17 %
Customer B10 %**11 %**
The following table presents customers individually accounting for more than 10% of the Company’s accounts receivable:
As of June 30, 2023As of December 31, 2022
Customer A23 %30 %
Customer B14 %**
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,
2023202220232022
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-
10


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, 2023As of December 31, 2022
Raw materials $92,363 $101,566 
Work in process1,516 3,073 
Finished goods25,038 19,825 
Total inventories118,917 124,464 
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 Allowance20232022
Balance at beginning of period$3,904 $3,370 
Charged to expense2,179 163 
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, 2023As of December 31, 2022
Accrued product warranty$12,100 $13,037 
Litigation reserves *
2,202 2,102 
Contract liabilities2,399 2,256 
Accrued compensation and benefits6,186 7,299 
Accrued interest expense6,692 5,257 
Other3,790 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.
11


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 impact 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 Warranty20232022
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 period22,226 25,790 
Less: current portion12,100 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 and 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.
Note 2.    Revenue
Disaggregation of Revenue
The following table summarizes net sales by end market:
(in thousands)For the Three Months Ended June 30,For the Six Months Ended June 30,
End Market2023202220232022
Power Systems$54,452 $46,981 $99,086 $85,211 
Industrial45,590 58,449 88,465 104,252 
Transportation21,823 15,049 50,783 29,963 
Total$121,865 $120,479 $238,334 $219,426 
The following table summarizes net sales by geographic area:
(in thousands)For the Three Months Ended June 30,For the Six Months Ended June 30,
Geographic Area2023202220232022
United States$95,746 $85,955 $188,862 $160,365 
North America (outside of United States)7,303 4,309 12,121 7,720 
Pacific Rim12,379 22,675 26,551 36,516 
Europe3,920 3,637 6,965 6,759 
Other2,517 3,903 3,835 8,066 
Total$121,865 $120,479 $238,334 $219,426 
12


Contract Balances
Most of the Company’s contracts are for a period of less than one year; however, certain long-term manufacturing and extended warranty contracts extend beyond one year. The timing of revenue recognition may differ from the time of invoicing to customers and these timing differences result in contract assets, or contract liabilities on the Company’s Consolidated Balance Sheet. Contract assets include amounts related to the contractual right to consideration for completed performance when the right to consideration is conditional. The Company records contract liabilities when cash payments are received or due in advance of performance. Contract assets and contract liabilities are recognized at the contract level.
(in thousands)As of June 30, 2023As of December 31, 2022
Short-term contract assets (included in Prepaid expenses and other current assets)
$11,342 $3,620 
Short-term contract liabilities (included in Other accrued liabilities)
(2,399)(2,256)
Long-term contract liabilities (included in Noncurrent contract liabilities)
(2,836)(3,199)
Net contract liabilities$6,107 $(1,835)
During the six months ended June 30, 2023 and 2022, the Company recognized $0.9 million and $0.4 million, respectively, of revenue upon satisfaction of performance obligations related to amounts that were included in the net contract liabilities balance as of December 31, 2022 and 2021, respectively.
Remaining Performance Obligations
The Company has elected the practical expedient to not disclose remaining performance obligations that have expected original durations of one year or less. For performance obligations that extend beyond one year, the Company had $3.8 million of remaining performance obligations as of June 30, 2023 primarily related to extended warranties. The Company expects to recognize revenue related to these remaining performance obligations of approximately $0.6 million in the remainder of 2023, $1.0 million in 2024, $0.5 million in 2025, $0.8 million in 2026, $0.8 million in 2027 and less than $0.1 million in 2028 and beyond.
Note 3.    Weichai Transactions
Weichai Shareholder’s Loan Agreements
The Company is party to four shareholder’s loan agreements with Weichai, including the $130.0 million first Amended Shareholder's Loan Agreement, the $25.0 million second Amended Shareholder's Loan Agreement, the $50.0 million third Amended Shareholder's Loan Agreement, and the $30.0 million fourth Amended Shareholder's Loan Agreement. See additional discussion of these debt agreements in Note 6. Debt.
Weichai Collaboration Arrangement and Related Party Transactions
The Company and Weichai executed a strategic collaboration agreement (the “Collaboration Agreement”) March 2017 in order to achieve their respective strategic objectives and enhance the strategic cooperation alliance to share experiences, expertise and resources. Among other things, the Collaboration Agreement established a joint steering committee, permitted Weichai to select a limited number of certain technical, marketing, sales, procurement and finance personnel to work at the Company and established several collaborations related to stationary natural-gas applications and Weichai diesel engines. The Collaboration Agreement provided for the steering committee to create various sub-committees with operating roles and otherwise governs the treatment of intellectual property of parties prior to the collaboration and the intellectual property developed during the collaboration. On March 22, 2023, the Collaboration Agreement was extended for an additional term of three years.
The Company evaluates whether an arrangement is a collaborative arrangement at its inception based on the facts and circumstances specific to the arrangement. The Company also reevaluates whether an arrangement qualifies or continues to qualify as a collaborative arrangement whenever there is a change in either the roles of the participants or the participants’ exposure to significant risks and rewards dependent on the ultimate commercial success of the endeavor. For those collaborative arrangements where it is determined that the Company is the principal participant, costs incurred and revenue generated from third parties are recorded on a gross basis in the financial statements. For the three and six months ended June 30, 2023, the Company’s sales to Weichai and its subsidiaries were $1.0 million and $2.1 million, respectively. For the three and six months ended June 30, 2022, the Company’s sales to Weichai and its subsidiaries were $0.1 million and $0.5 million, respectively. Purchases of inventory from Weichai were $0.7 million and $3.8 million for the three and six months ended June 30, 2023, respectively. Purchases of inventory from Weichai were $2.9 million and $7.1 million for the three and six months ended June 30, 2022, respectively. As of June 30, 2023 and December 31, 2022, the Company had $2.0 million and $2.3 million receivables from Weichai and its subsidiaries, respectively and outstanding accounts payables to Weichai of $24.4 million and $23.4 million, respectively.
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In January 2022, PSI and Baudouin (“Baudouin”), a subsidiary of Weichai, entered into an international distribution and sales agreement which enables Baudouin to bring PSI’s power systems line of products into the European, Middle Eastern, and African markets. In addition to sales, Baudouin will manage service, support, warranty claims, and technical requests. The Baudouin related party amounts are reflected above for the current and prior year reporting periods.
Note 4.    Property, Plant and Equipment
Property, plant and equipment by type were as follows:
(in thousands)As of June 30, 2023As of December 31, 2022
Property, Plant and Equipment
Leasehold improvements$7,189 $7,107 
Machinery and equipment46,687 45,747 
Construction in progress1,291 467 
Total property, plant and equipment, at cost55,167 53,321 
Accumulated depreciation(41,351)(39,477)
Property, plant and equipment, net$13,816 $13,844 
Note 5.    Goodwill and Other Intangibles
Goodwill
The carrying amount of goodwill at both June 30, 2023 and December 31, 2022 was $29.8 million.
Other Intangible Assets
Components of intangible assets are as follows:
(in thousands)As of June 30, 2023
Gross Carrying ValueAccumulated AmortizationNet Book Value
Customer relationships$34,940 $(30,361)$4,579 
Developed technology700 (700) 
Trade names and trademarks1,700 (1,492)208 
Total$37,340 $(32,553)$4,787 
(in thousands)As of December 31, 2022
Gross Carrying ValueAccumulated AmortizationNet Book Value
Customer relationships$34,940 $(29,527)$5,413 
Developed technology700 (700) 
Trade names and trademarks1,700 (1,453)247 
Total$37,340 $(31,680)$5,660 
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Note 6.    Debt
The Company’s outstanding debt consisted of the following:
(in thousands)As of June 30, 2023As of December 31, 2022
Amount
Rate (1)
Amount
Rate (1)
Maturity Date
Short-term financing:
Revolving credit facility *$110,000 8.44%$130,000 7.04%March 22, 2024
Amended Shareholder’s Loan Agreement (second)25,000 9.90%25,000 9.10%
May 20, 2024
Amended Shareholder's Loan Agreement (third)50,000 9.60%50,000 9.01%November 30, 2023
Amended Shareholder's Loan Agreement (fourth)4,820 9.30% March 31, 2024
Other short-term financing 614 Various
Total short-term debt$189,820 $205,614 
Long-term debt:
Amended Shareholder's Loan Agreement (fourth)$ $4,800 9.00%March 31, 2024
Finance leases and other debt515 **619 **Various
Total long-term debt and finance leases515 5,419 
Less: Current maturities of long-term debt and finance leases219 220 
Long-term debt$296 $5,199 
*
Unamortized financing costs and deferred fees on the revolving credit facility are not presented in the above table as they are classified in Prepaid expenses and other current assets on the Consolidated Balance Sheet. Unamortized debt issuance costs, were $0.7 million and $0.4 million as of June 30, 2023 and December 31, 2022, respectively.
**
Finance lease obligations are a non-cash financing activity. See Note 7. Leases.
(1)Includes the weighted average interest rate.
Credit Agreement and Shareholder’s Loan Agreements
On March 24, 2023, the Company amended and restated its $130.0 million Second Amended and Restated Uncommitted Revolving Credit Agreement with Standard Chartered. The Credit Agreement extends the maturity date of loans outstanding under its previous credit facility to the earlier of March 22, 2024 or the demand of Standard Chartered. The Credit Agreement is subject to customary events of default and covenants, including minimum consolidated EBITDA and Consolidated Interest Coverage Ratio covenants for the second and third quarters of 2023. Borrowings under the Credit Agreement will incur interest at either the alternate base rate or the SOFR plus applicable rate of 3.35% per annum. In addition, the Company paid fees of $1.0 million related to the Credit Agreement which will be deferred and amortized over the term of the Credit Agreement. The Credit Agreement continues to be secured by substantially all of the Company’s assets and provides Standard Chartered the right to demand payment of any and all of the outstanding borrowings and other amounts owed under the Credit Agreement at any point in time prior to the maturity date at Standard Chartered’s discretion. The Company made a $20.0 million payment related to the Credit Agreement with no additional borrowings during the second quarter of 2023. As of June 30, 2023, the Company had $110.0 million outstanding under the Credit Agreement.
In connection with this Credit Agreement, on March 24, 2023, the Company also amended two of the four shareholder’s loan agreements with Weichai, to among other things, extend the maturities thereof. The first Amended Shareholder's Loan Agreement continues to provide the Company with a $130.0 million subordinated loan under which Weichai is obligated to advance funds solely for purposes of repaying outstanding borrowings under the $130.0 million Credit Agreement if the Company is unable to pay such borrowings. The fourth Amended Shareholder's Loan Agreement continues to provide the Company with access to up to $30.0 million of credit at the discretion of Weichai. The maturity of the first Amended Shareholder's Loan Agreement was extended to April 24, 2024 and the maturity of the fourth Amended Shareholder's Loan Agreement was extended to March 31, 2024. Borrowings under the first Amended Shareholder's Loan Agreement and the fourth Amended Shareholder's Loan Agreement will bear interest at an annual rate equal to SOFR plus 4.05% per annum. Further, if the applicable SOFR rate is negative, the interest rate per annum shall be deemed as 4.05% per annum. If the interest rate for any loan is lower than Weichai’s borrowing cost, the interest rate for such loan shall be equal to Weichai’s borrowing cost plus 1%. All of the amended shareholder loan agreements with Weichai are subject to customary events of default and covenants. The Company has covenanted to secure any amounts borrowed under either of the agreements upon payment in full
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of all amounts outstanding under the $130.0 million Credit Agreement. As of June 30, 2023, there were no borrowings under the first Amended Shareholder's Loan Agreement.
On May 12, 2023, the Company amended and extended the maturity of its second Amended Shareholder's Loan Agreement with Weichai to May 20, 2024. The second Amended Shareholder's Loan Agreement continues to provide the Company with a $25.0 million subordinated loan. Borrowings under the second Amended Shareholder's Loan Agreement will incur interest at the applicable SOFR rate, plus 4.05% per annum. Further, if the applicable term SOFR is negative, the interest rate per annum shall be deemed as 4.05% per annum. If the interest rate for any loan under the second Amended Shareholder's Loan Agreement is lower than Weichai’s borrowing cost, the interest rate for such loan shall be equal to Weichai’s borrowing cost plus 1%.
The Company is also party to a third Shareholder's Loan Agreement with Weichai, which was entered into on December 10, 2021. The third Shareholder's Loan Agreement provides the Company with a $50.0 million uncommitted facility that is subordinated to the Credit Agreement and any borrowing requests made under the third Shareholder's Loan Agreement are subject to Weichai’s discretionary approval. Borrowings under the third Shareholder's Loan Agreement will incur interest at the applicable SOFR, plus 4.65% per annum and can be used for general corporate purposes, except for certain legal expenditures which require additional approval from Weichai. Further, if the applicable term SOFR is negative, the interest rate per annum shall be deemed as 4.65% per annum. If the interest rate for any loan is lower than Weichai’s borrowing cost, the interest rate for such loan shall be equal to Weichai’s borrowing cost plus 1%. Borrowings under the third Shareholder's Loan Agreement can be used for general corporate purposes, except for certain legal expenditures which require additional approval from Weichai. The third Shareholder's Loan Agreement was amended on November 29, 2022 and expires on November 30, 2023 with any outstanding principal and accrued interest due upon maturity.
As of June 30, 2023, the Company’s total outstanding debt obligations under 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 in the aggregate, and its cash and cash equivalents were $27.8 million. The Company's total accrued interest for the Credit Agreement and all shareholder loans was $6.7 million and $5.3 million as of June 30, 2023 and December 31, 2022, respectively. Accrued interest is included within Other Accrued Liabilities on the Consolidated Balance Sheet.
See Note 1. Summary of Significant Accounting Policies and Other Information for further discussion of the Company’s going concern considerations.
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Note 7.    Leases
Leases
The Company has obligations under lease arrangements primarily for facilities, equipment and vehicles. These leases have original lease periods expiring between July 2023 and July 2034. The following table summarizes the lease expense by category in the Consolidated Statement of Operations:
(in thousands)For the Three Months Ended June 30,For the Six Months Ended June 30,
2023202220232022
Cost of sales$2,069 $1,524 $3,971 $3,135 
Research, development and engineering expenses63 65 126 141 
Selling, general and administrative expenses18 18 37 37 
Interest expense23 22 41 51 
Total$2,173 $1,629 $4,175 $3,364 
The following table summarizes the components of lease expense:
(in thousands)For the Three Months Ended June 30,For the Six Months Ended June 30,
2023202220232022
Operating lease cost
$1,448 $1,160 $2,807 $2,339 
Finance lease cost
Amortization of right-of-use (“ROU”) asset20 40 41 88 
Interest expense4 5 8 12 
Short-term lease cost
258 29 401 65 
Variable lease cost
442 340 918 720 
Sublease income(264)(271)(530)(536)
Total lease cost$1,908 $1,303 $3,645 $2,688 
The following table presents supplemental cash flow information related to leases:
(in thousands)For the Six Months Ended June 30,
20232022
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows paid for operating leases$2,426 $2,424 
Operating cash flows paid for interest portion of finance leases8 12 
Financing cash flows paid for principal portion of finance leases44 93 
Right-of-use assets obtained in exchange for lease obligations
Operating leases
13,986  
As of June 30, 2023 and December 31, 2022, the weighted-average remaining lease term was 6.6 years and 5.8 years for operating leases and 2.6 years and 3.0 years for finance leases, respectively. As of June 30, 2023 and December 31, 2022, the weighted-average discount rate was 7.5% and 7.1% for operating leases, and 6.5% and 6.6% for finance leases, respectively.
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The following table presents supplemental balance sheet information related to leases:
(in thousands)June 30, 2023December 31, 2022
Operating lease ROU assets, net 1
$25,005 $13,282 
Operating lease liabilities, current
2,753 2,894 
Operating lease liabilities, non-current 23,316 10,971 
Total operating lease liabilities
$26,069 $13,865 
Finance lease ROU assets, net 1
$184 $225 
Finance lease liabilities, current 85 90 
Finance lease liabilities, non-current 136 170 
Total finance lease liabilities
$221 $260 
1.Included in Other noncurrent assets for operating leases and Property, plant and equipment, net for finance leases on the Consolidated Balance Sheets.
The following table presents maturity analysis of lease liabilities as of June 30, 2023:
(in thousands)Operating LeasesFinance Leases
Nine months ending December 31, 2023$2,183 $57 
Year ending December 31, 20245,214 84 
Year ending December 31, 20255,376 81 
Year ending December 31, 20265,126 17 
Year ending December 31, 20275,209  
Year ending December 31, 20284,205  
Thereafter6,059  
Total undiscounted lease payments
33,372 239 
Less: imputed interest
7,303 18 
Total lease liabilities
$26,069 $221 
Note 8.    Fair Value of Financial Instruments
For assets and liabilities measured at fair value on a recurring and nonrecurring basis, a three-level hierarchy of measurements based upon observable and unobservable inputs is used to arrive at fair value. Observable inputs are developed based on market data obtained from independent sources, while unobservable inputs reflect the Company’s assumptions about valuation based on the best information available in the circumstances. Depending on the inputs, the Company classifies each fair-value measurement as follows:
Level 1 – based on quoted prices in active markets for identical assets or liabilities;
Level 2 – based on other significant observable inputs for the assets or liabilities through corroborations with market data at the measurement date; and
Level 3 – based on significant unobservable inputs that reflect management’s best estimate of what market participants would use to price the assets or liabilities at the measurement date.
Financial Instruments Measured at Carrying Value
Current Assets
Cash and cash equivalents are measured at carrying value, which approximates fair value because of the short-term maturities of these instruments.
Debt
The Company measured its revolving credit facility and other short-term financing at original carrying value. Unamortized financing costs and deferred fees of $0.7 million and $0.4 million as of June 30, 2023 and December 31, 2022, respectively, on the revolving credit facility are classified in Prepaid expenses and other current assets on the Consolidated Balance Sheet. The fair value of the revolving credit facility and other short-term financing approximated carrying value, as it consisted primarily of short-term variable rate loans.
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(in thousands)As of June 30, 2023
Carrying ValueFair Value
Level 1Level 2Level 3
Revolving credit facility$110,000 $ $110,000 $ 
Other financing79,820  79,820  
(in thousands)As of December 31, 2022
Carrying ValueFair Value
Level 1Level 2Level 3
Revolving credit facility$130,000 $ $130,000 $ 
Other financing75,614  75,614  
Note 9.    Commitments and Contingencies
Legal Contingencies
The legal matters discussed below and others could result in losses, including damages, fines, civil penalties and criminal charges, which could be substantial. The Company records accruals for these contingencies to the extent the Company concludes that a loss is both probable and reasonably estimable. Regarding the matters disclosed below, unless otherwise disclosed, the Company has determined that liabilities associated with these legal matters are reasonably possible; however, unless otherwise stated, the possible loss or range of possible loss cannot be reasonably estimated. Given the nature of the litigation and investigations and the complexities involved, the Company is unable to reasonably estimate a possible loss for all such matters until the Company knows, among other factors, the following:
what claims, if any, will survive dispositive motion practice;
the extent of the claims, particularly when damages are not specified or are indeterminate;
how the discovery process will affect the litigation;
the settlement posture of the other parties to the litigation; and
any other factors that may have a material effect on the litigation or investigation.
However, the Company could incur judgments, enter into settlements or revise its expectations regarding the outcome of certain matters, and such developments could have a material adverse effect on the Company’s results of operations in the period in which the amounts are accrued and/or liquidity in the period in which the amounts are paid.
Securities and Exchange Commission and United States Attorney’s Office (“USAO”) for the Northern District of Illinois Investigations
In September 2020, the Company entered into agreements with the SEC and the USAO to resolve the investigations into the Company’s past revenue recognition practices. Under the settled administrative order with the SEC, the Company committed to remediate the deficiencies in its internal control over financial reporting that constituted material weaknesses identified in its 2017 Form 10-K filed in May 2019 by April 30, 2021 unless an extension was provided by the SEC. On April 12, 2021, the SEC granted the Company’s request for an extension of time until March 31, 2022 in which to comply with the requirements of the administrative order to remediate the remaining outstanding material weaknesses. In April 2022, the SEC granted a further extension of time until March 31, 2023 to fully comply with the administrative order. In May 2023, the Company submitted documentation to the SEC for its review to assess the Company’s compliance with the administrative order. In July 2023, the Company was notified by the SEC that no additional information with respect to the administrative order is required.
Jerome Treadwell v. the Company     
In October 2018, a punitive class-action complaint was filed against the Company and NOVAtime Technology, Inc. (“NOVAtime”) in the Circuit Court of Cook County, Illinois. In December 2018, NOVAtime removed the case to the U.S. District Court for the Northern District of Illinois, Eastern Division under the Class Action Fairness Act. Plaintiff has since voluntarily dismissed NOVAtime from the lawsuit without prejudice and filed an amended complaint in April 2019. The operative, amended complaint asserts violations of the Illinois Biometric Information Privacy Act (“BIPA”) in connection with employees’ use of the time clock to clock in and clock out using a finger scan and seeks statutory damages, attorneys’ fees, and injunctive and equitable relief. An aggrieved party under BIPA may recover (i) $1,000 per violation if the Company is found to have negligently violated BIPA or (ii) $5,000 per violation if the Company is found to have intentionally or recklessly violated BIPA plus reasonable attorneys’ fees. In May 2019, the Company filed its motion to dismiss the plaintiff’s amended complaint. In December 2019, the court denied the Company’s motion to dismiss. In January 2020, the Company moved for reconsideration of the court’s order denying the motion to dismiss, or in the alternative, to stay the case pending the Illinois Appellate Court’s ruling in McDonald v. Symphony Healthcare on a legal question that would be potentially dispositive in this
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matter. In February 2020, the court denied the Company’s motion for reconsideration, but required the parties to submit additional briefing on the Company’s motion to stay. In April 2020, the court granted the Company’s motion to stay and stayed the case pending the Illinois Appellate Court’s ruling in McDonald v. Symphony Healthcare. In October 2020, after the McDonald ruling, the court granted the parties’ joint request to continue the stay of the case for 60 days. The court also ordered the parties to schedule a settlement conference with the Magistrate Judge in May 2021 which went forward without a settlement being reached. On May 22, 2023, the Company filed the answer to the amended complaint. The case is in discovery proceedings. As of both June 30, 2023 and December 31, 2022, the Company had recorded an estimated liability of $2.0 million, recorded within Other accrued liabilities on the Consolidated Balance Sheet related to the potential settlement of this matter.   
Mast Powertrain v. the Company
In February 2020, the Company received a demand for arbitration from Mast Powertrain, LLC (“Mast”) pursuant to a development agreement entered into in November 2011 (the “Development Agreement”). Mast claimed that it was owed more than $9.0 million in past royalties and other damages for products sold by the Company pursuant to the Development Agreement. The Company disputed Mast’s damages, denied that any royalties are owed to Mast, denied any liability, and counterclaimed for overpayment on invoices paid to Mast. Mast subsequently clarified its claim for past royalties owed to be approximately $4.5 million. In July 2021, the Company reached a settlement with Mast to resolve past claims for royalties owed for $1.5 million which the Company had previously recorded within Selling, general and administrative expenses in the Consolidated Statement of Operations for the year-ended December 31, 2020. The Company fully paid the settlement as of December 31, 2022 and had no recognized liability as of June 30, 2023.        
Gary Winemaster Litigation v. The Company
In August 2021, the Company’s former Chairman of the Board and former Chief Executive Officer and President, Gary Winemaster (“Winemaster”) filed suit in the Court of Chancery of the State of Delaware against the Company and Travelers Casualty and Surety Company of America (“Travelers”) alleging the Company’s breach of its advancement obligations under Winemaster’s indemnification agreement and Travelers’ breach of the side A policy between Traveler’s and the Company of which Winemaster is a beneficiary. In his complaint, Winemaster was seeking reimbursement under his indemnification agreement in excess of $7.2 million of attorney’s fees plus interest incurred by Winemaster in his defense of the Department of Justice (“DOJ”) case, U.S. v. Winemaster et al. Since the filing of the complaint, the Company estimates that Travelers has paid approximately $8.8 million to Winemaster’s attorneys, Latham and Watkins, under the Company’s side A policy to settle existing outstanding attorney’s fees. Travelers is seeking reimbursement from the Company for those advances pursuant to the terms of the side A policy. In October 2021, the Company and Winemaster entered into a Stipulation and Advancement Order to handle all future attorney’s fees relating to his DOJ and SEC cases, to the extent not reimbursed by Travelers under the side A policy. As of both June 30, 2023 and December 31, 2022, the Company has approximately $8.8 million accrued for the reimbursement to Travelers recorded within Accounts payable on the Consolidated Balance Sheet.
Jeffrey Ehlers and Rick Lulloff Litigation
In September 2021, Jeffrey Ehlers (“Ehlers”) and Rick Lulloff (“Lulloff”), former employees of the Company, made demand against the Company for approximately $2.4 million and $1.2 million, respectively, for alleged wages due and owing under each employee’s employment contract related to “Incentive Bonuses” for revenues generated in the Company’s transportation end market. In November 2021, Ehlers and Lulloff separately filed complaints against the Company in the Circuit Court of Cook County, Illinois, alleging breach of contract and violations of the Illinois Wage and Payment Collection Act incorporating their claims in the above referenced demand letter. The Company filed a notice of removal from the Circuit Court of Cook County, Illinois and has also moved to consolidate the cases which has been granted by the Court. In December 2022, the Company reached a settlement with both Ehlers and Lulloff, for $0.8 million and $0.5 million, respectively. As of June 30, 2023, the Company has recorded the aforementioned settlement liabilities within Other accrued liabilities on the Consolidated Balance Sheet and is paying the settlement amounts in installments. As of June 30, 2023 the Company paid Ehlers and Lulloff, $0.4 million and $0.2 million, respectively.
Indemnification Agreements
In June 2020, the Company entered into a new directors’ and officers’ liability insurance policy, which has been renewed annually and expires in July 2024. The insurance policy includes standard exclusions including for any ongoing or pending litigation such as the previously disclosed investigations by the SEC and USAO.
Other Commitments and Contingencies
At June 30, 2023, the Company had five outstanding letters of credit totaling $2.1 million. The letters of credit primarily serve as collateral for the Company for certain facility leases and insurance policies. As discussed in Note 1. Summary of Significant Accounting Policies and Other Information, the Company had restricted cash of $3.8 million as of June 30, 2023 related to these letters of credit and cash held in escrow due to a customer agreement.
Other Financial Assets and Liabilities
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In addition to the methods and assumptions used for the financial instruments discussed above, accounts receivable, net, income tax receivable, and accounts payable and certain accrued expenses are measured at carrying value, which approximates fair value because of the short-term maturities of these instruments.
Note 10.    Income Taxes
On a quarterly basis, the Company computes an estimated annual effective tax rate considering ordinary income and related income tax expense. Ordinary income refers to income (loss) before income tax expense excluding significant, unusual or infrequently occurring items. The tax effect of an unusual or infrequently occurring item is recorded in the interim period in which it occurs.
The Company has assessed the need to maintain a valuation allowance for deferred tax assets based on an assessment of whether it is more likely than not that deferred tax benefits will be realized through the generation of future taxable income. Appropriate consideration is given to all available evidence, both positive and negative, in assessing the need for a valuation allowance. In assessing the realizability of the Company’s deferred tax assets, the Company considered whether it is more likely than not that some or all of the deferred tax assets will be realized through the generation of future taxable income. In making this determination, the Company assessed all of the evidence available at the time, including recent earnings, forecasted income projections and historical performance. The Company determined that the negative evidence outweighed the objectively verifiable positive evidence and continues to maintain a full valuation allowance against deferred tax assets.
The effective tax rate for the three and six months ended June 30, 2023 was 3.6% and 3.6%, respectively, compared to an effective tax rate for the three and six months ended June 30, 2022 of (137.8)% and 24.4%, respectively. The effective tax rates for all periods were significantly different than the applicable U.S. statutory tax rate. For the three and six months ended June 30, 2023, the difference between the effective and statutory tax rates was primarily due to the Company’s full valuation allowance. For the three and six months ended June 30, 2022, the difference between the effective and statutory tax rates was primarily due to the Company’s full valuation allowance and the ability to carry back 2013 research and experimentation credits to 2012.
On August 16, 2022, President Biden signed the Inflation Reduction Act of 2022 (“IRA”) into law. The IRA contains several revisions to the Internal Revenue Code, including a 15% corporate minimum income tax and a 1% excise tax on corporate stock repurchases in tax years beginning after December 31, 2022. While these tax law changes have no immediate effect and are not expected to have a material adverse effect on our results of operations going forward, we will continue to evaluate its impact as further information becomes available.
Note 11.    Stockholders’ Equity
Common and Treasury Stock
The changes in shares of Common and Treasury Stock are as follows:
(in thousands)Common Shares IssuedTreasury Stock SharesCommon Shares Outstanding
Balance at December 31, 202223,117 166 22,951 
Net shares issued for Stock awards— (2)2 
Balance as of June 30, 202323,117 164 22,953 
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Note 12. Earnings (Loss) Per Share
The Company computes basic earnings (loss) per share by dividing net income (loss) by the weighted-average common shares outstanding during the year. Diluted earnings (loss) per share is calculated to give effect to all potentially dilutive common shares that were outstanding during the year. Weighted-average diluted common shares outstanding primarily reflect the additional shares that would be issued upon the assumed exercise of stock options and the assumed vesting of unvested share awards. The treasury stock method has been used to compute diluted earnings (loss) per share for the three and six months ended June 30, 2023 and 2022.
The Company issued Stock Appreciation Rights (“SARs”) and Restricted Stock Awards (“RSAs”), all of which have been evaluated for their potentially dilutive effect under the treasury stock method. See Note 13. Stock-Based Compensation in the Company’s 2022 Annual Report for additional information on the SARs and the RSAs.
The computations of basic and diluted earnings (loss) per share are as follows:
(in thousands, except per share basis)For the Three Months Ended June 30,For the Six Months Ended June 30,
2023202220232022
Numerator:
Net income (loss)$6,417 $1,358 $10,141 $(1,241)
Denominator:
Shares used in computing net income (loss) per share:
Weighted-average common shares outstanding – basic
22,952 22,927 22,952 22,927 
Effect of dilutive securities
14 13 15  
Weighted-average common shares outstanding — diluted
22,966 22,940 22,967 22,927 
Earnings (Loss) per common share:
Earnings (Loss) per share of common stock – basic$0.28 $0.06 $0.44 $(0.05)
Earnings (Loss) per share of common stock – diluted$0.28 $0.06 $0.44 $(0.05)
The aggregate number of shares excluded from the diluted earnings (loss) per share calculations, because they would have been anti-dilutive, was 0.1 million for both the three months ended June 30, 2023 and 2022, respectively, and 0.1 million and 0.2 million for the six months ended June 30, 2023 and 2022, respectively. For the three and six months ended June 30, 2023 and 2022, SARs and RSAs were not included in the diluted earnings (loss) per share calculations as they would have been anti-dilutive (1) due to the losses reported in the Consolidated Statements of Operations or (2) the Company’s average stock price was less than the exercise price of the SARs or the grant price of the RSAs.

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Note 13.    Related Party Transactions
Weichai Transactions
See Note 3. Weichai Transactions for information regarding the Weichai Shareholder’s Loan Agreements and Collaboration Agreement.
Other Related Party Transactions
See Note 9. Commitments and Contingencies for information regarding the Company’s indemnification obligations related to certain former directors and officers of the Company.
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Note 14. Subsequent Events
In August 2023, the Company executed a new real estate lease agreement for a manufacturing facility in Beloit, WI, with an initial term of 88 months. The lease includes one, five-year renewal option which the Company is not reasonably certain it will exercise.
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Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis includes forward-looking statements about the Company’s business and consolidated results of operations for the three and six months ended June 30, 2023 and 2022, including discussions about management’s expectations for the Company’s business. These statements represent projections, beliefs and expectations based on current circumstances and conditions and are made in light of recent events and trends. These statements should not be construed either as assurances of performance or as promises of a given course of action. Instead, various known and unknown factors are likely to cause the Company’s actual performance and management’s actions to vary, and the results of these variances may be both material and adverse. See “Forward-Looking Statements.” The following discussion should also be read in conjunction with the Company’s unaudited consolidated financial statements and the related Notes included in this Quarterly Report.
Executive Overview
The Company designs, engineers, manufactures, markets and sells a broad range of advanced, emission-certified engines and power systems that run on a wide variety of clean, alternative fuels, including natural gas, propane, and biofuels, as well as gasoline and diesel options, within the power systems, industrial and transportation end markets with primary manufacturing, assembly, engineering, research and development (“R&D”), sales and distribution facilities located in suburban Chicago, Illinois and Darien, Wisconsin. The Company provides highly engineered, comprehensive solutions designed to meet specific customer application requirements and technical specifications, including those imposed by environmental regulatory bodies, such as the U.S. Environment Protection Agency (“EPA”), the California Air Resource Board (“CARB”) and the People’s Republic of China’s Ministry of Ecology and Environment (“MEE”).
The Company’s products are primarily used by global original equipment manufacturers (“OEM”) and end-user customers across a wide range of applications and equipment that includes standby and prime power generation, demand response, microgrid, combined heat and power, arbor care, material handling (including forklifts), agricultural and turf, construction, pumps and irrigation, compressors, utility vehicles, light- and medium-duty vocational trucks, school and transit buses, and utility power. The Company manages the business as a single reporting segment.
For the three months ended June 30, 2023, the Company’s net sales increased $1.4 million, or 1%, from the three months ended June 30, 2022 to $121.9 million, as a result of sales increases of $7.5 million and $6.8 million within the power systems and transportation end markets, respectively, partly offset by a decrease of $12.9 million in the industrial end market. Gross margin for the three months ended June 30, 2023 was 22.1%, an increase of 6.9% compared to 15.2% in the comparable 2022 period. Gross profit increased by $8.6 million, or 47%, for the three months ended June 30, 2023, while operating expenses increased by $0.6 million, or 4% compared to the same period in 2022. Interest expense increased by $2.0 million during the three months ended June 30, 2023 compared to the three months ended June 30, 2022. The Company recorded an income tax expense of $0.2 million during the three months ended June 30, 2023 compared to an income tax benefit of $0.8 million in the prior year period. Collectively, these factors contributed to a $5.1 million improvement in net income, which totaled $6.4 million for the three months ended June 30, 2023 compared to net income of $1.4 million in the same period in 2022. Diluted earnings per share was $0.28 for the three months ended June 30, 2023 compared to diluted earnings per share of $0.06 in the comparable 2022 period. Adjusted net income, which excludes certain items described below that the Company believes are not indicative of its ongoing operating performance, was $6.4 million for the three months ended June 30, 2023, compared to Adjusted net income of $2.4 million in 2022. Adjusted earnings per share was $0.28 in the three months ended June 30, 2023 compared to Adjusted earnings per share of $0.10 in 2022. Adjusted earnings before interest expense, income taxes, depreciation and amortization (“Adjusted EBITDA”) was positive at $12.6 million in the three months ended June 30, 2023 compared to a positive Adjusted EBITDA of $6.0 million in 2022. Adjusted net income (loss), Adjusted earnings (loss) per share and Adjusted EBITDA are non-GAAP financial measures. For a reconciliation of each of these measures to the nearest applicable GAAP financial measure, as well as additional information about these non-GAAP measures, see the section entitled Non-GAAP Financial Measures in this Item 2.
For the six months ended June 30, 2023, the Company’s net sales increased $18.9 million, or 9%, compared to the six months ended June 30, 2022, as a result of higher sales of $13.9 million and $20.8 million in the power systems and transportation end markets, respectively, partly offset by a decrease of $15.8 million in the industrial end market. Gross margin was 21.2% and 16.0% during the six months ended June 30, 2023 and 2022, respectively. Gross profit increased during the six months ended June 30, 2023 by $15.4 million, or 44%, compared to the six months ended June 30, 2022, while operating expenses decreased by $1.0 million, or 3%, as compared to the same period in 2022. Interest expense increased by $4.2 million for the six months ended June 30, 2023 compared the same period in 2022. Also, the Company recorded an income tax expense of $0.4 million for the six months ended June 30, 2023 compared to a benefit of $0.4 million for the same period last year. Collectively, these factors contributed to a $11.4 million increase in the net income, which totaled income of $10.1 million in the 2023 period compared to a net loss of $1.2 million in the same period of 2022. Diluted earnings per share was $0.44 in the 2023 period compared to diluted loss per share of $0.05 in the comparable 2022 period. Adjusted net income, which excludes certain items described below that the Company believes are not indicative of its ongoing operating performance, was $10.2 million in the 2023 period compared to Adjusted net income of $1.5 million in 2022. Adjusted earnings per share was $0.44 in 2023 compared to Adjusted earnings per share of $0.07 in 2022. Adjusted EBITDA was positive at $22.7 million in 2023 compared
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to a positive Adjusted EBITDA of $9.7 million in 2022. Adjusted net income (loss), Adjusted earnings (loss) per share and Adjusted EBITDA are non-GAAP financial measures. For a reconciliation of each of these measures to the nearest applicable GAAP financial measure, as well as additional information about these non-GAAP measures, see the section entitled Non-GAAP Financial Measures in this Item 2.
Net sales by geographic area and by end market for the three and six months ended June 30, 2023 and 2022 are presented below:
(in thousands)For the Three Months Ended June 30,For the Six Months Ended June 30,
2023202220232022
Geographic Area% of Total% of Total% of Total% of Total
United States$95,746 79 %$85,955 71 %$188,862 79 %$160,365 73 %
North America (outside of United States)7,303 %4,309 %12,121 %7,720 %
Pacific Rim12,379 10 %22,675 19 %26,551 11 %36,516 17 %
Europe3,920 %3,637 %6,965 %6,759 %
Others2,517 %3,903 %3,835 %8,066 %
Total$121,865 100 %$120,479 100 %$238,334 100 %$219,426 100 %
(in thousands)For the Three Months Ended June 30,For the Six Months Ended June 30,
2023202220232022
End Market% of Total% of Total% of Total% of Total
Power Systems$54,452 45 %$46,981 39 %$99,086 42 %$85,211 38 %
Industrial45,590 37 %58,449 49 %88,465 37 %104,252 48 %
Transportation21,823 18 %15,049 12 %50,783 21 %29,963 14 %
Totals$121,865 100 %$120,479 100 %$238,334 100 %$219,426 100 %

Recent Trends and Business Outlook
The Company judiciously manages its expenses, including the restriction of all non-essential travel and minimized discretionary expenses and consulting services. The Company continues to review operating expenses, including prioritizing certain R&D investments in support of the Company’s long-term growth objectives. During 2022, the Company took rightsizing actions to align its staffing with current needs, while also streamlining certain roles.
By the end of 2022, the global economy mostly recovered after the global pandemic, COVID-19. The recovery led to challenging market conditions across certain areas of the Company’s business. Average crude oil prices reached the highest average price in five years during 2022 but has since decreased through the first half of 2023. Rig counts in the U.S. oil markets also increased through 2022 and has closed in on pre-pandemic levels through the first half of 2023. Despite higher rig counts and crude oil prices, the Company believes that capital spending within the areas of the oil and gas market that it participates in, remains below pre-pandemic levels. While the Company saw an increase of sales to customers with traditional exposure to the oil and gas markets during the first half of 2023, as compared to the prior year, sales remain below pre-pandemic levels. A significant portion of the Company’s sales and profitability has historically been derived from the sale of products that are used within the oil and gas industry. The Company has seen the logistical challenges experienced during the prior years of port congestion and shipping delays ease and return to a pre-pandemic state and, excluding any unforeseen events, expects this to continue throughout the year. However, the Company continues to experience inflationary cost pressures for certain raw materials and other goods which the Company continues to mitigate the impact of these through price increases and other cost reduction measures. Additionally, the Company continues to experience ongoing tariff costs for products and is mitigating these impacts through price increases and other measures, such as seeking certain tariff exclusions, where possible. The Company has also experienced delays in the imports of raw materials directly related to the UFLPA as the UFLPA continues to be updated and expanded from its initial passage in 2022. This could result in the delay of importing raw materials needed to fulfil future orders while the Company works to comply with requests in regards to the UFLPA. The potential for continued economic uncertainty and unfavorable oil and gas market dynamics may have a material adverse impact on the levels of future customer orders.
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Results of Operations
Condensed consolidated results of operations for the three and six months ended June 30, 2023 compared with the three and six months ended June 30, 2022:
(in thousands, except per share amounts)For the Three Months Ended June 30,For the Six Months Ended June 30,
 20232022Change% Change20232022Change% Change
Net sales
(from related parties $1,000 and $75 for the three months ended June 30, 2023 and June 30, 2022, respectively, $2,100 and $513 for the six months ended June 30, 2023 and June 30, 2022, respectively)
 $121,865 $120,479 $1,386 %$238,334 $219,426 $18,908 %
Cost of sales
(from related parties $600 and $69 for the three months ended June 30, 2023 and June 30, 2022, respectively, and $1,500 and $410 for the six months ended June 30, 2023 and June 30, 2022, respectively)
94,911 102,158 (7,247)(7)%187,911 184,388 3,523 %
Gross profit 26,954 18,321 8,633 47 %50,423 35,038 15,385 44 %
Gross margin %22.1 %15.2 %6.9 %21.2 %16.0 %5.2 %
Operating expenses: 
Research, development and engineering expenses4,662 4,554 108 %9,266 9,113 153 %
Research, development and engineering expenses as a % of sales3.8 %3.8 %— %3.9 %4.2 %(0.3)%
Selling, general and administrative expenses10,550 9,995 555 %20,455 21,380 (925)(4)%
Selling, general and administrative expenses as a % of sales8.7 %8.3 %0.4 %8.6 %9.7 %(1.1)%
Amortization of intangible assets437 531 (94)(18)%873 1,072 (199)(19)%
Total operating expenses15,649 15,080 569 %30,594 31,565 (971)(3)%
Operating income 11,305 3,241 8,064 NM