Revenue

On January 1, 2018, the Company adopted ASC 606 using the modified retrospective approach for all contracts that were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported under the accounting standards in effect for the prior period.

Upon adoption of ASC 606, recognition of revenue and costs of sales for certain power systems used in standby and prime power generation was changed from recognition at the time the power system shipped from the Company’s facilities (or was delivered to the customer depending on shipping terms) to recognition over time as the product was constructed. The cumulative effects of the changes made to the Consolidated Balance Sheet as of January 1, 2018 for the adoption of ASC 606 were as follows:



(in thousands)	As Reported			Adjustments due to ASC 606		As Restated
	December 31, 2017			Adjustments due to ASC 606		January 1, 2018
Assets
Inventories, net	$	86,724		(5,159	)	81,565
Prepaid expenses and other current assets	14,359			6,166		20,525

Liabilities and Stockholders' Equity
Other accrued liabilities^*	$	34,332		(706	)	33,626
Accumulated deficit	(82,147		)	1,713		(80,434	)

The Company recorded adjustments to reflect a portion of the accrued product warranty liability within Other accrued liabilities to Other noncurrent liabilities at December 31, 2017 to conform the presentation to the current period. See Note 1. Summary of Significant Accounting Policies and Other Information for additional discussion of the adjustment. The adjustment had no impact on the adoption of ASC 606.

Impact on Consolidated Financial Statements

The following table summarizes the effects of the adoption of ASC 606 on selected line items within the Consolidated Statement of Operations for the year ended December 31, 2018:



(in thousands)	As Reported ASC 606			Impact of ASC 606			ASC 605
Net sales	$	496,038		$	(1,995	)	$	498,033
Cost of sales	437,269			(573		)	437,842
Gross profit	58,769			(1,422		)	60,191
Operating loss	(36,705		)	(1,422		)	(35,283		)
Loss before income taxes	(54,557		)	(1,422		)	(53,135		)
Net loss	(54,726		)	(1,422		)	(53,304		)
Net loss available to common stockholders	(54,726		)	(1,422		)	(53,304		)
Net loss per common share:
Basic	(2.94		)	(0.08		)	(2.86		)
Diluted	(2.94		)	(0.08		)	(2.86		)

The following table summarizes the effects of the adoption of ASC 606 on selected line items within the Consolidated Balance Sheet as of December 31, 2018:



(in thousands)	As Reported ASC 606			Impact of ASC 606			ASC 605
Assets
Inventories, net	$	105,614		$	(4,586	)	$	110,200
Prepaid expenses and other current assets	22,917			2,926			19,991
Liabilities and Stockholders' Equity
Other accrued liabilities	$	45,700		$	(1,952	)	$	47,652
Accumulated deficit	(135,160		)	292			(135,452		)

The adoption of ASC 606 had no impact on net cash provided by or (used in) operating, financing or investing activities on the Company’s Consolidated Statement of Cash Flows.

Revenue Recognition

The Company determines the amount of revenue to be recognized through the following steps:


•	Identification of the contract, or contracts with a customer;


•	Identification of the performance obligations in the contract;


•	Determination of the transaction price;


•	Allocation of the transaction price to the performance obligations in the contract; and


•	Recognition of revenue when, or as, the Company satisfies the performance obligations.

Revenue for the Company is generated from contracts that may include a single performance obligation (generally, a single type of engine) or multiple performance obligations (which may include an engine with aftermarket parts, different types of engines, etc.). A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account for revenue recognition. Revenue is measured at the transaction price which is based on the amount of consideration that the Company expects to receive in exchange for transferring the promised goods or services to the customer. The transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The Company is required to estimate the total consideration expected to be received from contracts with customers. The consideration expected to be received may be variable based on the specific terms of the contract and the Company’s past practices.

For contracts with multiple performance obligations, the Company allocates the total transaction price to distinct performance obligations based on directly observable data, if available, or the Company’s best estimate of stand-alone selling price of each distinct performance obligation. The primary method used to estimate stand-alone selling price is the cost plus a margin approach.

The Company applies significant judgment in order to identify and determine the number of performance obligations, determine the total transaction price, allocate the transaction price to each performance obligation, and determine the appropriate timing of revenue recognition.

Taxes collected from customers and remitted to governmental authorities are presented on a net basis; that is, such taxes are excluded from revenues.

The Company’s payment terms are generally 60 days or less and its sales arrangements do not contain any significant financing components.

Timing of revenue recognition. The Company recognizes revenue related to performance obligations in its contracts with customers when control passes to the customer. Control passes to the customer when the customer has the ability to direct the use of and obtain substantially all of the remaining benefits from the asset. For the majority of the Company’s products, revenue is recognized at a point in time when the products are shipped or delivered to the customer based on the shipping terms as that is the point in time when control passes to the customer. For the year ended December 31, 2018, the Company recognized revenue of $449.8 million related to products shipped or delivered at a point in time.

The Company also recognizes revenue over time primarily when the Company’s performance obligation includes: enhancing a customer-controlled asset (generally when an engine is provided by the customer) or constructing an asset with no alternative future use and the Company has an enforceable right to payment throughout the period as the services are performed. The Company recognizes revenue throughout the manufacturing process in these scenarios based on labor hours incurred because the customer receives the benefit of the asset as the product is constructed. The Company believes labor hours incurred relative to total estimated labor hours at completion faithfully depicts the transfer of control to the customer. For the year ended December 31, 2018, the Company recognized revenue of $46.2 million for products manufactured over time.

Shipping and handling costs. The Company accounts for shipping and handling costs as fulfillment costs which are recorded in Cost of sales in the Consolidated Statements of Operations. This includes shipping and handling costs incurred after control of the asset has transferred to the customer as the Company has elected the practical expedient in ASC 606.

Variable consideration. Variable consideration primarily includes rebates and discounts. The Company estimates the projected amount of rebates and discounts based on current assumptions, customer-specific information and historical experience. Variable consideration is recorded as a reduction of revenue to the extent that it is probable that there will not be significant changes to the Company's estimate of variable consideration when any uncertainties are settled.

Costs to obtain and fulfill a contract. The Company has elected the practical expedient in ASC 606 to recognize incremental costs to obtain a contract (primarily commissions) as expense when incurred since the amortization period of the asset that the Company otherwise would have recognized is one year or less.

Disaggregation of Revenue

The following table summarizes net sales by end market:



	For the Quarter Ended (Unaudited)								For the Year Ended
(in thousands)	March 31,		June 30,		September 30,		December 31,		December 31,
End Market	2018		2018		2018		2018		2018
Industrial	$	45,719	$	48,051	$	52,367	$	55,059	$	201,196
Energy	38,567		52,014		48,481		46,623		185,685
Transportation	10,127		27,008		35,470		36,552		109,157
Total	$	94,413	$	127,073	$	136,318	$	138,234	$	496,038

The following table summarizes net sales by geographic area:



	For the Quarter Ended (Unaudited)								For the Year Ended
(in thousands)	March 31,		June 30,		September 30,		December 31,		December 31,
Geographic Area	2018		2018		2018		2018		2018
North America	$	79,947	$	111,444	$	120,955	$	123,722	$	436,068
Pacific Rim	10,339		11,516		10,913		9,303		42,071
Europe	3,315		3,621		3,012		3,795		13,743
Other	812		492		1,438		1,414		4,156
Total	$	94,413	$	127,073	$	136,318	$	138,234	$	496,038

Contract Balances

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)	December 31, 2018			January 1, 2018
Short-term contract assets (included in Prepaid expenses and other current assets)	$	2,926		$	6,166
Short-term contract liabilities (included in Other accrued liabilities)	(4,897		)	(1,299		)
Long-term contract liabilities (included in Other noncurrent liabilities)	(14,611		)	(2,767		)
Net contract assets (liabilities)	$	(16,582	)	$	2,100

During the year ended December 31, 2018, the Company recognized $1.2 million of revenue upon satisfaction of performance obligations. These amounts were included in the net contract asset (liability) balance as of January 1, 2018.

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 $13.9 million of remaining performance obligations as of December 31, 2018. The Company expects to recognize revenue related to these remaining performance obligations in 2020.