20162014 FORM 10-K ANNUAL REPORT

TABLEOF CONTENTS

Forward-Looking Statements

This annual report contains forward-looking statements that are subject to risks and uncertainties. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “anticipate,” “estimate,” “expect,” “forecast,” “project,” “plan,” “intend,” “believe,” “confident,” “may,” “should,” “can have,” “likely,” “future,” “optimistic” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events.

The forward-looking statements contained in this annual report are based on assumptions that we have made in light of our industry experience and on our perceptions of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the circumstances. As you read and consider this report, you should understand that these statements are not guarantees of performance or results. They involve risks, uncertainties (some of which are beyond our control) and assumptions. Although we believe that these forward-looking statements are based on reasonable assumptions, you should be aware that many factors could affect our actual financial results and cause them to differ materially from those anticipated in the forward-looking statements. The forward-looking statements contained in this annual report include estimates regarding:

Factors that could affect our actual financial results and cause them to differ materially from those anticipated in the forward-looking statements include:

Should one or more of these risks or uncertainties materialize, or should any of these assumptions prove incorrect, our actual results may vary in material respects from those projected in any forward-looking statements. A detailed discussion of these and other factors that may affect future results is contained in Item 1A of this Annual Report on Form 10-K. Stockholders, potential investors and other readers should consider these factors carefully in evaluating the forward-looking statements.

Any forward-looking statement made by us in this report speaks only as of the date on which it is made. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.

PART I

PART I

ItemItem 1. Business

We are a leading designer and manufacturer of a wide range of power generation equipment and other engine powered products serving thethe residential, light commercial industrial, oil & gas, and constructionindustrial markets. Power generation is our primary focus, which differentiates us from our primary competitors that also have broad operations outside of the generator market. As the only significant market participant focused predominantly on these products, we have one of the leading market positions in the power equipmentgeneration market in North America and an expanding presence internationally. We believe we have one of the widest rangeranges of products in the marketplace, including residential, commercial and industrial standby generators,generators; as well as portable and mobile generators used in a variety of applications. Other engine powered products that we design and manufacture include light towers which provide temporary lighting for various end markets; commercial and industrial mobile heaters used in the oil & gas, construction and other industrial markets; and a broad product line of outdoor power washersequipment for residential and commercial use.

We design, manufacture, source and modify engines, alternators, transfer switches and other components necessary for our products, which are fueled by natural gas, liquid propane, gasoline, diesel and Bi-Fuel™. Our products are available primarily across the U.S and Canada, with an expanding presence internationally in Latin America, Europe, the Middle East, Africa and Asia/Pacific regions. Products are sold into these regionsglobally through a broad network of independent dealers, distributors, retailers, wholesalers and equipment rental companies under the Generac®, Magnum^TM, Ottomotores^TM, Tower Light^TM, Powermate®, Dewalt®, MAC^TM and Honeywell®a variety of brand names. We also sell direct to certain national and regional account customers, as well as to individual consumers, that are the end users of our products.

We have a significant market share in the residential and light commercial generator markets for automatic standby generators, which we believe are currently under penetrated.remain under-penetrated in the marketplace. We also have a leading market position for portable generators used in residential, light construction and recreational applications. We believe that our leading market position is largely attributable to our strategy of providing a broad product line of high-quality, innovative and affordable products through our extensive and multi-layered distribution network to whom we offer the most comprehensive support and programs from the factory.Infactory. In addition, through recent acquisitions, we are also a leading provider of light towers, mobile generators, and flameless heaters, as well as a supplier ofoutdoor power equipment and industrial diesel generators ranging in sizes up to 3,250kW.

History

Generac Holdings Inc. (the Company)Company or Generac) is a Delaware corporation, whose principal operating subsidiary is Generac Power Systems, Inc., (collectively Generac). Generacwhich was founded in 1959 to market a line of affordable portable generators that offered superior performance and features. Through innovation and focus, we have grown to be a leading provider of power generation equipment and other engine powered products to the residential, light commercial,light-commercial and industrial oil & gas and construction markets.

Key events in our history include the following:

Additionally, over the past several years, we have executed a number of acquisitions that support our strategic plan. A summary of these acquisitions can be found in Note 1, “Description of Business,” to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K.

Reportable Segments

Today,Effective in the second quarter of 2016, we changed our segment reporting from one reportable segment to two reportable segments – Domestic and International – as a result of the recent Pramac acquisition and the ongoing strategy to expand the business internationally. The Domestic segment includes the legacy Generac business and the impact of acquisitions that are based in the United States, all of which have revenues that are substantially derived from the U.S. and Canada. The International segment includes the Ottomotores, Tower Light and Pramac acquisitions, all of which have revenues that are substantially derived from outside the U.S. and Canada. Both segments design and manufacture a full linewide range of power generation equipment and other engine powered products, for a wide variety of applications and markets. We have demonstrated a long track record of achieving significant revenue growth through product innovation, expanded distribution and increased awarenesswhich are discussed in further detail below in the context of our products. Our success is built on engineering expertise, manufacturing & sourcing excellence and our innovative approachesproduct classes. Refer to Note 6, “Segment Reporting,” to the market.consolidated financial statements in Item 8 of this Annual Report on Form 10-K for further information.

PProductsroducts

We design and manufacture stationary, portable and mobile generators with single-engine outputs ranging between800Wbetween 800W and 3,250kW, with3,250kW. We have the ability to expand the power range for certain stationary generator solutions to much larger multi-megawatt systems through ouran integrated paralleling configuration called Modular Power Systems (MPS), an integrated paralleling configuration.. Other engine powered products that we design and manufacture include light towers, mobile heaters, power washers and pumps.water pumps, along with a broad line of outdoor power equipment. We classify our products into three categories based on similar range of power output geared for varying end customer uses: Residential products, Commercial & Industrial (C&I) products and Other products. The following summary outlines our portfolio of products, including their key attributes and customer applications.

ResidentialResidential Products Products

Our residential automatic standby generators range in output from 6kW to 60kW, with manufacturer's suggested retail prices (MSRPs) from approximately $1,799 to$16,199.$1,899 to $16,199. These products operate on natural gas, liquid propane or diesel and are permanently installed with an automatic transfer switch, which we also manufacture. Air-cooled engine residential standby generators range in outputs from 6kW to 22kW, are available in steel and aluminum enclosures and serve as an emergency backup for small to medium-sized homes. Liquid-cooled engine generators serve as emergency backup for larger homes and small businesses and range in output from 22kW to 60kW. We also providea cellular-based remote monitoring system for home standby generators calledMobileLink™, which allows our customers to check the status of their generator conveniently from a desktop PC, tablet computer or smartphone, and also provides the capability to receive maintenance orand service alerts.

In 2014, we introduced a new 22kW air-cooled engine standby generator which provides the highest output for an air-cooled generator currently available in the marketplace. Another new product introduction during 2014 was the Guardian Synergy, the industry’s first variable-speed residential standby generator and is a best-in-class, much quieter, more fuel-efficient generator with exceptionally clean power output. Also during 2014, we launched the industry’s most cost-effective automatic home standby generator called the PowerPact, which combines all the benefits of automatic operation with many of the features found in Generac’s market-leading Guardian series, with the 7kW unit starting at an affordable $1,899 at retail.

We provide a broad product line of portable generators that are fueled predominantly by gasoline, with certain models running on propane and diesel fuel, which range in size from 800W to17,500W.to 17,500W. These products serve as an emergency home backup source of electricity and are also used for construction and recreational purposes. Our portable generators are targeted at homeowners, with price points ranging between the consumer value end of the market through the premium homeowner market,market; at professional contractors, starting at the value end through the premium contractor segment, as well assegment; and inverter generators targeted forat the recreational market. In addition, we offer manual transfer switches to supplement our portable generator product offering. OurThe acquisition of PR Industrial S.r.l. (Pramac) in March 2016 added a broad product line of portable generators that are offered under the Generac®, Powermate®, Dewalt®sold globally and Honeywell® brand namesused for numerous residential, light construction and recreational purposes.

We alsoWe provide a broad product line of engine driven power washers which are fueled by gasoline, that range in PSI from 2,000 to 4,200 that are used for residential and commercial use. We recently introduceduse, fueled by gasoline, which range in pressure from 2,500 to 4,200 PSI. Additionally, we offer a product line of water pumps built to meet the water removal needs of homeowners, farmers, construction crews and other end-user applications.

Further, we provide a broad product line of outdoor power equipment that includes trimmer & brush mowers, log splitters, lawn & leaf vacuums, and chipper shredders for the property maintenance needs of larger-acreage residences, light commercial properties, municipalities and farms. These products are largely sold in North America through catalogs and outdoor power equipment dealers primarily under the DR® brand name.

Residential power products comprised 49.5%53.5%, 56.8%51.2% and 60.0%49.5%, respectively, of total net sales in 2014, 20132016, 2015 and 2012.2014.

Commercial & Industrial Products Products

We offer a full line of C&I generators fueled by diesel, natural gas, liquid propane and Bi-Fuel™. Ranging from 10kW up to 3,250kW, weWe believe we have one of the broadest product offerings in the industry.industry with power outputs ranging from 10kW up to 3,250kW.

Our light-commercial standby generators include a full range of affordable systems from 22kW to 150kW and related transfer switches, providing three-phase power sufficient for most small and mid-sized businesses including grocery stores, convenience stores, restaurants, gas stations, pharmacies, retail banks, small health care facilities and other small-footprint retail applications. Our light-commercial generators run on natural gas, liquid propane and diesel fuel.

We also manufacture a broad line of standard and configured stationary standby generators and related transfer switches for various industrial standby, continuous-duty and prime rated applications. Our single-engine industrial generators range in output from 10kW up to 3,250kW, which includes stationary and containerized packages, with our MPS technology extending our product range up to much larger multi-megawatt systems through an integrated paralleling configuration. We offer four fuel options for our industrial generators, including diesel, natural gas, liquid propane or Bi-Fuel™. Bi-Fuel™ generators operate on a combination of both diesel and natural gas to allow our customers the advantage of multiple fuel sources and extended run times. Our industrial standby generators are primarily used as emergency backup for large healthcare, telecom, datacom, commercial office, municipal and manufacturing customers.

The acquisition of Baldor Generators in November 2013 enabled us to offer single-engine industrial generators larger than 600kW within the U.S.and Canada. The Baldor Generators product offering includes stationary and containerized packages up to 2,500kW that can be used in standby applications and in certain configurations in prime or continuous-duty power applications. The addition of these products significantly expanded our industrial product offering and the addressable domestic market that our distribution partners can serve.

Our MPS technology combines the power of several smaller generators to produce the output of a larger generator, providing our customers with redundancy and scalability in a cost-effective manner. For larger industrial applications, our MPS products offer customers an efficient, affordable way to scale their standby power needs, and also offers superior reliability given its built-in redundancy which allows individual units to be taken off-line for routine maintenance while retaining coverage for critical circuits.

OurWe provide a broad line of light towers, mobile generators and mobile heaters, which provide temporary lighting, power and heat for various end markets, such as road and commercial construction, energy, mining, military and special events. We also manufacture commercial mobile pumps which utilize wet and dry-priming pump systems for a wide variety of wastewater applications.

We introduced several new commercialThe acquisition of Pramac in March 2016 added a broad product line of C&I stationary and industrial productsmobile generators that are sold in 2014. We further expanded ourover 150 countries through a broad line up of natural gas generators with the introduction of a new 400kW power node at an industry leading price point. In addition to new stationary products, we also introduced a new vertical-mast light tower called the MLT6S, which provides the most compact footprint in the industry, improved ease of use, transportation, run time and serviceability.distribution network.

C&I power products comprised 44.6%38.6%, 38.4%41.6% and 34.9%44.6% respectively, of total net sales in 2014, 20132016, 2015 and 2012.2014.

Other POtherroductsProducts

We sell Our “Other Products” category includes aftermarket service parts to our dealers, product accessories and proprietary engines to third-party original equipment manufacturers (OEMs).

Other power products comprised 5.97.9%, 4.8%7.2% and 5.1%5.9%, respectively, of total net sales in 2014, 20132016, 2015 and 2012.2014.

Distribution Channels and Customers

We distribute our products through several distribution channels to increase awareness of our product categories and brands, and to ensure our products reach a broad customer base. This distribution network includesindependentincludes independent residential dealers, industrial distributors and dealers, national and regional retailers, e-commerce merchants, electrical and HVAC wholesalers (including certain private label arrangements), catalogs, equipment rental companies and equipment distributors. We also sell direct to certain national and regional account customers, as well as to individual consumers, that are the end users of our products.

We believe our distribution network is a competitive advantage that has strengthened over the last decadeyears as a result of adding, expanding and expandingdeveloping the various distribution channelsthrough which we sell our products. Our network is well balanced with no customer providing more than 8%7% of our sales in 2014.2016.

Our overall dealer network which is located principally in the United States, Canada and Latin America, is the industry's largest network of factory direct independent generator contractors. In addition,contractors in North America. We further expanded our Tower Light business provides access to numerous independent distributorsdealer network on a global basis with the acquisition of Pramac in over 50 countries.March 2016, particularly in Europe, the Middle East and Asia/Pacific regions.

Our residential/light commercial dealer network sells, installs and services our residential and light commercial products to end users. We have increased our level of investment in recent years by focusing on a variety of initiatives to more effectively market and sell our home standby products and better align our dealer network with Generac.

Our industrial network consists of a combination of primary distributors as well as a support network of dealers serving the U.S.United States and Canada. The industrial distributors and dealers provide industrial and commercial end users with ongoing sales and product support. Our industrial distributors and dealers maintain the local relationships with commercial electrical contractors, specifying engineers and national account regional buying offices. In recent years, we have been particularly focused on expanding our dealer network globally through the Ottomotores acquisition in Latin AmericaDecember 2012 and other regions of the worldPramac acquisition in March 2016, along with organic means, in order to expand our international sales opportunities.

Our retail distribution network includes thousands of locationsacross the globe and includes a variety of regional and national home improvement chains, retailers, clubs, buying groups and farm supply stores. These physical retail locations are supplemented by a number of catalog and e-commerce retailers. This network primarily sells our residential standby, portable and light-commercial generators, as well as our power washers.other engine powered tools. The placement of our products at retail locations drives significant awareness for our brands and the automatic home standby product category.

Our wholesaler network distributes our residential and light-commercial generators, and consists of selling branches of both national and local distribution houses for electrical and HVAC products.

On a selective basis, we have established private label and licensing arrangements with third party partners to provide residential, light-commerciallight-commercial and industrial generators. These partners include leading home equipment, electrical equipment and construction machinery companies, each of which provides access to incremental channels of distribution for our products.

The distribution for our mobile products includesincludes international, national, regional and specialty equipment rental companies, equipment distributors and construction companies, which primarily serve non-residential building construction, road construction, energy markets and special events. In addition, our Tower Light and Pramac businesses provide access to numerous independent distributors in over 150 countries.

We sell direct to certain national and regional account customers that are the end users of our products covering a number of end market verticals, including telecommunication, retail, banking, convenience stores, grocery stores and other light commercial applications. Additionally, a portion of our portable generators and other engine powered tools are sold direct to individual consumers, who are the end users of the product.

BusinessStrategy

We believehave been executing on our growth over the last several years is due in part to the development and execution of our "Powering“Powering Ahead” strategy. Since shortly after our initial public offering in 2010, this strategic plan, has servedwhich serves as the framework for the significant investments we have made to drivecapitalize on the long-term growth prospects of Generac. As we continue to move the Powering Ahead plan into the future, we are focused on a number of initiatives that are driven by the same four key objectives:

Growing the residential standby generator market.As the leader in the home standby generator category,market, it is incumbent upon us to continue to drive growth and increase the penetration rate of these products in households across the United States and Canada. Central to this strategy is to increase the awareness, availability and affordability of home standby generators. Ongoing power outage activity, combined with expanding our residential/light commercial dealer base and overall distribution in affected regions, are key drivers in elevating the awareness of home standby generators over the long term. We intend to continue to supplement these key growth drivers by further optimizing our innovativefocusing on a variety of strategic initiatives targeted toward generating more sales leads, improving close rates and marketing techniques introduced in recent years to further extendreducing the awarenesstotal overall cost of a home standby generators.system. In addition, we intend to continue to focus on innovation in this emerginggrowing product category and introduce new products into the marketplace. With only approximately 3.5%4.0% penetration of the addressable market of U.S. homes in the United States (which we define as single-family detached, owner-occupied households with a home value of over $100,000, as defined by the U.S. Census Bureau's 20132015 American Housing Survey for the United States), we believe there are opportunities to further penetrate the residential standby generator market.

Gaining commercial and industrial market share.Our growth strategy for commercial and industrial power generation products is focused on incremental market share gains. Key to this objective are our efforts to developleverage our expanding platform of diesel and improvenatural gas offerings by better optimizing our industrial distribution further increasepartners’ capabilities to market, sell and support these products. Specifically, we continue to pursue certain initiatives to expand our addressable marketdistributors’ interactions with new productsengineering firms and increase the rate at whichelectrical contractors responsible for specifying and selecting our products are specified inwithin C&I power generation applications. In addition, weWe are also committed to a number of sales process initiatives to improve the overall specification rates for our products which should increase quoting activity and close rates for our industrial distributors.

Lead with gas power generation products. We will attempt to gain incremental market share within commercial and industrial markets through our leading position in the growing market for cleaner burning, more cost effective natural gas fueled back-upstandby power solutions. While still a much smaller portion of the overall C&I market, we believe demand for these products continues to increase at a faster rate than traditional diesel fueled generators as a result of their lower capital investment and operating costs. We also believe there is an opportunityintend to provide smaller, more cost effectiveexplore new gaseous generator related market opportunities, including increasing our product capabilities for continuous-duty and prime rated applications, by leveraging our deep technical capabilities for gaseous-fueled products, leading position for natural gas standby generators marketed aggressively towards the underpenetrated “optional” standby generatorand growing market which includes smaller footprint commercial buildings.acceptance for these products.

ExpandingDiversifying end markets by expanding product offerings and services. global presence.In recent years, weWe have diversified our end markets with new product and service platforms. Much of this diversification has been achieved with our strategic acquisitions over the last four years. We now have access to several new products, new markets and new customers through the purchase of Magnum in October 2011, Ottomotores in December 2012, Tower Light in August 2013, Baldor Generators in November 2013 and MAC in October 2014. As a result of these acquisitions, we now have access to a broader lineup of mobile power products and higher-output generators, including products that serve the oil & gas and other infrastructure power markets. We are now a more balanced company relative to our residential product sales as compared to only four years ago, as revenues for our C&I products have expanded from 31.0% of total net sales in 2010 to 44.6% in 2014. Additionally, our re-entry into the market for power washers in 2011 allowed us to further diversify our company with the addition of this platform. As we continue to build upon our recent diversification efforts, we intend to evaluate other products and services which we believe could further diversify our end markets.

Expanding into new geographies.During 2014, approximately 9% ofincreased our revenues were shipped to regions outside the U.S. and Canada. GivenCanada in recent years, with sales outside this region accounting for approximately 20% of our revenues during 2016, as compared to approximately 10% and 9% in 2015 and 2014, respectively. This increase is largely the result of acquisitions made that thecomprise our International segment – Ottomotores, Tower Light and Pramac. These businesses have significantly increased our global market for power generation equipment is estimated to exceed $16 billion annually, we believe there are growth opportunities for Generacpresence by expanding into new geographies. Prior to 2012, these efforts had been mostly organic with the creation of a dedicated sales teamadding product, manufacturing and the addition of new distribution pointscapabilities that serve local markets around the globe, withworld, and have resulted in us becoming a focus in Latin America. The acquisitions of Ottomotores, located in Latin America, and Tower Light, located in Europe, provide us with an enhanced platform and immediate scale for our international growth initiatives, and also accelerate our efforts to become a moreleading global player in the markets for backup power and mobile power equipment. As we look forward, we expectintend to driveleverage our increased international footprint attained from these acquisitions to serve the over $13 billion annual market for power generation equipment outside the U.S. and Canada. We also intend to improve the profit margins of our International segment by executing on several revenue and cost synergies, and driving organic growth in the keyexisting markets they serve with additional investment and focus, and we intendincluding the expanding opportunity for global gaseous-fueled products. We will continue to leverage these acquisitions while also evaluatingevaluate other opportunities to expand into otheradditional regions of the world. This is targeted to be accomplishedworld through both organic growthinitiatives and potential acquisitions, and by establishing and developing additional distribution globally and building the Generac brand internationally.acquisitions.

We believe thethe investments we have made to date, due in part to our Powering Ahead strategy, have helped to capitalize on the macro, secular growth drivers for our business and are an important part of our efforts to diversify and globalize our business. See “Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations -– Business Drivers and Trends” for additional drivers that influence demand for our products and other trends affecting the markets that we serve.

Manufacturing

We operate severalnumerous manufacturing plants, distribution facilities and inventory warehouses located principallyinthroughout the United States, Mexico, Italy and Brazil totaling over three and a half million square feet.world. We maintain inventory warehouses in the United States that accommodate material storage and rapid response requirements of our customers. See “Item 2 – Properties” for additional details regarding the locations and activities of our principal operations.

In recent years, we have added manufacturing capacity through investments in automation, improved utilization and the expansion of our manufacturing footprint through organic means as well as through acquisitions. We believe we have sufficient capacity to achieve our business goals for the near-to-intermediate term.

Research and Development

Our primary focus on generatorspower generation equipment and other engine powered equipmentproducts drives technological innovation, specialized engineering and manufacturing competencies. Research and development (R&D) is a core competency and includes a staff of over 250300 engineers working on numerous active projects. Our sponsored research and development expense was $31.5$37.2 million, $29.3$32.9 million and $23.5$31.5 million for the years ended December 31, 2014, 20132016, 2015 and 2012,2014, respectively. Research and development is conducted at eachseveral of our manufacturing facilities worldwide and is focused on developing new technologies and product enhancements as well as maintaining product competitiveness by improving manufacturing costs, safety characteristics, reliability and performance while ensuring compliance with regulatory standards. We have over 30 years of experience using natural gas engines and have developed specific expertise with fuel systems and emissions technology. In the residential and light commercial markets, we have developed proprietary engines, cooling packages, controls, fuel systems and emissions systems. We believe that our expertise in engine powered equipment gives us the capability to develop new products that will allow continued diversification in our end markets.

Intellectual Property

We are committed to research and development, and we rely on a combination of patents and trademarks to establish and protect our proprietary rights. Our commitment to researchand development has resulted in a portfolio of over 170 U.S. and international patents and patent applications. Our patents expire between 2015 and 2032 and protect certain features and technologies we have developed for use in our products including fuel systems, air flow, electronics and controls, noise reduction and air-cooled engines. Newly issued U.S. patents generally have a life of 20 years from the date the patent application is initially filed. U.S. and international trademark registrations generally have a perpetual duration if they are properly maintained and renewed. We believe the existence of these patents and trademarks, along with our ongoing processes to register additional patents and trademarks, protect our intellectual property rights and enhance our competitive position. We also use proprietary manufacturing processes that require customized equipment.

Suppliers of Raw Materials

Our primary raw material inputs are steel, copper and aluminum, all of which are purchased from third parties and, in many cases, as part of machined or manufactured components. We have developed an extensive network of reliable suppliers in the United States and abroad.internationally. Our strategic global sourcing function continuously evaluates the quality and cost structure of our products and assesses the capabilities of our supply chain. Components are sourced accordingly based on this evaluation. Our supplier quality engineers conduct on-site audits of major supply chain partners and help to maintain the reliability of critical sourced components.In 2014, we sourced approximately 55% of our materials and components from outside the United States.components.

Competition

The market for power generation equipment and other engine powered products is competitive. We face competition from a variety of large diversified industrial companies as well as smaller generator manufacturers, andalong with mobile equipment and engine powered tools providers, both domestic and internationally. However, specifically in the generator market, most of the traditional participants compete on a more specialized basis, focused on specific applications within their larger diversified product mix. We are the only significant market participant with a primary focus on power generation with a core emphasis on standby, portable and mobile generators with broad capabilities across the residential, light commercial,light-commercial and industrial oil & gas, and construction generator markets. We believe that our engineering capabilities and core focus on generators provide us with manufacturing flexibility and enableenables us to maintain a first-mover advantage over our competition for product innovation. We also believe our broad product offering, diverse distribution model and strong factory support provide additional advantages as well.

A summary of the primary competitors across our main product classes are as follows:

Residential standby generatorsproducts -– Kohler, Briggs & Stratton, Cummins, Honda, Champion, Techtronics International, Husqvarna and Cummins, eachAriens, along with a number of smaller domestic and foreign competitors; certain of which also have broad operations in other manufacturing businesses.

C&I pPortable generatorsroducts - Honda, Briggs & Stratton, Champion and Techtronics International (TTI), along with a number of smaller domestic and foreign competitors.

Power washers - Briggs & Stratton, TTI, FNA Group, Mi-T-M and Karcher.

Standby commercial and industrial generators -– Caterpillar, Cummins, Kohler, MTU, Stemac, Selmec, IGSA, Wacker, MultiQuip, Terex, Doosan, Briggs & Stratton (Allmand), Atlas Copco and FG Wilson,Himonisa; certain of which focus on the market for diesel generators as they are also diesel engine manufacturers. Also, includeswe compete against other regional packagers that serve local markets throughout the world.

Mobile generators - Doosan, Wacker and MultiQuip

Light towers - Terex, Briggs & Stratton (Allmand), Wacker and Atlas Copco

Mobileheaters - Wacker, Briggs & Stratton (Allmand), Flagro and Frost Fighter

In a continuously evolving sector,market, we believe our scale and broad capabilities make us well positioned to remain competitive. We compete primarily on the basis of brand reputation, quality, reliability, pricing, innovative features, breadth of product offering, product availability and factory support.

Employees

As of December 31 2014,, 2016, we had 3,5874,202 employees (3,198(3,608 full time and 389594 part-time and temporary employees). Of those, 2,2212,266 employees were directly involved in manufacturing at our manufacturing facilities.

Domestically, wewe have had an “open shop” bargaining agreement for the past 4950 years. The current agreement, which expires October 17, 2016,2021, covers our Waukesha and Eagle, Wisconsin facilities. Additionally, our plants in Mexico, Italy and Brazil are operated under various local or national union groups. Our other facilities are not unionized.

Regulation, includingincluding Environmental MattersMatters

As a manufacturing company, our operations are subject to a variety of foreign, federal, state, local and localforeign laws and regulations covering environmental, health and safety matters. Applicable laws and regulations include those governing, among other things, emissions to air, discharges to water, noise and employee safety, as well as the generation, handling, storage, transportation, treatment, and disposal of waste and other materials. In addition, our products are subject to various laws and regulations relating to, among other things, emissions and fuel requirements, as well as labeling and marketing.

Our products sold in the United States are regulated by the U.S. EnvironmentalEnvironmental Protection Agency (EPA), California Air Resources Board (CARB) and various other state and local air quality management districts. These governing bodies continue to pass regulations that require us to meet more stringent emission standards, and all of our engines and engine-driven products are regulated within the United States and its territories. Other countries have variousvarying degrees of regulation depending upon product application and fuel types. New regulations could require us to redesign our products and could affect market growth for our products.

Segment Information

We refer you to Note 7, “Segment Reporting,” to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for information about our business segment and geographic areas.

Available Information

The Company’sCompany’s principal executive offices are located at S45 W29290 Highway 59, Waukesha, Wisconsin, 53189 and the Company’s telephone number is (262) 544-4811. The Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports are available free of charge through the “Investors” portion of the Company’s web site, www.generac.com, as soon as reasonably practical after they are filed with the Securities and Exchange Commission (SEC). The SEC maintains a web site, www.sec.gov, which contains reports, proxy and information statements, and other information filed electronically with the SEC by the Company. The information provided on these websites is not part of this report and is therefore not incorporated herein by reference.

Executive Officers

The following table sets forth information regarding our executive officers:

Aaron P. Jagdfeld has served as our Chief Executive Officer since September 2008, and as a director since November 2006.2006 and was named Chairman in February 2016. Prior to becoming Chief Executive Officer, Mr. Jagdfeld worked for Generac for 15 years. He began his career in the finance department in 1994 and became our Chief Financial Officer in 2002. In 2007, he was appointed President and was responsible for sales, marketing, engineering and product development. Prior to joining Generac, Mr. Jagdfeld worked in the audit practice of the Milwaukee, Wisconsin office of Deloitte and Touche. Mr. Jagdfeld holds a Bachelor of Business Administration in Accounting from the University of Wisconsin-Whitewater.

York A. Ragen has served as our Chief Financial Officer since September 2008. Prior to becoming Chief Financial Officer, Mr. Ragen held Director of Finance and Vice President of Finance positions at Generac. Prior to joining Generac in 2005, Mr. Ragen was Vice President, Corporate Controller at APW Ltd., a spin-off from Applied Power Inc., now known as Actuant Corporation. Mr. Ragen began his career in the Audit division of Arthur Andersen's Milwaukee, Wisconsin office. Mr. Ragen holds a Bachelor of Business Administration in Accounting from the University of Wisconsin-Whitewater.

Russell S. Minick Terrence J. Dolanbegan serving as our Executive Vice President, Mobile ProductsChief Marketing Officer in September 2014. Prior to this appointment he served as SVP Sales from January 2010 to October 2011, EVP Industrial Products from October 2011 to December 2013 and Executive Vice President, Global Commercial & Industrial Products from January to May 2014. Prior to joining Generac, Mr. Dolan was Senior Vice President of Business Development and Marketing at Boart Longyear from 2007 to 2008, Vice President of Sales and Marketing at Ingersoll Rand from 2002 to 2007, and Director of Strategic Accounts at Case Corporation from 1991 to 2001. Mr. Dolan holds a B.A. in Management and Communications from Concordia University.

Russell S. Minickbegan serving as our Executive Vice President, North America in September 2014.August 2016. Prior to this appointment he served as Executive Vice President, Residential Products insince October 2011, with this responsibility being expanded in January 2014 to Executive Vice President, Global Residential Products.Products and to Executive Vice President, North America in September 2014. Prior to joining Generac, Mr. Minick was President & CEO of Home Care Products for Electrolux from 2006 to 2011, President of The Gunlocke Company at HNI Corporation from 2003 to 2006, Senior Vice President of Sales, Marketing and Product Development at True Temper Sports from 2002 to 2003, and General Manager of Extended Warranty Operations for Ford Motor Company from 1998 to 2002. Mr. Minick is a graduate of the University of Northern Iowa, and holds a degree in marketing.

Erik Wilde began serving as our Executive Vice President, North America Industrial in July 2016. Mr. Wilde was Vice President and General Manager of the Mining Division for Komatsu America Corp. from 2013 until he joined Generac. Prior to that role, he held leadership positions as Vice President of the ICT Business Division and Product Marketing back to 2005. Mr. Wilde holds a Bachelor of Business Administration in Management from Boise State University and an M.B.A. from Keller Graduate School of Management.

Roger Pascavis has served as our Executive Vice President, Strategic Global Sourcing since March 2013. Prior to becoming Executive Vice President of Strategic Global Supply, he served as the Senior Vice President of Operations since January 2008. Mr. Pascavis joined Generac in 1995 and has served as Director of Materials and Vice President of Operations. Prior to joining Generac, Mr. Pascavis was a Plant Manager for MTI in Waukesha, Wisconsin. Mr. Pascavis holds a B.S. in Industrial Technology from the University of Wisconsin-Stout and an M.B.A. from Lake Forest Graduate School of Management.

Patrick Forsythe Allen D. Gillette ishas served as our Executive Vice President of Global Engineering. Mr. Gillette joinedEngineering since re-joining Generac in 1998July 2015. Mr. Forsythe was Vice President, Global Engineering & Technology of Hayward Industries from 2008 to 2015, Vice President, Global Engineering at Ingersoll Rand Company (and the acquired Doosan Infracore International) from 2004 to 2008, and has served in numerous engineering positions involving increasing levels of responsibilities and corresponding titles. Prior to joining Generac, Mr. Gillette was ManagerDirector of Engineering at Transamerica Delaval Enterprise Division, Chief Engineer—High-Speed Engines at Ajax-Superior Division and Manager of Design & Development, Cooper-Bessemer Reciprocating Products Division.Ingersoll Rand Company from 2002 to 2004. Prior to 2002, Mr. GilletteForsythe worked in various engineering management capacities with Generac from 1995 to 2002. Mr. Forsythe holds an M.S.a Higher National Diploma (HND) in Mechanical Engineering from Purduethe University andof Ulster (United Kingdom), a B.S. in Mechanical Engineering, and an M.S. in Manufacturing Management & Technology from Gonzaga University.The Open University (United Kingdom).

Clement Feng has served as our Senior Vice President of Marketing since August 2013 when he re-joined Generac after three years as Vice President - Global Marketing with the Fluke Corporation. Mr. Feng served as our Senior Vice President of Marketing from 2007 until 2010. Mr. Feng holds a B.S. in Chemical Engineering from Stanford University and an M.B.A. from the University of Chicago- Booth School of Business.

Item 1A. Risk Factors

You should carefully consider the following risks. These risks could materially affect our business, results of operationsoperations or financial condition, cause the trading price of our common stock to decline materially or cause our actual results to differ materially from those expected or those expressed in any forward-looking statements made by us or on our behalf.us. These risks are not exclusive, and additional risks to which we are subject include, but are not limited to, the factors mentioned under “Forward-Looking Statements” and the risks of our businesses described elsewhere in this Annual Report.

Risk factors relatedrelated to our business and industry

Demand for the majority of our products is significantlysignificantly affected by unpredictable power-outage activity that can lead to substantial variations in, and uncertainties regarding, our financial results from period to period.

Sales of our products are subject to consumer buying patterns, and demand forthe majority of our products is affected by power outage events caused by thunderstorms, hurricanes, ice storms, blackouts and other power grid reliability issues. The impact of these outage events on our sales can vary depending on the location, frequency and severity of the outages. Sustained periods without major power disruptions can lead to reduced consumer awareness of the benefits of standby and portable generator products and can result in reduced sales growth rates and excess inventory. In addition, thereThere are smaller, more localized power outages that occur frequently that drive a baseline level of demand for back-up power solutions. The lack of major power-outage events and fluctuations to the baseline levels of power-outage activity are part of managing our business, and these fluctuations could have an adverse effect on our net sales and profits. Despite their unpredictable nature, we believe power disruptions create awareness and accelerate adoption for our home standby products.

Demand for our products is significantly affected by durable goods spending by consumers and businesses, and other macroeconomic conditions.

Our business is affected by general economic conditions, and uncertainty or adverse changes such as the prolonged downturn in U.S. residential investment and the impact of more stringent credit standards could lead to a decline in demand for our products and pressure to reduce our prices. Our sales of light-commercial and industrial generators are affected by conditions in the non-residential construction sector and by the capital investment trends for small and large businesses and municipalities. If these businesses and municipalities cannot access credit markets or do not utilize discretionary funds to purchase our products as a result of the economy or other factors, our business could suffer and our ability to realize benefits from our strategy of increasing sales in the light-commercial and industrial sectors through, among other things, our focus on innovation and product development, including natural gas engine and modular technology, could be adversely affected. In addition, consumer confidence and home remodeling expenditures have a significant impact on sales of our residential products, and prolonged periods of weakness in consumer durable goods spending could have a material impact on our business. Typically, we do not have contracts with our customers which call for committed volume, and we cannot guarantee that our current customers will continue to purchase our products.products at the same level, if at all. If general economic conditions or consumer confidence were to worsen, or if the non-residential construction sector or rate of capital investments were to decline, our net sales and profits would likely be adversely affected. Additionally, timing of capital spending by our national account customers can vary from quarter-to-quarter based on capital availability and internal capital spending budgets.

Decreases in the availability and quality, or increases in the cost, of raw materials and key components we use could materially reduce our earnings.

The principal raw materials that we use to produce our products are steel, copper and aluminum. We also source a significant number of component parts from third parties that we utilize to manufacture our products. The prices of those raw materials and components are susceptible to significant fluctuations due to trends in supply and demand, transportation costs, government regulations and tariffs, price controls, economic conditions and other unforeseen circumstances beyond our control. We do not have long-term supply contracts in place to ensure the raw materials and components we use are available in necessary amounts or at fixed prices. If we are unable to mitigate raw material or component price increases through product design improvements, price increases to our customers, manufacturing productivity improvements, or hedging transactions, our profitability could be adversely affected. Also, our ability to continue to obtain quality materials and components is subject to the continued reliability and viability of our suppliers, including in some cases, suppliers who are the sole source of certain important components. If we are unable to obtain adequate, cost efficient or timely deliveries of required raw materials and components, we may be unable to manufacture sufficient quantities of products on a timely basis. This could cause us to lose sales, incur additional costs, delay new product introductions or suffer harm to our reputation.

The industry in which we compete is highly competitive, and our failure to compete successfullycould adversely affect our results of operations and financial condition.

We operate in markets that are highly competitive. Some of our competitors have established brands and are larger in size or are divisions of large diversified companies andwhich have substantially greater financial resources.resources than we do. Some of our competitors may be willing to reduce prices and accept lower margins in order to compete with us. In addition, we could face new competition from large international or domestic companies with established industrial brands that enter our end markets. Demand for our products may also be affected by our ability to respond to changes in design and functionality, to respond to downward pricing pressure, and to provide shorter lead times for our products than our competitors. If we are unable to respond successfully to these competitive pressures, we could lose market share, which could have an adverse impact on our results. For further information, see “Item 1—Business—Competition.”

Competition”.

Our industry is subject to technological change, and our failure to continue developing new and improved products and to bring these products rapidly to market could have an adverse impact on our business.

New products, or refinements and improvements of existing products, may have technical failures, their introduction may be delayed they may haveintroductions, higher than expected production costs than originally expected or they may not be well accepted by our customers. If we are not able to anticipate, identify, develop and market high quality products in line with technological advancements that respond to changes in customer preferences, demand for our products could decline and our operating results could be adversely affected.

We rely on independent dealers and distribution partners, and the loss of these dealers and distribution partners, or of any of our sales arrangements with significant private label, telecommunications, retail or equipment rental customers, would adversely affect our business.

In addition to our direct sales force and manufacturer sales representatives, we depend on the services of independent distributors and dealers to sell our products and provide service and aftermarket support to our end customers. We also rely upon our distribution channels to drive awareness for our product categories and our brands. In addition, we sell our products to end users through private label arrangements with leading home equipment, electrical equipment and constructionconstruction machinery companies; arrangements with top retailers and equipment rental companies; and our direct national accounts with telecommunications and industrial customers. Our distribution agreements and any contracts we have with large telecommunications, retail and other customers are typically not exclusive, and many of the distributors and customers with whom we do business offer competitors’ products and services of our competitors.services. Impairment of our relationships with our distributors, dealers or large customers, loss of a substantial number of these distributors or dealers or of one or more large customers, or an increase in our distributors' or dealers' sales of our competitors' products to our customers or of our large customers' purchases of our competitors' products could materially reduce our sales and profits. Also, our ability to successfully realize our growth strategy is dependent in part on our ability to identify, attract and retain new distributors at all layers of our distribution platform, and we cannot be certain that we will be successful in these efforts. For further information, see “Item 1—Business—Distribution Channels and Customers”.

Our business could be negatively impacted if we fail to adequately protect our intellectual property rights or if third parties claim that we are in violation of their intellectual property rights.

We viewconsider our intellectual property rights as veryto be important assets. Weassets, and seek to protect our intellectual property rightsthem through a combination of patent, trademark, copyright and trade secret laws, as well as licensing and confidentiality agreements. These protections may not be adequate to prevent third parties from using our intellectual property without our authorization, breaching any confidentiality agreements with us, copying or reverse engineering our products, or developing and marketing products that are substantially equivalent to or superior to our own. The unauthorized use of our intellectual property by others could reduce our competitive advantage and harm our business. Not only are intellectual property-related proceedings burdensome and costly, but they could span years to resolve and we maymight not ultimately prevail. We cannot guarantee that any patents, issued or pending, will provide us with any competitive advantage or will not be challenged by third parties. Moreover, the expiration of our patents may lead to increased competition with respect to certain products.

In addition, we cannot be certain that we do not or will not infringe third parties' intellectual property rights. Any such claim, even if it is without merit, may be expensive and time-consuming to defend, subject us to damages, cause us to cease making, using or selling certain products that incorporate the disputed intellectual property, require us to redesign our products, divert management time and attention, and/or require us to enter into costly royalty or licensing arrangements. Furthermore, in connection with our sale of Generac Portable Products to a private equity firm in 1998, we granted the private equity firm an exclusive perpetual license for the use of the “Generac Portable Products” trademark in connection with the manufacture and sale of certain engine driven consumer products. This perpetual license was eventually transferred to another company when the private equity firm sold that business. Currently, this trademark is not being used in commerce and, as such, there is a rebuttable presumption that the trademark has been abandoned. However, in the event that this trademark is used in the future, we could suffer competitive confusion and our business could be negatively impacted.

Our operations are subject to various environmental, health and safety laws and regulations, and non-compliance with or liabilities under such laws and regulations could result in substantial costs, fines, sanctions and claims.

Our operations are subject to a variety of foreign, federal, state and local environmental, health and safety laws and regulations including those governing, among other things, emissions to air; discharges to water; noise; and the generation, handling, storage, transportation, treatment and disposal of waste and other materials. In addition, under federal and state environmental laws, we could be required to investigate, remediate and/or monitor the effects of the release or disposal of materials both at sites associated with past and present operations and at third-party sites where wastes generated by our operations were disposed. This liability may be imposed retroactively and whether or not we caused, or had any knowledge of, the existence of these materials and may result in our paying more than our fair share of the related costs. We could also be subject to a recall action by regulatory authorities. Violations of or liabilities under such laws and regulations could result in substantial costs, fines and civil or criminal proceedings or personal injury and workers' compensation claims.

Our products are subject to substantial government regulation.

Our products are subject to extensive statutory and regulatory requirements governing, among other things, emissions and noise, including standards imposed by the EPA, CARB and other regulatory agencies around the world. These laws are constantly evolving and many are becoming increasingly stringent. Changes in applicable laws or regulations, or in the enforcement thereof, could require us to redesign our products and could adversely affect our business or financial condition in the future. Developing and marketing products to meet such new requirements could result in substantial additional costs that may be difficult to recover in some markets. In some cases, we may be required to modify our products or develop new products to comply with new regulations, particularly those relating to air emissions. For example,we were required to modify our spark-ignited air-cooled gaseous engines to comply with the 2011 EPA and CARB regulations, as well as the continued implementation of Tier 4 nonroad diesel engine changes associated with acquisitions serving the mobile product markets. Typically, additional costs associated with significant compliance modifications are passed on to the market. While we have been able to meet previous deadlines and requirements, failure to comply with other existing and future regulatory standards could adversely affect our position in the markets we serve.

WWe may incur costs and liabilities as a result of product liability claims.

We face a risk of exposure to product liability claims in the event that the use of our products is alleged to have resulted in injury or other damage. Although we currently maintain product liability insurance coverage, we may not be able to obtain such insurance on acceptable terms in the future, if at all, or obtain insurance that will provide adequate coverage against potential claims. Product liability claims can be expensive to defend and can divert the attention of management and other personnel for long periods of time, regardless of the ultimate outcome. A significant unsuccessful product liability defense could have a material adverse effect on our financial condition and results of operations. In addition, we believe our business depends on the strong brand reputation we have developed. If our reputation is damaged, we may face difficulty in maintaining our market share and pricing with respect to some of our products, which could reduce our sales and profitability.

The loss of any key members of our senior management team or key employees could disrupt our operations and harm our business.

Our success depends, in part, on the efforts of certain key individuals, including the members of our senior management team, who have significant experience in the power products industry. If, for any reason, our senior executives do not continue to be active in management, or if our key employees leave our company, our business, financial condition or results of operations could be adversely affected. Failure to continue to attract these individuals at reasonable compensation levels could have a material adverse effect on our business, liquidity and results of operations. Although we do not anticipate that we will have to replace any of these individuals in the near future, the loss of the services of any of our key employees could disrupt our operations and have a material adverse effect on our business.

Disruptions caused by labor disputes or organized labor activities could harm our business.

We may from time to time experience union organizing activities in our non-union facilities. Disputes with the current labor union or new union organizing activities could lead to work slowdowns or stoppages and make it difficult or impossible for us to meet scheduled delivery times for product shipments to our customers, which could result in loss of business. In addition, union activity could result in higher labor costs, which could harm our financial condition, results of operations and competitive position. A work stoppage or limitations on production at our facilities for any reason could have an adverse effect on our business, results of operations and financial condition. In addition, many of our suppliers have unionized work forces. Strikes or work stoppages experienced by our customers or suppliers could have an adverse effect on our business, results of operations and financial condition.

We may experience material disruptions to our manufacturing operations.

While we seek to operate our facilities in compliance with applicable rules and regulations and take measures to minimize the risks of disruption at our facilities, a material disruption at one of our manufacturing facilities could prevent us from meeting customer demand, reduce our sales and/or negatively impact our financial results. Any of our manufacturing facilities, or any of our equipment within an otherwise operational facility, could cease operations unexpectedly due to a number of events, including:

In addition, the majoritya significant portion of our manufacturing and production facilities are located in Wisconsin within a 100-mile radius of each other. We could experience prolonged periods of reduced production due to unforeseen events occurring in or around our manufacturing facilities in Wisconsin. In the event of a business interruption at our facilities, in particular our Wisconsin facilities, we may be unable to shift manufacturing capabilities to alternate locations, accept materials from suppliers or meet customer shipment needs, among other severe consequences. Such an event could have a material and adverse impact on our financial condition and results of our operations.

A significant portion of our purchased components are sourced in foreign countries, exposing us to additional risks that may not exist in the United States.

We source a significant portion of our purchased components overseas, primarily in Asia and Europe. Our international sourcing subjects us to a number of potential risks in addition to the risks associated with third-party sourcing generally. Such risks include:

These factors may have an adverse effect on our ability to efficiently and cost effectively source our purchased components overseas. In particular, if the U.S. dollar were to depreciate significantly against the currencies in which we purchase raw materials from foreign suppliers, our cost of goods sold could increase materially, which would adversely affect our results of operations.

We are vulnerable to supply disruptions from single-sourced suppliers.

We single-source certain types of parts in our product designs. Any delay in our suppliers’ deliveries may impair our ability to deliver products to our customers. A wide variety of factors could cause such delays including, but not limited to, lack of capacity, economic downturns, availability of credit, weather events or natural disasters.

As a U.S. corporation that conducts business in a variety of foreign countries including, but not limited to, Mexico, Italy and Brazil, we are subject to the Foreign Corrupt Practices Act and a variety of anti-corruption laws worldwide. A determination that we violated any of these laws may affect our business and operations adversely.

As a U.S. corporation that conducts business in a variety of foreign countries including, but not limited to, Mexico, Italy and Brazil, we are subject to the regulations imposed by a variety of anti-corruption laws worldwide. The U.S. Foreign Corrupt Practices Act (FCPA) generally prohibits U.S. companies and their intermediaries from making improper payments to foreign officials for the purpose of obtaining or keeping business. The United Kingdom Bribery Act (UKBA) prohibits domestic and foreign bribery of the private sector as well as public officials. Any determination that we have violated any anti-corruption laws could have a material adverse effect on our financial position, operating results and cash flows.

Our total assets include goodwill and other indefinite-lived intangibles. If we determine these have become impaired, in the future, net income could be materially adversely affected.

Goodwill represents the excess of cost over the fair market value of net assets acquired in business combinations. Indefinite-lived intangibles are comprised of certain trade names.tradenames. At December 31, 2014,2016, goodwill and other indefinite-lived intangibles totaled $818.2 million, most of which arose from the CCMP Transaction.$833.0 million. We review goodwill and other intangibles at least annually for impairment and any excess in carrying value over the estimated fair value is charged to the statement of operations. A reduction in net income resulting from the write-down or impairment of goodwill or indefinite-lived intangibles could have a material adverse effect on our financial statements.

Goodwill and identifiable intangible assets are recorded at fair value on the date of acquisition. In accordance with the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 350-20,Intangibles - Goodwill and Other, goodwill and indefinite lived intangibles are reviewed at least annually for impairment and definite-lived intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable. Future impairment may result from, among other things, deterioration in the performance of an acquired business or product line, adverse market conditions and changes in the competitive landscape, adverse changes in applicable laws or regulations, including changes that restrict the activities of an acquired business or product line, and a variety of other circumstances. The amountA reduction in net income resulting from the write-down or impairment of any impairment is recorded asgoodwill or indefinite-lived intangibles could have a charge to the statement of operations. We may never realize the full value of our intangible assets. Any future determination requiring the write-off of a significant portion of intangible assets would have anmaterial adverse effect on our financial condition and results of operations. See “Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operations” for further information on the Company’s impairment tests and at-risk goodwill for the Ottomotores reporting unit, and see Note 2, “Significant Accounting Policies,” to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for further details.statements.

We are unable to determine the specific impact of changes in selling prices or changes in volumes of our products on our net sales.

Because of the wide range of products that we sell, the level of customization for many of our products, the frequent rollout of new products and the fact that we do not apply pricing changes uniformly across our entire portfolio of products, we are unable to determine with specificity the effect of volume changes or changes in selling prices on our net sales.

We may not realize all of the anticipated benefits of our acquisitions or those benefits may take longer to realize than expected. We may also encounter significant unexpected difficulties in integrating acquired businesses.

Our ability to realize the anticipated benefits of our acquisitions will depend, to a large extent, on our ability to integrate the acquired businesses with our business. The combination of independent businesses is a complex, costly and time-consuming process. Further, integrating and managing businesses with international operations may pose challenges not previously experienced by our management. As a result, we willmay be required to devote significant management attention and resources to integrating the business practices and operations of any acquired businesses with ours. The integration process may disrupt our business and, if implemented ineffectively, wouldcould preclude realization of the full benefits expected by us. Our failure to meet the challenges involved in integrating an acquired business into our existing operations or otherwise to realize the anticipated benefits of the transaction could cause an interruption of, or a loss of momentum in, our activities and could adversely affect our results of operations.

In addition, the overall integration of our acquired businesses may result in material unanticipated problems, expenses, liabilities, competitive responses, loss of customer relationships, and diversion of management's attention, and may cause our stock price to decline.

The difficulties of combining the operations of acquired businesses with ours include, among others:

Many of these factors will be outside of our control and any one of them could result in increased costs, decreases in the amount of expected revenues and diversion of management's time and energy, which could materially impact our business, financial condition and results of operations. In addition, even if the operations of our acquired businesses are integrated successfully with our operations, we may not realize the full benefits of the transaction, including the synergies, cost savings or sales or growth opportunities that we expect. These benefits may not be achieved within the anticipated time frame, or at all. Or, additional unanticipated costs may be incurred in the integration of our businesses. All of these factors could cause dilution to our earnings per share, decrease or delay the expected accretive effect of the acquisition, and cause a decrease in the price of our common stock. As a result, we cannot assure you that the combination of our acquisitions with our business will result in the realization of the full benefits anticipated from the transaction.

Security breachesWe may encounter difficulties in implementing or operating a new enterprise resource planning (ERP) system across our subsidiaries, which may adversely affect our operations and other disruptions could compromise our information and expose us to liability, which would cause our business and reputation to suffer.financial reporting.

In the ordinary course2016, we implemented a new ERP system for a majority of our business as part of our ongoing efforts to improve and strengthen our operational and financial processes and our reporting systems, and we will be implementing the new ERP system at our other locations in future years. The ERP system may not provide the benefits anticipated, could add costs and complications to ongoing operations, and may impact our ability to process transactions efficiently, all of which may have a material adverse effect on the Company’s business and results of operations.

Failures or security breaches of our networks or information technology systems could have an adverse effect on our business.

We rely heavily on information technology (IT) both in our products and services for customers and in our IT systems. Further, we collect and store sensitive information in our data centers and on our networks. The secure processing, maintenanceGovernment agencies and transmissionsecurity experts have warned about growing risks of thishackers, cyber-criminals, malicious insiders and other actors targeting confidential information is critical toand all types of IT systems. These actors may engage in fraudulent activities, theft of confidential or proprietary information and sabotage.

Our IT systems and our operations. Despite our security measures, ourconfidential information technology and infrastructure may be vulnerable to damage or intrusion from a variety of attacks by hackers or breached due to employee error, malfeasanceincluding computer viruses, worms or other disruptions. Any such breach could compromisemalicious software programs. These attacks pose a risk to the security of the products, systems and networks of our networks,customers, suppliers and third-party service providers, as well to the confidentiality of our information and the integrity and availability of our data. While we attempt to mitigate these risks through controls, due diligence, training, surveillance and other measures, we remain vulnerable to information stored there could be accessed, publicly disclosed, lostsecurity threats.

Despite the precautions we take, an intrusion or stolen. Any such access, disclosure or other lossinfection of informationour systems could result in legal claimsthe disruption of our business, loss of proprietary or proceedings, regulatory penalties, disruptconfidential information, or injuries to people or property. Similarly, an attack on our operations and damageIT systems could result in theft or disclosure of trade secrets or other intellectual property or a breach of confidential customer or employee information. Any such events could have an adverse impact on sales, harm our reputation which could adversely affectand cause us to incur legal liability and increased costs to address such events and related security concerns. As the threats evolve and become more potent, we may incur additional costs to secure the products that we sell, as well as our business.data and infrastructure of networks and devices.

Risks related to our common stock

If securities or industry analysts do not publish research or reports about our business, if they adversely change their recommendations regarding our common stock or if our results of operations do not meet their expectations, our common stock price and trading volume could decline.

The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline. Moreover, if one or more of the analysts who cover us downgrade recommendations regarding our stock, or if our results of operations do not meet their expectations, our stock price could decline and such decline could be material.

Anti-takeover provisions in our amended and restated certificate of incorporation and by-laws could prohibit a change of control that our stockholders may favor and could negatively affect our stock price.

Provisions in our amended and restated certificate of incorporation and by-laws may make it more difficult and expensive for a third party to acquire control of us even if a change of control would be beneficial to the interests of our stockholders. These provisions could discourage potential takeover attempts and could adversely affect the market price of our common stock. These provisions may also prevent or frustrate attempts by our stockholders to replace or remove our management. For example, our amended and restated certificate of incorporation and by-laws:

These provisions make it more difficult for stockholders or potential acquirers to acquire us without negotiation and could discourage potential takeover attempts and could adversely affect the market price of our common stock.

Wecurrentlydo nothave have plans to paydividends on our common stock in the foreseeable future.

While we declared a special dividend in both June 2012 and June 2013, weWe currently do not have plans to pay dividends in the foreseeable future on our common stock. We intend to retain alluse future earnings for the operation and expansion of our business, and theas well as for repayment of outstanding debt.debt and for share repurchases. In addition, the terms of our senior secured credit facilities limit our ability to pay dividends on our common stock. As a result, capital appreciation, if any, of our common stock will be the sole source of gain for the foreseeable future. While we may change this policy at some point in the future, we cannot assure that we will make such a change.

Risks related to our capital structure

We have a significant amount of indebtedness which could adversely affect our cash flow and our ability to remain in compliance with debt covenants and make payments on our indebtedness.

We have a significantsignificant amount of indebtedness. As of December 31, 2014,2016, we had total indebtedness of $1,082.7$1,052.9 million. Our significant level of indebtedness increases the possibility that we may be unable to generate cash sufficient to pay, when due, the principal of, interest on or other amounts due in respect of our indebtedness. Our significant indebtedness, combined with our other financial obligations and contractual commitments could have other important consequences. For example, it could:

Any of the above-listed factors could materially adversely affect our business, financial condition, results of operations and cash flows. While we maintain interest rate swaps covering a portion of our outstanding debt, our interest expense could increase if interest rates increase because debt under our credit facilities bears interest at a variable rate once above a certain LIBOR floor. If we do not have sufficient earnings to service our debt, we may be required to refinance all or part of our existing debt, sell assets, borrow more money or sell securities, none of which we can guarantee we will be able to do.

The terms of our credit facilities restrict our current and future operations, particularly our ability to respond to changes in our business or to take certain actions.

Our credit facilities contain, and any future indebtedness of ours or our subsidiaries would likely contain, a number of restrictive covenants that impose significant operating and financial restrictions on us and our subsidiaries, including restrictions on our ability to engage in acts that may be in our best long-term interests. These restrictions include, among other things, our ability to:

The operating and financial restrictions in our credit facilities and any future financing agreements may adversely affect our ability to finance future operations or capital needs or to engage in other business activities. A breach of any of the restrictive covenants in our credit facilities would result in a default. If any such default occurs, the lenders under our credit facilities may elect to declare all outstanding borrowings, together with accrued interest and other fees, to be immediately due and payable, or enforce their security interest, any of which would result in an event of default. The lenders will also have the right in these circumstances to terminate any commitments they have to provide further borrowings.Ourborrowings. Our existing credit facilities do not contain any financial maintenance covenants.

We may need additional capital to finance our growth strategy or to refinance our existing credit facilities, and we may not be able to obtain it on acceptable terms, or at all, which may limit our ability to grow.

We may require additional financing to expand our business. Financing may not be available to us or may be available to us only on terms that are not favorable. The terms of our senior secured credit facilities limit our ability to incur additional debt. In addition, economic conditions, including a downturn in the credit markets, could impact our ability to finance our growth on acceptable terms or at all. If we are unable to raise additional funds or obtain capital on acceptable terms, we may have to delay, modify or abandon some or all of our growth strategies. On May 31, 2013, we amended and restated our term loan credit agreement, pursuant to which we incurred $1,200 million of a senior secured term loan, which matures in 2020, to replace our prior $900 million term loan facility. In the future, if we are unable to refinance suchour credit facilities on acceptable terms, our liquidity could be adversely affected.

ItemItem 1B. Unresolved Staff Comments

None.

Item 2. Properties

We own, operate or lease manufacturing, distribution and distributionoffice facilities located principally in the United States, Mexico, Italy and Brazilglobally totaling over 3.5four million square feet. We also operate a dealer training center at our Eagle, Wisconsin facility, which allows us to train new industrial and residential dealers on the service and installation of our products and provide existing dealers with training on product innovations. We also have inventory warehouses in the United States that accommodate material storage and rapid response requirements of our customers.

The following table shows the location and activities ofprovides information about our principal operations:facilities exceeding 10,000 square feet:

As of December 31, 2014,2016, substantially all of our owneddomestically-owned and a portion of our internationally-owned properties are subject to collateral provisions under our senior secured credit facilities.

ItemItem 3. Legal Proceedings

From time to time, we are involved in legal proceedings primarily involving product liability, patent and employment matters and general commercial disputes arising in the ordinary course of our business. As of December 31, 2014,2016, we believe that there is no litigation pending that would have a material effect on our results of operations or financial condition.

Item 4. Mine Safety Disclosures

Not Applicable.

PPARTART II

ItemItem 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Price Range of Common Stock

SharesShares of our common stock are traded on the New York Stock Exchange (NYSE) under the symbol “GNRC.” The following table sets forth the high and low sales prices reported on the NYSE for our common stock by fiscal quarter during 20142016 and 2013,2015, respectively.

2015		High				Low
Fourth Quarter		$	32.53			$	26.88
Third Quarter		$	39.78			$	27.16
Second Quarter		$	49.35			$	39.62
First Quarter		$	50.41			$	43.74

 

2013		High				Low
Fourth Quarter		$	57.05			$	39.01
Third Quarter		$	44.30			$	37.11
Second Quarter		$	41.48			$	32.41
First Quarter		$	41.40			$	32.72

Purchases of Equity Securities By the Issuer and Affiliated Purchasers

 

The following table summarizes the stock repurchase activity for the three months ended December 31, 2014,2016, which consisted of the withholding of shares upon the vesting of restricted stock awards to pay withholding taxes:taxes on behalf of the recipient and shares repurchased under the Company’s $250.0 million stock repurchase program authorized in October 2016:

 

				Total Number of Shares Purchased				Average Price Paid per Share			Total Number Of Shares Purchased AsPart OfPublicly AnnouncedPlans Or Programs	ApproximateDollar ValueOf Shares ThatMay YetBe Purchased Under ThePlans Or Programs
10/01/14	-	10/31/14			615			$	44.25		N/A	N/A
11/01/14	-	11/30/14			6,185			$	41.52		N/A	N/A
12/01/14	-	12/31/14			122			$	41.93		N/A	N/A
Total					6,922			$	41.77

		Total Number of Shares Purchased				Average Price Paid per Share				Total Number Of Shares Purchased As Part Of Publicly Announced Plans Or Programs				Approximate Dollar Value Of Shares That May Yet Be Purchased Under The Plans Or Programs
10/01/16 - 10/31/16			38,699			$	38.58				38,500			$	248,639,009
11/01/16 - 11/30/16			716,809				39.66				716,000				220,244,705
12/01/16 - 12/31/16			481,000				41.84				481,000				200,120,516
Total			1,236,508			$	40.47

 

For equity compensation plan information, please refer to Note 15, “Share Plans,” to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K.

 

Stock Performance Graph

 

The line graph below compares the cumulative total stockholder return on our common stock with the cumulative total return of the Standard & Poor’sPoor’s S&P 500 Index, the S&P 500 Industrials Index and the Russell 2000 Index for the approximate five-year period ended December 31, 2014.2016. The graph and table assume that $100 was invested on February 11, 2010 (first day of trading)December 31, 2011 in each of our common stock, the S&P 500 Index, the S&P 500 Industrials Index and the Russell 2000 Index, and that all dividends were reinvested. Cumulative total stockholder returns for our common stock, the S&P 500 Index, the S&P 500 Industrials Index and the Russell 2000 Index are based on our fiscal year.

 

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Company / Market / Peer Group		2/11/2010				12/31/2010				12/31/2011				12/31/2012				12/31/2013				12/31/2014
Generac Holdings Inc.		$	100.00			$	125.93			$	218.30			$	344.40			$	646.54			$	533.76
S&P 500 Index - Total Returns			100.00				118.71				121.22				140.62				186.16				211.65
S&P 500 Industrials Index			100.00				126.65				125.90				145.23				204.30				224.38
Russell 2000 Index			100.00				130.86				125.40				145.94				202.61				212.53

Company / Market / Peer Group		12/31/2011				12/31/2012				12/31/2013				12/31/2014				12/31/2015				12/31/2016
Generac Holdings Inc.		$	100.00			$	157.76			$	296.17			$	244.51			$	155.67			$	213.03
S&P 500 Index - Total Returns			100.00				116.00				153.57				174.60				177.01				198.18
S&P 500 Industrials Index			100.00				115.35				162.27				178.22				173.70				206.46
Russell 2000 Index			100.00				116.35				161.52				169.42				161.95				196.45

 

Holders

 

As of February 20, 2015,17, 2017, there were approximately 169199 registered holders of record of Generac’s common stock. A substantially greater number of holders of Generac common stock are “street name” or beneficial holders, whose shares are held of record by banks, brokers and other financial institutions.

Dividends

 

On June 21, 2013, the Company used a portion of the proceeds from the May 31, 2013 debt refinancing (see Note 11, “Credit Agreements,” to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K) to pay a special cash dividend of $5.00 per share on its common stock, resulting in payments totaling $340.8 million to stockholders.

On June 29, 2012, the Company used a portion of the proceeds from the May 30, 2012 debt refinancing (see Note 11, “Credit Agreements,” to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K) together with cash on its balance sheet to pay a special cash dividend of $6.00 per share on its common stock, resulting in payments totaling $404.3 million to stockholders.Dividends

 

We currently do not have plans to pay dividends on our common stock in the foreseeable future. However, in the future, subject to factors such as general economic and business conditions, our financial condition and results of operations, our capital requirements, our future liquidity and capitalization, and other such other factors that our board of directors may deem relevant, we may change this policy and choose to pay dividends. Our ability to pay dividends on our common stock is currently restricted by the terms of our senior secured credit facilities and may be further restricted by any future indebtedness we incur. Our business is conducted through our subsidiaries, including our principal operating subsidiary, Generac Power Systems. Dividends from, and cash generated by our subsidiaries will be our principal sources of cash to repay indebtedness, fund operations, repurchase shares of common stock and pay dividends. Accordingly, our ability to pay dividends to our stockholders is dependent on the earnings and distributions of funds from our subsidiaries, including Generac Power Systems.

 

Securities Authorized for Issuance Under Equity Compensation Plans

 

For information on securities authorized for issuance under our equity compensation plans, see “Item 12 - Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters,” which is incorporated herein by reference.

 

Recent Sales of Unregistered Securities

 

None.

 

Use of Proceeds from Registered Securities

 

Not applicable.

 

ItemItem 6. Selected Financial Data

 

The following table sets forth our selected historical consolidated financial data for the periods and at the dates indicated. The selected historical consolidated financial data for the years ended December 31, 2014, 20132016, 2015 and 20122014 are derived from our audited consolidated financial statements included elsewhere in this annual report. The selected historical consolidated financial data for the years ended December 31, 20112013 and 20102012 is derived from our audited historical consolidated financial statements not included in this annual report.

 

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The results indicated below and elsewhere in this annual report are not necessarily indicative of our futurefuture performance. This information should be read together with “Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes thereto included in Item 8 of this Annual Report on Form 10-K.

 

(Dollars in thousands, except per share data)		Year Ended December 31, 2014				Year Ended December 31, 2013				Year Ended December 31, 2012				Year Ended December 31, 2011				Year Ended December 31, 2010
																						Year Ended December 31,
(U.S. Dollars in thousands, except per share data)																						2016				2015				2014				2013				2012
Statement of Operations Data:
Net sales		$	1,460,919			$	1,485,765			$	1,176,306			$	791,976			$	592,880			$	1,444,453			$	1,317,299			$	1,460,919			$	1,485,765			$	1,176,306
Costs of goods sold			944,700				916,205				735,906				497,322				355,523				930,347				857,349				944,700				916,205				735,906
Gross profit			516,219				569,560				440,400				294,654				237,357				514,106				459,950				516,219				569,560				440,400
Operating expenses:
Selling and service			120,408				107,515				101,448				77,776				57,954				164,607				130,242				120,408				107,515				101,448
Research and development			31,494				29,271				23,499				16,476				14,700				37,229				32,922				31,494				29,271				23,499
General and administrative			54,795				55,490				46,031				30,012				22,599				74,700				52,947				54,795				55,490				46,031
Amortization of intangibles (1)			21,024				25,819				45,867				48,020				51,808				32,953				23,591				21,024				25,819				45,867
Trade name write-down (2)			-				-				-				9,389				-
Tradename and goodwill impairment (2)																							-				40,687				-				-				-
Gain on remeasurement of contingent consideration (3)			(4,877	)			-				-				-				-				-				-				(4,877	)			-				-
Total operating expenses			222,844				218,095				216,845				181,673				147,061				309,489				280,389				222,844				218,095				216,845
Income from operations			293,375				351,465				223,555				112,981				90,296				204,617				179,561				293,375				351,465				223,555
Other income (expense):
Interest expense			(47,215	)			(54,435	)			(49,114	)			(23,718	)			(27,397	)			(44,568	)			(42,843	)			(47,215	)			(54,435	)			(49,114	)
Investment income			130			��	91				79				110				235				44				123				130				91				79
Loss on extinguishment of debt (4)			(2,084	)			(15,336	)			(14,308	)			(377	)			(4,809	)			(574	)			(4,795	)			(2,084	)			(15,336	)			(14,308	)
Gain on change in contractual interest rate (4)			16,014				-				-				-				-
Costs related to acquisition			(396	)			(1,086	)			(1,062	)			(875	)			-
Gain (loss) on change in contractual interest rate (5)																							(2,957	)			(2,381	)			16,014				-				-
Costs related to acquisitions																							(1,082	)			(1,195	)			(396	)			(1,086	)			(1,062	)
Other, net			(1,462	)			(1,983	)			(2,798	)			(1,155	)			(1,105	)			902				(5,487	)			(1,462	)			(1,983	)			(2,798	)
Total other expense, net			(35,013	)			(72,749	)			(67,203	)			(26,015	)			(33,076	)			(48,235	)			(56,578	)			(35,013	)			(72,749	)			(67,203	)
Income before provision for income taxes			258,362				278,716				156,352				86,966				57,220				156,382				122,983				258,362				278,716				156,352
Provision (benefit) for income taxes (5)			83,749				104,177				63,129				(237,677	)			307
Provision for income taxes																							57,570				45,236				83,749				104,177				63,129
Net income		$	174,613			$	174,539			$	93,223			$	324,643			$	56,913				98,812				77,747				174,613				174,539				93,223
Income (loss) per share - diluted:
Common Stock (formerly Class A non-voting common stock) (6)		$	2.49			$	2.51			$	1.35			$	4.79			$	(1.65	)
Class B Common Stock (6)		n/a				n/a				n/a				n/a					505.00
Net income attributable to noncontrolling interests																							24				-				-				-				-
Net income attributable to Generac Holdings Inc.																						$	98,788			$	77,747			$	174,613			$	174,539			$	93,223
Net income attributable to common shareholders per common share - diluted:																						$	1.50			$	1.12			$	2.49			$	2.51			$	1.35
Statement of Cash Flows data:
Depreciation		$	13,706			$	10,955			$	8,293			$	8,103			$	7,632			$	21,465			$	16,742			$	13,706			$	10,955			$	8,293
Amortization of intangible assets			21,024				25,819				45,867				48,020				51,808				32,953				23,591				21,024				25,819				45,867
Expenditures for property and equipment			(34,689	)			(30,770	)			(22,392	)			(12,060	)			(9,631	)			(30,467	)			(30,651	)			(34,689	)			(30,770	)			(22,392	)
Other Financial Data:
Adjusted EBITDA (7)		$	337,283			$	402,613			$	289,809			$	188,476			$	156,249
Adjusted Net Income (8)			234,165				301,664				220,792				147,176				115,954
Adjusted EBITDA attributable to Generac Holdings Inc. (6)																						$	274,603			$	270,816			$	337,283			$	402,613			$	289,809
Adjusted net income attributable to Generac Holdings Inc. (7)																							198,257				198,436				234,165				301,664				220,792

 

(Dollars in thousands)		As of December 31, 2014				As of December 31, 2013				As of December 31, 2012				As of December 31, 2011				As of December 31, 2010
Balance Sheet Data:
Current assets		$	730,478			$	654,179			$	522,553			$	383,265			$	272,519
Property, plant and equipment, net			168,821				146,390				104,718				84,384				75,287
Goodwill			635,565				608,287				552,943				547,473				527,148
Other intangibles and other assets			347,678				389,349				423,633				537,671				334,929
Total assets		$	1,882,542			$	1,798,205			$	1,603,847			$	1,552,793			$	1,209,883
Total current liabilities		$	240,522			$	250,845			$	294,859			$	165,390			$	86,685
Long-term borrowings, less current portion			1,082,101				1,175,349				799,018				575,000				657,229
Other long-term liabilities			70,120				54,940				46,342				43,514				24,902
Stockholders' equity			489,799				317,071				463,628				768,889				441,067
Total liabilities and stockholders' equity		$	1,882,542			$	1,798,205			$	1,603,847			$	1,552,793			$	1,209,883

(U.S. Dollars in thousands)		As of December 31, 2016				As of December 31, 2015				As of December 31, 2014				As of December 31, 2013				As of December 31, 2012
Balance Sheet Data:
Current assets		$	683,509			$	632,017			$	707,637			$	627,310			$	473,866
Property, plant and equipment, net			212,793				184,213				168,821				146,390				104,718
Goodwill			704,640				669,719				635,565				608,287				552,943
Other intangibles and other assets			260,742				292,686				352,396				394,237				459,470
Total assets		$	1,861,684			$	1,778,635			$	1,864,419			$	1,776,224			$	1,590,997
Total current liabilities		$	341,939			$	213,224			$	240,522			$	250,845			$	294,859
Long-term borrowings, less current portion			1,006,758				1,037,132				1,065,858				1,155,298				785,031
Other long-term liabilities			78,737				62,408				68,240				53,010				47,479
Redeemable noncontrolling interests			33,138				-				-				-				-
Stockholders' equity			401,112				465,871				489,799				317,071				463,628
Total liabilities and stockholders' equity		$	1,861,684			$	1,778,635			$	1,864,419			$	1,776,224			$	1,590,997

 

(1)   Our amortization of intangibles expense includes the straight-line amortization of customer lists, patents, certain tradenames and other finite-lived intangiblesintangible assets.

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(2)   During the fourth quarter of 2011, we decided2015, our Board of Directors approved a plan to strategically transition and consolidate certain productsof our brands acquired through acquisitions over the past several years to their more widely known Generac brand. Based on this decision, we recordedthe Generac® tradename. This brand strategy change resulted in a $9.4reclassification to a two year remaining useful life for the impacted tradenames and a $36.1 million non-cash charge which primarilyto write-down to net realizable value. Additionally, during the fourth quarter of 2015, a $4.6 million goodwill impairment charge was recorded related to the write downwrite-down of the impacted trade nameOttomotores reporting unit goodwill. Refer to net realizable value.Note 2, “Significant Accounting Policies – Goodwill and Other Indefinite-Lived Intangible Assets,” to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K for further information on the 2015 impairment charges.

 

(3)  During the second quarter of 2014, we recorded a gain of $4.9 million related to an adjustment to a certain earn-out obligation in connection with a recentthe Tower Light acquisition.

(4)

(4)  For the years ended December 31, 2016, 2015, 2014 2013 and 2012,2013, represents the lossesnon-cash write-off of original issue discount and deferred financing costs due to voluntary debt prepayments. Additionally, for the year ended December 31, 2013, represents the loss on extinguishment of debt as a result of a refinancing transaction in May 2013. For the year ended December 31, 2012, represents the loss on extinguishment of debt as a result of the refinancing transactions in February and gain on change in contractual interest rate as described inMay 2012. Refer to Note 11,10, “Credit Agreements,” to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K. For the years ended December 31, 2011 and 2010, represents10-K for further information on the losses on extinguishment of debt relateddebt.

(5)  For the year ended December 31, 2016, represents a non-cash loss in the third quarter relating to the write-offcontinued 25 basis point increase in borrowing costs as a result of the credit agreement leverage ratio remaining above 3.0 times and expected to remain above 3.0 times based on current projections. For the year ended December 31, 2015, represents a portionnon-cash loss relating to a 25 basis point increase in borrowing costs as a result of deferred financingthe credit agreement leverage ratio rising above 3.0 times effective third quarter 2015 and expected to remain above 3.0 times based on projections at that time. For the year ended December 31, 2014, represents a non-cash gain relating to a 25 basis point reduction in borrowing costs relatedas a result of the credit agreement leverage ratio falling below 3.0 times effective second quarter 2014 and expected to accelerated repayments of debt.

(5)  The 2011 net tax benefit of $237.7 million includes a tax benefit of $271.4 million recorded due to the reversal of valuation allowances recordedremain below 3.0 times based on our net deferred tax assets.projections at that time. Refer to Note 13, “Income Taxes,10, “Credit Agreements,” to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K for additional detailsfurther information on the tax provision forgains and losses on changes in the years ended December 31, 2014, 2013 and 2012.contractual interest rate.

 

(6)  Diluted earnings per share reflects the impact of a reverse stock split which occurred immediately prior to the initial public offering (IPO). At the time of the IPO on February 17, 2010, all shares of Class B common stock were converted into shares of Class A common stock, and the Class A common stock became the one class of outstanding common stock.

(7)(6)   Adjusted EBITDA represents net income before noncontrolling interests, interest expense, taxes, depreciation and amortization, as further adjusted for the other items reflected in the reconciliation table set forth below. The computation of adjusted EBITDA is based on the definition of EBITDA contained in Generac's Newthe Term Loan Credit Agreement and NewAmended ABL Credit AgreementFacility (terms defined in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Financial Position” and Note 11,10, “Credit Agreements,” to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K), dated as of May 31, 2013, which is substantially the same definition that was contained in the Company’s previous credit agreements.

 

We view Adjusted EBITDA as a key measure of our performance. We present Adjusted EBITDA not only due to its importance for purposes of our credit agreements, but also because it assists us in comparing our performance across reporting periods on a consistent basis because it excludes items that we do not believe are indicative of our core operating performance. Our management uses Adjusted EBITDA:

 

●

for planning purposes, including the preparation of our annual operating budget and developing and refining our internal projections for future periods;

●

to allocate resources to enhance the financial performance of our business;

●

as a benchmark for the determination of the bonus component of compensation for our senior executives under our management incentive plan, as described further in our Proxy Statement;

●

to evaluate the effectiveness of our business strategies and as a supplemental tool in evaluating our performance against our budget for each period; and

●

in communications with our boardBoard of directorsDirectors and investors concerning our financial performance.

 

We believe Adjusted EBITDA is used by securities analysts, investors and other interested parties in the evaluation of our company.the Company. Management believes the disclosure of Adjusted EBITDA offers an additional financial metric that, when coupled with results prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) and the reconciliation to U.S. GAAP results, provides a more complete understanding of our results of operations and the factors and trends affecting our business. We believe Adjusted EBITDA is useful to investors for the following reasons:

 

●

Adjusted EBITDA and similar non-GAAP measures are widely used by investors to measure a company's operating performance without regard to items that can vary substantially from company to company depending upon financing and accounting methods, book values of assets, tax jurisdictions, capital structures and the methods by which assets were acquired;

●

investors can use Adjusted EBITDA as a supplemental measure to evaluate the overall operating performance of our company, including our ability to service our debt and other cash needs; and

●

by comparing our Adjusted EBITDA in different historical periods, our investors can evaluate our operating performance excluding the impact of items described below.

 

The adjustments included in the reconciliation table listed below are provided for under our New Term Loan Credit Agreement and NewAmended ABL Credit AgreementFacility and also are presented to illustrate the operating performance of our business in a manner consistent with the presentation used by our management and board of directors. These adjustments eliminate the impact of a number of items that:

 

●

we do not consider indicative of our ongoing operating performance, such as non-cash write-downs and other charges, non-cash gains and write-offs relating to the retirement of debt, severance costs and other restructuring-related business optimization expenses;

●

we believe to be akin to, or associated with, interest expense, such as administrative agent fees, revolving credit facility commitment fees and letter of credit fees; or

●

are non-cash in nature, such as share-based compensation; or

compensation●

were eliminated following the consummation of our initial public offering..

 

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We explain in more detail in footnotes (a) through (d)(h) below why we believe these adjustments are useful in calculating Adjusted EBITDA as a measure of our operating performance.

 

Adjusted EBITDA does not represent, and should not be a substitute for, net income or cash flows from operations as determined in accordance with U.S. GAAP. Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under U.S. GAAP. Some of the limitations are:

 

●

Adjusted EBITDA does not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments;

●

Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

●

Adjusted EBITDA does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments on our debt;

●

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements;

●

several of the adjustments that we use in calculating Adjusted EBITDA, such as non-cash write-downswrite-downs and other charges, while not involving cash expense, do have a negative impact on the value our assets as reflected in our consolidated balance sheet prepared in accordance with U.S. GAAP; and

●

other companies may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.

 

Furthermore, as noted above, one of our uses of Adjusted EBITDA is as a benchmark for determining elements of compensation for our senior executives. At the same time, some or all of these senior executives have responsibility for monitoring our financial results, generally including the items that are included as adjustments in calculating Adjusted EBITDA (subject ultimately to review by our boardBoard of directorsDirectors in the context of the board'sBoard's review of our financial statements). While many of the adjustments (for example, transaction costs and credit facility fees), involve mathematical application of items reflected in our financial statements, others involve a degree of judgment and discretion. While we believe that all of these adjustments are appropriate, and while the calculations are subject to review by our boardBoard of directorsDirectors in the context of the board'sBoard's review of our financial statements, and certification by our chief financial officerChief Financial Officer in a compliance certificate provided to the lenders under our New Term Loan Credit Agreement and NewAmended ABL Credit Agreement,Facility, this discretion may be viewed as an additional limitation on the use of Adjusted EBITDA as an analytical tool.

 

Because of these limitations, Adjusted EBITDA should not be considered as a measure of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our U.S. GAAP results and using Adjusted EBITDA only supplementally.

 

The following table presents a reconciliation of net income to Adjusted EBITDA:EBITDA attributable to Generac Holdings Inc.:

 

(Dollars in thousands)		Year Ended December 31, 2014				Year Ended December 31, 2013				Year Ended December 31, 2012				Year Ended December 31, 2011				Year Ended December 31, 2010
Net income		$	174,613			$	174,539			$	93,223			$	324,643			$	56,913
Interest expense			47,215				54,435				49,114				23,718				27,397
Depreciation and amortization			34,730				36,774				54,160				56,123				59,440
Income taxes provision (benefit)			83,749				104,177				63,129				(237,677	)			307
Non-cash write-down and other adjustments (a)			(3,853	)			78				247				10,400				(361	)
Non-cash share-based compensation expense (b)			12,612				12,368				10,780				8,646				6,363
Loss on extinguishment of debt (c)			2,084				15,336				14,308				377				4,809
Gain on change in contractual interest rate (c)			(16,014	)			-				-				-				-
Transaction costs and credit facility fees (d)			1,851				3,863				4,117				1,719				1,019
Other			296				1,043				731				527				362
Adjusted EBITDA		$	337,283			$	402,613			$	289,809			$	188,476			$	156,249

		Year Ended December 31,
(U.S. Dollars in thousands)		2016				2015				2014				2013				2012
Net income attributable to Generac Holdings Inc.		$	98,788			$	77,747			$	174,613			$	174,539			$	93,223
Net income attributable to noncontrolling interests (a)			24				-				-				-				-
Net income			98,812				77,747				174,613				174,539				93,223
Interest expense			44,568				42,843				47,215				54,435				49,114
Depreciation and amortization			54,418				40,333				34,730				36,774				54,160
Provision for income taxes			57,570				45,236				83,749				104,177				63,129
Non-cash write-down and other adjustments (b)			357				3,892				(3,853	)			78				247
Non-cash share-based compensation expense (c)			9,493				8,241				12,612				12,368				10,780
Tradename and goodwill impairment (d)			-				40,687				-				-				-
Loss on extinguishment of debt (e)			574				4,795				2,084				15,336				14,308
(Gain) loss on change in contractual interest rate (f)			2,957				2,381				(16,014	)			-				-
Transaction costs and credit facility fees (g)			2,442				2,249				1,851				3,863				4,117
Business optimization expenses (h)			7,316				1,947				-				-				-
Other			(120	)			465				296				1,043				731
Adjusted EBITDA			278,387				270,816				337,283				402,613				289,809
Adjusted EBITDA attributable to noncontrolling interests			3,784				-				-				-				-
Adjusted EBITDA attributable to Generac Holdings Inc.		$	274,603			$	270,816			$	337,283			$	402,613			$	289,809

 

(a)   For the year ended December 31, 2016, includes the noncontrolling interests’ share of expenses related to Pramac purchase accounting, including the step-up in value of inventories and intangible amortization of $8.0 million.

(b)   Represents the following non-cash charges:

● gains/losses on disposal of assets, unrealized mark-to-market adjustments on commodity contracts, foreign currency gains/losses and certain purchase accounting related adjustments. Additionally, the year ended December 31, 2014 includes a gain of $4.9 million related to an adjustment to an earn-out obligation in connection with the Tower Light acquisition.

for the year ended December 31, 2014, primarily $4.9 million adjustment to a certain earn-out obligation in connection with a recent acquisition. Also includes loss on disposal of assets and unrealized mark-to-market adjustments on commodity contracts;

●

for the years ended December 31, 2013 and 2012, includes loss on disposals of assets, unrealized mark-to-market adjustments on commodity contracts and adjustments to an earn-out obligation in connection with a permitted business acquisition, as defined in our credit agreement;

●

for the year ended December 31, 2011, primarily $9.4 million trade name write-down relating to the Company’s decision to strategically transition certain products to their more widely known Generac brand. Also includes loss on disposal of assets and unrealized mark-to-market adjustments on commodity contracts;

●

for the year ended December 31, 2010, primarily unrealized mark-to-market adjustments on commodity and Euro forward contracts and loss on disposal of assets;

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We believe that adjusting net income for these non-cash charges is useful for the following reasons:

 

●

TheThe loss gains/losses on disposals of assets described above result from the sale of assets that are no longer useful in our business and therefore represent gains or losses that are not from our core operations;

●

The adjustments for unrealized mark-to-market gains and losses on commodity and Euro forward contracts represent non-cash items to reflect changes in the fair value of forward contracts that have not been settled or terminated. We believe it is useful to adjust net income for these items because the charges do not represent a cash outlay in the period in which the charge is incurred, although Adjusted EBITDA must always be used together with our U.S. GAAP statements of comprehensive income and cash flows to capture the full effect of these contracts on our operating performance;

●

The purchase accounting adjustments represent non-cash items to reflect fair value at the date of acquisition, and therefore do not reflect our ongoing operations; and

●

TheThe adjustment to a certain earn-out obligation in connection with a recentthe Tower Light acquisition recorded in the year ended December 31, 2014, and the trade name write-down recorded in the year ended December 31, 2011, areis a one-time chargescharge that we believe dodoes not reflect our ongoing operations;operations.

 

(b)(c)   Represents share-based compensation expense to account for stock options, restricted stock and other stock awards over their respective vesting period.

 

(c)  For(d)  During the fourth quarter of 2015, our Board of Directors approved a plan to strategically transition and consolidate certain of our brands acquired through acquisitions over the past several years ended December 31, 2014, 2013to the Generac® tradename. This brand strategy change resulted in a reclassification to a two year remaining useful life for the impacted tradenames and 2012, representsa $36.1 million non-cash charge to write-down to net realizable value. Additionally, during the losses on extinguishmentfourth quarter of debt2015, a $4.6 million goodwill impairment charge was recorded related to the write-down of the Ottomotores reporting unit goodwill. Refer to Note 2, “Significant Accounting Policies – Goodwill and gain on change in contractual interest rate as described in Note 11, “Credit Agreements,Other Indefinite-Lived Intangible Assets,” to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K.10-K for further information on the 2015 impairment charges.

(e)   For the years ended December 31, 20112016, 2015, 2014 and 2010,2013, represents the non-cash write-off of original issue discount and deferred financing costs due to voluntary debt prepayments. Additionally, for the year ended December 31, 2013, represents the loss on extinguishment of debt as a result of a refinancing transaction in May 2013. For the year ended December 31, 2012, represents the loss on extinguishment of debt as a result of the refinancing transactions in February and May 2012. Refer to Note 10, “Credit Agreements,” to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K for further information on the losses on extinguishment of debt relateddebt.

(f)   For the year ended December 31, 2016, represents a non-cash loss in the third quarter relating to the write-offcontinued 25 basis point increase in borrowing costs as a result of the credit agreement leverage ratio remaining above 3.0 times and expected to remain above 3.0 times based on current projections. For the year ended December 31, 2015, represents a portionnon-cash loss relating to a 25 basis point increase in borrowing costs as a result of deferred financingthe credit agreement leverage ratio rising above 3.0 times effective third quarter 2015 and expected to remain above 3.0 times based on projections at that time. For the year ended December 31, 2014, represents a non-cash gain relating to a 25 basis point reduction in borrowing costs relatedas a result of the credit agreement leverage ratio falling below 3.0 times effective second quarter 2014 and expected to accelerated repaymentsremain below 3.0 times based on projections at that time. Refer to Note 10, “Credit Agreements,” to the consolidated financial statements in Item 8 of debt.this Annual Report on Form 10-K for further information on the gains and losses on changes in the contractual interest rate.

 

(d)

(g)   Represents transaction costs incurred directly in connection with any investment, as defined in our credit agreement, equity issuance, or debt issuance or refinancing, together with certain fees relating to our senior secured credit facilities, such as:

 

●

administrative agent fees and revolving credit facility commitment fees under our New Term Loan Credit Agreement and NewAmended ABL Credit Agreement,Facility, which we believe to be akin to, or associated with, interest expense and whose inclusion in Adjusted EBITDA is therefore similar to the inclusion of interest expense in that calculation;

●

transaction costs relating to the acquisition of a business;and

●

other financing costs incurred relating to the dividend recapitalization transactions completed in May 2012 and 2013; and

2013●

pre-2011 transaction costs relating to repurchases of debt under our first and second lien credit facilities by affiliates of CCMP, who contributed the repurchased debt to our company in exchange for the issuances of securities, which repurchases we do not expect to recur;.

 

(8)(h)   For the year ended December 31, 2016, represents charges relating to business optimization and restructuring costs to address the significant and extended downturns for capital spending within the oil & gas industry. For the year ended December 31, 2015, represents severance and non-recurring restructuring charges related to the integration of our facilities, which represent expenses that are not from our core operations and do not reflect our ongoing operations.

(7) Adjusted Net Income is defined as net income before noncontrolling interests and provision (benefit) for income taxes adjusted for the following items: cash income tax expense, amortization of intangible assets, amortization of deferred financing costs and original issue discount related to our debt, gains and losses on changes in cash flows related to our debt, intangible asset impairment charges, certain transaction costs and other purchase accounting adjustments, andlosses on extinguishment of debt, business optimization expenses, certain other non-cash gains and losses, as reflected in the reconciliation table set forth below.and adjusted net income attributable to noncontrolling interests.

 

We believe Adjusted Net Income is used by securities analysts, investors and other interested partiesparties in the evaluation of our companycompany’s operations. Management believes the disclosure of Adjusted Net Income offers an additional financial metric that, when used in conjunction with U.S. GAAP results and the reconciliation to U.S. GAAP results, provides a more complete understanding of our results of operations, our cash flows, and the factors and trends affecting our business.

 

The adjustments included in the reconciliation table listed below are presented to illustrate the operating performance of our business in a manner consistent with the presentation used by investors and securities analysts. Similar to the Adjusted EBITDA reconciliation, these adjustments eliminate the impact of a number of items we do not consider indicative of our ongoing operating performance or cash flows, such as amortization costs, transaction costs and write-offs relating to the retirement of debt. We also make adjustments to present cash taxes paid as a result of our favorable tax attributes.

 

Similar to Adjusted EBITDA, Adjusted Net Income does not represent, and should not be a substitute for, net income or cash flows from operations as determined in accordance with U.S. GAAP. Adjusted Net Income has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under U.S. GAAP. Some of the limitations are:

 

●

Adjusted Net Income does not reflect changes in, or cash requirements for, our working capital needs;

●

although amortization is a non-cash charge, the assets being amortized may have to be replaced in the future, and Adjusted Net Income does not reflect any cash requirements for such replacements; and

●

other companies may calculate Adjusted Net Income differently than we do, limiting its usefulness as a comparative measure.

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The following table presents a reconciliation of net income to Adjusted Net Income:Income attributable to Generac Holdings Inc.:

 

(Dollars in thousands)		Year Ended December 31, 2014				Year Ended December 31, 2013				Year Ended December 31, 2012				Year Ended December 31, 2011				Year Ended December 31, 2010
																						Year Ended December 31,
(U.S. Dollars in thousands)																						2016				2015				2014				2013				2012
Net income attributable to Generac Holdings Inc.																						$	98,788			$	77,747			$	174,613			$	174,539			$	93,223
Net income attributable to noncontrolling interests																							24				-				-				-				-
Net income		$	174,613			$	174,539			$	93,223			$	324,643			$	56,913				98,812				77,747				174,613				174,539				93,223
Provision (benefit) for income taxes			83,749				104,177				63,129				(237,677	)			307
Income before provision (benefit) for income taxes			258,362				278,716				156,352				86,966				57,220
Provision for income taxes																							57,570				45,236				83,749				104,177				63,129
Income before provision for income taxes																							156,382				122,983				258,362				278,716				156,352
Amortization of intangible assets			21,024				25,819				45,867				48,020				51,808				32,953				23,591				21,024				25,189				45,867
Amortization of deferred finance costs and original issue discount			6,615				4,772				3,759				1,986				2,439				3,940				5,429				6,615				4,772				3,759
Tradename and goodwill impairment																							-				40,687				-				-				-
Loss on extinguishment of debt			2,084				15,336				14,308				377				4,809				574				4,795				2,084				15,336				14,308
Gain on change in contractual interest rate			(16,014	)			-				-				-				-
Trade name write-down			-				-				-				9,389				-
(Gain) loss on change in contractual interest rate																							2,957				2,381				(16,014	)			-				-
Transaction costs and other purchase accounting adjustments (a)			(3,623	)			2,842				3,317				875				-				5,653				2,710				(3,623	)			2,842				3,317
Business optimization expenses																							7,316				1,947				-				-				-
Adjusted net income before provision for income taxes			268,448				327,485				223,603				147,613				116,276				209,775				204,523				268,448				326,855				223,603
Cash income tax expense (b)			(34,283	)			(25,821	)			(2,811	)			(437	)			(322	)			(9,299	)			(6,087	)			(34,283	)			(25,821	)			(2,811	)
Adjusted net income		$	234,165			$	301,664			$	220,792			$	147,176			$	115,954				200,476				198,436				234,165				301,034				220,792
Adjusted net income attributable to noncontrolling interests																							2,219				-				-				-				-
Adjusted net income attributable to Generac Holdings Inc.																						$	198,257			$	198,436			$	234,165			$	301,034			$	220,792

 

(a)(a) Represents transaction costs incurred directly in connection with any investment, as defined in our credit agreement, equity issuance or debt issuance or refinancing. Therefinancing, and certain purchase accounting adjustments. Additionally, the year ended December 31, 2014 also includes certain purchase accounting adjustments and adjustmentsa gain of $4.9 million related to certainan adjustment to an earn-out obligationsobligation in connection with acquisitions ($4.9 million).the Tower Light acquisition.

 

(b) Amounts(b) For the year ended December 31, 2016, amount is based on a cash income tax rate of 5.9%. Cash income tax expense for 2016 is based on the projected taxable income and corresponding cash tax rate for the full year after considering the effects of current and deferred income tax items, and is calculated by applying the derived cash tax rate to the period’s pretax income. For the years ended December 31, 2015, 2014, 2013 and 2012, amounts are based on actual cash income taxes paid during each year.

                                                                 

ItemItem 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis of our financial condition and results of operations should be read together with “Item“Item 1 – Business,” “Item 6 - Selected Financial Data” and the consolidated financial statements and the related notes thereto included in Item 8 of this Annual Report on Form 10-K. This discussion contains forward-looking statements, based on current expectations and related to future events and our future financial performance, that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those set forth under “Item 1A - Risk Factors.”

 

Overview

 

We are a leading designer and manufacturer of a wide range of power generation equipment and other engine powered products serving the residential, light commercial and industrial oil & gas, and construction markets. Power generation is our primary focus, which differentiates us from our primary competitors that also have broad operations outside of the generatorpower equipment market. As the only significant market participant focused predominantly on these products, we have one of the leading market positions in the power equipment market in North America and an expanding presence internationally. We believe we have one of the widest rangeranges of products in the marketplace, including residential, commercial and industrial standby generators, as well as portable and mobile generators used in a variety of applications. Other engine powered products that we design and manufacture include light towers which provide temporary lighting for various end markets; commercial and industrial mobile heaters used in the oil & gas, construction and other industrial markets; and a broad product line of outdoor power washersequipment for residential and commercial use.

 

Over the past several years, we have executed a number of acquisitions that support our strategic plan. A summary of these acquisitions can be found in Note 1, “Description of Business,” to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K.

 

Business Drivers and Operational FactorsFactors

 

In operating our business and monitoring its performance, we pay attention to a number of business drivers and trends as well as operational factors. The statements in this section are based on our current expectations.

Business Drivers and TrendsTrends

 

Our performance is affected by the demand for reliable power generation products, mobile product solutions and other mobile product solutionsengine powered products by our customer base. This demand is influenced by several important drivers and trends affecting our industry, including the following:

 

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Increasing penetration opportunity.    Many potential customers are not aware of the costs and benefits of automatic backup power solutions. We estimate that penetration rates for home standby generators are only approximately 3.5%4.0% of U.S. single-family detached, owner-occupied households with a home value of over $100,000, as defined by the U.S. Census Bureau's 20132015 American Housing Survey for the United States. The decision to purchase backup power for many light-commercial buildings such as convenience stores, restaurants and gas stations is more return-on-investment (ROI) driven and as a result these applications have relatively lower penetration rates as compared to buildings used in code-driven or mission critical applications such as hospitals, wastewater treatment facilities, 911 call centers, data centers and certain industrial locations. The emergence of lower cost, cleaner burning natural gas fueled generators has helped to accelerateincrease the penetration of standby generators in the light-commercial market. In addition, the importanceinstalled base of backup power for telecommunications infrastructure is increasing due to the growing importance for uninterrupted voice and data services. Also, in recent years, a more stringent regulatory environment around the flaring of natural gas at oil & gas drilling and production sites has been a catalyst for increased demand for natural gas fueled generators, including mobile solutions. We believe by expanding our distribution network, continuing to develop our product line, and targeting our marketing efforts, we can continue to build awareness and increase penetration for our standby and mobile generators for residential, commercial and industrial purposes.

 

Effect of large scaleand baselinepower disruptions.    Power disruptions are an important driver of customer awareness and have historically influenced demand for generators.generators, both in the United States and internationally. Increased frequency and duration of major power outage events, that have a broader impact beyond a localized level, increases product awareness and may drive consumers to accelerate their purchase of a standbyportable or portablestandby generator during the immediate and subsequent period, which we believe may last for sixnine to twelve months following a major power outage event for standby generators. For example, the multiple major outage events that occurred during the second half of both 2011 and 2012 drove strong demand for portable and home standby generators, and the increased awareness of these products contributed to substantial organic revenue growth in 2012 with strong growth continuing during 2013. Major power disruptions are unpredictable by nature and, as a result, our sales levels and profitability may fluctuate from period to period. In addition, there are smaller, more localized power outages that occur frequently across the U.S.United States that drive the baseline level of demand for back-up power solutions. The level of baseline power outage activity occurring across the U.S.United States can also fluctuate, and may cause our financial results to fluctuate from year to year.

 

Impact of residential investment cycle.    The market for residential generators is also affected by the residential investment cycle and overall consumer confidence and sentiment. When homeowners are confident of their household income, the value of their home and overall net worth, they are more likely to invest in their home. These trends can have an impact on demand for residential generators. Trends in the new housing market highlighted by residential housing starts can also impact demand for our residential products.generators. Demand for outdoor power equipment is also impacted by several of these factors, as well as weather precipitation patterns.

 

Impact of business capital investment cycle.cycles. The global market for our commercial and industrial products is affected by the overalldifferent capital investment cycle, includingcycles, which can vary across the numerous regions around the world in which we participate. These markets include non-residential building construction, durable goods and infrastructure spending as well as investments in the exploration and production of oil & gas, as businesses or organizations either add new locations or make investments to upgrade existing locations or equipment. These trends can have a material impact on demand for these products. The capital investment cycle may differ for the various commercial and industrial end markets that we serve including light commercial, retail, telecommunications, industrial, data centers, healthcare, construction, oil & gas and municipal infrastructure, among others. The market for these products is also affected by general economic and geopolitical conditions andas well as credit availability in the geographic regions that we serve. In addition, we believe demand for our mobile power products will continue to benefit over the long term from a secular shift towards renting versus buying this type of equipment.

 

FactorsFactors Affecting Results of Operationsperations

 

We are subject to various factors that can affect our results of operations, which we attempt to mitigate through factors we can control, including continued product development, expanded distribution, pricing and cost control. Certain operational and other factors that affect our business include the following:

 

Effect of commodity, currency and component price fluctuations.    Industry-wide price fluctuations of key commodities, such as steel, copper and aluminum, andalong with other components we use in our products, together with foreign currency fluctuations, can have a material impact on our results of operations. Also, with the Pramac acquisition in 2016, we have further expanded our commercial and operational presence outside of the United States. This acquisition, along with our existing international presence, exposes us to fluctuations in foreign currency exchange rates that can have a material impact on our results of operations.

We have historically attempted to mitigate the impact of rising commodity, currency and component prices through improved product design and sourcing, manufacturing efficiencies, price increases and select hedging transactions. Our results are also influenced by changes in fuel prices in the form of freight rates, which in some cases are borneaccepted by our customers and in other cases are paid by us.

 

Seasonality.Seasonality.    Although there is demand for our products throughout the year, in each of the past threefive years approximately 23% to 27% of our net sales occurred in the first quarter, 20% to 25% in the second quarter, 24% to 26%27% in the third quarter and 25% to 29% in the fourth quarter, with different seasonality depending on the presence,occurrence, timing and severity of major power outage activity in each year. Major outage activity is unpredictable by nature and, as a result, our sales levels and profitability may fluctuate from period to period. For example, there were multipleThe seasonality experienced during a major power outage, events that occurred during the second half of both 2011 and 2012, which were significant in terms of severity. As a result, the seasonality experienced during this time period, and for the subsequent quarters following the time period, variedevent, will vary relative to other periods where no major outage events occurred. We maintain a flexible production and supply chain infrastructure in order to respond to outage-driven peak demand.

 

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Factors influencing interest expense and cash interest expense.Interest expense can be impacted by a variety of factors, including market fluctuations in LIBOR, interest rate election periods, interest rate swap agreements, credit facility pricing grids, and repayments or borrowings of indebtedness. Cash interest expense decreasedincreased during 20142016 compared to 2013,2015, primarily due to a reductionadditional debt assumed in interest rate fromrecent acquisitions, increased borrowings at other foreign subsidiaries and an increase in the credit agreement refinancing completed in May 2013 and the 25 basis point reduction in borrowing costs during the second quarter of 2014 as a result of our net debt leverage ratio, as defined in our New Term Loan Credit Agreement, falling below 3.0 times.LIBOR rate. Refer to Note 11,10, “Credit Agreements,” to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K for additional details.further information.

 

Factors influencing provision for income taxes and cash income taxes paid.   We had approximately $837$592 million of tax-deductible goodwill and intangible asset amortization remaining as of December 31, 20142016 related to our acquisition by CCMP in 2006 that we expect to generate aggregate cash tax savings of approximately $326$231 million through 2021, assuming continued profitability and a 39% tax rate. The recognition of the tax benefit associated with these assets for tax purposes is expected to be $122 million annually through 2020 and $102 million in 2021, which generates annual cash tax savings of $48 million through 2020 and $40 million in 2021, assuming profitability and a 39% tax rate. As a result of the asset acquisition of the Magnum business in the fourth quarter of 2011, we had approximately $45.5$38.0 million of incremental tax deductible goodwill and intangible assets remaining as of December 31, 2014.2016. We expect these assets to generate aggregate cash tax savings of $17.8$14.9 million through 2026 assuming continued profitability and a 39% tax rate. The amortization of these assets for tax purposes is expected to be $3.8 million annually through 2025 and $2.8 million in 2026, which generates an additional annual cash tax savings of $1.5 million through 2025 and $1.1 million in 2026, assuming profitability and a 39% tax rate. Based on current business plans, we believe that our cash tax obligations through 2026 will be significantly reduced by these tax attributes. Other domestic acquisitions have resulted in additional tax deductible goodwill and intangible assets that will generate tax savings, but are not material to the Company’s consolidated financial statements.

 

In the second quarter of 2013, the dividend recapitalization discussed under “Liquidity and Financial Position” was completed. After considering the increased debt and related interest expense, the Company believes it will still generate sufficient taxable income to fully utilize the tax attributes discussed above.

Transactions with CCMP

In November 2006, affiliates of CCMP, together with certain other investors and members of our management, purchased an aggregate of $689 million of our equity capital. In addition, on November 10, 2006, Generac Power Systems borrowed an aggregate of $1.38 billion, consisting of an initial drawdown of $950 million under a $1.1 billion first lien secured credit facility and $430 million under a $430 million second lien secured credit facility. With the proceeds from these equity and debt financings, together with cash on hand at Generac Power Systems, we (1) acquired all of the capital stock of Generac Power Systems and repaid certain pre-transaction indebtedness of Generac Power Systems for $2.0 billion, (2) paid $66 million in transaction costs related to the transaction and (3) retained $3 million for general corporate purposes. Subsequently, during 2007, 2008 and 2009, affiliates of CCMP acquired approximately $249.2 million of second lien term loans and $9.9 million of first lien term loans for approximately $155.9 million. CCMP’s affiliates then exchanged this debt for additional shares of then-existing Class B Common Stock and Series A Preferred Stock, which were subsequently converted into the same class of our common stock through a corporate reorganization in conjunction with the IPO in February 2010.

In August 2013, CCMP completed the last of a series of sale transactions that began in November 2012 by which it sold substantially all of the shares of common stock that it owned as of the IPO.

Initial Public Offering

On February 17, 2010, the Company completed its IPO of 18,750,000 shares of its common stock at a price of $13.00 per share. In addition,the underwriters exercised their option and purchased an additional 1,950,500 shares of the Company’s common stock from the Company on March 18, 2010. We received a total of approximately $247.9 million in net proceeds from the initial public offering and underwriters’ option exercise, after deducting the underwriting discounts and expenses. All shares sold in this offering were primary shares. Immediately following the IPO and underwriters’ option exercise, we had 67,529,290 total shares of common stock outstanding.

Components of Net Sales and Expenses

 

Net SNetalesSales

 

Substantially all of our net sales are generated through the sale of our generatorspower generator equipment and other engine powered products forto the residential, light commercial industrial, oil & gas, and constructionindustrial markets. We also sell engines to certain customers and service parts to our dealer network. Net sales, which include shipping and handling charges billed to customers, are generally recognized upon shipment of products to our customers. Related freight costs are included in cost of sales.

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During 2014, our net sales were affected primarily by the U.S. market as sales outside of the United States represented approximately 16% of total net sales.

 

We are not dependent on any one channel or customer for our net sales, with no single customer representing more than 8%7% of our sales, for the year ended December 31, 2014 and our top ten customers representing less than 26%22% of our total sales for the same period.year ended December 31, 2016.

 

Costs of Goods Soldold

 

The principal elements of costs of goods sold in our manufacturing operations are component parts, raw materials, factory overhead and labor. Component parts and raw materials comprised over 85%approximately 78% of costs of goods sold for the year ended December 31, 2014.2016. The principal component parts are engines and alternators. We design and manufacture air-cooled engines for certain of our productsgenerators up to 22kW.22kW, along with certain liquid-cooled engines. We source engines for certain of our smaller products and all of our products larger than 22kW.diesel products. For certain natural gas engines, we source the base engine block, and then add a significant amount of value engineering, sub-systems and other content to the point that we are recognized as the OEM.OEM of those engines. We design allmany of the alternators for our units and either manufacture or source alternators for certain of our units. We also manufacture other generator components where we believe we have a design and cost advantage. We source component parts from an extensive global network of reliable, high quality suppliers. In some cases, these relationships are proprietary.

 

The principal raw materials used in the manufacturing process that are sourced are steel, copper and aluminum. We are susceptible to fluctuations in the cost of these commodities, impacting our costs of goods sold. We seek to mitigate the impact of commodity prices on our business through a continued focus on global sourcing, product design improvements, manufacturing efficiencies, price increases and select hedging transactions. However, there is typically a lag between raw material price fluctuations and their effect on our costs of goods sold.

 

Other sources of costs include our manufacturing and warehousing facilities, factory overhead, labor and shipping costs. Factory overhead includes utilities, support personnel, depreciation, general supplies, support and maintenance. Although we attempt to maintain a flexible manufacturing cost structure, our margins can be impacted when we cannot timely adjust labor and manufacturing costs to match fluctuations in net sales.

 

Operating Expensesxpenses

 

Our operating expenses consist of costs incurred to support our sales, marketing, distribution, service parts, engineering, information systems, human resources, finance, risk management, legal and tax functions.functions, among others. These expenses include personnel costs such as salaries, bonuses, employee benefit costs and taxes, and are classified into three categories: selling and service, research and development, and general and administrative. Additionally, the amortization expense related to our finite-lived intangible assets is included within operating expenses.

 

Selling and service.    Our selling and service expenses consist primarily of personnel expense, marketing expense, warranty expense and other sales expenses. Our personnel expense recorded in selling and services expenses includes the expense of our sales force responsible for our broad customer base and other personnel involved in the marketing, sales and service of our products. Warranty expense, which is recorded at the time of sale, is estimated based on historical trends. Our marketing expenses include direct mail costs, printed material costs, product display costs, market research expenses, trade show expenses, media advertising, promotional expenses and co-op advertising costs. Marketing expenses are generally related to the launch of new product offerings, participation in trade shows and other events, and opportunities to create market awareness for home standby generators in areas impacted by heightened power outage activity.

 

Research and development.    Our research and development expenses support numerous projects covering all of our product lines. We currently operate engineering facilities at eightmany locations globally and employ over 250300 personnel with focus on new product development, existing product improvement and cost containment. Our commitmentWe are committed to research and development, has resulted inand rely on a significant portfoliocombination of over 170 U.S. and international patents and patent applications.trademarks to establish and protect our proprietary rights. Our research and development costs are expensed as incurred.

 

General and administrative.    Our general and administrative expenses include personnel costs for general and administrative employees,employees; accounting, legal and legal professional services fees,fees; information technology costs, insurance,costs; insurance; travel and entertainment expenseexpense; and other corporate expense.expenses.

 

Amortization of intangibles.    Our amortization of intangibles expenses includeexpense includes the straight-line amortization of definite-livedfinite-lived tradenames, customer lists, patents and other intangibles assets.

 

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Other Income (Expense)xpense)

 

Other income (expense) includes the interest expense on our outstanding borrowings, amortization of debt financing costs and original issue discount as well as, and expenses related to interest rate swap agreements. Other income (expense) also includes other financial items such as losslosses on extinguishment of debt, a gaingains (losses) on change in contractual interest rate, interest income earned on our cash and cash equivalents, and costs related to acquisitions.

 

Costs related to acquisitions.    In 2016, the other expenses include transaction expenses related to the acquisitions of Pramac and Motortech. In 2015, the other expenses include transaction expenses related to the acquisitions of CHP and Pramac. In 2014, the other expenses include one-time transaction-relatedtransaction expenses related to the acquisitions of Powermate and MAC. In 2013, other expenses include one-time transaction-related expenses relatedRefer to Note 3, “Acquisitions” and Note 19, “Subsequent Events” to the acquisitionsconsolidated financial statements in Item 8 of Tower Light and Baldor. In 2012, other expenses include one-time transaction-related expenses related tothis Annual Report on Form 10-K for additional information on the acquisition of the Ottomotores businesses.Company’s recent acquisitions.

 

Results of Operations

 

Year ended December 31, 2016 compared4 compared to year ended December 31, 201331, 2015

 

The following table sets forth our consolidated statement of operations data for the periods indicated:

 

(Dollars in thousands)		Year Ended December 31, 2014				Year Ended December 31, 2013
										Year Ended December 31,
(U.S. Dollars in thousands)										2016				2015				$ Change				% Change
Net sales		$	1,460,919			$	1,485,765			$	1,444,453			$	1,317,299				127,154				9.7	%
Costs of goods sold			944,700				916,205
Cost of goods sold											930,347				857,349				72,998				8.5	%
Gross profit			516,219				569,560				514,106				459,950				54,156				11.8	%
Operating expenses:
Selling and service			120,408				107,515				164,607				130,242				34,365				26.4	%
Research and development			31,494				29,271				37,229				32,922				4,307				13.1	%
General and administrative			54,795				55,490				74,700				52,947				21,753				41.1	%
Amortization of intangibles			21,024				25,819
Gain on remeasurement of contingent consideration			(4,877	)			-
Amortization of intangible assets											32,953				23,591				9,362				39.7	%
Tradename and goodwill impairment											-				40,687				(40,687	)			-100.0	%
Total operating expenses			222,844				218,095				309,489				280,389				29,100				10.4	%
Income from operations			293,375				351,465				204,617				179,561				25,056				14.0	%
Total other expense, net			35,013				72,749				(48,235	)			(56,578	)			8,343				-14.7	%
Income before provision for income taxes			258,362				278,716				156,382				122,983				33,399				27.2	%
Provision for income taxes			83,749				104,177				57,570				45,236				12,334				27.3	%
Net income		$	174,613			$	174,539				98,812				77,747				21,065				27.1	%
Net income attributable to noncontrolling interests											24				-				24				N/A
Net income attributable to Generac Holdings Inc.										$	98,788			$	77,747				21,041				27.1	%

 

(Dollars in thousands)		Year Ended December 31, 2014				Year Ended December 31, 2013
Residential power products		$	722,206			$	843,727
Commercial & Industrial power products			652,216				569,890
Other			86,498				72,148
Net sales		$	1,460,919			$	1,485,765

The following sets forth our reportable segment information for the periods indicated:

		Net Sales
		Year Ended December 31,
(U.S. Dollars in thousands)		2016				2015				$ Change				% Change
Domestic		$	1,173,559			$	1,204,589				(31,030	)			-2.6	%
International			270,894				112,710				158,184				140.3	%
Total net sales		$	1,444,453			$	1,317,299				127,154				9.7	%

		Adjusted EBITDA
		Year Ended December 31,
		2016				2015				$ Change				% Change
Domestic		$	261,428			$	254,882				6,546				2.6	%
International			16,959				15,934				1,025				6.4	%
Total Adjusted EBITDA		$	278,387			$	270,816				7,571				2.8	%

The following table sets forth our product class information for the periods indicated:

		Year Ended December 31,
(U.S. Dollars in thousands)		2016				2015				$ Change				% Change
Residential products		$	772,436			$	673,764				98,672				14.6	%
Commercial & industrial products			557,532				548,440				9,092				1.7	%
Other			114,485				95,095				19,390				20.4	%
Total net sales		$	1,444,453			$	1,317,299				127,154				9.7	%

Net sales.    

Net sales.NetThe decrease in Domestic sales decreased $24.9 million, or 1.7%, to $1,460.9 million for the year ended December 31, 20142016 was primarily due to significant declines in shipments of mobile products into oil & gas and general rental markets. Partially offsetting these impacts was the contribution from $1,485.8 million the CHP acquisition, along with increased shipments of portable and home standby generators.

The increase in International sales for the year ended December 31, 2016 was due to the contribution from the Pramac acquisition. Partially offsetting this impact were declines in organic shipments of mobile products into the European region.

The total contribution from non-annualized recent acquisitions for the year ended December 31, 2013. Residential product sales decreased 14.4% to $722.2 million from $843.7 million for the comparable period in 2013. Residential product sales declined on a year-over-year basis as the prior year benefited from approximately $140 million in incremental shipments as a result of satisfying the extended lead times that resulted from Superstorm Sandy in October 2012, which did not repeat in 2014. Excluding this benefit in the prior year, residential products increased approximately 3%. C&I product sales increased 14.4% to $652.2 million from $569.9 million for the comparable period in 2013, primarily due to the contributions from recent acquisitions along with strength in the oil & gas markets, partially offset by reduced capital spending from certain telecom customers and overall softness within Latin America.2016 was $236.6 million.

 

Net incomeGross profit.Gross profit decreased $53.4 million, or 9.4%, attributable to $516.2 millionGenerac Holdings Inc.    Net income attributable to Generac Holdings Inc. for the year ended December 31, 2014 from $569.62016 includes the impact of $7.1 million of non-recurring, pre-tax charges relating to business optimization and restructuring costs to address the impact of the significant and extended downturn for capital spending within the oil & gas industry. The cost-reduction actions taken include the consolidation of production facilities, headcount reductions, certain non-cash asset write-downs and other non-recurring product-related charges. The charges consist of $2.7 million classified within cost of goods sold and $4.4 million classified within operating expenses. The increase in net income attributable to Generac Holdings Inc. was primarily due to a prior year $40.7 million pre-tax, non-cash charge for the year ended December 31, 2013. impairment of certain intangible assets, partially offset by the business optimization charge discussed above and the other factors outlined in this section.

Gross profit. Gross profit margin for the year ended December 31, 2014 decreased2016 was 35.6% compared to 35.3% from 38.3%34.9% for the year ended December 31, 2013. The decline in gross margin was driven by the combination of a higher mix of organic C&I product shipments,2015, which includes the impact of recent acquisitions,the aforementioned $2.7 million of business optimization charges classified within cost of goods sold, as well as $4.2 million of expense relating to the purchase accounting adjustment for the step-up in value of inventories relating to the Pramac acquisition. Excluding the impact of these adjustments, gross profit margin was 36.1%, an improvement of 120 basis points over the prior year. The increase in promotional activitieswas primarily due to the favorable impacts from lower commodity costs and overseas sourcing benefits from a stronger U.S. Dollar, along with an overall favorable organic product mix. In addition, gross margin in the currentprior year and an overall increase in product costs, including awas negatively impacted by temporary increaseincreases in certain costs associated with the slowdown of activity in west coast portsport congestion as well as short-term increases in other overhead-related costs.costs that did not repeat in the current year. These factors were partially offset by the mix impact from the Pramac acquisition.

 

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Operating expenses.OperatingExcluding the impact of the aforementioned current year $4.4 million of business optimization charges and prior year $40.7 million of intangible impairment charges classified within operating expenses, operating expenses increased $4.7$65.4 million, or 27.3%, to $222.8$305.1 million for the year ended December 31, 20142016 from $218.1$239.7 million for the year ended December 31, 2013. Operating expenses increased2015. The increase was primarily due to the impactaddition of recurring operating expenses associated with recent acquisitions and increased amortization expense.

Other expense. Other expense in the prior year included a more favorable adjustment to warranty reservesnon-cash $4.8 million loss on extinguishment of debt resulting from $150.0 million of voluntary prepayments of Term Loan debt, and a $2.4 million non-cash loss resulting from an increase in 2013our Term Loan interest rate spread of 25 basis points. In the current year, other expense included a $3.0 million non-cash loss resulting from a continuation of the 25 basis point spread increase, and a $0.6 million loss on extinguishment of debt resulting from a $25.0 million voluntary prepayment of Term Loan debt.

Income tax expense. The effective income tax rates for the years ended December 31, 2016 and 2015 were 36.8%.

Adjusted EBITDA. Adjusted EBITDA margins for the Domestic segment for the year ended December 31, 2016 were 22.3% of net sales as compared to 21.2% of net sales for the current year ended December 31, 2015. This increase was primarily due to overall favorable product mix; lower commodity costs and increased marketingoverseas sourcing benefits from a stronger U.S. Dollar; and advertising expenses to support our Powering Ahead strategy. These increases werethe benefit of cost-reduction actions within domestic mobile products, partially offset by increased promotional activities.

Adjusted EBITDA margins for the International segment for the year ended December 31, 2016 were 6.3% of net sales as compared to 14.1% of net sales for the year ended December 31, 2015. This decrease was primarily due to a large decline in mobile products margins given the reduced operating leverage on lower organic sales volume, unfavorable sales mix, foreign currency impacts with the weakness in the British Pound, and, to a lesser extent, the Pramac acquisition sales mix.

Adjusted net income. Adjusted Net Income of $198.3 million for the year ended December 31, 2016 decreased 0.1% from $198.4 million for the year ended December 31, 2015. The increased earnings outlined above were offset by an increase in cash income tax expense and adjusted net income attributable to noncontrolling interests.

Year ended December 31, 2015 compared to year ended December 31, 2014

The following table sets forth our consolidated statement of operations data for the periods indicated:

		Year Ended December 31,
(U.S. Dollars in thousands)		2015				2014				$ Change				% Change
Net sales		$	1,317,299			$	1,460,919				(143,620	)			-9.8	%
Cost of goods sold			857,349				944,700				(87,351	)			-9.2	%
Gross profit			459,950				516,219				(56,269	)			-10.9	%
Operating expenses:
Selling and service			130,242				120,408				9,834				8.2	%
Research and development			32,922				31,494				1,428				4.5	%
General and administrative			52,947				54,795				(1,848	)			-3.4	%
Amortization of intangible assets			23,591				21,024				2,567				12.2	%
Tradename and goodwill impairment			40,687				-				40,687				N/A
Gain on remeasurement of contingent consideration			-				(4,877	)			4,877				-100.0	%
Total operating expenses			280,389				222,844				57,545				25.8	%
Income from operations			179,561				293,375				(113,814	)			-38.8	%
Total other expense, net			(56,578	)			(35,013	)			(21,565	)			61.6	%
Income before provision for income taxes			122,983				258,362				(135,379	)			-52.4	%
Provision for income taxes			45,236				83,749				(38,513	)			-46.0	%
Net income		$	77,747			$	174,613				(96,866	)			-55.5	%

The following table sets forth our reportable segment information for the periods indicated:

		Net Sales
		Year Ended December 31,
(U.S. Dollars in thousands)		2015				2014				$ Change				% Change
Domestic		$	1,204,589			$	1,343,367				(138,778	)			-10.3	%
International			112,710				117,552				(4,842	)			-4.1	%
Total net sales		$	1,317,299			$	1,460,919				(143,619	)			-9.8	%

		Adjusted EBITDA
		Year Ended December 31,
		2015				2014				$ Change				% Change
Domestic		$	254,882			$	322,769				(67,887	)			-21.0	%
International			15,934				14,514				1,420				9.8	%
Total Adjusted EBITDA		$	270,816			$	337,283				(66,467	)			-19.7	%

The following table sets forth our product class information for the periods indicated:

		Year Ended December 31,
(U.S. Dollars in thousands)		2015				2014				$ Change				% Change
Residential products		$	673,764			$	722,206				(48,442	)			-6.7	%
Commercial & industrial products			548,440				652,216				(103,776	)			-15.9	%
Other			95,095				86,497				8,598				9.9	%
Total net sales		$	1,317,299			$	1,460,919				(143,620	)			-9.8	%

Net sales. The decrease in Domestic sales for the year ended December 31, 2015 was primarily due to lower demand of home standby generators as a result of the significant decline in the power outage severity environment during 2015, and a reduction in shipments into oil & gas and general rental markets and, to a lesser extent, reduced shipments to telecom national account customers. Partially offsetting these impacts was the contribution from the CHP acquisition.

The decrease in International sales for the year ended December 31, 2015 was primarily due to the negative impact of foreign currency translation.

The contribution from non-annualized recent acquisitions to the year ended December 31, 2015 was $62.8 million.

Gross profit. Gross profit margin for the year ended December 31, 2015 decreased to 34.9% from 35.3% for the year ended December 31, 2014. The decline in gross margin was primarily due to unfavorable absorption of manufacturing overhead-related costs, partially offset by the favorable impact of lower commodity costs and overseas sourcing benefits from a stronger U.S. dollar.

Operating expenses. Operating expenses for the year ended December 31, 2015 include a non-cash $36.1 million impairment charge relating to tradenames as a result of a new brand strategy to transition and consolidate various brands to the Generac® tradename, and a non-cash $4.6 million impairment charge relating to the write-down of the goodwill of the Ottomotores reporting unit. Additionally, operating expenses for the year ended December 31, 2014 include a $4.9 million gain recorded in the second quarter of 2014 relating to a remeasurement of a contingent earn-out obligation from a recentthe Tower Light acquisition. Excluding the impact of these items, operating expenses increased $12.0 million primarily due to the addition of recurring operating expenses associated with the CHP acquisition, increased marketing and advertising expenses, and a $4.8$2.6 million year-over-year declineincrease in the amortization of intangible assets. This was partially offset by reductions in variable operating expenses on lower sales volumes.

 

Other expense.OtherThe increase in other expense decreased $37.7was primarily due to a $16.0 million or 51.9%, to $35.0 million fornon-cash gain recorded in the year ended December 31, 2014 from $72.7 million for the year ended December 31, 2013. Beginning in the second quarter of 2014, there wasrelating to a 25 basis point reduction in borrowing costs as a result of the Company’s net debtcredit agreement leverage ratio falling below 3.0 times effective second quarter 2014 and remaining below 3.0 times based on projections at that time, and a $2.4 million non-cash loss recorded in the year ended December 31, 2015 relating to a 25 basis point increase in borrowing costs as a result of our credit agreement leverage ratio rising above 3.0 times effective third quarter 2015 and remaining above 3.0 times based on projections at the time. Additionally, $150.0 million of voluntary prepayments of Term Loan debt were made in the year ended December 31, 2015, resulting in a $16.0 million non-cash gain being recorded in 2014. In conjunction with the May 2013 refinancing and other debt prepayments made in the prior year, a $15.3$4.8 million loss on extinguishment of debt was recorded. During 2014, $87.0 million ofcompared to voluntary prepayments of term loanTerm Loan debt were made,of $87.0 million in the year ended December 31, 2014, which resulted in recording a non-cash $2.1 million loss on extinguishment of debt. Additionally, there wasThe debt repayments resulted in a $7.2 million year-over-year decrease in interest expense due to the refinancing of our debt in May 2013.$4.4 million.

 

Income tax expense.Income tax expense decreased $20.5 million to $83.7 million for the year ended December 31, 2014 from $104.2 million for the year ended December 31, 2013. The effective tax rate for 20142015 was 32.4%36.8% as compared to 37.4%32.4% for 2013.2014. The decreaseincrease in effectiveincome tax rate was primarily attributable to tax planning related toa decrease in the federal and state research credits, and utilization of theCompany’s federal domestic production activity deduction due to sufficient taxablelower pre-tax income.

 

Net income.As a result of the factors identified above, we generated net income of $77.7 million for the year ended December 31, 2015 compared to $174.6 million for the year ended December 31, 20142014.

Adjusted EBITDA. Adjusted EBITDA margins for the Domestic segment for the year ended December 31, 2015 were 21.2% of net sales as compared to $174.524.0% of net sales for the year ended December 31, 2014. This decrease was primarily due to increased marketing and advertising expenses, and reduced overall leverage of fixed operating expenses, partially offset by the favorable impact of lower commodity costs and overseas sourcing benefits from a stronger U.S. Dollar.

Adjusted EBITDA margins for the International segment for the year ended December 31, 2015 were 14.1% of net sales as compared to 12.3% of net sales for the year ended December 31, 2014. This increase was primarily due to lower operating expenses.

Adjusted net income. Adjusted Net Income of $198.4 million for the year ended December 31, 2013.

Adjusted EBITDA.Adjusted EBITDA, as defined and reconciled inItem 6, “Selected Financial Data,”2015 decreased to $337.3 million in 2014 as compared to $402.6 million in 2013, due to the factors discussed above.

Adjusted net income.Adjusted Net Income, as defined and reconciled inItem 6, “Selected Financial Data,”decreased to15.3% from $234.2 million in 2014 compared to $301.7 million in 2013, due to the factors discussed above.

Year ended December 31, 2013 compared to year ended December 31, 2012

(Dollars in thousands)		Year Ended December 31, 2013				Year Ended December 31, 2012
Net sales		$	1,485,765			$	1,176,306
Costs of goods sold			916,205				735,906
Gross profit			569,560				440,400
Operating expenses:
Selling and service			107,515				101,448
Research and development			29,271				23,499
General and administrative			55,490				46,031
Amortization of intangibles			25,819				45,867
Total operating expenses			218,095				216,845
Income from operations			351,465				223,555
Total other expense, net			72,749				67,203
Income before provision for income taxes			278,716				156,352
Provision for income taxes			104,177				63,129
Net income		$	174,539			$	93,223

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(Dollars in thousands)		Year Ended December 31, 2013				Year Ended December 31, 2012
Residential power products		$	843,727			$	705,444
Commercial & Industrial power products			569,890				410,341
Other			72,148				60,521
Net sales		$	1,485,765			$	1,176,306

Net sales.Net sales increased $309.5 million, or 26.3%, to $1,485.8 million for the year ended December 31, 2013 from $1,176.3 million for the year ended December 31, 2012. Residential product sales increased 19.6% to $843.7 million from $705.4 million for the comparable period in 2012. The increase in residential product sales was primarily driven by increases in shipments for home standby generators2014, due to a combination ofthe factors including the additional awareness and adoption of our products created by major power outages in recent years, including Superstorm Sandy in 2012, the Company’s expanded distribution, increased sales and marketing initiatives, overall strong operational execution and an improving environment for residential investment. The strength in home standby generators wasoutlined above, partially offset by a declinedecrease in shipments of portable generators due to less severe power outage events relative to the prior year. In addition, increased revenue from power washer products contributed to the year-over-year sales growth in residential products. C&I product sales increased 38.9% to $569.9 million from $410.3 million for the comparable period in 2012. The increase was driven by the impact of recent acquisitions along with strong organic growth for stationary and mobile generators. The increase in organic revenues was primarily driven by strong shipments to national account customers and increased sales of natural gas generators used in light commercial applications.cash income tax expense.

 

Gross profit.Gross profit increased $129.2 million, or 29.3%, to $569.6 million for the year ended December 31, 2013 from $440.4 million for the year ended December 31, 2012. Gross profit margin for the year ended December 31, 2013 increased to 38.3% from 37.4% for the year ended December 31, 2012. This gross margin improvement reflects improved product mix, improved pricing and a moderation in product costs due to lower commodity prices and execution of cost reduction initiatives. These margin improvements were partially offset by the mix impact from recent acquisitions.

Operating expenses.Operating expenses increased $1.3 million to $218.1 million for the year ended December 31, 2013 from $216.8 million for the year ended December 31, 2012. This increase resulted from the impact of recent acquisitions, as well as increased sales, engineering and administrative infrastructure to support the strategic growth initiatives and higher sales levels of the Company. These increases were mostly offset by warranty rate improvements resulting in a $17.6 million favorable adjustment to warranty reserves driven by better claims experience, which impacted selling and service expense, as well as a decline in the amortization of intangibles.

Other expense.Other expense increased $5.5 million, or 8.3%, to $72.7 million for the year ended December 31, 2013 from $67.2 million for the year ended December 31, 2012. These additional expenses were primarily driven by a $5.3 million increase in interest expense due to the higher debt levels from the May 2012 and 2013 refinancing transactions, partially offset by a slight reduction in interest rate on the new credit facility.

Income tax expense.Income tax expense increased $41.1 million to $104.2 million for the year ended December 31, 2013 from $63.1 million for the year ended December 31, 2012. The increase was primarily driven by the increase in pre-tax income during 2013 compared to 2012, partially offset by a lower effective tax rate. The decrease in the effective income tax rate year-over-year is primarily due to the lower tax rate of a foreign subsidiary acquired during the fourth quarter of 2012 and the reinstatement of the federal research and development tax credit in 2013.

Net income.As a result of the factors identified above, we generated net income of $174.5 million for the year ended December 31, 2013 compared to $93.2 million for the year ended December 31, 2012.

Adjusted EBITDA.Adjusted EBITDA, as defined and reconciled inItem 6, “Selected Financial Data,” increased to $402.6 million in 2013 as compared to $289.8 million in 2012 due to the factors discussed above.

Adjusted net income.Adjusted Net Income, as defined and reconciled inItem 6, “Selected Financial Data,”increased to $301.7 million in 2013 compared to $220.8 million in 2012 due to the factors discussed above.

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Liquidity and Financial Position

 

Our primary cash requirements include payment for our raw material and component supplies, salaries & benefits, operating expenses, interest and principal payments on our debt and capital expenditures. We finance our operations primarily through cash flow generated from operations and, if necessary, borrowings under our Amended ABL revolving credit facility.Facility.

 

In February 2012, we paid in full our previously existing debt and entered into a newThe Company’s credit agreement (Credit Agreement). The Credit Agreement provided for borrowings under a $150.0 million revolving credit facility, a $325.0 million tranche A term loan facility and a $250.0 million tranche B term loan facility. Proceeds received from loans made under the Credit Agreement were used to repay in full all outstanding borrowings under the former credit agreement, dated as of November 10, 2006, as amended from time to time, and for general corporate purposes.

In May 2012, we amended and restated our then existing Credit Agreement by entering into a new credit agreement (Term Loan Credit Agreement) and a new revolving credit agreement (ABL Credit Agreement). The Term Loan Credit Agreement provided for a $900.0 million term loan B credit facility (Term Loan) and included a $125.0 million uncommitted incremental term loan facility and the ABL Credit Agreement provided for borrowings under a $150.0 million senior secured ABL revolving credit facility and an uncommitted $50.0 million incremental revolving credit facility. A portion of the proceeds from the Term Loan were used to repay outstanding borrowings under the previous Credit Agreement. The remaining proceeds from the Term Loan were used, together with cash on hand, to pay a special cash dividend of $6.00 per share on our common stock (2012 dividend recapitalization).

On May 31, 2013, we amended and restated our then existing Term Loan Credit Agreement by entering into a new term loan credit agreement (New Term Loan Credit Agreement). The New Term Loan Credit Agreementagreements provided for a $1.2 billion term loan B credit facility (New Term Loan)Loan and includedinclude a $300.0 million uncommitted incremental term loan facility. The New Term Loan Credit Agreement matures on May 31, 2020. Proceeds from the New Term Loan were used to repay outstanding borrowings under the previous Term Loan Credit Agreement and to fund a special cash dividend of $5.00 per share on our common stock (2013 dividend recapitalization). Remaining funds from the New Term Loan were used for general corporate purposes and to pay related financing fees and expenses.2023. The New Term Loan initially bore interest at rates based upon either a base rate plus an applicable margin of 1.75% or adjusted LIBOR rate plus an applicable margin of 2.75%, subject to a LIBOR floor of 0.75%. Beginning in the second quarter of 2014, and measured each subsequent quarter thereafter, the applicable margin related to base rate loans has beenis reduced to 1.50% and the applicable margin related to LIBOR rate loans has beenis reduced to 2.50%, to the extent Generac Power Systems’ (Borrower)that the Company’s net debt leverage ratio, as defined in the New Term Loan, Credit Agreement, is below 3.00 to 1.00 for that measurement period. For the fourth quarter of 2014, the Borrower’sThe Company’s net debt leverage ratio continued to be belowas of December 31, 2016 was above 3.00 to 1.00. As of December 31, 2016, the Company is in compliance with all covenants of the Term Loan. There are no financial maintenance covenants on the Term Loan.

 

Concurrent withThe Company’s credit agreements also provide for the closing of the New Term Loan Credit Agreement, on May 31, 2013, we amended our existing$250.0 million Amended ABL Credit Agreement.Facility. The amendment provides for a one year extension of the maturity date in respect of the $150.0 million senior secured ABL revolving credit facility provided under the previous ABL Credit Agreement (ABL Facility). The extended maturity date of the Amended ABL Facility is May 31, 2018.29, 2020. In May 2015, the Company borrowed $100.0 million under the Amended ABL Facility, the proceeds of which were used as a voluntary prepayment of Term Loan borrowings. As of December 31, 2014, no amounts were2016, there was $100.0 million outstanding under the Amended ABL facility.Facility, and the Company is in compliance with all of its covenants.

 

At December 31, 2014,2016, we had cash and cash equivalents of $189.8$67.3 million and $148.5$145.6 million of availability under our revolving ABL credit facility, net of outstanding letters of creditcredit.

In August 2015, our Board of Directors approved a $200.0 million stock repurchase program, which we completed with stock repurchases in the third quarter of 2016. In October 2016, our Board of Directors approved a $250.0 million stock repurchase program, under which we may repurchase an additional $250.0 million of common stock over 24 months from time to time; in amounts and at prices we deem appropriate, subject to market conditions and other considerations. The repurchases may be executed using open market purchases, privately negotiated agreements or other transactions. The actual timing, number and value of shares repurchased under the program will be determined by management at its discretion and will depend on a number of factors, including the market price of our shares of common stock and general market and economic conditions, applicable legal requirements, and compliance with the terms of the Company’s outstanding borrowings.indebtedness. The repurchases may be funded from cash on hand, available borrowings, or proceeds from potential debt or other capital market sources. The stock repurchase program may be suspended or discontinued at any time without prior notice. For the year ended December 31, 2016, we repurchased 3,968,706 shares of our common stock for $149.9 million, and for the year ended December 31, 2015, the Company repurchased 3,303,500 shares of its common stock for $99.9 million, all funded with cash on hand.

 

Refer to Note 11,10, “Credit Agreements,” to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for additional information.

 

Long-term Liquidity

 

We believe that our cashcash flow from operations and our availability under our revolving credit facility,Amended ABL Facility, combined with relatively low ongoing capital expenditure requirements and favorable tax attributes (which result in a lower cash tax rate as compared to the U.S. statutory tax rate) provide us with sufficient capital to continue to grow our business in the future. We will use a portion of our cash flow to pay interest and principal on our outstanding debt as well as repurchase shares of our common stock, impacting the amount available for working capital, capital expenditures and other general corporate purposes. As we continue to expand our business, we may require additional capital to fund working capital, capital expenditures or acquisitions.

 

Cash Flow

 

Year ended December 31, 20142016 compared compared to year ended December 31, 20132015

 

The following table summarizes our cash flows by category for the periods presented:

 

		Year Ended December 31,
(Dollars in thousands)		2014				2013				Change				% Change
Net cash provided by operating activities		$	252,986			$	259,944			$	(6,958	)			-2.7	%
Net cash used in investing activities			(95,491	)			(144,549	)			49,058				-33.9	%
Net cash used in financing activities			(116,023	)			(73,399	)			(42,624	)			58.1	%

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		Year Ended December 31,
(U.S. Dollars in thousands)		2016				2015				Change				% Change
Net cash provided by operating activities		$	253,409			$	188,619			$	64,790				34.3	%
Net cash used in investing activities			(105,822	)			(104,328	)			(1,494	)			1.4	%
Net cash used in financing activities			(195,705	)			(154,483	)			(41,222	)			26.7	%

 

NetThe 34.3% increase in net cash provided by operating activities was $253.0 million for 2014 compared to $259.9 million in 2013. This decrease of $6.9 million, or 2.7%, is primarily attributable to lower operating income, after adding back non-cash items, in the current year, partially offsetdriven by a reduction in working capital investment due to a slight decrease in inventory levels in 2014during the current year as compared to a significantthe larger investment that was incurred in the prior year, and an overall increase in inventory in 2013. The prior year period included a significant use of cash to replenish finished good inventory levels that had been depleted by demand driven from major power outages.operating earnings.

 

Net cash used in investing activities for the year ended December 31, 2016 primarily represents cash payments of $76.7 million related to the acquisitions of businesses and $30.5 million for the purchase of property and equipment. Net cash used in investing activities for the year ended December 31, 2015 primarily represents cash payments of $74.6 million related to the acquisition of CHP and $30.7 million for the purchase of property and equipment.

Net cash used in financing activities for the year ended December 31, 2016 primarily represents $149.9 million payments for the repurchase of the Company’s common stock, $65.4 million of debt repayments ($37.6 million of long-term borrowings and $27.8 million of short-term borrowings) and $12.4 million related to the net settlement of equity awards. These payments were partially offset by $28.7 million cash proceeds from short-term borrowings and $7.9 million of excess tax benefits from equity awards.

Net cash used in financing activities for the year ended December 31, 2015 primarily represents $174.0 million of debt repayments ($150.8 million of long-term borrowings and $23.2 million of short-term borrowings), partially offset by $126.4 million cash proceeds from borrowings ($100.0 million from long-term borrowings under the Amended ABL facility and $26.4 million from short-term borrowings). In addition, the Company paid $99.9 million for the repurchase of its common stock and $13.0 million for the net share settlement of equity awards, which was partially offset by $9.6 million of excess tax benefits from equity awards.

Year ended December 31, 2015 compared to year ended December 31, 2014

The following table summarizes our cash flows by category for the periods presented:

		Year Ended December 31,
(U.S. Dollars in thousands)		2015				2014				Change				% Change
Net cash provided by operating activities		$	188,619			$	252,986			$	(64,367	)			-25.4	%
Net cash used in investing activities			(104,328	)			(95,491	)			(8,837	)			9.3	%
Net cash used in financing activities			(154,483	)			(116,023	)			(38,460	)			33.1	%

The 25.4% decrease in net cash provided by operating activities was primarily attributable to lower operating earnings during the year ended December 31, 2015, along with higher working capital investment primarily due to a decrease in accounts payable, partially offset by lower cash tax payments.

Net cash used in investing activities for the year ended December 31, 2015 was primarily related to cash payments of $74.6 million related to the acquisition of CHP and $30.7 million for the purchase of property and equipment. Net cash used in investing activities for the year ended December 31, 2014 was $95.5 million.This includedprimarily attributable to cash payments of $61.2 million related to the acquisition of businesses and $34.7 million for the purchase of property and equipment.

Net cash used for investingin financing activities for the year ended December 31, 2013 was $144.6 million.This included2015 primarily represents $174.0 million of debt repayments ($150.8 million of long-term borrowings and $23.2 million of short-term borrowings), partially offset by $126.4 million cash payments of $116.1proceeds from borrowings ($100.0 million related tofrom long-term borrowings under the acquisition of businessesAmended ABL facility and $30.8$26.4 million from short-term borrowings). In addition, the Company paid $99.9 million for the purchaserepurchase of propertyits common stock and equipment,$13.0 million for the net share settlement of equity awards, which was partially offset by cash proceeds$9.6 million of $2.3 millionexcess tax benefits from the sale of a business.equity awards.

 

Net cash used forin financing activities was $116.0 million for the year ended December 31, 2014 primarily representingrepresents $120.4 million of debt repayments ($94.0 million repayment of long-term borrowings and $26.4 million repayment of short-term borrowings),; partially offset by $6.6 million of cash proceeds from short-term borrowings. In addition, the Company paid $12.2 million of taxes related tofor the net share settlement of equity awards, which was partially offset by $11.0 million of cash inflow related to excess tax benefits offrom equity awards.

 

Net cash used for financing activities was $73.4 million for the year ended December 31, 2013, primarily representingthe net cash impact of debt prepayments and the dividend recapitalization transaction that occurred during the first half of 2013, including cash proceeds from long-term borrowings of $1,200.0 million offset by $901.2 million of long-term borrowing repayments. The Company paid $22.4 million for transaction fees incurred in connection with the May 2013 refinancing transaction. Following the refinancing, the Company paid a special cash dividend of $5.00 per share ($340.8 million) on the Company’s common stock (incremental to the $2.6 million cash dividends paid during 2013, related to the 2012 dividend, due to the vesting of restricted stock awards). In addition, the Company paid $15.0 million in taxes related to the net share settlement of equity awards which was partially offset by approximately $11.6 million of excess tax benefits of equity awards. Finally, the Company repaid $19.0 million of short-term borrowings, which were partially offset by $16.0 million of cash proceeds from short-term borrowings.

Year ended December 31, 2013 compared to year ended December 31, 2012

The following table summarizes our cash flows by category for the periods presented:

		Year Ended December 31,
(Dollars in thousands)		2013				2012				Change				% Change
Net cash provided by operating activities		$	259,944			$	235,594			$	24,350				10.3	%
Net cash used in investing activities			(144,549	)			(69,345	)			(75,204	)			-108.4	%
Net cash used in financing activities			(73,399	)			(151,352	)			77,953				51.5	%

Net cash provided by operating activities was $259.9 million for 2013 compared to $235.6 million in 2012. This increase of $24.4 million, or 10.3%, is primarily attributable to increased operating earnings as a result of strong organic sales growth and improved operating margins partially offset by increased working capital investments, such as increases in inventory levels to support higher production rates and replenish finished good inventories.

Net cash used for investing activities for the year ended December 31, 2013 was $144.6 million. This included cash payments of $116.1 million related to the acquisition of businesses and $30.8 million for the purchase of property and equipment, partially offset by cash proceeds of $2.3 million from the sale of a business. Net cash used for investing activities for the year ended December 31, 2012 was $69.3 million. This included $22.4 million for the purchase of property and equipment and $47.0 million for the acquisition of a business.

Net cash used for financing activities was $73.4 million for the year ended December 31, 2013, primarily representingthe net cash impact of debt prepayments and the dividend recapitalization transaction that occurred during the first half of 2013, including cash proceeds from long-term borrowings of $1,200.0 million offset by $901.2 million of long-term borrowing repayments. The Company paid $22.4 million for transaction fees incurred in connection with the May 2013 refinancing transaction. Following the refinancing, the Company paid a special cash dividend of $5.00 per share ($340.8 million) on the Company’s common stock (incremental to the $2.6 million cash dividends paid during 2013, related to the 2012 dividend, due to the vesting of restricted stock awards). In addition, the Company paid $15.0 million in taxes related to the net share settlement of equity awards which was partially offset by approximately $11.6 million of excess tax benefits of equity awards. Finally, the Company repaid $19.0 million of short-term borrowings, which were partially offset by $16.0 million of cash proceeds from short-term borrowings.

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Net cash used for financing activities was $151.4 million for the year ended December 31, 2012, primarily representing the net cash impact of our refinancing activities and the dividend recapitalization transaction that occurred during the first half of 2012, including cash proceeds from long-term borrowings of $1,455.6 million offset by $1,175.1 million of long-term borrowing repayments. The Company made $25.7 million of cash payments for transaction fees incurred in connection with these refinancing transactions. Following the May 2012 refinancing, the Company paid a special cash dividend of $6.00 per share ($404.3 million, which excludes dividends for unvested restricted stock) on the Company’s common stock during the second quarter of 2012.

Senior Secured Credit Facilities

 

Refer to Note 11,10, “Credit Agreements,” to the consolidated financial statements included in Item 8 and the “Liquidity and Financial Position” section included in Item 7 of this Annual Report on Form 10-K for information on the senior secured credit facilities.

 

Covenant Compliance

 

The New Term Loan Credit Agreement contains restrictions on the Borrower’sCompany’s ability to pay distributions and dividends (but which permitted the payment of the special cash dividend described in Note 17, “Special Cash Dividend,” to the consolidated financial statements included in Item 8 of this annual report on Form 10-K).dividends. Payments can be made by the Borrower to the Company or other parent companies for certain expenses such as operating expenses in the ordinary course, fees and expenses related to any debt or equity offering and to pay franchise or similar taxes. Dividends can be used to repurchase equity interests, subject to limitations in certain circumstances. Additionally, the New Term Loan Credit Agreement restricts the aggregate amount of dividends and distributions that can be paid and, in certain circumstances, requires pro forma compliance with certain fixed charge coverage ratios or gross leverage ratios, as applicable, in order to pay certain dividends and distributions. The New Term Loan Credit Agreement also contains other affirmative and negative covenants that, among other things, limit the incurrence of additional indebtedness, liens on property, sale and leaseback transactions, investments, loans and advances, mergers or consolidations, asset sales, acquisitions, transactions with affiliates, prepayments of certain other indebtedness and modifications of our organizational documents. The New Term Loan Credit Agreement does not contain any financial maintenance covenants.

 

The New Term Loan Credit Agreement contains customary events of default, including, among others, nonpayment of principal, interest or other amounts, failure to perform covenants, inaccuracy of representations or warranties in any material respect, cross-defaults with other material indebtedness, certain undischarged judgments, thethe occurrence of certain ERISA, bankruptcy or insolvency events, or the occurrence of a change in control (as defined in the New Term Loan Credit Agreement)Loan). A bankruptcy or insolvency event of default will cause the obligations under the New Term Loan Credit Agreement to automatically become immediately due and payable.

 

The NewAmended ABL Credit AgreementFacility also contains covenants and events of default substantially similar to those in the New Term Loan, Credit Agreement, as described above. 

 

Contractual Obligations

 

The following table summarizes our expected paymentspayments for significant contractual obligations as of December 31, 2014:2016:

 

(Dollars in thousands)		Total				Less than 1 Year				2 - 3 Years				4 - 5 Years				After 5 Years
(U.S. Dollars in thousands)																						Total				Less than 1 Year				2 - 3 Years				4 - 5 Years				After 5 Years
Long-term debt, including curent portion (1)		$	1,104,460			$	389			$	71			$	-			$	1,104,000			$	1,043,753			$	14,399			$	320			$	100,034			$	929,000
Capital lease obligations, including current portion			2,059				168				368				389				1,134				4,647				566				1,064				1,034				1,983
Interest on long-term debt			197,422				36,447				72,975				72,851				15,149				212,971				36,369				67,782				64,176				44,644
Operating leases			6,987				2,585				4,138				264				-				36,839				7,922				13,682				9,506				5,730
Total contractual cash obligations (2)		$	1,310,928			$	39,589			$	77,552			$	73,504			$	1,120,283			$	1,298,210			$	59,256			$	82,848			$	174,750			$	981,357

 

(1)On May 31, 2013, the Borrower amended and restated its then existingThe Term Loan Credit Agreement by entering into the New Term Loan Credit Agreement with certain commercial banks and other lenders. The New Term Loan Credit Agreement providedprovides for a $1,200.0 million New Term Loan$1.2 billion term loan B credit facility and includes a $300.0 million uncommitted incremental term loan facility. The New Term Loan Credit Agreement matures on May 31, 2023. The Amended ABL Facility provides for a $250.0 million senior secured ABL revolving credit facility, which matures on May 29, 2020. There was $100.0 million outstanding on the Amended ABL Facility as of December 31, 2016.

 

(2(2)) Pension obligations are excluded from this table as we are unable to estimate the timing of payment due to the inherent assumptions underlying the obligation. However, the Company estimates we will contribute $1.2$0.6 million to our pension plans in 2015.2017.

 

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Capital Expenditures

 

Our operations require capital expenditures for technology, tooling, equipment, capacity expansion, systems and upgrades. Capital expenditures were $34.7$30.5 million and $30.8$30.7 million for the years ended December 31, 20142016 and 2013,2015, respectively, and were funded through cash from operations.

 

Off-Balance Sheet Arrangements

 

We have an arrangement with a finance company to provide floor plan financing for selected dealers. This arrangement provides liquidity for our dealers by financing dealer purchases of products with credit availability from the finance company. We receive payment from the finance company after shipment of product to the dealer and our dealers are given a longer period of time to pay the finance provider. If our dealers do not pay the finance company, we may be required to repurchase the applicable inventory held by the dealer. We do not indemnify the finance company for any credit losses they may incur.

 

Total inventory financed under this arrangement accounted for approximately 8% and 9% of net sales for the years ended December 31, 20142016 and 2013.2015, respectively. The amount financed by dealers which remained outstanding was $26.1$33.9 million and $24.3$32.4 million as of December 31, 20142016 and 2013,2015, respectively.

 

Critical Accounting Policies

 

In preparing the financial statements in accordance with U.S. GAAP, management is required to make estimates and assumptions that have an impact on the asset, liability, revenue and expense amounts reported. These estimates can also affect supplemental information disclosures of the Company, including information about contingencies, risk and financial condition. The Company believes, given current facts and circumstances, that its estimates and assumptions are reasonable, adhere to U.S. GAAP, and are consistently applied. Inherent in the nature of an estimate or assumption is the fact that actual results may differ from estimates and estimates may vary as new facts and circumstances arise. The Company makes routine estimates and judgments in determining net realizable value of accounts receivable, inventories, property plant and equipment, and prepaid expenses. Management believes the Company’s most critical accounting estimates and assumptions are in the following areas: goodwill and other indefinite-lived intangible asset impairment assessment; business combinations and purchase accounting; defined benefit pension obligations; estimates of allowance for doubtful accounts, excess and obsolete inventory reserves, product warranty and other contingencies; derivative accounting; income taxes and share based compensation.

Goodwill and Other Indefinite-Lived Intangible Antangiblessets Assets

 

SeeRefer to Note 2, “Significant Accounting Policies -– Goodwill and Other Indefinite-Lived Intangible Assets,” to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for further information on the Company’s policy regarding the accounting for goodwill and other intangible assets.

The Company performed the required annual impairment tests for goodwill and other indefinite-lived intangible assets for the fiscal years 2014, 20132016, 2015 and 2012,2014, and found no impairment.impairment following the 2016 and 2014 tests. There were no reporting units with a carrying value at-risk of exceeding fair value as of the October 31, 2016 impairment test date.

After performing the impairment tests for fiscal year 2015, the Company determined that the fair value of the Ottomotores reporting unit was less than its carrying value, resulting in a non-cash goodwill impairment charge of $4.6 million in the fourth quarter of 2015. The fair value was determined using a discounted cash flow analysis, which utilizes key estimates and assumptions as discussed below. Additionally, in the fourth quarter of 2015, the Company’s Board of Directors approved a plan to strategically transition and consolidate certain of the Company’s brands acquired through acquisitions over the past several years to the Generac® tradename. This brand strategy change resulted in a reclassification to a two year remaining useful life for the impacted tradenames, causing the fair value to be less than the carrying value using the relief-from-royalty approach in a discounted cash flow analysis. As such, a $36.1 million non-cash impairment charge was recorded in the fourth quarter of 2015 to write-down the impacted tradenames to net realizable value. See Note 2, “Significant Accounting Policies – Goodwill and Other Indefinite-Lived Intangible Assets,” to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K for further information on the impairment charges recorded in 2015.

 

When preparing a discounted cash flow analysis for purposes of our annual impairment test, we make a number of key estimates and assumptions. We estimate the future cash flows of the business based on historical and forecasted revenues and operating costs. This, in turn, involves further estimates, such as estimates of future growth rates and inflation rates. In addition, we apply a discount rate to the estimated future cash flows for the purpose of the valuation. This discount rate is based on the estimated weighted average cost of capital for the business and may change from year to year. Weighted average cost of capital includes certain assumptions such as market capital structures, market betas, risk-free rate of return and estimated costs of borrowing.

In our October 31, 2014 impairment test calculation, the Ottomotores reporting unit had an estimated fair value that was approximately equal to carrying value. The carrying value of the Ottomotores goodwill was approximately $4.6 million as of December 31, 2014. Key financial assumptions utilized to determine the fair value of the reporting unit includes revenue growth levels that reflect a recovery of Latin American economies, impacts of Mexican energy reform, improving profit margins, a 3% terminal growth rate and a 16.8% discount rate. A 50 basis point increase in the discount rate results in a decrease to the estimated fair value of the reporting unit of approximately 4%, while a reduction in the sales continuous annual growth rate of 100 basis points would decrease the estimated fair value by approximately 3%. As of the October 31, 2014 impairment test date, there were no other reporting units with a carrying value that was at risk of exceeding its fair value.

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As noted above, a considerable amount of management judgment and assumptions are required in performing the goodwill and indefinite-lived intangible asset impairment tests. While we believe our judgments and assumptions are reasonable, different assumptions could change the estimated fair values. A number of factors, many of which we have no ability to control, could cause actual results to differ from the estimates and assumptions we employed. These factors include:

 

●

a prolonged global or regional economic downturn;

●

a significant decrease in the demand for our products;

●

the inability to develop new and enhanced products and services in a timely manner;

●

a significant adverse change in legal factors or in the business climate;

●

an adverse action or assessment by a regulator;

●

successful efforts by our competitors to gain market share in our markets;markets;

●

disruptions to the Company’sCompany’s business;

●

inability to effectively integrate acquired businesses;

●

unexpected or planned changes in the use of assets or entity structure; and

●

business divestitures.

 

If management's estimates of future operating results change or if there are changes to other assumptions due to these factors, the estimate of the fair values may change significantly. Such change could result in impairment charges in future periods, which could have a significant impact on our operating results and financial condition.

 

Business CBusinessCombinations andPurchase PAccountingurchaseAccounting

 

We account for business combinations using the acquisition method of accounting, and accordingly, the assets and liabilities of the acquired business are recorded at their respective fair values. The excess of the purchase price over the estimated fair value of assets and liabilities is recorded as goodwill. Assigning fair market values to the assets acquired and liabilities assumed at the date of an acquisition requires knowledge of current market values, and the values of assets in use, and often requires the application of judgment regarding estimates and assumptions. While the ultimate responsibility resides with management, for material acquisitions we retain the services of certified valuation specialists to assist with assigning estimated values to certain acquired assets and assumed liabilities, including intangible assets and tangible long-lived assets. Acquired intangible assets, excluding goodwill, are valued using certain discounted cash flow methodologies based on future cash flows specific to the type of intangible asset purchased. This methodology incorporates various estimates and assumptions, the most significant being projected revenue growth rates, earnings margins, and forecasted cash flows based on the discount rate and terminal growth rate.

See Note 1, “Description of Business,” to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K for further information on the Company’s business acquisitions.

Defined Benefit Pension OensionbligationsObligations

 

TThehe Company’s pension benefit obligation and related pension expense or income are calculated in accordance with ASCthe Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 715-30, Defined Benefit Plans—Pension, and are impacted by certain actuarial assumptions, including the discount rate and the expected rate of return on plan assets. RatesSuch rates are evaluated on an annual basis considering such factors asincluding market interest rates and historical asset performance. Actuarial valuations for fiscal year 20142016 used a discount rate of 3.97%4.14% for the salaried pension plan and 3.99%4.16% for the hourly pension plan. Our discount rate was selected using a methodology that matches plan cash flows with a selection of “Aa” or higher rated bonds, resulting in a discount rate that better matches a bond yield curve with comparable cash flows. In estimating the expected return on plan assets, we study historical markets and preserve the long-term historical relationships between equities and fixed-income securities. We evaluate current market factors such as inflation and interest rates before we determine long-term capital market assumptions and review peer data and historical returns to check for reasonableness and appropriateness. Changes in the discount rate and return on assets can have a significant effect on the funded status of our pension plans, stockholders' equity and related expense. We cannot predict these changes in discount rates or investment returns and, therefore, cannot reasonably estimate whether the impact in subsequent years will be significant.

 

The funded status of our pension plans is the difference between the projected benefit obligation and the fair value of its plan assets. The projected benefit obligation is the actuarial present value of all benefits expected to be earned by the employees' service.service. No compensation increase is assumed in the calculation of the projected benefit obligation, as the plans were frozen effective December 31, 2008. Further information regarding the funded status of our pension plans can be found in Note 14, “Benefit Plans,” to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K.

 

Our funding policy for our pension plans is to contribute amounts at least equal to the minimum annual amount required by applicable regulations. Given this policy, we expect to make $1.2$0.6 million in contributions to our pension plans in 2015.2017.

 

Allowance for Doubtful Accounts, Excess & Obsolete InventoryReserves, Product Warranty Reserves and Other Contingenciesontingencies

 

The reserves, if any, for customer rebates, product warranty, product liability, litigation excess and obsolete inventory, and doubtful accountscustomer rebates are fact-specific and take into account such factors as specific customer situations, historical experience, and current and expected economic conditions. Further information on these reserves are reflected under Notes 2, 8, 10,9, and 16 and 19 to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K.

 

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Income TDerivative Accountingaxes

 

See Note 2, “Significant Accounting Policies - Derivative Instruments and Hedging Activities,” and Note 4, “Derivative Instruments and Hedging Activities,” to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for further information on the Company’s policy and assumptions related to derivative accounting.

Income Taxes

We account for income taxes in accordance with ASC 740, Income Taxes. Our estimate of income taxes payable, deferred income taxes and the effective tax rate is based on an analysis of many factors including interpretations of federal, state and international income tax laws; the difference between tax and financial reporting bases of assets and liabilities; estimates of amounts currently due or owed in various jurisdictions; and current accounting standards. We review and update our estimates on a quarterly basis as facts and circumstances change and actual results are known.

 

Our balance sheet includes significant deferred tax assets as a result of goodwill and intangible asset book versus tax differences.

In assessing the realizability of thesethe deferred tax assets on our balance sheet, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the years in which those temporary differences become deductible. We consider the taxable income in prior carryback years, scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment.

Generac Brazil, acquired in the Ottomotores acquisition in December 2012, is in a three-year cumulative net loss position dueRefer to Note 13, “Income Taxes” to the start-up natureconsolidated financial statements in Item 8 of this Annual Report on Form 10-K for further information on the business, and therefore we have not considered expected future taxableCompany’s income in analyzing the realizability of its deferred tax assets as of December 31, 2014. As a result, a full valuation allowance was recorded against the deferred tax assets of Generac Brazil.taxes.

In performing the assessment of the realization of our deferred tax assets as of December 31, 2014, excluding Generac Brazil, we have determined that it is more likely than not that our deferred tax assets will be realized, and therefore no valuation allowance is required.

Share Based Compensationompensation

Under the fair value recognition provisions of ASC 718, Compensation -– Stock Compensation, share based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period. Determining the fair value of share based awards at the grant date requires judgment, including estimating expected dividends and market volatility of our stock. In addition, judgment is also required in estimating the amount of share based awards that are expected to be forfeited. If actual results differ significantly from these estimates, share based compensation expense and our results of operations could be impacted. See Note 15, “Share Plans” to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K for further information on the Company’s share based compensation.

New Accounting Standards

 

For information with respect to new accounting pronouncements and the impact of these pronouncements on our consolidated financial statements, see Note 2, “Significant Accounting Policies - New Accounting Pronouncements,” to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K.

 

ItemItem 7A. Quantitative and Qualitative Disclosures About Market Risk

 

We are exposed to market risk from changes in foreign currency exchange rates, commodity prices and interest rates. To reduce the risk from these changes, in certain foreign currency exchange rates, commodity prices and interest rates, we use financial instruments from time to time. We do not hold or issue financial instruments for trading purposes.

 

Foreign Currency

 

We are exposed to foreign currency exchange risk as a result of purchasing from supplierstransactions denominated in currencycurrencies other than the U.S. Dollar, as well as operating businesses in foreign countries. Periodically, we utilize foreign currency forward purchase and sales contracts to manage the volatility associated with certain foreign currency purchases and sales in the normal course of business. Contracts typically have maturities of one yeartwelve months or less. Realized gains and losses on transactions denominated in foreign currency are recorded in earnings as a component of cost of goods sold on the statements of comprehensive income.

 

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AsThe following is a summary of December 31, 2014, we had the following foreign currency contracts outstanding as of December 31, 2016 (in thousands):

 

Currency Denomination

Trade Date

Effective Date

Notional Amount

Exchange Rate(EUR:GBP)

Expiration Date

Trade Dates

Effective Dates

Notional Amount

Expiration Dates

GBP

July 24, 2014

October 1, 2014

1,000

0.7983

March 2, 2015

9/28/16

–

12/20/16

9/28/16

–

1/9/17

5,850

1/27/17

–

6/28/17

GBP

September 17, 2014

December 15, 2014

500

0.8011

March 31, 2015

GBP

September 17, 2014

December 15, 2014

500

0.8030

March 27, 2015

GBP

October 31, 2014

November 4, 2014

1,000

0.7900

May 29, 2015

GBP

October 31, 2014

February 26, 2015

1,000

0.7918

April 28, 2015

GBP

November 3, 2014

January 15, 2015

1,000

0.7885

April 28, 2015

USD

9/26/16

–

12/19/16

9/26/16

–

12/19/16

7,950

1/13/17

–

6/30/17

 

With the purchase of the Ottomotores business in December 2012 and the Tower Light business in August 2013, a small portion of revenues and expenses are now denominated in Euros, Mexican Pesos, Brazilian Real and British Pounds.

Commodity Prices

 

We are a purchaser of commodities and of componentscomponents manufactured from commodities including steel, aluminum, copper and others. As a result, we are exposed to fluctuating market prices for those commodities. While such materials are typically available from numerous suppliers, commodity raw materials are subject to price fluctuations. We generally buy these commodities and components based upon market prices that are established with the supplier as part of the purchase process. Depending on the supplier, these market prices may reset on a periodic basis based on negotiated lags.lags and calculations. To the extent that commodity prices increase and we do not have firm pricing from our suppliers, or our suppliers are not able to honor such prices, we may experience a decline in our gross margins to the extent we are not able to increase selling prices of our products or obtain manufacturing efficiencies or supply chain savings to offset increases in commodity costs.

 

Periodically, we engage in certain commodity risk management activities. The primary objectives of these activities are to understand and mitigate the impact of potential price fluctuations on our financial results. Generally, these risk management transactions will involve the use of commodityThese derivatives to protect against exposure resulting from significant price fluctuations.

We primarily utilize commodity contracts withtypically have maturities of less than eighteen months. These contracts are intended to offset the effect of price fluctuations on actual inventory purchases and to mitigate the impact on our financial results. As of December 31, 2014,2016, we had the following commodity forward contractscontract outstanding (in thousands):

 

Hedged Item

Trade Date

Effective Date

Notional Amount

Fixed Price (per LB)

Expiration Date

Trade Date

Effective Date

Notional Amount

Fixed Price (per LB)

Expiration Date

Copper

October 2, 2014

October 1, 2014

$

4,960

$

3.000

December 31, 2015

October 19, 2016

October 20, 2016

$

3,502

$

2.118

December 31, 2017

Copper

October 15, 2014

November 1, 2014

$

4,637

$

3.005

December 31, 2015

Copper

December 1, 2014

December 1, 2014

$

8,232

$

2.872

December 31, 2015

 

For additional information on the Company’s commodity forward contracts, including amounts charged to the statement of comprehensive income during 2014,2016, see Note 4, “Derivative Instruments and Hedging Activity,” to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K.

 

Interest Rates

 

As of December 31, 2014,2016, all of the outstanding debt under our term loanTerm Loan was subject to floating interest rate risk. As of December 31, 2014,2016, we had the following interest rate swap contracts outstanding (in thousands):

 

Hedged Item	Contract Date	Effective Date		Notional Amount				Fixed LIBOR Rate			Expiration Date
Interest rate	October 23, 2013	July 1, 2014		$	100,000				1.7420	%	July 1, 2018
Interest rate	October 23, 2013	July 1, 2014		$	100,000				1.7370	%	July 1, 2018
Interest rate	May 19, 2014	July 1, 2014		$	100,000				1.6195	%	July 1, 2018

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Hedged Item	Contract Date	Effective Date		Notional Amount				Fixed LIBOR Rate			Expiration Date
Interest rate	October 23, 2013	July 1, 2014		$	100,000				1.7420	%	July 1, 2018
Interest rate	October 23, 2013	July 1, 2014		$	100,000				1.7370	%	July 1, 2018
Interest rate	May 19, 2014	July 1, 2014		$	100,000				1.6195	%	July 1, 2018

 

At December 31, 2014,2016, the fair value of thethese interest rate swaps was a liability of $1.0$1.7 million. For additional information on the Company’s interest rate swaps, including amounts charged to the statement of comprehensive income during 2014,2016, see Note 4, “Derivative Instruments and Hedging Activities,” and “Note 6, AccumulatedNote 5, “Accumulated Other Comprehensive Loss,” to our consolidated financial statements included in Item 8 of this Annual Report on Form 10-K. Even after giving effect to these swaps, we are exposed to risks due to changes in interest rates with respect to the portion of our term loansTerm Loan that areis not covered by the swaps. A hypothetical change in the LIBOR interest rate of 100 basis points would have changed annual cash interest expense by approximately $4.1$6.3 million (or, without the swaps in place, $5.6$9.3 million) in 2014.2016. The existence of a 0.75% LIBOR floor provision in our New Term Loan Credit Agreement, effective May 31, 2013, limits the impact of a hypothetical 100 basis point change in LIBOR at current December 31, 20142016 LIBOR rates.

 

 

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ItemItem 8. Financial Statements and Supplementary Data

 

Report of Independent Registered Public Accounting Firm

 

To the Board of Directors and Stockholders of Generac Holdings Inc.

Waukesha, Wisconsin

 

We have audited the accompanying consolidated balance sheet of Generac Holdings Inc.’s and subsidiaries (the "Company") as of December 31, 2016, and the related consolidated statements of comprehensive income, stockholders' equity and cash flows for the year ended December 31, 2016. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Generac Holdings Inc. and subsidiaries as of December 31, 2016, and the consolidated results of their operations and their cash flows for the year ended December 31, 2016, in conformity accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December 31, 2014,2016, based on criteria established in Internal Control—IntegratedControl-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) (the COSO criteria).(2013) and our report dated February 24, 2017 expressed an unqualified opinion thereon.

/s/ Deloitte & Touche LLP

Milwaukee, WI

February 24, 2017

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of Generac Holdings Inc.’s

Waukesha, Wisconsin

We have audited the accompanying consolidated balance sheet of Generac Holdings Inc. (the Company) as of December 31, 2015, and the related consolidated statements of comprehensive income, stockholders' equity and cash flows for each of the two years in the period ended December 31, 2015. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Generac Holdings Inc. at December 31, 2015, and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles.

/s/ Ernst & Young LLP

Milwaukee, WI

February 26, 2016 (except for Note 6, Segment Reporting, and Note 2, New Accounting Pronouncements, as to which the date is February 24, 2017)

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of Generac Holdings Inc.

Waukesha, Wisconsin

We have audited the internal control over financial reporting of Generac Holdings Inc. and its subsidiaries (the "Company") as of December 31, 2016, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. As described in Management’s Report on Internal Control Over Financial Reporting, management excluded from its assessment the internal control over financial reporting at the PR Industrial business ("Pramac"), which was acquired on March 1, 2016 and whose financial statements constitute 22.5% and 11.1% of net and total assets, respectively, 12.6% of revenues, and 0.7% of net income of the total consolidated financial statement amounts as of and for the year ended December 31, 2016. Accordingly, our audit did not include the internal control over financial reporting at Pramac. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Overover Financial Reporting. Our responsibility is to express an opinion on the company’sCompany's internal control over financial reporting based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

A company’scompany's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’scompany's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’scompany's assets that could have a material effect on the financial statements.

 

Because of itsthe inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not preventbe prevented or detect misstatements.detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

As indicated in the accompanying Management’s Report on Internal Control Over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of the Powermate and MAC businesses, which are included in the December 31, 2014 consolidated financial statements of Generac Holdings Inc., and constituted 2.2% and 0.1% of total and net assets, respectively, as of December 31, 2014 and 1.6% and 0.4% of revenues and net income, respectively, for the year then ended. Our audit of internal control over financial reporting of Generac Holdings Inc. also did not include an evaluation of the internal control over financial reporting of Powermate and MAC.

In our opinion, Generac Holdings Inc.the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014,2016, based on the COSO criteria.criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

 

We have also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheetssheet as of December 31, 20142016 and 2013, andthe related consolidated statementsstatement of comprehensive income, stockholders'stockholders’ equity and cash flows for each of the three years in the periodyear ended December 31, 20142016 of Generac Holdings Inc. and our report dated February 27, 201524, 2017 expressed an unqualified opinion thereon.on those financial statements.

 

/s/ Ernst Deloitte & YoungTouche LLP

 

Milwaukee, WI USA

February 27, 201524, 2017

Generac Holdings Inc.

Consolidated Balance Sheets

(U.S. Dollars in Thousands, Except Share and Per Share Data)

		December 31,
		2016				2015
Assets
Current assets:
Cash and cash equivalents		$	67,272			$	115,857
Accounts receivable, less allowance for doubtful accounts of $5,642 and $2,494 at December 31, 2016 and 2015, respectively			241,857				182,185
Inventories			349,731				325,375
Prepaid expenses and other assets			24,649				8,600
Total current assets			683,509				632,017
Property and equipment, net			212,793				184,213
Customer lists, net			45,312				39,313
Patents, net			48,061				53,772
Other intangible assets, net			2,925				2,768
Tradenames, net			158,874				161,057
Goodwill			704,640				669,719
Deferred income taxes			3,337				34,812
Other assets			2,233				964
Total assets		$	1,861,684			$	1,778,635
Liabilities and stockholders’ equity
Current liabilities:
Short-term borrowings		$	31,198			$	8,594
Accounts payable			181,519				108,332
Accrued wages and employee benefits			21,189				13,101
Other accrued liabilities			93,068				82,540
Current portion of long-term borrowings and capital lease obligations			14,965				657
Total current liabilities			341,939				213,224
Long-term borrowings and capital lease obligations			1,006,758				1,037,132
Deferred income taxes			17,278				4,950
Other long-term liabilities			61,459				57,458
Total liabilities			1,427,434				1,312,764
Redeemable noncontrolling interest			33,138				–
Stockholders’ equity:
Common stock, par value $0.01, 500,000,000 shares authorized, 70,261,481 and 69,582,669 shares issued at December 31, 2016 and 2015, respectively			702				696
Additional paid-in capital			449,049				443,109
Treasury stock, at cost, 7,564,874 and 3,567,575 shares at December 31, 2016 and 2015, respectively			(262,402	)			(111,516	)
Excess purchase price over predecessor basis			(202,116	)			(202,116	)
Retained earnings			456,052				358,173
Accumulated other comprehensive loss			(40,163	)			(22,475	)
Stockholders’ equity attributable to Generac Holdings Inc.			401,122				465,871
Noncontrolling interests			(10	)			–
Total stockholders’ equity			401,112				465,871
Total liabilities and stockholders’ equity		$	1,861,684			$	1,778,635

See notes to consolidated financial statements.

 

 

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Report of Independent Registered Public Accounting Firm

Generac Holdings Inc.

Consolidated Statements of Comprehensive Income

(U.S. Dollars in Thousands, Except Share and Per Share Data)

 

To the Board of Directors and Stockholders of Generac Holdings Inc.

		Year Ended December 31,
		2016				2015				2014
Net sales		$	1,444,453			$	1,317,299			$	1,460,919
Costs of goods sold			930,347				857,349				944,700
Gross profit			514,106				459,950				516,219
Operating expenses:
Selling and service			164,607				130,242				120,408
Research and development			37,229				32,922				31,494
General and administrative			74,700				52,947				54,795
Amortization of intangibles			32,953				23,591				21,024
Tradename and goodwill impairment			–				40,687				–
Gain on remeasurement of contingent consideration			–				–				(4,877	)
Total operating expenses			309,489				280,389				222,844
Income from operations			204,617				179,561				293,375
Other (expense) income:
Interest expense			(44,568	)			(42,843	)			(47,215	)
Investment income			44				123				130
Loss on extinguishment of debt			(574	)			(4,795	)			(2,084	)
Gain (loss) on change in contractual interest rate			(2,957	)			(2,381	)			16,014
Costs related to acquisition			(1,082	)			(1,195	)			(396	)
Other, net			902				(5,487	)			(1,462	)
Total other expense, net			(48,235	)			(56,578	)			(35,013	)
Income before provision for income taxes			156,382				122,983				258,362
Provision for income taxes			57,570				45,236				83,749
Net income			98,812				77,747				174,613
Net income attributable to noncontrolling interests			24				-				-
Net income attributable to Generac Holdings Inc.		$	98,788			$	77,747			$	174,613
Net income attributable to common shareholders per common share - basic:		$	1.51			$	1.14			$	2.55
Weighted average common shares outstanding - basic:			64,905,793				68,096,051				68,538,248
Net income attributable to common shareholders per common share - diluted:		$	1.50			$	1.12			$	2.49
Weighted average common shares outstanding - diluted:			65,382,774				69,200,297				70,171,044
Other comprehensive income (loss):
Foreign currency translation adjustment		$	(18,545	)		$	(7,624	)		$	(3,082	)
Net unrealized gain (loss) on derivatives			535				(965	)			(1,420	)
Pension liability adjustment			322				1,881				(8,850	)
Other comprehensive loss			(17,688	)			(6,708	)			(13,352	)
Total comprehensive income			81,124				71,039				161,261
Comprehensive loss attributable to noncontrolling interests			(973	)			–				–
Comprehensive income attributable to Generac Holdings Inc.		$	82,097			$	71,039			$	161,261

 

We have audited the accompanying consolidated balance sheets of Generac Holdings Inc. (the Company) as of December 31, 2014 and 2013, and the related consolidated statements of comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2014. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Generac Holdings Inc. at December 31, 2014 and 2013, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Generac Holdings Inc.’s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) and our report dated February 27, 2015 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Milwaukee, WI, USA

February 27, 2015

See notes to consolidated financial statements.

 

 

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Generac Holdings Inc.

Consolidated Statements of Stockholders' Equity

(U.S. Dollars in Thousands, Except Share Data)

		Generac Holdings Inc.
		Common Stock								Additional Paid-In				Treasury Stock								Excess Purchase Price Over Predecessor				Retained				Accumulated Other Comprehensive				Total Stockholders'				Noncontrolling
		Shares				Amount				Capital				Shares				Amount				Basis				Earnings				Income (Loss)				Equity				Interest				Total
Balance at December 31, 2013			68,767,367			$	688			$	421,672				(163,458	)		$	(6,571	)		$	(202,116	)		$	105,813			$	(2,415	)		$	317,071			$	–			$	317,071
Unrealized loss on interest rate swaps, net of tax of $(860)			–				–				–				–				–				–				–				(1,420	)			(1,420	)			–				(1,420	)
Foreign currency translation adjustment			–				–				–				–				–				–				–				(3,082	)			(3,082	)			–				(3,082	)
Common stock issued under equity incentive plans, net of shares withheld for employee taxes and strike price			354,904				3				(10,378	)			–				–				–				–				–				(10,375	)			–				(10,375	)
Net share settlement of restricted stock awards			–				–				–				(34,854	)			(1,770	)			–				–				–				(1,770	)			–				(1,770	)
Excess tax benefits from equity awards			–				–				10,972				–				–				–				–				–				10,972				–				10,972
Share-based compensation			–				–				12,612				–				–				–				–				–				12,612				–				12,612
Dividends declared			–				–				28				–				–				–								–				28				–				28
Pension liability adjustment, net of tax of $(5,658)			–				–				–				–				–				–				–				(8,850	)			(8,850	)			–				(8,850	)
Net income			–				–				–				–				–				–				174,613				–				174,613				–				174,613
Balance at December 31, 2014			69,122,271			$	691			$	434,906				(198,312	)		$	(8,341	)		$	(202,116	)		$	280,426			$	(15,767	)		$	489,799			$	-			$	489,799
Unrealized loss on interest rate swaps, net of tax of $(609)			–				–				–				–				–				–				–				(965	)			(965	)			–				(965	)
Foreign currency translation adjustment			–				–				–				–				–				–				–				(7,624	)			(7,624	)			–				(7,624	)
Common stock issued under equity incentive plans, net of shares withheld for employee taxes and strike price			460,398				5				(9,626	)			–				–				–				–				–				(9,621	)			–				(9,621	)
Net share settlement of restricted stock awards			–				–				–				(65,763	)			(3,233	)			–				–				–				(3,233	)			–				(3,233	)
Stock repurchases			–				–				–				(3,303,500	)			(99,942	)			–				–				–				(99,942	)			–				(99,942	)
Excess tax benefits from equity awards			–				–				9,559				–				–				–				–				–				9,559				–				9,559
Share-based compensation			–				–				8,241				–				–				–				–				–				8,241				–				8,241
Dividends declared			–				–				29				–				–				–								–				29				–				29
Pension liability adjustment, net of tax of $1,176			–				–				–				–				–				–				–				1,881				1,881				–				1,881
Net income			–				–				–				–				–				–				77,747				–				77,747				–				77,747
Balance at December 31, 2015			69,582,669			$	696			$	443,109				(3,567,575	)		$	(111,516	)		$	(202,116	)		$	358,173			$	(22,475	)		$	465,871			$	-			$	465,871
Acquisition of business			–				–				–				–				–				–				–				–				–				53				53
Unrealized gain on interest rate swaps, net of tax of $341			–				–				–				–				–				–				–				535				535				–				535
Foreign currency translation adjustment			–				–				–				–				–				–				–				(18,545	)			(18,545	)			13				(18,532	)
Common stock issued under equity incentive plans, net of shares withheld for employee taxes and strike price			678,812				6				(11,473	)			–				–				–				–				–				(11,467	)			–				(11,467	)
Net share settlement of restricted stock awards			–				–				–				(28,593	)			(949	)			–				–				–				(949	)			–				(949	)
Stock repurchases			–				–				–				(3,968,706	)			(149,937	)			–				–				–				(149,937	)			–				(149,937	)
Excess tax benefits from equity awards			–				–				7,920				–				–				–				–				–				7,920				–				7,920
Share-based compensation			–				–				9,493				–				–				–				–				–				9,493				–				9,493
Pension liability adjustment, net of tax of $207			–				–				–				–				–				–				–				322				322				–				322
Redemption value adjustment			–				–				–				–				–				–				(909	)			–				(909	)			–				(909	)
Net income			–				–				–				–				–				–				98,788				–				98,788				(76	)			98,712
Balance at December 31, 2016			70,261,481			$	702			$	449,049				(7,564,874	)		$	(262,402	)		$	(202,116	)		$	456,052			$	(40,163	)		$	401,122			$	(10	)		$	401,112

See notes to consolidated financial statements.

Generac Holdings Inc.

Consolidated Statements of Cash Flows

(U.S. Dollars in Thousands)

		Year Ended December 31,
		2016				2015				2014
Operating activities
Net income		$	98,812			$	77,747			$	174,613
Adjustment to reconcile net income to net cash provided by operating activities:
Depreciation			21,465				16,742				13,706
Amortization of intangible assets			32,953				23,591				21,024
Amortization of original issue discount and deferred financing costs			3,940				5,429				6,615
Tradename and goodwill impairment			–				40,687				–
Loss on extinguishment of debt			574				4,795				2,084
(Gain) loss on change in contractual interest rate			2,957				2,381				(16,014	)
Gain on remeasurement of contingent consideration			–				–				(4,877	)
Deferred income taxes			39,347				26,955				37,878
Share-based compensation expense			9,493				8,241				12,612
Other			127				540				1,248
Net changes in operating assets and liabilities, net of acquisitions:
Accounts receivable			(9,082	)			9,610				(2,988	)
Inventories			15,514				9,084				3,508
Other assets			406				5,063				2,456
Accounts payable			32,908				(27,771	)			15,269
Accrued wages and employee benefits			5,196				(5,361	)			(9,405	)
Other accrued liabilities			6,719				445				6,229
Excess tax benefits from equity awards			(7,920	)			(9,559	)			(10,972	)
Net cash provided by operating activities			253,409				188,619				252,986
Investing activities
Proceeds from sale of property and equipment			1,360				105				394
Expenditures for property and equipment			(30,467	)			(30,651	)			(34,689	)
Acquisition of business, net of cash acquired			(61,386	)			(73,782	)			(61,196	)
Deposit paid related to acquisition			(15,329	)			–				–
Net cash used in investing activities			(105,822	)			(104,328	)			(95,491	)
Financing activities
Proceeds from short-term borrowings			28,712				26,384				6,550
Proceeds from long-term borrowings			–				100,000				–
Repayments of short-term borrowings			(27,755	)			(23,149	)			(26,444	)
Repayments of long-term borrowings and capital lease obligations			(37,627	)			(150,826	)			(94,035	)
Stock repurchases			(149,937	)			(99,942	)			–
Payment of debt issuance costs			(4,557	)			(2,117	)			(4	)
Cash dividends paid			(76	)			(1,436	)			(902	)
Taxes paid related to the net share settlement of equity awards			(14,008	)			(12,956	)			(12,160	)
Proceeds from the exercise of stock options			1,623				–				–
Excess tax benefits from equity awards			7,920				9,559				10,972
Net cash used in financing activities			(195,705	)			(154,483	)			(116,023	)
Effect of exchange rate changes on cash and cash equivalents			(467	)			(3,712	)			(1,858	)
Net increase (decrease) in cash and cash equivalents			(48,585	)			(73,904	)			39,614
Cash and cash equivalents at beginning of period			115,857				189,761				150,147
Cash and cash equivalents at end of period		$	67,272			$	115,857			$	189,761
Supplemental disclosure of cash flow information
Cash paid during the period
Interest		$	42,456			$	39,524			$	42,592
Income taxes			8,889				6,087				34,283

See notes to consolidated financial statements.

 

Generac Holdings Inc.
Notes to Consolidated Financial Statements

Consolidated Balance SheetsYears Ended December 31, 2016, 2015, and 2014

((U.S. Dollars in Thousands, Except Share and Per Share Data)

		December 31,
		2014				2013
Assets
Current assets:
Cash and cash equivalents		$	189,761			$	150,147
Restricted cash			-				6,645
Accounts receivable, less allowance for doubtful accounts of $2,275 atDecember 31, 2014 and $2,658 at December 31, 2013			189,107				164,907
Inventories			319,385				300,253
Deferred income taxes			22,841				26,869
Prepaid expenses and other assets			9,384				5,358
Total current assets			730,478				654,179
Property and equipment, net			168,821				146,390
Customer lists, net			41,002				42,764
Patents, net			56,894				62,418
Other intangible assets, net			4,298				4,447
Trade names, net			182,684				173,196
Goodwill			635,565				608,287
Deferred financing costs, net			16,243				20,051
Deferred income taxes			46,509				85,104
Other assets			48				1,369
Total assets		$	1,882,542			$	1,798,205
Liabilities and stockholders’ equity
Current liabilities:
Short-term borrowings		$	5,359			$	9,575
Accounts payable			132,248				109,238
Accrued wages and employee benefits			17,544				26,564
Other accrued liabilities			84,814				92,997
Current portion of long-term borrowings and capital lease obligations			557				12,471
Total current liabilities			240,522				250,845
Long-term borrowings and capital lease obligations			1,082,101				1,175,349
Other long-term liabilities			70,120				54,940
Total liabilities			1,392,743				1,481,134
Stockholders’ equity:
Common stock, par value $0.01, 500,000,000 shares authorized, 69,122,271 and 68,767,367 shares issued at December 31, 2014 and 2013, respectively			691				688
Additional paid-in capital			434,906				421,672
Treasury stock, at cost, 198,312 and 163,458 shares at December 31, 2014 and 2013, respectively			(8,341	)			(6,571	)
Excess purchase price over predecessor basis			(202,116	)			(202,116	)
Retained earnings			280,426				105,813
Accumulated other comprehensive loss			(15,767	)			(2,415	)
Total stockholders’ equity			489,799				317,071
Total liabilities and stockholders’ equity		$	1,882,542			$	1,798,205

See notes to consolidated financial statements.

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Generac Holdings Inc.

Consolidated Statements of Comprehensive Income

(Dollars in Thousands, Except Share and Per Share Data)

		Year Ended December 31,
		2014				2013				2012
Net sales		$	1,460,919			$	1,485,765			$	1,176,306
Costs of goods sold			944,700				916,205				735,906
Gross profit			516,219				569,560				440,400
Operating expenses:
Selling and service			120,408				107,515				101,448
Research and development			31,494				29,271				23,499
General and administrative			54,795				55,490				46,031
Amortization of intangibles			21,024				25,819				45,867
Gain on remeasurement of contingent consideration			(4,877	)			-				-
Total operating expenses			222,844				218,095				216,845
Income from operations			293,375				351,465				223,555
Other (expense) income:
Interest expense			(47,215	)			(54,435	)			(49,114	)
Investment income			130				91				79
Loss on extinguishment of debt			(2,084	)			(15,336	)			(14,308	)
Gain on change in contractual interest rate			16,014				-				-
Costs related to acquisitions			(396	)			(1,086	)			(1,062	)
Other, net			(1,462	)			(1,983	)			(2,798	)
Total other expense, net			(35,013	)			(72,749	)			(67,203	)
Income before provision for income taxes			258,362				278,716				156,352
Provision for income taxes			83,749				104,177				63,129
Net income		$	174,613			$	174,539			$	93,223
Net income per common share - basic:		$	2.55			$	2.56			$	1.38
Weighted average common shares outstanding - basic:			68,538,248				68,081,632				67,360,632
Net income per common share - diluted:		$	2.49			$	2.51			$	1.35
Weighted average common shares outstanding - diluted:			70,171,044				69,667,529				69,193,138
Dividends declared per share		$	-			$	5.00			$	6.00
Other comprehensive income (loss):
Amortization of unrealized loss on interest rate swaps		$	-			$	2,381			$	2,082
Foreign currency translation adjustment			(3,082	)			1,238				(34	)
Net unrealized gain (loss) on derivatives			(1,420	)			774				365
Pension liability adjustment			(8,850	)			7,688				(1,552	)
Other comprehensive income (loss)			(13,352	)			12,081				861
Comprehensive income		$	161,261			$	186,620			$	94,084

See notes to consolidated financial statements.

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Generac Holdings Inc.

Consolidated Statements of Stockholders' Equity

(Dollars in Thousands, Except Share Data)

		Common Stock								Additional Paid-In				Treasury Stock								Excess Purchase Price OverPredecessor				Retained Earnings (Accumulated				Accumulated Other Comprehensive				Total Stockholders'
		Shares				Amount				Capital				Shares				Amount				Basis				Deficit)				Income (Loss)				Equity
Balance at December 31, 2011			67,652,812			$	676			$	1,142,701				-			$	-			$	(202,116	)		$	(157,015	)		$	(15,357	)		$	768,889
Unrealized gain on interest rate swaps, net of tax of $236			-				-				-				-				-				-				-				365				365
Amortization of unrealized loss on interest rate swaps, net of tax of $95			-				-				-				-				-				-				-				2,082				2,082
Foreign currency translation adjustment			-				-				-				-				-				-				-				(34	)			(34	)
Common stock issued under equity incentive plans, net of shares withheldfor employee taxes and strike price			643,148				7				(6,431	)			-				-				-				-				-				(6,424	)
Excess tax benefits from equity awards			-				-				4,588				-				-				-				-				-				4,588
Share-based compensation			-				-				10,780				-				-				-				-				-				10,780
Dividends declared			-				-				(408,289	)			-				-				-				-				-				(408,289	)
Pension liability adjustment, net of tax of $(1,001)			-				-				-				-				-				-				-				(1,552	)			(1,552	)
Net income			-				-				-				-				-				-				93,223				-				93,223
Balance at December 31, 2012			68,295,960				683				743,349				-				-				(202,116	)			(63,792	)			(14,496	)			463,628
Unrealized gain on interest rate swaps, net of tax of $462			-				-				-				-				-				-				-				774				774
Amortization of unrealized loss on interest rate swaps, net of tax of $109			-				-				-				-				-				-				-				2,381				2,381
Foreign currency translation adjustment			-				-				-				-				-				-				-				1,238				1,238
Common stock issued under equity incentive plans, net of shares withheldfor employee taxes and strike price			471,407				5				(8,587	)			-				-				-				-				-				(8,582	)
Treasury stock purchases			-				-				-				(163,458	)			(6,571	)			-				-				-				(6,571	)
Excess tax benefits from equity awards			-				-				11,553				-				-				-				-				-				11,553
Share-based compensation			-				-				12,368				-				-				-				-				-				12,368
Dividends declared			-				-				(337,011	)			-				-				-				(4,934	)			-				(341,945	)
Pension liability adjustment, net of tax of $5,060			-				-				-				-				-				-				-				7,688				7,688
Net income			-				-				-				-				-				-				174,539				-				174,539
Balance at December 31, 2013			68,767,367			$	688			$	421,672				(163,458	)		$	(6,571	)		$	(202,116	)		$	105,813			$	(2,415	)		$	317,071
Unrealized loss on interest rate swaps, net of tax of $(860)			-				-				-				-				-				-				-				(1,420	)			(1,420	)
Foreign currency translation adjustment			-				-				-				-				-				-				-				(3,082	)			(3,082	)
Common stock issued under equity incentive plans, net of shares withheldfor employee taxes and strike price			354,904				3				(10,378	)			-				-				-				-				-				(10,375	)
Treasury stock purchases			-				-				-				(34,854	)			(1,770	)			-				-				-				(1,770	)
Excess tax benefits from equity awards			-				-				10,972				-				-				-				-				-				10,972
Share-based compensation			-				-				12,612				-				-				-				-				-				12,612
Dividends declared			-				-				28				-				-				-				-				-				28
Pension liability adjustment, net of tax of $(5,658)			-				-				-				-				-				-				-				(8,850	)			(8,850	)
Net income			-				-				-				-				-				-				174,613				-				174,613
Balance at December 31, 2014			69,122,271			$	691			$	434,906				(198,312	)		$	(8,341	)		$	(202,116	)		$	280,426			$	(15,767	)		$	489,799

See notes to condensed consolidated financial statements.

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Generac Holdings Inc.

Consolidated Statements of Cash Flows

(Dollars in Thousands)

		Year Ended December 31,
		2014				2013				2012
Operating activities
Net income		$	174,613			$	174,539			$	93,223
Adjustment to reconcile net income to net cash provided by operating activities:
Depreciation			13,706				10,955				8,293
Amortization of intangible assets			21,024				25,819				45,867
Amortization of original issue discount			3,599				2,074				1,598
Amortization of deferred financing costs			3,016				2,698				2,161
Amortization of unrealized loss on interest rate swaps			-				2,381				2,082
Loss on extinguishment of debt			2,084				15,336				14,308
Gain on change in contractual interest rate			(16,014	)			-				-
Gain on remeasurement of contingent consideration			(4,877	)			-				-
Provision for losses on accounts receivable			672				1,037				204
Deferred income taxes			37,878				82,675				62,429
Loss on disposal of property and equipment			576				370				261
Share-based compensation expense			12,612				12,368				10,780
Net changes in operating assets and liabilities:
Accounts receivable			(2,988	)			(5,257	)			(137	)
Inventories			3,508				(52,488	)			(31,656	)
Other assets			2,456				(10,902	)			(8,416	)
Accounts payable			15,269				(5,847	)			(3,898	)
Accrued wages and employee benefits			(9,405	)			6,248				3,168
Other accrued liabilities			6,229				9,491				39,915
Excess tax benefits from equity awards			(10,972	)			(11,553	)			(4,588	)
Net cash provided by operating activities			252,986				259,944				235,594
Investing activities
Proceeds from sale of property and equipment			394				80				91
Expenditures for property and equipment			(34,689	)			(30,770	)			(22,392	)
Proceeds from sale of business, net			-				2,254				-
Acquisitions of businesses, net of cash acquired			(61,196	)			(116,113	)			(47,044	)
Net cash used in investing activities			(95,491	)			(144,549	)			(69,345	)
Financing activities
Proceeds from short-term borrowings			6,550				16,007				23,018
Proceeds from long-term borrowings			-				1,200,000				1,455,614
Repayments of short-term borrowings			(26,444	)			(18,982	)			(23,000	)
Repayments of long-term borrowings and capital lease obligations			(94,035	)			(901,184	)			(1,175,124	)
Payment of debt issuance costs			(4	)			(22,376	)			(25,691	)
Cash dividends paid			(902	)			(343,429	)			(404,332	)
Taxes paid related to the net share settlement of equity awards			(12,181	)			(15,020	)			(6,425	)
Excess tax benefits from equity awards			10,972				11,553				4,588
Proceeds from exercise of stock options			21				32				-
Net cash used in financing activities			(116,023	)			(73,399	)			(151,352	)
Effect of exchange rate changes on cash and cash equivalents			(1,858	)			128				-
Net increase in cash and cash equivalents			39,614				42,124				14,897
Cash and cash equivalents at beginning of period			150,147				108,023				93,126
Cash and cash equivalents at end of period		$	189,761			$	150,147			$	108,023
Supplemental disclosure of cash flow information
Cash paid during the period
Interest		$	42,592			$	55,828			$	33,076
Income taxes			34,283				25,821				2,811

See notes to consolidated financial statements

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Generac Holdings Inc.
Notes to Consolidated Financial Statements

Years Ended December 31, 2014, 2013, and2012

(Dollars in Thousands, Except Share and Per Share Data)

 

1.	Description of Business

 

Founded in 1959, Generac Holdings Inc. (the Company) owns all of the common stock of Generac Acquisition Corp. (GAC), which in turn, owns all of the common stock of Generac Power Systems, Inc. (the Subsidiary and the Borrower). The Company is a leading designer and manufacturer of a wide range of power generation equipment and other engine powered products serving the residential, light-commercial industrial, oil & gas, and constructionindustrial markets. Generac’s power products are available globally through a broad network of independent dealers, distributors, retailers, wholesalers and equipment rental companies, as well as sold direct to certain end user customers.

 

Over the past several years, we havethe Company has executed a number of acquisitions that support our strategic plan.plan (refer to Item 1 in this Annual Report on Form 10-K for discussion of our Powering Ahead strategic plan). A summary of these acquisitions include the following:

 

●

IOnn October 3, 2011, wethe Company acquired substantially all the assets of Magnum Products (Magnum), a supplier of generator powered light towers and mobile generators for a variety of industries and specialties.industrial applications. The Magnum business is a strategic fit for usthe Company as it provides diversification withthrough the introduction of new engine powered products, distribution channels and end markets.

●

IOnn December 8, 2012, wethe Company acquired the equity of Ottomotores UK and its affiliates (Ottomotores), with operations in Mexico City, Mexico and Curitiba, Brazil. Ottomotores is a leading manufacturer in the Mexican market for industrial diesel gensets and is a market participant throughout all of Latin America.

●

IOnn August 1, 2013, wethe Company acquired the equity of Tower Light SRL and its wholly-owned subsidiaries (Tower Light). Headquartered outside Milan, Italy, Tower Light is a leading developer and supplier of mobile light towers throughout Europe, the Middle East and Africa.

●

IOnn November 1, 2013, wethe Company purchased the assets of Baldor Electric Company’s generator division (Baldor Generators). Baldor Generators offers a complete line of power generation equipment throughout North America with power output up to 2.5MW.2.5MW, which expands the Company’s commercial and industrial product lines.

●

In SeptemberOn September 2, 2014, wethe Company acquired the equity of Pramac America LLC (Powermate), resulting in the ownership of the Powermate trade name and the right to license the DeWalt brand name for certain residential engine powered tools. The transaction also included working capital associated with these products. This acquisition helps to expand the Generac brand portfolio across itsexpands Generac’s residential product platform and increases its product offeringportfolio in the portable generator category.

●

IOnn October 1, 2014, wethe Company acquired MAC, Inc. and its related entities (MAC). MAC is a leading manufacturer of premium-grade commercial and industrial mobile heaters withinfor the United States and Canada.Canadian markets. The acquisition expands the Company’s portfolio of mobile power products and provides increased access to the oil & gas market.

●

In August 2015, the Company acquired Country Home Products and its subsidiaries (CHP). CHP is a leading manufacturer of high-quality, innovative, professional-grade engine powered equipment used in a wide variety of property maintenance applications, which are primarily sold in North America under the DR® Power Equipment brand. The acquisition provides an expanded product lineup and additional scale to the Company’s residential engine powered products.

●

In March 2016, the Company acquired a majority ownership interest in PR Industrial S.r.l and its subsidiaries (Pramac). Headquartered in Siena, Italy, Pramac is a leading global manufacturer of stationary, mobile and portable generators primarily sold under the Pramac® brand. Pramac products are sold in over 150 countries through a broad distribution network.

●

In January 2017, the Company acquired Motortech GmbH & affiliates (Motortech), headquartered in Celle, Germany. Motortech is a leading manufacturer of gaseous-engine control systems and accessories, which are sold primarily to European gas-engine manufacturers and to aftermarket customers.

2.	Significant Accounting Policies

 

2.Significant Accounting Policies

Principles of Consolidation

 

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries.subsidiaries that are consolidated in conformity with U.S. generally accepted accounting principles (U.S. GAAP). All intercompany amounts and transactions have been eliminated in consolidation.

 

Cashand CashEquivalents

 

The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.

 

Restricted Cash

Restricted cash represents cash transferred to an escrow account for the settlement of certain earn-out obligations associated with the Tower Light acquisition. See Note 3, “Acquisitions,” to the consolidated financial statements for additional details.

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Concentration of Credit Risk

 

The Company maintains the majority of itsdomestic cash in one commercial bank in multiple operating and investment accounts. Balances on deposit are insured by the Federal Deposit Insurance Corporation (FDIC) up to specified limits. Balances in excess of FDIC limits are uninsured.

 

One customer accounted for approximately 9% and 11% of accounts receivable at December 31, 20142016 and 2013,2015, respectively. No one customer accounted for greater than 8%7%, 6%7% and 7%8%, of net sales during the years ended December 31, 2016, 2015, or 2014, 2013, or 2012, respectively.

 

Accounts Receivable

 

Receivables are recorded at their face value amount less an allowance for doubtful accounts. The Company estimates and records an allowance for doubtful accounts based on specific identification and historical experience. The Company writes off uncollectible accounts against the allowance for doubtful accounts after all collection efforts have been exhausted. Sales are generally made on an unsecured basis.

 

Inventories

 

Inventories are stated at the lower of cost or market, with cost determined generally using the first-in, first-out method.

 

Property and Equipment

 

Property and equipment are recorded at cost and are being depreciated using the straight-line method over the estimated useful lives of the assets, which are summarized below (in years). Costs of leasehold improvements are amortized over the lesser of the term of the lease (including renewal option periods) or the estimated useful lives of the improvements.

 

Land improvements	10 - 15
Buildings and improvements	10 - 40
Leasehold improvements	7 - 20
Machinery and equipment	5 - 20
Dies and tools	3 - 10
Vehicles	3 - 5
Office equipment	3 - 10

Land improvements			15	–	20
Buildings and improvements			10	–	40
Machinery and equipment			3	–	10
Dies and tools			3	–	10
Vehicles			3	–	6
Office equipment and systems			3	–	15
Leasehold improvements			2	–	20

 

Debt Issuance CostsTotal depreciation expense was $21,465, $16,742, and $13,706 for the years ended December 31, 2016, 2015, and 2014, respectively.

 

Direct and incremental costs incurred in connection with the issuance of long-term debt are capitalized and amortized to interest expense over the terms of the related credit agreements. Debt discounts incurred in connection with the issuance of long-term debt are deferred and recorded as a reduction of outstanding debt and amortized to interest expense using the catch-up approach of the effective interest method over the terms of the related credit agreements. Approximately $6,615, $4,772, and $3,759 of deferred financing costs and original issue discount were amortized to interest expense during fiscal years 2014, 2013 and 2012, respectively. Excluding the impact of any future long-term debt issuances or prepayments, estimated amortization expense for the next five years is as follows: 2015, $7,012; 2016, $7,302; 2017, $7,550; 2018, $7,505; 2019, $7,534.

Goodwill and Other Indefinite-Lived Intangible Assets

 

Goodwill represents the excess of the purchase price over fair value of identifiable net assets acquired from business acquisitions. Goodwill is not amortized, but is reviewed for impairment on an annual basis and between annual tests if indicators of impairment are present. The Company evaluates goodwill for impairment annually onas of October 31 or more frequently when an event occurs or circumstances change that indicates the carrying value may not be recoverable. The Company has the option to assess goodwill for impairment by first performing a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the Company determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then further goodwill impairment testing is not required to be performed. If the Company determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company is required to perform a two-step goodwill impairment test. In the first step, the fair value of the reporting unit is compared to its book value including goodwill. If the fair value of the reporting unit is in excess of its book value, the related goodwill is not impaired and no further analysis is necessary. If the fair value of the reporting unit is less than its book value, there is an indication of potential impairment and a second step is performed. When required, the second step of testing involves calculating the implied fair value of goodwill for the reporting unit. The implied fair value of goodwill is determined in the same manner as goodwill recognized in a business combination, which is the excess of the fair value of the reporting unit determined in step one over the fair value of its net assets and identifiable intangible assets as if the reporting unit had been acquired. If the carrying value of the reporting unit's goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. For reporting units with a negative book value (i.e., excess of liabilities over assets), qualitative factors are evaluated to determine whether it is necessary to perform the second step of the goodwill impairment test.

 

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The Company performed the required annual impairment tests for goodwill and other indefinite-lived intangible assets for the fiscal years 2016, 2015 and 2014, and found no impairment following the 2016 and 2014 tests. There were no reporting units with a carrying value at-risk of exceeding fair value as of the October 31, 2016 impairment test date.

After performing the impairment tests for fiscal year 2015, the Company determined that the fair value of the Ottomotores reporting unit was less than its carrying value, resulting in a non-cash goodwill impairment charge in the fourth quarter of 2015 of $4,611 to write-down the balance of the Ottomotores goodwill. The decrease in fair value of the Ottomotores reporting unit was due to several factors in the second half of 2015: the continued challenges of the Latin American economies, devaluation of the Peso against the U.S. Dollar, the slow development of Mexican energy reform as a result of decreasing oil prices; combining to cause 2015 results to fall short of prior expectations and future forecasts to decrease. The fair value was determined using a discounted cash flow analysis, which utilized key financial assumptions including the sales growth factors discussed above, a 3% terminal growth rate and a 15.7% discount rate.

 

Other indefinite-lived intangible assets consist of trade names.certain tradenames. The Company tests the carrying value of these trade namestradenames by comparing the assets’ fair value to its carrying value. Fair value is measured using a relief-from-royalty approach, which assumes the fair value of the trade nametradename is the discounted cash flows of the amount that would be paid had the Company not owned the trade nametradename and instead licensed the trade nametradename from another company. The Company conducts its annual impairment test for indefinite-lived intangible assets onas of October 31 of each year.

 

TheIn the fourth quarter of 2015, the Company performed’s Board of Directors approved a plan to strategically transition and consolidate certain of the Company’s brands acquired in acquisitions over the past several years to the Generac® tradename. This brand strategy change resulted in a reclassification to a two year remaining useful life for the impacted tradenames, causing the fair value to be less than the carrying value using the relief-from-royalty approach in a discounted cash flow analysis. As such, a $36,076 non-cash impairment charge was recorded to write-down the impacted tradenames to net realizable value.

Other than the impairment charges discussed above, the Company found no other impairment when performing the required annual impairment tests for goodwill and other indefinite-lived intangible assets for fiscal years 2014, 2013 and 2012 and found no impairment of goodwill or indefinite-lived trade names.year 2015. There can be no assurance that future impairment tests will not result in a charge to earnings.

 

Impairment ofLong-Lived Assets

 

The Company periodically evaluates the carrying value of long-lived assetsassets (excluding goodwill and trade names)indefinite-lived tradenames). Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the sum of the expected future undiscounted cash flows is less than the carrying amount of an asset, a loss is recognized for the difference between the fair value and carrying value of the asset. Such analyses necessarily involve significant judgments.

 

Debt Issuance Costs

Debt discounts and direct and incremental costs incurred in connection with the issuance of long-term debt are deferred and recorded as a reduction of outstanding debt and amortized to interest expense using the effective interest method over the terms of the related credit agreements. Approximately $3,939, $5,429, and $6,615 of deferred financing costs and original issue discount were amortized to interest expense during fiscal years 2016, 2015 and 2014, respectively. Excluding the impact of any future long-term debt issuances or prepayments, estimated amortization expense for the next five years is as follows: 2017 - $2,516; 2018 - $4,314; 2019 - $4,466; 2020 - $4,420; 2021 - $4,419.

Income Taxes

 

The Company is a C Corporation and therefore accounts for income taxes pursuant to the liability method. Accordingly, the current or deferred tax consequences of a transaction are measured by applying the provision of enacted tax laws to determine the amount of taxes payable currently or in future years. Deferred income taxes are provided for temporary differences between the income tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the years in which those temporary differences become deductible. The Company considers taxable income in prior carryback years, the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies, as appropriate, in making this assessment.

 

Revenue Recognition

Sales, net of estimated returns and allowances, are recognized upon shipment of product to the customer, which is generally when title passes, the Company has no further obligations, and the customer is required to pay.pay subject to agreed upon payment terms. The Company, at the request of certain customers, will warehouse inventory billed to the customer but not delivered. Unless all revenue recognition criteria have been met, the Company does not recognize revenue on these transactions until the customers take possession of the product. In these cases, the funds collected on product warehoused for these customers are recorded as a customer advance until the customer takes possession of the product and the Company’s obligation to deliver the goods is completed. Customer advances are included in accrued liabilities in the consolidated balance sheets.

 

The Company provides for certain estimated sales promotions,programs, discounts and incentive expenses which are recognized as a reduction of sales.

 

Shipping and Handling Costs

 

Shipping and handling costs billed to customers are included in net sales, and the related costs are included in cost of goods sold in the consolidated statements of comprehensive income.

 

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Advertising and Co-Op Advertising

 

Expenditures for advertising, included in selling and service expenses in the consolidated statements of comprehensive income, are expensed as incurred. Total expenditures for advertising were $32,352, $19,910,$45,488, $39,258, and $13,360$32,352 for the years ended December 31, 2016, 2015, and 2014, 2013, and 2012, respectively.

 

Research and Development

 

The Company expenses research and development costs as incurred. Total expenditures incurred for research and development were $31,494, $29,271,$37,229, $32,922, and $23,499$31,494 for the years ended December 31, 2016, 2015 and 2014, 2013 and 2012, respectively.

 

Foreign Currency Translation and Transactions

 

Balance sheet amounts for non-U.S. Dollar functional currency businesses are translated into dollarsU.S. Dollars at the rates of exchange in effect at fiscal year-end. Income and expenses incurred in a foreign currency are translated at the average rates of exchange in effect during the year. The related translation adjustments are made directly to accumulated other comprehensive loss, a component of stockholders’ equity, in the consolidated balance sheets. Gains and losses from foreign currency transactions are recognized as incurred in the consolidated statements of comprehensive income.

 

Fair Value of Financial Instruments

 

The Financial Accounting Standards Board (FASB) Accounting Standards Update (ASC)(ASC) 820-10,Fair Value Measurement,among other things, defines fair value, establishes a consistent framework for measuring fair value, and expands disclosure for each major asset and liability category measured at fair value on either a recurring basis or nonrecurring basis. ASC 820-10 clarifies that fair value is an exit price, representing the amount that would be received in the sale of an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the pronouncement establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows: (Level 1) observable inputs such as quoted prices in active markets; (Level 2) inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and (Level 3) unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

 

Assets and liabilities measured at fair value are based on the market approach, which are prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.

The Company believes the carrying amount of its financial instruments (cash and cash equivalents, restricted cash, accounts receivable, accounts payable, accrued liabilities, short-term borrowings and short-termABL facility borrowings), excluding long-termTerm Loan borrowings, approximates the fair value of these instruments based upon their short-term nature. The fair value of long-termTerm Loan borrowings, including amounts classified as current, which have an aggregate carrying value of $1,080,599$903,673, was approximately $1,048,165$904,780 (Level 2) at December 31, 2014,2016, as calculated based on independent valuations whose inputs and significant value drivers are observable.

 

For the fair value of the assets and liabilities measured on a recurring basis, see the fair value table in Note 4, “Derivative Instruments and Hedging Activities,” to the consolidated financial statements. The fair value of all derivative contracts is classified as Level 2. The valuation techniques used to measure the fair value of derivative contracts, all of which have counterparties with high credit ratings, were based on quoted market prices or model driven valuations using significant inputs derived from or corroborated by observable market data. The fair value of derivative contracts considers the Company’s credit risk in accordance with ASC 820-10.

Use of Estimates

 

The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles (U.S. GAAP)GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, andthe disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Derivative Instruments and Hedging Activities

 

The Company records all derivatives in accordance with ASC 815,Derivatives and Hedging, which requires derivative instruments be reported on the consolidated balance sheets at fair value and establishes criteria for designation and effectiveness of hedging relationships. The Company is exposed to market risk such as changes in commodity prices, foreign currencies and interest rates. The Company does not hold or issue derivative financial instruments for trading purposes.

 

Stock-Based Compensation

 

Stock-based compensation expense, including stock options and restricted stock awards, is generally recognized on a straight-line basis over the vesting period based on the fair value of awards which are expected to vest. The fair value of all share-based awards is estimated on the date of grant.

 

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New Accounting Pronouncements

 

In May 2014, the FASB issued ASU No 2014-09,Revenue from Contracts with Customers. This guidance is the culmination of the FASB’s joint project with the International Accounting Standards Board to clarify the principles for recognizing revenue. The core principal of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides a five-step process that entities should follow in order to achieve that core principal. The guidance isASU 2014-09, as amended by ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations, ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, and ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, becomes effective for the Company in 2017.2018. The guidance can be applied either on a full retrospective basis or on a modified retrospective basis in which the cumulative effect of initially applying the standard is recognized at the date of initial application. While the Company is continuing to assess all potential impacts the standard may have on its financial statements, it believes that the adoption will not have a significant impact on its revenue related to equipment and parts sales, which represent substantially all of the revenue for the Company. The Company has not yet determined its method of adoption.

In February 2016, the FASB issued ASU 2016-02, Leases. This guidance is being issued to increase transparency and comparability among organizations by requiring the recognition of lease assets and lease liabilities on the statement of financial position and by disclosing key information about leasing arrangements. The guidance should be applied using a modified retrospective approach and is effective for the Company in 2019, with early adoption permitted. The Company is currently assessing the impact the adoption of this guidance will have on the Company’sits results of operations.operations and financial position.

In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation: Improvements to Employee Share-Based Payment Accounting. This guidance is a part of the FASB’s initiative to reduce complexity in accounting standards, and includes simplification involving several aspects of the accounting for share-based payment transactions, including excess tax benefits. The guidance should be applied on a modified retrospective basis and is effective for the Company in 2017, with early adoption permitted. While the Company is still currently assessing all impacts of the guidance, the primary impact of adoption will be the recognition of excess tax benefits within the provision for income taxes on the statement of comprehensive income rather than within additional paid-in capital on the balance sheet. Additionally, this change will result in excess tax benefits from stock compensation to be reflected in net cash from operating activities on the statement of cash flows.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments. This guidance is being issued to decrease diversity in practice for how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This guidance should be applied on a retrospective basis and is effective for the Company in 2018, with early adoption permitted. The Company does not believe that this guidance will have a significant impact on its presentation of the statement of cash flows.

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment. This guidance is being issued to simplify the subsequent measurement of goodwill by eliminating Step 2 of the goodwill impairment test. Under the new guidance, the recognition of a goodwill impairment charge is calculated based on the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. This guidance should be applied on a prospective basis and is effective for the Company in 2020. Early adoption is permitted for goodwill impairment tests performed after January 1, 2017. The Company is currently assessing the impact the adoption will have on its results of operations and financial position.

In the first quarter of 2016, the Company adopted ASU 2015-03, Interest – Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs. As a result, the Company adjusted the impacted line items in the December 31, 2015 consolidated balance sheet to conform to the current period’s presentation; decreasing both the Deferred financing costs, net and Long-term borrowings and capital lease obligations line items by $12,965. Also in the first quarter of 2016, the Company adopted ASU 2015-17, Income Taxes: Balance Sheet Classification of Deferred Taxes. As a result, the Company adjusted the impacted line items in the December 31, 2015 consolidated balance sheet to conform to the current period’s presentation; decreasing the Deferred income taxes line item within current assets by $29,355, increasing the Deferred income taxes line item within noncurrent assets by $28,139, and decreasing the Deferred income taxes line within noncurrent liabilities by $1,216.

 

There are several other new accounting pronouncements issued by the FASB. Each of these pronouncements, as applicable, has been or will be adopted by the Company. Management does not believe any of these accounting pronouncements has had or will have a material impact on the Company’sCompany’s consolidated financial statements.

3.	Acquisitions

Acquisition of Pramac

 

On March 1, 2016, the Company acquired a 65% ownership interest in Pramac for a purchase price, net of cash acquired, of $60,886. Headquartered in Siena, Italy, Pramac is a leading global manufacturer of stationary, mobile and portable generators primarily sold under the Pramac® brand. Pramac products are sold in over 150 countries through a broad distribution network. The acquisition purchase price was funded solely through cash on hand.

The 35% noncontrolling interest in Pramac had an acquisition date fair value of $34,253, and was recorded as a redeemable noncontrolling interest in the consolidated balance sheet, as t3.Acquisitionshe noncontrolling interest holder has within its control the right to require the Company to redeem its interest in Pramac. The noncontrolling interest holder has a put option to sell their interests to the Company any time within five years from the date of acquisition. The put option price is either (i) a fixed amount if voluntarily exercised within the first two years after the acquisition, or (ii) based on a multiple of earnings, subject to the terms of the acquisition. Additionally, the Company holds a call option that it may redeem commencing five years from the date of acquisition, or earlier upon the occurrence of certain circumstances. The call option price is based on a multiple of earnings that is subject to the terms of the acquisition. Both the put and call option only provide for the complete transfer of the noncontrolling interest, with no partial transfers of interest permitted.

The redeemable noncontrolling interest is recorded at the greater of the initial fair value, increased or decreased for the noncontrolling interests’ share of comprehensive net income (loss), or the estimated redemption value, with any adjustment to the redemption value impacting retained earnings, but not net income. However, the redemption value adjustments are reflected in the earnings per share calculation, as detailed in Note 12, "Earnings Per Share," to the consolidated financial statements. The following table presents the changes in the redeemable noncontrolling interest:

		Year Ended
		December 31, 2016
Beginning Balance - January 1		$	-
Noncontrolling interest of Pramac			34,253
Net income			100
Foreign currency translation			(2,124	)
Redemption value adjustment			909
Ending Balance - December 31		$	33,138

The Company recorded a preliminary purchase price allocation during the first quarter of 2016, which was updated in the fourth quarter of 2016, based upon its estimates of the fair value of the acquired assets and assumed liabilities. The preliminary purchase price allocation as of the balance sheet date was as follows:

		March 1, 2016
Accounts receivable		$	51,289
Inventories			39,889
Property and equipment			19,138
Intangible assets			34,471
Goodwill			46,202
Other assets			7,698
Total assets acquired			198,687
Short-term borrowings			21,105
Accounts payable			40,270
Long-term debt and capital lease obligations (including current portion)			18,599
Other liabilities			23,521
Redeemable noncontrolling interest			34,253
Noncontrolling interest			53
Net assets acquired		$	60,886

The goodwill ascribed to this acquisition is not deductible for tax purposes. The accompanying consolidated financial statements include the results of Pramac from the date of acquisition through December 31, 2016.

 

Acquisition of CHP

On August 1, 2015, the Company acquired CHP for a purchase price, net of cash acquired, of $74,570. Headquartered in Vergennes, Vermont, CHP is a leading manufacturer of high-quality, innovative, professional-grade engine powered equipment used in a wide variety of property maintenance applications, with sales primarily in North America. The acquisition purchase price was funded solely through cash on hand.

The Company recorded a preliminary purchase price allocation during the third quarter of 2015 based upon its estimates of the fair value of the acquired assets and assumed liabilities. As a result, the Company recorded approximately $81,726 of intangible assets, including approximately $30,076 of goodwill, as of the acquisition date. The purchase price allocation was finalized in the fourth quarter of 2015, resulting in a $6,552 decrease to total intangible assets, including an increase of $6,208 in goodwill. The goodwill ascribed to this acquisition is not deductible for tax purposes. In addition, the Company assumed $12,000 of debt along with this acquisition. The accompanying consolidated financial statements include the results of CHP from the date of acquisition through December 31, 2016.

Acquisition of MAC

 

On October 1, 2014, a subsidiary of the Company acquired MAC for a purchase price, net of cash acquired, of $55,690.  Headquartered in Bismarck, North Dakota,$53,747. MAC is a leading manufacturer of premium-grade commercial and industrial mobile heaters within the United States and Canada. The acquisition expands the Company’s portfolio of mobile power products and provides increased access to the oil & gas market. This acquisition was funded solely by existing cash.through cash on hand.

The Company recorded a preliminary purchase price allocation during the fourth quarter of 2014 based upon its estimates of the fair value of the acquired assets and assumed liabilities. As a result, the Company recorded approximately $49,378 of intangible assets, including approximately $25,898 of goodwill, as of the acquisition date. The accompanying consolidated financial statements include the results of MAC from October 1, 2014 through December 31, 2014. The goodwill ascribed to this acquisition is not deductible for tax purposes.

Acquisition of Tower Light

On August 1, 2013, a subsidiary of the Company acquired all of the shares of Tower Light for a purchase price, net of cash acquired and inclusive of estimated earn-out payments, of $85,812. Headquartered outside Milan, Italy, Tower Light is a leading developer and supplier of mobile light towers throughout Europe, the Middle East and Africa. Tower Light has built a leading market position in the equipment rental markets by leveraging its broad product offering and strong global distribution network in over 50 countries worldwide.

The net cash paid at closing was $80,239 and included a cash deposit of $6,645 into an escrow account to fund future earn-out payments required by the purchase agreement, which was recorded as restricted cash on the Company’s consolidated balance sheet as of December 31, 2013. The earn-out payment of $7,641 was finalized during the second quarter of 2014, resulting in a gain of $4,877, which was recorded in the consolidated statement of comprehensive income for the year ended December 31, 2014. The difference between the total escrow deposit and the Company’s final earn-out payment is reflected as an addition to the purchase price. Additionally, the cash paid at closing included an estimate of acquired working capital. This estimate was finalized during third quarter of 2013, resulting in a $300 decrease to the purchase price. The acquisition was funded solely by existing cash.

The Company recorded a preliminary purchase price allocation was finalized during the third quarter of 2013 based upon its estimates of the fair value of the acquired assets and assumed liabilities. As2015, resulting in a result, the Company recorded approximately $67,900 of$4,229 decrease to total intangible assets, including approximately $38,400an increase of $2,481 to goodwill. Based on revised purchase accounting estimates, an additional $9,328 of goodwill was recorded during the fourth quarter of 2013. The goodwill ascribed to this acquisition is not deductible for tax purposes. The accompanying consolidated financial statements include the results of Tower LightMAC from August 1, 2013the date of acquisition through December 31, 2014.2016.

Pro Forma Information

 

Acquisition of Ottomotores

On December 8, 2012, a subsidiaryThe following unaudited pro forma information of the Company acquired allgives effect to these acquisitions as though the transactions had occurred on January 1, 2014:

		Year Ended December 31,
		2016				2015				2014
Net Sales:
As reported		$	1,444,453			$	1,317,299			$	1,460,919
Pro forma			1,473,799				1,556,459				1,776,843
Net income attributable to Generac Holdings Inc.:
As reported		$	98,788			$	77,747			$	174,613
Pro forma			100,907				78,618				174,926
Net income attributable to Generac Holdings Inc. per common share - diluted
As reported		$	1.50			$	1.12			$	2.49
Pro forma			1.53				1.14				2.49

This unaudited pro forma information is presented for informational purposes only and is not necessarily indicative of the sharesresults of Ottomotores. Ottomotores was founded in 1950 and is located in Mexico City, Mexico and Curitiba, Brazil. Ottomotores is a leading manufacturer inoperations that actually would have been achieved had the Mexican market for industrial diesel gensets ranging in size from 15kW to 3,250kW and is a market participant throughout all of Latin America.

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The cash paid at closing of $44,769, net of cash acquired, included an estimate of acquired working capital. This estimate was finalized during the second quarter of 2013 to reflect actual working capital acquired as well as cash acquired and debt assumed, resulting in a $6,278 decrease to the purchase price. This acquisition was funded solely by existing cash.

The Company recorded a preliminary purchase price allocation during the fourth quarter of 2012 based upon its estimates of the fair value of the acquired assets and assumed liabilities. As a result, the Company recorded approximately $16,100 of intangible assets, including approximately $5,050 of goodwill, as of the acquisition date. The purchase price allocation was finalized during the second quarter of 2013, resulting in an additional $2,590 of intangible assets and a $439 decrease to goodwill. The goodwill ascribed to this acquisition is not deductible for tax purposes.

Management considers these acquisitions to be immaterial for full required disclosure.

bee4. Derivative Instruments and Hedging Activitiesn consummated on January 1, 2014.

 

4.	Derivative Instruments and Hedging Activities

Commodities

Commodities

 

The primary objectives of theCompany is exposed to significant price fluctuations in commodities it uses as raw materials, and periodically utilizes commodity risk management activities arederivatives to understand and mitigate the impact of these potential price fluctuations on the Company’sits financial results and its economic well-being. While the Company’s risk management objectives and strategies will be driven from an economic perspective, the Company attempts, where possible and practical, to ensure that the hedging strategies it engages in can be treated as “hedges” from an accounting perspective or otherwise result in accounting treatment where the earnings effect of the hedging instrument provides substantial offset (in the same period) to the earnings effect of the hedged item. Generally, these risk management transactions will involve the use of commodityThese derivatives to protect against exposure resulting from significant price fluctuations.

The Company primarily utilizes commodity contracts withtypically have maturities of less than eighteen months. These are intended to offsetAt both December 31, 2016 and 2015, the effectCompany had one commodity contract outstanding, covering the purchases of price fluctuations on actual inventory purchases. Outstanding commodity forward contracts in place to hedge the Company’s projected commodity purchases were as follows:copper.

As of December 31, 2014:
Commodity	Trade Date		Effective Date		Notional Amount			Termination Date
Copper	October 2, 2014		October 1, 2014		$	4,960		December 31, 2015
Copper	October 15, 2014		November 1, 2014		$	4,637		December 31, 2015
Copper	December 1, 2014		December 1, 2014		$	8,232		December 31, 2015

As of December 31, 2013:
Commodity		Trade Date	Effective Date		Notional Amount			Termination Date
Copper		June 21, 2013	October 1, 2013		$	2,169		June 30, 2014

As of December 31,2012:
Commodity		Trade Date	Effective Date		Notional Amount			Termination Date
Copper		October 29, 2012	January 1, 2013		$	3,472		September 30, 2013

 

Because these contracts do not qualify for hedge accounting,the related gains and losses are recorded in cost of goods sold in the Company’s consolidated statements of comprehensive income. Net gains (losses) recognized on such contracts in the consolidated statements of comprehensive income were $(629), $(605)$739, $(1,909) and $386$(629) for the years ended December 31, 2016, 2015, and 2014, 2013, and 2012, respectively.

 

Foreign Currencies

 

The Company is exposed to foreign currency exchange risk as a result of transactions denominated in currencies other currencies.than the U.S. Dollar. The Company periodically utilizes foreign currency forward purchase and sales contracts to manage the volatility associated with certain foreign currency purchases and sales in the normal course of business. Contracts typically have maturities of twelve months or less. There were no foreign currency hedge contracts outstanding during the year ended December 31, 2012. As of December 31, 20142016 and 2013,2015, the followingCompany had thirty-eight and six foreign currency contracts were outstanding:outstanding, respectively.

 

As of December 31, 2014:
Currency Denomination		Notional Amount
British Pound Sterling (GBP) to Euro		£	5,000

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As ofDecember 31, 2013:
Currency Denomination		Notional Amount
United States Dollar (USD) to Euro		$	650
British Pound Sterling (GBP) to Euro		£	4,000

Total netBecause these contracts do not qualify for hedge accounting, the related gains and losses recognizedare recorded in cost of goods sold in the Company’s consolidated statements of comprehensive incomeincome. Net losses recognized for the years ended December 31, 2016, 2015 and 2014 were $385, $624 and 2013 were $(149) and $(56),$149, respectively.

 

Interest Rate Swaps

As of May 30, 2012, the date of a previous credit agreement refinancing, the Company had four interest rate swap agreements outstanding. Due to the incorporation of a new interest rate floor provision in the then new credit agreement, which constituted a change in critical terms, the Company concluded that as of May 30, 2012, the then outstanding swaps would no longer be highly effective in achieving offsetting changes in cash flows during the periods the hedges were designated. As a result, the Company was required to de-designate the four outstanding hedges as of May 30, 2012. Beginning May 31, 2012, the effective portion of the swaps prior to the change (i.e. amounts previously recorded in Accumulated Other Comprehensive Loss) were amortized into interest expense over the period of the originally designated hedged transactions which had various termination dates through October 2013. Future changes in fair value of these swaps were immediately recognized in the consolidated statements of comprehensive income as interest expense.

 

OnIn October 23, 2013, the Company entered into two interest rate swap agreements, and onin May 19, 2014, the Company entered into onean additional interest rate swap agreement. The Company formally documented all relationships between interest rate hedging instruments and the related hedged items, as well as its risk-management objectives and strategies for undertaking various hedge transactions. These interest rate swap agreements qualify as cash flow hedges. For derivatives that are designatedhedges, and qualify as a cash flow hedge,accordingly, the effective portionportions of the gaingains or loss on the derivative islosses are reported as a component of accumulated other comprehensive loss.loss (AOCL). The cash flows of the swaps are recognized as adjustments to interest expense each period. The ineffective portionportions of the derivatives’ changechanges in fair value, if any, isare immediately recognized in earnings. The Company assesses on an ongoing basis whether derivatives used in hedging transactions are highly effective in offsetting changes in cash flows of hedged items.  The effective dates of the swaps are July 1, 2014 with a notional amount of $100,000 each, a fixed LIBOR rate of 1.7370%, 1.7420% and 1.6195%, including a LIBOR floor of 0.75%, and all expire on July 1, 2018.

Fair Value

 

The following table presents the fair value of the Company’s derivative assets (liabilities):Company’s derivatives:

 

		December 31, 2014				December 31, 2013				December 31, 2016				December 31, 2015
Interest rate swaps		$	(1,045	)		$	1,236
Commodity contracts			(515	)			69			$	623			$	(400	)
Foreign currency contracts			(149	)			56				(150	)			(171	)
Interest rate swaps											(1,739	)			(2,618	)

 

The fair value of the commodity contract is included in other assets, the fair value of the foreign currency contracts are included in other accrued liabilities, and the fair value of the interest rate swaps andare included in other long-term liabilities in the consolidated balance sheet as of December 31, 2016. The fair value of the commodity and foreign currency contracts are included in other accrued liabilities, and the fair value of the interest rate swaps are included in other assetslong-term liabilities in the consolidated balance sheetssheet as of December 31, 2014 and 2013, respectively.2015. Excluding the impact of credit risk, the fair value of the derivative contracts as of December 31, 20142016 and 20132015 is a liability of $(1,727)$1,295 and an asset of $1,385,$3,248, respectively, which represents the amount the Company would need to pay or would receive to exit the agreements on those dates.

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The following presentsamount of gains (losses) recognized in AOCL in the impactconsolidated balance sheets on the effective portion of interest rate swaps commodity contracts and foreign currency contracts on the consolidated statement of comprehensive incomedesignated as hedging instruments for the years ended December 31, 2016, 2015 and 2014 2013were $535, $(965) and 2012:$(1,420), respectively. The amount of gains (losses) recognized in cost of goods sold in the consolidated statements of comprehensive income for commodity and foreign currency contracts not designated as hedging instruments for the years ended December 31, 2016, 2015 and 2014 were $354, $(2,533) and $(778), respectively.

		Amount of Gain (Loss) Recognized in AOCI for the Year Ended December 31,											Location of Gain (Loss) Recognized in the Net Income (Loss) on Ineffective		Amount of Loss Reclassified from AOCI into Net Income for the Year Ended December 31,												Amount of Gain (Loss) Recognized in Net Income on Hedges (Ineffective Portion) for the Year Ended December 31,
		2014				2013				2012			Portion of Hedges		2014				2013				2012				2014				2013				2012
Derivatives designated as hedging instruments
Interest rate swaps (1)		$	(1,420	)		$	774			$	365		Interest Expense		$	-			$	-			$	-			$	-			$	-			$	-
Derivatives not designated as hedging instruments
Interest rate swaps (2)		$	-			$	-			$	-		Interest Expense		$	-			$	(2,381	)		$	(2,082	)		$	-			$	2,973			$	1,695
Commodity and foreign currency contracts		$	-			$	-			$	-		Cost of goods sold		$	-			$	-			$	-			$	(778	)		$	(661	)		$	386

 

(1)5.

Amounts recorded for the year ended December 31, 2012 relate to the interest rate swap agreements outstanding prior to May 30, 2012, the date the hedging relationships for these agreements were terminated.Accumulated Other Comprehensive Loss

(2)	Amounts recorded for the years ended December 31, 2013 and 2012 relate to interest rate swap agreements outstanding as of May 30, 2012, the date the hedging relationships for these agreements were terminated.

5.  Fair Value Measurements

Assets (liabilities) measured at fair value on a recurring basis are as follows:

		Fair Value Measurement Using
		Total December 31, 2014				Quoted Prices in Active Markets for Identical Contracts (Level 1)				Significant Other Observable Inputs (Level 2)
Interest rate swaps		$	(1,045	)		$	-			$	(1,045	)
Commodity contracts		$	(515	)		$	-			$	(515	)
Foreign currency contracts		$	(149	)		$	-			$	(149	)

		Fair Value Measurement Using
		Total December 31, 2013				Quoted Prices in Active Markets for Identical Contracts (Level 1)				Significant Other Observable Inputs (Level 2)
Interest rate swaps		$	1,236			$	-			$	1,236
Commodity contracts		$	69			$	-			$	69
Foreign currency contracts		$	56			$	-			$	56

The valuation techniques used to measure the fair value of derivative contracts classified as Level 2, all of which have counterparties with high credit ratings, were valued based on quoted market prices or model driven valuations using significant inputs derived from or corroborated by observable market data. The fair value of derivative contracts above considers the Company’s credit risk in accordance with ASC 820-10.

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6. Accumulated Other Comprehensive Loss

 

The following presents a tabular disclosure of changes in accumulated other comprehensive income (loss)AOCL during the years ended December 31, 20142016 and 2013,2015, net of tax:

 

		Foreign Currency Translation Adjustments				Defined Benefit Pension Plan				Unrealized  Gain (Loss) on Cash Flow Hedges				Total
Beginning Balance - January 1, 2014		$	1,204			$	(4,393	)		$	774			$	(2,415	)
Other comprehensive loss beforereclassifications			(3,082	)			(8,922	)			(1,420	)			(13,424	)
Amounts reclassified from accumulated othercomprehensive loss			-				72		(1)		-				72
Net current-period other comprehensive loss			(3,082	)			(8,850	)			(1,420	)			(13,352	)
Ending Balance - December 31, 2014		$	(1,878	)		$	(13,243	)		$	(646	)		$	(15,767	)

		Foreign Currency Translation Adjustments				Defined Benefit Pension Plan				Unrealized Gain (Loss) on Cash Flow Hedges				Total
Beginning Balance – January 1, 2016		$	(9,502	)		$	(11,362	)		$	(1,611	)		$	(22,475	)
Other comprehensive income (loss) before reclassifications			(18,545	)			(273	)			535				(18,283	)
Amounts reclassified from AOCL			-				595				-				595
Net current-period other comprehensive income (loss)			(18,545	)			322				535				(17,688	)
Ending Balance – December 31, 2016		$	(28,047	)		$	(11,040	)		$	(1,076	)		$	(40,163	)

 

		Foreign Currency Translation Adjustments				Defined Benefit Pension Plan				Unrealized Gain (Loss)  on Cash Flow Hedges				Total
Beginning Balance - January 1, 2013		$	(34	)		$	(12,081	)		$	(2,381	)		$	(14,496	)
Other comprehensive income beforereclassifications			1,238				6,994				774				9,006
Amounts reclassified from accumulated othercomprehensive loss			-				694		(2)		2,381		(3)		3,075
Net current-period other comprehensive income			1,238				7,688				3,155				12,081
Ending Balance - December 31, 2013		$	1,204			$	(4,393	)		$	774			$	(2,415	)

		Foreign Currency Translation Adjustments				Defined Benefit Pension Plan				Unrealized Loss on Cash Flow Hedges				Total
Beginning Balance – January 1, 2015		$	(1,878	)		$	(13,243	)		$	(646	)		$	(15,767	)
Other comprehensive income (loss) before reclassifications			(7,624	)			1,105				(965	)			(7,484	)
Amounts reclassified from AOCL			-				776				-				776
Net current-period other comprehensive income (loss)			(7,624	)			1,881				(965	)			(6,708	)
Ending Balance – December 31, 2015		$	(9,502	)		$	(11,362	)		$	(1,611	)		$	(22,475	)

 

(1)

Represents the unrecognized actuarial losses of $(106)$(412), net of tax benefit of $34,$139, included in the computation of net periodic pension cost.cost for the year ended December 31, 2016. See Note 14, “Benefit Plans,” to the consolidated financial statements for additional information.

(2)

Represents unrealized gains of $876, net of tax effect of $(341) for the year ended December 31, 2016.

(3)

Represents actuarial losses of $(1,108),$941, net of tax benefiteffect of $414, included in the computation of$(346), amortized to net periodic pension cost.cost for the year ended December 31, 2016. See Note 14, “Benefit Plans,” to the consolidated financial statements for additional information.

(3)(4)

Represents amortizationunrecognized actuarial gains of unrealized losses on interest rate swaps to interest expense on the consolidated statements of comprehensive income of $(2,490),$1,829, net of tax benefiteffect of $109.$(724), included in the computation of net periodic pension cost for the year ended December 31, 2015. See Note 11, “Credit Agreements,14, “Benefit Plans,” to the consolidated financial statements for additional information.

(5)

Represents unrealized losses of $(1,574), net of tax benefit of $609 for the year ended December 31, 2015.

(6)

Represents actuarial losses of $1,228, net of tax effect of $(452), amortized to net periodic pension cost for the year ended December 31, 2015. See Note 14, “Benefit Plans,” to the consolidated financial statements for additional information.

6.	Segment Reporting

 

Effective7. Segment Reporting

The in the second quarter of 2016, the Company operates inchanged its segment reporting from one reportable segment to two reportable segments – Domestic and reportsInternational – as a single operatingresult of the recent Pramac acquisition and the ongoing strategy to expand the business internationally. The Domestic segment includes the legacy Generac business and the impact of acquisitions that are based in the United States, all of which ishave revenues that are substantially derived from the U.S. and Canada. The International segment includes the Ottomotores, Tower Light and Pramac acquisitions, all of which have revenues that are substantially derived from outside of the U.S and Canada. Both reportable segments design and manufacture of a wide range of power products. Net sales are predominantly generated through the sale of generatorsgeneration equipment and other engine powered products through various distribution channels.products. The Company manages and evaluates its operations as one segment primarily due to similarities inhas multiple operating segments, which it aggregates into the nature of thetwo reportable segments, based on materially similar economic characteristics, products, production processes, classes of customers and design processes, and methods of distribution. The Company’s sales indistribution methods. All segment information has been retrospectively applied to all periods presented to reflect the United States represent approximately 84%, 88%, and 93% of total sales for the years ended December 31, 2014, 2013 and 2012, respectively. Approximately 91%, 90% and 94% of the Company’s identifiable long-lived assets are located in the United States as of December 31, 2014, 2013 and 2012, respectively.new reportable segment structure.

 

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		Net Sales
		Year Ended December 31,
Reportable Segments		2016				2015				2014
Domestic		$	1,173,559			$	1,204,589			$	1,343,367
International			270,894				112,710				117,552
Total		$	1,444,453			$	1,317,299			$	1,460,919

 

The Company's product offerings consist primarily of power generation equipment and other engine powered products with a range of power output geared for varying end customer uses. Residential products and commercial & industrial products are each a similar class of products based on similar power output and end customer usage.customer. The breakout of net sales between residential, commercial & industrial, and other products by product class is as follows:

		Year Ended December 31,
		2014				2013				2012
Residential products		$	722,206			$	843,727			$	705,444
Commercial & industrial products			652,216				569,890				410,341
Other			86,497				72,148				60,521
Total		$	1,460,919			$	1,485,765			$	1,176,306

		Net Sales
		Year Ended December 31,
Product Classes		2016				2015				2014
Residential products		$	772,436			$	673,764			$	722,206
Commercial & industrial products			557,532				548,440				652,216
Other			114,485				95,095				86,497
Total		$	1,444,453			$	1,317,299			$	1,460,919

 

Management evaluates the performance of its segments based primarily on Adjusted EBITDA,8. Balance Sheet Details which is reconciled to Income before provision for income taxes below. The computation of Adjusted EBITDA is based on the definition that is contained in the Company’s credit agreements.

		Adjusted EBITDA
		Year Ended December 31,
		2016				2015				2014
Domestic		$	261,428			$	254,882			$	322,769
International			16,959				15,934				14,514
Total adjusted EBITDA		$	278,387			$	270,816			$	337,283
Interest expense			(44,568	)			(42,843	)			(47,215	)
Depreciation and amortization			(54,418	)			(40,333	)			(34,730	)
Non-cash write-down and other adjustments (1)			(357	)			(3,892	)			3,853
Non-cash share-based compensation expense (2)			(9,493	)			(8,241	)			(12,612	)
Tradename and goodwill impairment (3)			-				(40,687	)			-
Loss on extinguishment of debt (4)			(574	)			(4,795	)			(2,084	)
Gain (loss) on change in contractual interest rate (5)			(2,957	)			(2,381	)			16,014
Transaction costs and credit facility fees (6)			(2,442	)			(2,249	)			(1,851	)
Business optimization expenses (7)			(7,316	)			(1,947	)			-
Other			120				(465	)			(296	)
Income before provision for income taxes		$	156,382			$	122,983			$	258,362

(1)

Includes gains/losses on disposal of assets, unrealized mark-to-market adjustments on commodity contracts, and certain foreign currency and purchase accounting related adjustments.

(2)

Represents share-based compensation expense to account for stock options, restricted stock and other stock awards over their respective vesting periods.

(3)

Represents the 2015 impairment of certain tradenames due to a change in brand strategy to transition and consolidate various brands to the Generac® tradename ($36,076) and the impairment of goodwill related to the Ottomotores reporting unit ($4,611).

(4)

Represents the write-off of original issue discount and capitalized debt issuance costs due to voluntary debt prepayments.

(5)

For the year ended December 31, 2016, represents a non-cash loss in the third quarter 2016 relating to the continued 25 basis point increase in borrowing costs as a result of the credit agreement leverage ratio remaining above 3.0 times and expected to remain above 3.0 based on current projections. For the year ended December 31, 2015, represents a non-cash loss relating to a 25 basis point increase in borrowing costs as a result of the credit agreement leverage ratio rising above 3.0 times effective third quarter 2015 and expected to remain above 3.0 times based on projections at the time. For the year ended December 31, 2014 represents a non-cash gain relating to a 25 basis point reduction in borrowing costs as a result of the credit agreement leverage ratio falling below 3.0 times effective second quarter 2014 and expected to remain below 3.0 times based on projections at the time.

(6)

Represents transaction costs incurred directly in connection with any investment, as defined in our credit agreement; equity issuance, debt issuance or refinancing; together with certain fees relating to our senior secured credit facilities.

(7)

Represents charges relating to business optimization and restructuring costs.

The following tables summarize additional financial information by reportable segment:

		Assets
		Year Ended December 31,
		2016				2015				2014
Domestic		$	1,521,665			$	1,605,043			$	1,672,336
International			340,019				173,592				192,083
Total		$	1,861,684			$	1,778,635			$	1,864,419

		Depreciation and Amortization
		Year Ended December 31,
		2016				2015				2014
Domestic		$	42,346			$	35,327			$	29,410
International			12,072				5,006				5,320
Total		$	54,418			$	40,333			$	34,730

		Capital Expenditures
		Year Ended December 31,
		2016				2015				2014
Domestic		$	26,936			$	29,368			$	33,976
International			3,531				1,283				713
Total		$	30,467			$	30,651			$	34,689

The Company’s sales in the United States represent approximately 77%, 85%, and 84% of total sales for the years ended December 31, 2016, 2015 and 2014, respectively. Approximately 87% and 93% of the Company’s identifiable long-lived assets are located in the United States as of December 31, 2016 and 2015, respectively.

7.	Balance Sheet Details

 

Inventories consist of the following:

		December 31,
		2014				2013
Raw material		$	184,407			$	183,787
Work-in-process			8,798				9,620
Finished goods			135,567				113,404
Reserves for excess and obsolescence			(9,387	)			(6,558	)
Total		$	319,385			$	300,253

		December 31,
		2016				2015
Raw material		$	218,911			$	179,769
Work-in-process			2,950				2,567
Finished goods			127,870				143,039
Total		$	349,731			$	325,375

 

As of December 31, 20142016 and 2013,2015, inventories totaling $12,497$10,598 and $6,504,$11,253, respectively, were on consignment at customer locations.

 

Property and equipment consists of the following:

		December 31,
		2014				2013
Land and improvements		$	7,803			$	7,416
Buildings and improvements			102,254				96,161
Machinery and equipment			65,240				54,847
Dies and tools			16,897				17,071
Vehicles			1,383				1,979
Office equipment			21,990				17,304
Leasehold improvements			2,535				2,229
Construction in progress			20,120				9,724
Gross property and equipment			238,222				206,731
Accumulated depreciation			(69,401	)			(60,341	)
Total		$	168,821			$	146,390

		December 31,
		2016				2015
Land and improvements		$	12,079			$	8,553
Buildings and improvements			122,747				104,774
Machinery and equipment			81,687				72,280
Dies and tools			23,269				20,066
Vehicles			1,474				1,244
Office equipment and systems			66,929				29,395
Leasehold improvements			2,319				3,338
Construction in progress			8,654				30,482
Gross property and equipment			319,158				270,132
Accumulated depreciation			(106,365	)			(85,919	)
Total		$	212,793			$	184,213

 

9. Goodwill and Intangible Assets

8.	Goodwill and Intangible Assets

 

The changes in the carrying amount of goodwill by reportable segment for the years ended December 31, 20142016 and 20132015 are as follows:

 

		Year Ended December 31, 2014												Year Ended December 31, 2013
		Gross				Accumulated Impairment				Net				Gross				Accumulated Impairment				Net
Balance at beginning of year		$	1,111,480			$	(503,193	)		$	608,287			$	1,056,136			$	(503,193	)		$	552,943
Acquisitions of businesses, net			27,278				-			$	27,278				56,605				-			$	56,605
Sale of business, net			-				-				-				(1,261	)			-				(1,261	)
Balance at end of year		$	1,138,758			$	(503,193	)		$	635,565			$	1,111,480			$	(503,193	)		$	608,287

		Domestic				International				Total
Balance at December 31, 2014		$	582,686			$	52,879			$	635,565
Acquisitions of businesses, net			38,765				-				38,765
Impairment			-				(4,611	)			(4,611	)
Balance at December 31, 2015			621,451				48,268				669,719
Acquisitions of businesses, net			-				46,202				46,202
Foreign currency translation			-				(11,281	)			(11,281	)
Balance at December 31, 2016		$	621,451			$	83,189			$	704,640

The details of the gross goodwill allocated to each reportable segment at December 31, 2016 and 2015 are as follows:

		Year Ended December 31, 2016												Year Ended December 31, 2015
		Gross				Accumulated Impairment				Net				Gross				Accumulated Impairment				Net
Domestic		$	1,124,644			$	(503,193	)		$	621,451			$	1,124,644			$	(503,193	)		$	621,451
International			87,800				(4,611	)			83,189				52,879				(4,611	)			48,268
Total		$	1,212,444			$	(507,804	)		$	704,640			$	1,177,523			$	(507,804	)		$	669,719

 

See Note 3, “Acquisitions,” to the consolidated financial statements for further information regarding the Company’s acquisitions.acquisitions and Note 2, “Significant Accounting Policies – Goodwill and Other Indefinite-Lived Intangible Assets,” to the consolidated financial statements for further information regarding the Company’s 2015 goodwill impairment charge.

 

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The following table summarizes intangible assets by major category as of December 31, 2016 and 2015:

		Weighted Average				December 31, 2016												December 31, 2015
		Amortization Years				Gross				Accumulated Amortization				Net Book Value				Gross				Accumulated Amortization				Net Book Value
Finite-lived intangible assets:
Tradenames			8			$	50,742			$	(20,189	)		$	30,553			$	43,252			$	(10,516	)		$	32,736
Customer lists			9				333,935				(288,623	)			45,312				314,600				(275,287	)			39,313
Patents			14				130,099				(82,038	)			48,061				126,491				(72,719	)			53,772
Unpatented technology			15				13,169				(11,771	)			1,398				13,169				(11,628	)			1,541
Software			-				1,046				(1,046	)			-				1,046				(1,042	)			4
Non-compete/other			7				2,513				(986	)			1,527				1,731				(508	)			1,223
Total finite-lived intangible assets						$	531,504			$	(404,653	)		$	126,851			$	500,289			$	(371,700	)		$	128,589
Indefinite-lived tradenames							128,321				-				128,321				128,321				-				128,321
Total intangible assets						$	659,825			$	(404,653	)		$	255,172			$	628,610			$	(371,700	)		$	256,910

See Note 2, “Significant Accounting Policies – Goodwill and Other Indefinite-Lived Intangible Assets,” to the consolidated financial statements for further information regarding the Company’s 2015 brand strategy change and resulting tradename impairment charge, which was netted against the gross intangible asset balance at December 31, 2014 and 2013:2015.

		Weighted Average				2014												2013
		Amortization Years				Cost				Accumulated Impairment				Net Cost				Cost				Accumulated Impairment				Net Cost
Indefinite lived intangible assets
Trade names						$	192,073			$	(9,389	)		$	182,684			$	182,585			$	(9,389	)		$	173,196

						Cost				Accumulated Amortization				Amortized Cost				Cost				Accumulated Amortization				Amortized Cost
Finite lived intangible assets
Trade names			0			$	8,775			$	(8,775	)		$	-			$	8,775			$	(8,775	)		$	-
Customer lists			8				304,180				(263,178	)			41,002				294,627				(251,863	)			42,764
Patents			15				121,341				(64,447	)			56,894				118,921				(56,503	)			62,418
Unpatented technology			13				13,169				(10,435	)			2,734				13,169				(9,064	)			4,105
Software			8				1,046				(1,037	)			9				1,046				(912	)			134
Non-compete/other			7				1,961				(406	)			1,555				345				(137	)			208
Total finite lived intangible assets						$	450,472			$	(348,278	)		$	102,194			$	436,883			$	(327,254	)		$	109,629

 

Amortization of intangible assets was $32,953, $23,591 and $21,024 $25,819in 2016, 2015 and $45,867 in 2014, 2013 and 2012, respectively. Excluding the impact of any future acquisitions, the Company estimates amortization expense for the next five years will be as follows: 2015, $20,965; 2016, $19,015; 2017 $15,624;- $27,856; 2018 $11,422;- $19,511; 2019 $9,600.- $17,816; 2020 - $17,743; 2021 - $15,958.

 

10. Product Warranty Obligations

9.	Product Warranty Obligations

 

The Company records a liability for product warranty obligations at the time of sale to a customer based upon historical warranty experience. The Company also records a liability for specific warranty matters when they become known and are reasonably estimable. TheAdditionally, the Company also sells extended warranty coverage for certain product.products. The sales of extended warranties are recorded as deferred revenue, and we recognize the revenue from sales of extended warrantieswhich is recognized over the life of the contracts. The Company’s product warranty obligations, including deferred revenue related to extended warranty coverage, are included in other accrued liabilities and other long-term liabilities in the consolidated balance sheets.

 

The following is a tabular reconciliation of the product warranty liability, excluding the deferred revenue related to our extended warranty coverage:

 

		Year Ended December 31,
		2014				2013				2012
Balance at beginning of year		$	33,734			$	36,111			$	24,643
Payments			(20,615	)			(18,484	)			(19,801	)
Provision for warranties issued			22,890				33,707				34,173
Changes in estimates for pre-existing warranties			(5,100	)			(17,600	)			(2,904	)
Balance at end of year		$	30,909			$	33,734			$	36,111

		Year Ended December 31,
		2016				2015				2014
Balance at beginning of period		$	30,197			$	30,909			$	33,734
Product warranty reserve assumed in acquisition			840				351				360
Payments			(18,691	)			(21,686	)			(20,975	)
Provision for warranty issued			19,148				20,823				22,890
Changes in estimates for pre-existing warranties			201				(200	)			(5,100	)
Balance at end of period		$	31,695			$	30,197			$	30,909

 

The following is a tabular reconciliation of the deferred revenue related to extended warranty coverage:coverage:

 

		Year Ended December 31,
		2014				2013				2012
Balance at beginning of year		$	23,092			$	13,474			$	9,737
Deferred revenue on extended warranty contracts sold			7,343				11,998				5,547
Amortization of deferred revenue on extended warranty contracts			(3,242	)			(2,380	)			(1,810	)
Balance at end of year		$	27,193			$	23,092			$	13,474

		Year Ended December 31,
		2016				2015				2014
Balance at beginning of period		$	28,961			$	27,193			$	23,092
Deferred revenue contracts assumed in acquisition			-				291				-
Deferred revenue contracts issued			7,733				5,978				7,343
Amortization of deferred revenue contracts			(5,614	)			(4,501	)			(3,242	)
Balance at end of period		$	31,080			$	28,961			$	27,193

 

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Product warranty obligations and warranty related deferred revenues are included in the balance sheets as follows:

		December 31,
		2014				2013
Product warranty liability
Current portion - other accrued liabilities		$	24,143			$	26,080
Long-term portion - other long-term liabilities			6,766				7,654
Total		$	30,909			$	33,734
Deferred revenue related to extended warranty
Current portion - other accrued liabilities		$	4,519			$	3,325
Long-term portion - other long-term liabilities			22,674				19,767
Total		$	27,193			$	23,092

11. Credit Agreements

 

		December 31,
		2016				2015
Product warranty liability
Current portion - other accrued liabilities		$	20,763			$	21,726
Long-term portion - other long-term liabilities			10,932				8,471
Total		$	31,695			$	30,197
Deferred revenue related to extended warranties
Current portion - other accrued liabilities		$	6,728			$	6,026
Long-term portion - other long-term liabilities			24,352				22,935
Total		$	31,080			$	28,961

The revolving credit facilities and credit agreements discussed below were outstanding for the periods described below. The Company refinanced this debt on February 9, 2012, amended and restated its credit agreements on May 30, 2012, and further amended and restated its credit agreements on May 31, 2013.

10.	Credit Agreements

 

Short-term borrowings are included in the consolidated balance sheets as follows:

		December 31,
		2014				2013
ABL facility		$	-			$	-
Other lines of credit, as described below			5,359				9,575
Total		$	5,359			$	9,575

		December 31,
		2016				2015
ABL facility		$	-			$	-
Other lines of credit			31,198				8,594
Total		$	31,198			$	8,594

 

Long-term borrowingsborrowings are included in the consolidated balance sheets as follows:

		December 31,
		2014				2013
Term loan		$	1,104,000			$	1,197,000
Discount on debt			(23,861	)			(12,735	)
Capital lease obligation			2,059				2,529
Other			460				1,026
Total			1,082,658				1,187,820
Less current portion of debt			389				12,286
Less current portion of capital lease obligation			168				185
Total		$	1,082,101			$	1,175,349

		December 31,
		2016				2015
Term loan		$	929,000			$	954,000
Original issue discount and deferred financing costs			(26,677	)			(29,905	)
ABL facility			100,000				100,000
Capital lease obligation			4,647				1,694
Other			14,753				12,000
Total			1,021,723				1,037,789
Less: current portion of debt			14,399				500
Less: current portion of capital lease obligation			566				157
Total		$	1,006,758			$	1,037,132

 

Maturities of long-term borrowings outstanding at December 31, 2014,2016, are as follows:

 

Year
2015			$	557
2016				254
2017				185
2018				191
After 2018				1,105,332
Total			$	1,106,519

2017		$	14,965
2018			745
2019			639
2020			100,547
After 2020			931,504
Total		$	1,048,400

 

On February 9, 2012, a subsidiary of the Company entered into aThe Company’s credit agreement (Credit Agreement) with certain commercial banks and other lenders. The Credit Agreementagreements provided for borrowings under a $150,000 revolving credit facility, a $325,000 tranche A term loan facility and a $250,000 tranche B term loan facility. The revolving credit facility and tranche A term loan facility were scheduled to mature in February 2017 and the tranche B term loan facility was scheduled to mature in February 2019. Proceeds received by the Company from loans made under the Credit Agreement were used for general corporate purposes and to repay in full all outstanding borrowings under the former credit agreement.

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On May 30, 2012, the Borrower amended and restated its then existing Credit Agreement by entering into a new credit agreement (Term Loan Credit Agreement) and a new revolving credit agreement (ABL Credit Agreement) with certain commercial banks and other lenders. The Term Loan Credit Agreement provided for a $900,000 term loan B credit facility and a $125,000 uncommitted incremental term loan facility (Term Loan). The ABL Credit Agreement provided for borrowings under a $150,000 senior secured ABL revolving credit facility. The Term Loan Credit Agreement was scheduled to mature in May 2018 and the ABL Credit Agreement was scheduled to mature in May 2017. Proceeds received by the Company from loans under the Term Loan Credit Agreement, together with cash on hand, were used to repay amounts outstanding under the Company’s previous Credit Agreement and pay a special cash dividend of $6.00 per share on the Company’s common stock (refer to Note 17, “Special Cash Dividend” to the consolidated financial statements for additional details). The interest rate on the Term Loan was based upon either a base rate plus an applicable margin of 4.00% or adjusted LIBOR rate plus an applicable margin of 5.00%, subject to a LIBOR floor of 1.25%.

On May 31, 2013, the Borrower amended and restated its then existing Term Loan Credit Agreement by entering into a new term loan credit agreement (New Term Loan Credit Agreement) with certain commercial banks and other lenders. The New Term Loan Credit Agreement provides for a $1,200,000 term loan B credit facility (New Term(Term Loan) and includesinclude a $300,000 uncommitted incremental term loan facility. The NewIn November 2016, the Company amended its Term Loan Credit Agreement matures onto extend the maturity date from May 31, 2020. Proceeds from the New Term Loan were used2020 to repay amounts outstanding under the Company’s previous Term Loan Credit Agreement and to fund a special cash dividend of $5.00 per share on the Company’s common stock (refer to Note 17, “Special Cash Dividend” to the consolidated financial statements for additional details). Remaining funds from the New Term Loan were used for general corporate purposes and to pay related financing fees and expenses.May 31, 2023. The New Term Loan is guaranteed by all of the Borrower’sCompany’s wholly-owned domestic restricted subsidiaries, GAC and the Company, and is secured by associated collateral agreements which pledge a first priority lien on virtually all of the Borrower’sCompany’s assets, including fixed assets and intangibles, and the assets of the guarantors (other than the Company), other than all cash, trade accounts receivable, inventory, and other current assets and proceeds thereof, which will beare secured by a second priority lien.

Prior to any voluntary prepayments, the New The Term Loan amortized in equal installments of 0.25% of the original principal amount of the New Term Loan payable on the first day of April, July, October and January commencing on October 1, 2013 until the final maturity date of the New Term Loan on May 31, 2020. It initially bore interest at rates based upon either a base rate plus an applicable margin of 1.75% or adjusted LIBOR rate plus an applicable margin of 2.75%, subject to a LIBOR floor of 0.75%. Beginning in the second quarter of 2014, and measured each quarterly period thereafter, the applicable margin related to base rate loans can beis reduced to 1.50% and the applicable margin related to LIBOR rate loans can beis reduced to 2.50%, in each case, if the Borrower’sCompany’s net debt leverage ratio, as defined in the New Term Loan, Credit Agreement, falls below 3.00 to 1.00 for that measurement period.

 

As

Because the Borrower’sCompany’s net debt leverage ratio was below 3.00 to 1.00 on April 1, 2014, the Companyit realized a 25 basis point reduction in borrowing costs duringin the second quarter of 2014. As a result, the Company recorded a cumulative catch-up gain of $16,014 in the second quarter of 2014, which represents the total cash interest savings over the remaining term of the loan.loan, as the Company projected the net debt leverage ratio to remain below 3.00 to 1.00 using current forecasts at that time. The gain was recorded as original issue discount on long-term borrowings in the consolidated balance sheets.sheets and as a gain on change in contractual interest rate in the consolidated statements of comprehensive income. 

Because the Company’s net debt leverage ratio was above 3.00 to 1.00 on July 1, 2015, it realized a 25 basis point increase in borrowing costs in the third quarter of 2015. As a result, the Company recorded a cumulative catch-up loss of $2,381 in the third quarter of 2015, which represents the additional cash interest expected to be paid while the net debt leverage ratio is expected to be above 3.00 to 1.00 using current forecasts at that time. The Borrower’sloss was recorded against original issue discount on long-term borrowings in the consolidated balance sheets and as a loss on change in contractual interest rate in the consolidated statements of comprehensive income.

As the Company’s net debt leverage ratio continued to be above 3.00 to 1.00 on July 1, 2016, the Company recorded a cumulative catch-up loss of $2,957 in the third quarter of 2016, which represents the additional cash interest expected to be paid while the net debt leverage ratio is expected to be above 3.00 to 1.00 using current forecasts at that time. The loss was recorded against original issue discount on long-term borrowings in the consolidated balance sheets and as a loss on change in contractual interest rate in the consolidated statements of comprehensive income. The Company’s net debt leverage ratio as of December 31, 2014 continues to be below2016 was above 3.00 to 1.00.

 

IThe Newn May 2015, the Company amended certain provisions and covenants of the Term Loan. In connection with this amendment and in accordance with ASC 470-50, Debt Modifications and Extinguishments, the Company capitalized $1,528 of fees paid to creditors as original issue discount on long-term borrowings and expensed $49 of transaction fees in the second quarter of 2015.

In November 2016, the Company amended its Term Loan Credit Agreement contains restrictions on the Borrower’s ability to pay distributions and dividends (but which permitted the payment of the special cash dividend described in Note 17, “Special Cash Dividend” to the consolidated financial statements). Payments can be made by the Borrower to the Company or other parent companies for certain expenses such as operating expenses in the ordinary course, fees and expenses related to any debt or equity offering and to pay franchise or similar taxes. Dividends can be used to repurchase equity interests, subject to limitations in certain circumstances. Additionally, the New Term Loan Credit Agreement restricts the aggregate amount of dividends and distributions that can be paid and, in certain circumstances, requires pro forma compliance with certain fixed charge coverage ratios or gross leverage ratios, as applicable, in order to pay certain dividends and distributions. The New Term Loan Credit Agreement also contains other affirmative and negative covenants that, among other things, limit the incurrence of additional indebtedness, liens on property, sale and leaseback transactions, investments, loans and advances, mergers or consolidations, asset sales, acquisitions, transactions with affiliates, prepayments of certain other indebtedness and modifications of our organizational documents. The New Term Loan Credit Agreement does not contain any financial maintenance covenants.

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The New Term Loan Credit Agreement contains customary events of default, including, among others, nonpayment of principal, interest or other amounts, failure to perform covenants, inaccuracy of representations or warranties in any material respect, cross-defaults with other material indebtedness, certain undischarged judgments, the occurrence of certain ERISA or bankruptcy or insolvency events or the occurrence of a change in control (defined in the New Term Loan Credit Agreement). A bankruptcy or insolvency event of default will cause the obligations under the New Term Loan Credit Agreement to automatically become immediately due and payable.

Concurrent with the closing of the New Term Loan Credit Agreement on May 31, 2013, the Borrower amended its existing ABL Credit Agreement (New ABL Credit Agreement). The amendment provides for a one year extension ofextend the maturity date from May 31, 2020 to May 31, 2023. In connection with this amendment and in respectaccordance with ASC 470-50, Debt Modifications and Extinguishments, the Company capitalized $4,242 of fees paid to creditors as original issue discount on long-term borrowings and expensed $315 of transaction fees in the fourth quarter of 2016. As of December 31, 2016, the Company is in compliance with all covenants of the Term Loan. There are no financial maintenance covenants on the Term Loan.

The Company’s credit agreements also originally provided for a $150,000 senior secured ABL revolving credit facility provided under the ABL Credit Agreement (ABL Facility). The extended maturity date of the ABL Facility isoriginally was May 31, 2018. Borrowings under the ABL Facility are guaranteed by all of the Borrower’sCompany’s wholly-owned domestic restricted subsidiaries, and GAC, and are secured by associated collateral agreements which pledge a first priority lien on all cash, trade accounts receivable, inventory, and other current assets and proceeds thereof, and a second priority lien on all other assets, including fixed assets and intangibles of the Borrower,Company and certain domestic subsidiaries of the Borrower and the guarantors (other than the Company).

Borrowings under thesubsidiaries. ABL facility bearFacility borrowings initially bore interest at rates based upon either a base rate plus an applicable margin of 1.00% or adjusted LIBOR rate plus an applicable margin of 2.00%, in each case, subject to adjustments based upon average availability under the ABL Facility.

In May 2015, the Company amended its ABL Facility. The New ABL Credit Agreement requires the Borrower to maintain a minimum consolidated fixed charge coverage ratio of 1.0x, tested on a quarterly basis, when Availability plus the amount of Qualified Cash (up to $5,000) (as defined in the New ABL Credit Agreement) underamendment (i) increased the ABL Facility is less thanfrom $150,000 to $250,000 (Amended ABL Facility), (ii) extended the greatermaturity date from May 31, 2018 to May 29, 2020, (iii) increased the uncommitted incremental facility from $50,000 to $100,000, (iv) reduced the interest rate spread by 50 basis points and (v) reduced the unused line fee by 12.5 basis points across all tiers. Additionally, the amendment relaxes certain restrictions on the Company’s ability to, among other things, (i) make additional investments and acquisitions (including foreign acquisitions), (ii) make restricted payments and (iii) incur additional secured and unsecured debt (including foreign subsidiary debt). In connection with this amendment and in accordance with ASC 470-50, the Company capitalized $540 of (i) 10.0%new debt issuance costs in 2015.

In May 2015, the Company borrowed $100,000 under the Amended ABL Facility, the proceeds of which were used as a voluntary prepayment towards the Line Cap (as defined in the New ABL Credit Agreement) or (ii) $10,000. The New ABL Credit Agreement also contains covenants and events of default substantially similar to those in the New Term Loan Credit Agreement, as described above.Loan. As of December 31, 2014, no amounts were2016, there was $100,000 outstanding under the Amended ABL Facility. As of December 31, 2014, the Company had $189,761 of unrestricted cash and cash equivalents and $148,500Facility, leaving $145,593 of availability, under the ABL Facility, net of outstanding letters of credit.

 

IIn connection with the February 9, 2012 refinancingn April, September and in accordance with ASC 470-50, Debt Modifications and Extinguishments, the Company capitalized $10,409 of new debt issuance costs, recorded $1,386 of fees paid to creditors as a debt discount, expensed $1,407 of transaction fees and wrote-off $2,902 of unamortized debt issuance costs relating to the former credit agreement. In connection with the May 30, 2012 refinancing, the Company capitalized $15,309 of new debt issuance costs, recorded $18,000 of fees paid to creditors as a debt discount, expensed $801 of transaction fees and wrote-off $9,198 of unamortized debt issuance costs relating to the Credit Agreement. Amounts expensed were recorded as a loss on extinguishment of debt in the consolidated statement of comprehensive income for the year ended December 31, 2012.

In connection with the May 31, 2013 refinancing, the Company capitalized $21,824 of new debt issuance costs, recorded $13,797 of fees paid to creditors as a debt discount, expensed $7,100 of transaction fees and wrote-off $5,473 of unamortized debt issuance costs and original issue discount relating to the previous Term Loan Credit Agreement and ABL Credit Agreement. Amounts expensed were recorded as a loss on extinguishment of debt in the consolidated statement of comprehensive income for the year ended December 31, 2013. The Company amortizes both the capitalized debt issuance costs and the original issue discount on its loans under the catch-up approach of the effective interest method.

On February 11, 2013, the Company made an $80,000 voluntary prepayment of debt with available cash on hand that was applied to future principal amortizations on the Term Loan Credit Agreement. As a result, the Company wrote off $1,839 of original issue discount and capitalized debt issuance costs during the first quarter of 2013. On May 2, 2013, the Company made an additional $30,000 voluntary prepayment of existing debt with available cash on hand. As a result, the Company wrote off $924 of original issue discount and capitalized debt issuance costs during the second quarter of 2013.

On April 30, September 30 and December 31, 2014, the Company made voluntary prepayments of the New Term Loan of $12,000, $50,000 and $25,000, respectively, with available cash on hand that was applied to future principal amortizations and the Excess Cash Flow payment requirement in the New Term Loan Credit Agreement.Loan. As a result of the prepayments, the Company wrote off $2,084 of original issue discount and capitalized debt issuance costs during the year ended December 31, 2014 as a loss on extinguishment of debt in the consolidated statement of comprehensive income.

In March and May 2015, the Company made voluntary prepayments of the Term Loan of $50,000 and $100,000, respectively, which were applied to the Excess Cash Flow payment requirement in the Term Loan. As a result of the prepayments, the Company wrote off $4,795 of original issue discount and capitalized debt issuance costs during the year ended December 31, 2015 as a loss on extinguishment of debt in the consolidated statement of comprehensive income.

 

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In November 2016, the Company made a voluntary prepayment of the Term Loan of $25,000, which will be applied to the Excess Cash Flow payment requirement in the Term Loan. As a result of the prepayment, the Company wrote off $574 of original issue discount and capitalized debt issuance costs during the year ended December 31, 2016 as a loss on extinguishment of debt in the consolidated statement of comprehensive income.

 

As of December 31, 20142016 and December 31, 2013,2015, short-term borrowings consisted primarily of borrowings by our foreign subsidiaries on local lines of credit, which totaled $5,359$31,198 and $9,575$8,594, respectively.

11.	Stock Repurchase Program

In August 2015, the Company’s Board of Directors approved a $200,000 stock repurchase program. Under the program, the Company may repurchase up to $200,000 of its common stock over the following 24 months, in amounts and at prices the Company deems appropriate, subject to market conditions and other considerations. The Company completed the program in the third quarter of 2016.

 

I12. Earnings Per Sharen October 2016, the Company’s Board of Directors approved a $250,000 stock repurchase program. Under the program, the Company may repurchase an additional $250,000 of its common stock over the following 24 months. The Company may repurchase its common stock from time to time, in amounts and at prices the Company deems appropriate, subject to market conditions and other considerations. The repurchase may be executed using open market purchases, privately negotiated agreements or other transactions. The actual timing, number and value of shares repurchased under the program will be determined by management at its discretion and will depend on a number of factors, including the market price of the Company’s shares of common stock and general market and economic conditions, applicable legal requirements, and compliance with the terms of the Company’s outstanding indebtedness. The repurchases may be funded with cash on hand, available borrowings or proceeds from potential debt or other capital markets sources. The stock repurchase program may be suspended or discontinued at any time without prior notice. For the year ended December 31, 2016, the Company repurchased 3,968,706 shares of its common stock for $149,937. Since the inception of the programs, the Company has repurchased 7,272,206 shares of its common stock for $249,879, all funded with cash on hand.

12.	Earnings Per Share

 

Basic earnings per share is calculated by dividing net income attributable to the common shareholders of the Company by the weighted average number of common shares outstanding during the period, excluding unvestedexclusive of restricted shares. Except where the result would be anti-dilutive, dilutivediluted earnings per share is calculated by assuming the vesting of unvested restricted stock and the exercise of stock options, as well as their related income tax benefits. The following table summarizesreconciles the numerator and the denominator used to calculate basic and diluted earnings per share calculations:share:

 

		Year Ended December 31,												Year Ended December 31,
		2014				2013				2012				2016				2015				2014
Numerator
Net income attributable to Generac Holdings Inc.														$	98,788			$	77,747			$	174,613
Redeemable noncontrolling interest redemption value adjustment															(909	)			-				-
Net income attributable to common shareholders														$	97,879			$	77,747			$	174,613
Net income (numerator)		$	174,613			$	174,539			$	93,223
Weighted average shares (denominator)
Basic			68,538,248				68,081,632				67,360,632
Denominator
Weighted average shares, basic															64,905,793				68,096,051				68,538,248
Dilutive effect of stock compensation awards (1)			1,632,796				1,585,897				1,832,506				476,981				1,104,246				1,632,796
Diluted			70,171,044				69,667,529				69,193,138
Net income per share
Diluted shares															65,382,774				69,200,297				70,171,044
Net income attributable to common shareholders per share
Basic		$	2.55			$	2.56			$	1.38			$	1.51			$	1.14			$	2.55
Diluted		$	2.49			$	2.51			$	1.35			$	1.50			$	1.12			$	2.49

 

(1) Excludes approximately 81,600, 10,30015,800, 161,400 and 363,00081,600 stock options and restricted stock awards for the years ended December 31, 2014, 20132016, 2015 and 2012,2014, respectively, as the impact of such awards was anti-dilutive. Excludes approximately 1,000 shares of restricted stock for the year ended December 31, 2015, as the impact of such awards was anti-dilutive.

 

13. Income Taxes

13.	Income Taxes

 

The Company’sCompany’s provision for income taxes consists of the following:

 

		Year Ended December 31,
		2014				2013				2012
Current:
Federal		$	38,161			$	48,287			$	34,170
State			1,645				5,648				3,854
Foreign			5,701				2,214				81
			45,507				56,149				38,105
Deferred:
Federal			42,474				42,003				21,972
State			(3,134	)			5,523				3,048
Foreign			(1,462	)			167				25
			37,878				47,693				25,045
Change in valuation allowance			364				335				(21	)
Provision for income taxes		$	83,749			$	104,177			$	63,129

		Year Ended December 31,
		2016				2015				2014
Current:
Federal		$	11,717			$	13,614			$	38,161
State			2,047				1,966				1,645
Foreign			4,460				3,588				5,701
			18,224				19,168				45,507
Deferred:
Federal			41,264				31,869				42,474
State			3,029				1,387				(3,134	)
Foreign			(5,585	)			(7,326	)			(1,462	)
			38,708				25,930				37,878
Change in valuation allowance			638				138				364
Provision for income taxes		$	57,570			$	45,236			$	83,749

 

The Company has been notified by the Internal Revenue Service of an income tax audit for the 2012 tax year. To date, field work has not commenced. As of DecemberDecember 31, 2014,2016, due to the carryforward of net operating losses, and research and development credits, the Company is open to U.S. Federalfederal and state income tax examinations for the tax years 2006 through 2014.2015. In addition, the Company is subject to audit by various foreign taxing jurisdictions for the tax years 20092011 through 2014.2015. During 2015, the Internal Revenue Service completed field work on income tax audits for the 2012 and 2013 tax years. A final audit report was issued and resulted in no change to the Company’s provision for income taxes.

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Significant components of deferred tax assets and liabilities are as follows:

 

		December 31,								December 31,
		2014				2013				2016				2015
Deferred tax assets:
Goodwill and intangible assets		$	23,624			$	74,992
Accrued expenses			18,191				24,263			$	22,758			$	18,982
Deferred revenue			7,945				4,413				10,645				9,389
Inventories			6,306				4,483				10,159				9,772
Pension obligations			8,738				4,043				7,512				7,684
Stock-based compensation			8,628				6,609				7,291				7,974
Operating loss and credit carryforwards			10,047				976				20,927				15,677
Other			4,299				2,089				2,822				2,842
Valuation allowance			(1,385	)			(1,021	)			(4,362	)			(1,523	)
Total deferred tax assets			86,393				120,847				77,752				70,797
Deferred tax liabilities:
Deferred tax liabilitites:
Goodwill and intangible assets											58,133				12,455
Depreciation			18,535				15,163				25,194				19,507
Debt refinancing costs			10,925				7,494				7,193				7,732
Prepaid expenses			1,032				1,183				1,173				1,241
Total deferred tax liabilities			30,492				23,840				91,693				40,935
Net deferred tax assets		$	55,901			$	97,007
Net deferred tax assets (liabilities)										$	(13,941	)		$	29,862

As of December 31, 2016 and 2015, deferred tax assets of $3,337 and $34,812, and deferred tax liabilities of $17,278 and $4,950, respectively, were reflected on the consolidated balance sheets.

 

The net currentCompany had approximately $592,000 of tax-deductible goodwill and noncurrent components of deferred taxes included in the consolidated balance sheets are as follows:

		December 31,
		2014				2013
Net current deferred tax assets		$	22,841			$	26,869
Net long-term deferred tax assets			47,894				86,125
Net long-term deferred tax liabilities			(13,449	)			(14,966	)
Valuation allowance			(1,385	)			(1,021	)
Net deferred tax assets		$	55,901			$	97,007

The net long-term deferred tax liabilities and valuation allowance are included in other long-term liabilities and deferred income taxes (noncurrent), respectively, in the consolidated balance sheetsintangible asset amortization remaining as of December 31, 20142016 related to our acquisition by CCMP in 2006 that is expected to generate aggregate cash tax savings of approximately $231,000 through 2021, assuming continued profitability and 2013.a 39% tax rate. The recognition of the tax benefit associated with these assets for tax purposes is expected to be approximately $122,000 annually through 2020 and approximately $102,000 in 2021, which generates annual cash tax savings of approximately $48,000 through 2020 and approximately $40,000 in 2021, assuming profitability and a 39% tax rate.

 

Generac Brazil, acquiredacquired as part of the Ottomotores acquisition, has generated net operating losses for multiple years as part of the start-up of the business. The realizability of the deferred tax assets associated with these net operating losses is uncertain so a valuation allowance was recorded in the opening balance sheet as of December 8, 2012 as well as atand continued through December 31, 20142016.

In addition, the Company recorded a valuation allowance in the opening balance sheet and 2013.as of December 31, 2016 related to the Pramac acquisition. The valuation allowance represents a reserve for deferred tax assets, including loss carryforwards, of Pramac subsidiaries, for which utilization is uncertain.

 

At December 31, 2014,2016, the Company had state research and development credit,credits, and state manufacturing credit carryforwards of approximately $15,610$17,498 and $2,424,$3,736, respectively, which expire between 2017 and 2029.2031.

 

Changes in the Company’sCompany’s gross liability for unrecognized tax benefits, excluding interest and penalties, were as follows:

 

		December 31,				December 31,
		2014				2016				2015
Unrecognized tax benefit, beginning of period		$	-			$	7,239			$	6,394
Increase in unrecognized tax benefit for positions taken in current period			6,394				704				845
Unrecognized tax benefit, end of period		$	6,394			$	7,943			$	7,239

 

At December 31, 2013 and 2012, the Company had no reserves recorded for uncertain tax positions.

The entire unrecognized tax benefit as of December 31, 2014,2016 and 2015, if recognized, would impact the effective tax rate.

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Interest and penalties are recorded as a component of income tax expense. As of December 31, 2016, 2015 and 2014, total interest of approximately $272, $174 and $86, respectively, and penalties of approximately $425, $363 and $263, respectively, associated with net unrecognized tax benefits are included in the Company’s consolidated balance sheet. There were no interest or penalties related to income taxes that had been accrued or recognized as of and for the years ended December 31, 2013 and 2012.sheets.

 

The Company does not expect a significant increase or decrease to the total amounts of unrecognized tax benefits related to continuing operations during the fiscal year ending December 31, 2015.2017.

 

The Company considers the earnings of certain non-U.S. subsidiaries to be indefinitely invested outside the United States on the basis of estimates that future domestic cash generation will be sufficient to meet future domestic cash needs and the Company’s specific plans for reinvestment of those subsidiary earnings. The Company has not provided for additional U.S. income taxes on approximately $9,139$7,551 of undistributed earnings of consolidated non-U.S. subsidiaries. It is not practicable to estimate the amount of unrecognized withholding taxes and deferred tax liability on such earnings.

 

A reconciliation of the statutory tax rates and the effective tax rates for thethe years ended December 31, 2014, 20132016, 2015 and 20122014 are as follows:

		Year Ended December 31,
		2014				2013				2012
U.S. statutory rate			35.0	%			35.0	%			35.0	%
State taxes			3.1				3.7				4.1
Valuation allowance			0.2				0.2				-
Research and development credits			(5.0	)			(0.6	)			(0.2	)
Other			(0.9	)			(0.9	)			1.5
Effective tax rate			32.4	%			37.4	%			40.4	%

14. Benefit Plans

 

		Year Ended December 31,
		2016				2015				2014
U.S. statutory rate			35.0	%			35.0	%			35.0	%
State taxes			4.1				4.1				3.1
Research and development credits			(1.0	)			(2.3	)			(5.0	)
Other			(1.3	)			-				(0.7	)
Effective tax rate			36.8	%			36.8	%			32.4	%

14.	Benefit Plans

Medical and Dental Plan

 

The Company maintains medical and dental benefit plans covering its full-time domestic employees of the Company and their dependents. Certain plans are partially or fully self-funded plans under which participant claims are obligations of the plan. These plans are funded through employer and employee contributions at a level sufficient to pay for the benefits provided by the plan. The Company’s contributions to the plans were $11,701, $9,500,$15,019, $14,352, and $8,741$11,701 for the years ended December 31, 2016, 2015, and 2014, 2013, and 2012, respectively. During 2014, the Company paid premiums of $2,700 for other standard medical benefits covering certain full-time employees.

 

The Company’sCompany’s foreign subsidiaries participate in government sponsored medical benefit plans. In certain cases, the Company purchases supplemental medical coverage for certain employees at these foreign locations. The expenses related to these plans are not material to the Company’s consolidated financial statements.

 

SSavingsavings Plan

 

The Company maintains a defined-contribution 401(k) savings planplans for eligible domestic employees. Under the plan,plans, employees may defer receipt of a portion of their eligible compensation. The Company amended the 401(k) savings plans effective January 1, 2009, to add Company matching and non-elective contributions. The Company may contribute a matching contribution of 50% of the first 6% of eligible compensation of employees. The Company may also contribute a non-elective contribution for eligible employees employed on December 31, 2008. Both Company matching contributions and non-elective contributions are subject to vesting. Forfeitures may be applied against plan expenses.expenses and company contributions. The Company recognized $3,400, $3,300$3,000 and $3,000$3,400 of expense related to this plan in 2016, 2015 and 2014, 2013 and 2012, respectively.

 

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Pension Plans

 

The Company has a frozen noncontributory salaried and hourly pension plans (Pension Plans) covering certain domestic employees. The benefits under the salaried plan are based upon years of service and the participants’ defined final average monthly compensation. The benefits under the hourly plan are based on a unit amount at the date of termination multiplied by the participant’s years of credited service. The Company’s funding policy for the Pension Plans is to contribute amounts at least equal to the minimum annual amount required by applicable regulations.

 

The Company uses a December 31 measurement date for the Pension Plans. The table that includes the accumulated benefit obligation;obligation and reconciliation of the changes in projected benefit obligation, changes in plan assets and the funded status of the Pension Plans is as follows:

		Year Ended December 31,
		2014				2013
Accumulated benefit obligation at end of period		$	68,376			$	52,825
Change in projected benefit obligation
Projected benefit obligation at beginning of period		$	52,825			$	59,744
Interest cost			2,591				2,423
Net actuarial loss (gain)			14,791				(7,695	)
Benefits paid			(1,831				(1,647	)
Projected benefit obligation at end of period		$	68,376			$	52,825
Change in plan assets
Fair value of plan assets at beginning of period		$	42,440			$	36,570
Actual return on plan assets			3,110				6,465
Company contributions			1,733				1,052
Benefits paid			(1,831				(1,647	)
Fair value of plan assets at end of period		$	45,452			$	42,440
Funded status: accrued pension liability included in other long-term liabilities		$	(22,924			$	(10,385	)
Amounts recognized in accumulated other comprehensive income
Net actuarial loss		$	(13,243			$	(4,393	)

		Year Ended December 31,
		2016				2015
Accumulated benefit obligation at end of period		$	65,956			$	63,894
Change in projected benefit obligation
Projected benefit obligation at beginning of period		$	63,894			$	68,376
Interest cost			2,747				2,681
Net actuarial loss (gain)			1,363				(5,254	)
Benefits paid			(2,048	)			(1,909	)
Projected benefit obligation at end of period		$	65,956			$	63,894
Change in plan assets
Fair value of plan assets at beginning of period		$	43,985			$	45,452
Actual return (loss) on plan assets			3,820				(384	)
Company contributions			731				826
Benefits paid			(2,048	)			(1,909	)
Fair value of plan assets at end of period		$	46,488			$	43,985
Funded status: accrued pension liability included in other long-term liabilities		$	(19,468	)		$	(19,909	)
Amounts recognized in accumulated other comprehensive loss
Net actuarial loss, net of tax		$	(11,040	)		$	(11,362	)

 

The actuarial loss for the Pension Plans that was amortized from AOCIAOCL into net periodic (benefit) cost during 20142016 is $106.$941. The amount in AOCIAOCL as of December 31, 20142016 that is expected to be recognized as a component of net periodic pension expense during the next fiscal year is $1,228.$883.

 

The components of net periodic pension (benefit) cost isare as follows:

 

		Year Ended December 31,
		2014				2013				2012
Components of net periodic pension (benefit) cost:
Interest cost		$	2,591			$	2,423			$	2,453
Expected return on plan assets			(2,933	)			(2,520	)			(2,398	)
Amortization of net loss			106				1,108				909
Net periodic pension (benefit) cost		$	(236	)		$	1,011			$	964

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		Year Ended December 31,
		2016				2015				2014
Interest cost		$	2,747			$	2,681			$	2,591
Expected return on plan assets			(2,868	)			(3,041	)			(2,933	)
Amortization of net loss			941				1,228				106
Net periodic pension (benefit) cost		$	820			$	868			$	(236	)

 

Weighted-average assumptions used to determine the benefit obligations are as follows:

 

		December 31,
		2014				2013
Discount rate - salaried pension plan			3.97	%			4.98	%
Discount rate - hourly pension plan			3.99	%			5.01	%
Rate of compensation increase (1)			n/a				n/a

		December 31,
		2016				2015
Discount rate – salaried pension plan			4.14	%			4.36	%
Discount rate – hourly pension plan			4.16	%			4.39	%
Rate of compensation increase (1)			n/a				n/a

 

(1)

No compensation increase was assumed as the plans were frozen effective December 31, 2008.

 

Weighted-average assumptions used to determine net periodic pension (benefit) cost are as follows:

 

		Year Ended December 31,												Year Ended December 31,
		2014				2013				2012				2016				2015				2014
Discount rate			5.01	%			4.14	%			4.65	%			4.39	%			3.99	%			5.01	%
Expected long-term rate of return on plan assets			6.88				6.95				7.57				6.62	%			6.75	%			6.88	%
Rate of compensation increase (1)			n/a				n/a				n/a				n/a				n/a				n/a

 

(1)

No compensation increase was assumed as the plans were frozen effective December 31, 2008.2008.

 

To determine the long-term rate of return assumption for plan assets, the Company studies historical markets and preserves the long-term historical relationships between equities and fixed-income securities consistent with the widely accepted capital market principle that assets with higher volatility generate a greater return over the long run. The Company evaluates current market factors such as inflation and interest rates before it determines long-term capital market assumptions and reviews peer data and historical returns to check for reasonableness and appropriateness.

 

The Pension Plan’sPlans’ weighted-average asset allocation at December 31, 20142016 and 2013,2015, by asset category, is as follows:

 

						December 31, 2014								December 31, 2013												December 31, 2016								December 31, 2015
Asset Category		Target				Dollars				%				Dollars				%				Target				Dollars				%				Dollars				%
Fixed Income			24	%		$	7,400				16	%		$	7,307				17	%			20	%		$	7,812				17	%		$	8,571				19	%
Domestic equity			49	%			24,373				54	%			23,903				56	%			49	%			19,615				42	%			20,479				47	%
International equity			17	%			8,869				19	%			7,424				18	%			21	%			13,466				29	%			9,687				22	%
Real estate			10	%			4,810				11	%			3,806				9	%			10	%			5,595				12	%			5,248				12	%
Total			100	%		$	45,452				100	%		$	42,440				100	%			100	%		$	46,488				100	%		$	43,985				100	%

 

The fair values of the Pension Plan'sPlans’ assets at December 31, 20142016 are as follows:

 

		Total				Quoted Prices in Active Markets for Identical Asset (Level 1)				Significant Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)				Total				Quoted Prices in Active Markets for Identical Asset (Level 1)				Significant Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Mutual fund		$	42,267			$	42,267			$	-			$	-
Mutual funds																		$	37,860			$	37,860			$	–			$	–
Other investments			3,185				-				-				3,185				8,628				–				–				8,628
Total		$	45,452			$	42,267			$	-			$	3,185			$	46,488			$	37,860			$	–			$	8,628

 

The fair values of the Pension Plan'sPlan's assets at December 31, 20132015 are as follows:

 

		Total				Quoted Prices in Active Markets for Identical Asset (Level 1)				Significant Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Mutual fund		$	39,759			$	39,759			$	-			$	-
Collective trust			2,681				-				2,681				-
Total		$	42,440			$	39,759			$	2,681			$	-

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		Total				Quoted Prices in Active Markets for Identical Asset (Level 1)				Significant Observable Inputs (Level 2)				Significant Unobservable I nputs (Level 3)
Mutual funds		$	40,310			$	40,310			$	–			$	–
Other investments			3,675				–				–				3,675
Total		$	43,985			$	40,310			$	–			$	3,675

 

A reconciliation of beginningbeginning and ending balances for Level 3 assets for the yearyears ended December 31, 20142016 and 2015 is as follows:

 

		Other Investments				Year Ended December 31,
Balance as of December 31, 2013		$	-
						2016				2015
Balance at beginning of period						$	3,675			$	3,185
Purchases			3,100				4,400				408
Realized gains			85				553				82
Balance as of December 31, 2014		$	3,185
Balance at end of period						$	8,628			$	3,675

Mutual Funds - – This category includes investments in mutual funds that encompass both equity and fixed income securities that are designed to provide a diverse portfolio. The plan’s mutual funds are designed to track exchange indices, and invest in diverse industries. Some mutual funds are classified as regulated investment companies. Investment managers have the ability to shift investments from value to growth strategies, from small to large capitalization funds, and from U.S. to international investments. These investments are valued at the closing price reported on the active market on which the individual securities are traded. These investments are classified within Level 1 of the fair value hierarchy.

 

Other Investments - – This category includes investments in limited partnerships and are valued at estimated fair value, as determined with the assistance of each respective limited partnership, based on the net asset value of the investment as of the balance sheet date, which is subject to judgment. The Net Asset Value (NAV)judgment, and therefore is classified within Level 3 of the fair value hierarchy.

 

Collective Trusts - This category includes public investment vehicles valued using the NAV provided by the administrator of the trust. The NAV is based on the value of the underlying assets owned by the trust, minus its liabilities, and then divided by the number of shares outstanding. The NAV of the trust is classified within Level 2 of the fair value hierarchy.

The Company’sCompany’s target allocation for equity securities and real estate is generally between 65% - 85%, with the remainder allocated primarily to bonds.fixed income (bonds). The Company regularly reviews its actual asset allocation and periodically rebalances its investments to the targeted allocation when considered appropriate.

 

The Company expects to make estimated contributions of $1,187$568 to the Pension Plans in 2015.2017.

 

The following benefit payments are expected to be paid from the Pension Plans:

 

Year
2015			$	1,888
2016				1,998
2017				2,185
2018				2,319
2019				2,430
2020 - 2024				14,500

2017		$	2,258
2018			2,354
2019			2,430
2020			2,556
2021			2,692
2022 – 2026			16,021

 

Certain of the Company’sCompany’s foreign subsidiaries participate in local defined benefit or other post-employment benefit plans. These plans provide benefits that are generally based on years of credited service and a percentage of the employee’s eligible compensation earned throughout the applicable service period. Liabilities recorded under these plans are included in accrued wages and employee benefits in the Company’s consolidated balance sheets and are not material.

 

15. Share Plans

15.	Share Plans

 

The Company adopted an equity incentive plan (Plan) on February 10, 2010 in connection with its initial public offering. The plan,Plan, as amended, allows for granting of up to 9.1 million stock-based awards to executives, directors and employees. Awards available for grant under the Plan include stock options, stock appreciation rights, restricted stock, other stock-based awards and performance-based compensation awards. Total share-based compensation expense related to the equity incentive planPlan was $9,493, $8,241 and $12,612 $12,368 and $10,780for the years ended December 31, 2014, 20132016, 2015 and 2012,2014, respectively, net of estimated forfeitures, which is recorded in operating expenses in the consolidated statements of comprehensive income.

 

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Stock Options - Stock options granted in 2016 have an exercise price between $33.23 per share and $35.37 per share; stock options granted in 2015 have an exercise price between $28.36 per share and $49.70 per share, and the stock options granted in 2014 have an exercise price of between $42.20 per share and $59.01 per share, stock options granted in 2013 have an exercise price of between $29.81 per share and $48.36 per share, and the stock options granted in 2012 have an exercise price of between $15.94 per share and $32.05 per share. On June 21, 2013, the Company paid a special cash dividend of $5.00 per share on its common stock, and on June 29, 2012, the Company paid a special cash dividend of $6.00 per share on its common stock. In connection with these special dividends, and pursuant to the terms of the Company’s stock option plan, certain adjustments were made to stock options outstanding under the plan in order to avoid dilution of the intended benefits which would otherwise result as a consequence of the special dividend. As such, the strike price for all outstanding stock options as of the special dividend dates, were adjusted by the $5.00 and $6.00 special dividend amounts. There was no change to compensation expense as a result of these adjustments.

Stock options issued in 2014, 2013 and 2012 - 2016 vest in equal installments over four years, subject to the grantee’s continued employment or service and expire 10ten years after the date of grant. Stock options issued in 2011 and 2010 vest in equal installments over five years, subject to the grantee’s continued employment or service and expire 10ten years after the date of grant.

 

Beginning in 2011, stockStock option exercises arecan be net-share settled such that the Company withholds shares with value equivalent to the exercise price of the stock option awards plus the employees’ minimum statutory obligation for the applicable income and other employment taxes. Total shares withheld were 473,743, 272,296 and 235,644 323,427in 2016, 2015 and 667,041 in 2014, 2013 and 2012, respectively, and were based on the value of the stock on the exercise dates as determined based upon an average of the Company’s high and low stock sales price on the exercise dates. The net-share settlement has the effect of share repurchases by the Company as they reduce the number of shares that would have otherwise been issued. Total payments for the employees’employees' tax obligations to the taxing authorities were $13,056, $9,768 and $10,411 $8,449in 2016, 2015 and $6,425 in 2014, 2013 and 2012, respectively, and are reflected as a financing activity within the consolidated statements of cash flows. The net-share settlements had

Employees can also utilize a cashless for cash exercise of stock options, such that all exercised shares will be sold in the effectmarket immediately. Cash equivalent to the exercise price of share repurchasesthe awards plus the employees’ minimum statutory tax obligations is retained by the Company, with the remaining cash being transferred to the employee. Total proceeds from the cashless for cash exercise of stock options were $1,623 in 2016, and are reflected as they reduceda financing activity in the numberconsolidated statement of shares that would have otherwise been issued.cash flows.

 

The grant-date fair value of each option grant is estimated using the Black-Scholes-Merton option pricing model. The fair value is then amortized on a straight-line basis over the requisite service period of the awards, which is generally the vesting period. Use of a valuation model requires management to make certain assumptions with respect to selected model inputs. Sincethere is limited history for the Company’s stock, expectedExpected volatility is calculated based on an analysis of historic and implied volatility measures for a set of peer companies. The average expected life is based on the contractual term of the option using the simplified method. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with a remaining term equal to the expected life assumed at the date of grant. The compensation expense recognized is net of estimated forfeitures. Forfeitures are estimated based on actual share option forfeiture history. The weighted-average assumptions used in the Black-Scholes-Merton option pricing model for 2014, 20132016, 2015 and 20122014 are as follows:

		2014				2013				2012
Weighted average grant date fair value		$	26.35			$	16.30			$	12.13
Assumptions:
Expected stock price volatility			45	%			47	%			45	%
Risk free interest rate			1.90	%			1.21	%			1.22	%
Expected annual dividend per share		$	-			$	-			$	-
Expected life of options (years)			6.25				6.25				6.25

		2016				2015				2014
Weighted average grant date fair value		$	13.77			$	19.07			$	26.35
Assumptions:
Expected stock price volatility			41	%			41	%			45	%
Risk free interest rate			1.31	%			1.72	%			1.90	%
Expected annual dividend per share		$	-			$	-			$	-
Expected life of options (years)			6.25				6.25				6.25

 

The Company periodically evaluates its forfeiture rates and updates the rates it uses in the determination of its stock-based compensation expense. The impact of the change to the forfeiture rates on non-cash compensation expense was immaterial for the years ended December 31, 2014, 20132016, 2015 and 2012.2014.

 

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A summary of the Company’sCompany’s stock option activity and related information for the years ended December 31, 2014, 20132016, 2015 and 20122014 is as follows:

 

		Number of Options				Weighted- Average Exercise Price				Weighted- Average Remaining Contractual Term (in years)				Aggregate Intrinsic Value ($ in thousands)				Number of Options				Weighted- Average Exercise Price				Weighted- Average Remaining Contractual Term (in years)				Aggregate Intrinsic Value ($ in thousands)
Outstanding as of December 31, 2011			4,308,545			$	13.36				8.2			$	63,193
Granted			256,112				21.28
Exercised			(1,113,827	)			13.21
Expired			-				-
Forfeited			(10,788	)			20.52
Outstanding as of December 31, 2012			3,440,042				8.44				9.5			$	87,001
Granted			253,857				35.04
Exercised			(703,326	)			6.05
Expired			(1,625	)			20.94
Forfeited			(51,647	)			17.02
Outstanding as of December 31, 2013			2,937,301				5.74				9.5			$	148,369				2,937,301			$	5.74				9.5			$	148,369
Granted			187,189				57.21												187,189				57.21
Exercised			(549,282	)			3.44												(549,282	)			3.44
Expired			(259	)			15.94												(259	)			15.94
Forfeited			(32,810	)			12.68												(32,810	)			12.68
Outstanding as of December 31, 2014			2,542,139				9.94				8.5			$	96,518				2,542,139				9.94				8.5			$	96,518
Exercisable as of December 31, 2014			1,210,861				4.22				8.4			$	52,014
Granted																			287,165				45.18
Exercised																			(604,088	)			3.79
Expired																			(6,409	)			50.11
Forfeited																			(90,793	)			37.27
Outstanding as of December 31, 2015																			2,128,014				15.15				7.7			$	40,271
Granted																			398,313				33.24
Exercised																			(995,469	)			2.89
Forfeited																			(47,894	)			37.41
Outstanding as of December 31, 2016																			1,482,964				27.49				7.5			$	23,840
Exercisable as of December 31, 2016																			787,654				17.64				6.7			$	19,897

 

As of December 31, 2014,2016, there was $7,794$8,051 of total unrecognized compensation cost, net of expected forfeitures, related to unvested options. The cost is expected to be recognized over the remaining service period, having a weighted-average period of 2.42.7 years. Total share-based compensation cost related to the stock options for 2016, 2015 and 2014 2013was $4,366, $4,198 and 2012 was $8,509, $9,034 and $6,835, respectively, which is recorded in operating expenses in the consolidated statements of comprehensive income.

Restricted Stock – For awards issued prior to 2012, restricted stock awards vest in full on the third anniversary of the date of grant, subject to the grantee’s continued employment. Restricted stock awards issued in 2012 and after, vest in equal installments over three years, subject to the grantee’s continued employment or service. RestrictedCertain restricted stock awards also includesinclude performance shares, which were awarded forin the first time in 2014.years 2014 through 2016. The number of performance shares that can be earned are contingent upon Company performance measures over a three-year period. Performance measures are based on a weighting of revenue growth and EBITDA margin, from which grantees may earn from 0% to 200% of their target performance share award. The performance period for the 2014 awards covers the years 2014 through 2016.2016, the performance period for the 2015 awards covers the years 2015 through 2017, and the performance period for the 2016 awards covers the years 2016 through 2018. The Company estimates the number of performance shares that will vest based on projected financial performance. The fair market value of the restricted awards at the time of the grant is amortized to expense over the period of vesting. The fair value of restricted awards is determined based on the market value of the Company's shares on the grant date. The compensation expense recognized for restricted share awards is net of estimated forfeitures.

 

Restricted stock vesting is net-share settled such that, upon vesting, the Company withholds shares with value equivalent to the employees’ minimum statutory obligation for the applicable income and other employment taxes.taxes, and then pays those taxes on behalf of the employee. In effect, the Company repurchases these shares and classifies as treasury stock, and usespays the cash to the taxing authorities on behalf of the employees to satisfy the tax withholding requirements. Total shares withheld were approximately28,593, 65,763 and 34,854 163,458in 2016, 2015 and zero in 2014, 2013 and 2012, respectively, and were based on the value of the stock on the vesting dates as determined based upon an average of the Company’s high and low stock sales price on the vesting dates. Total payments for the employees’ tax obligations to the taxing authorities were $952, $3,233 and $1,770 $6,571in 2016, 2015 and zero in 2014, 2013 and 2012, respectively, and are reflected as a financing activity within the consolidated statements of cash flows.

 

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A summary of the Company's restricted share awardsstock activity for the years endedended December 31, 2014, 20132016, 2015 and 20122014 is as follows:

 

		Shares				Weighted- Average Grant- Date Fair Value				Shares				Weighted- Average Grant- Date Fair Value
Non-vested as of December 31, 2011			489,302			$	13.93
Non-vested as of December 31, 2013											304,406			$	29.68
Granted			195,771				26.94				115,473				54.35
Vested			-				-				(105,123	)			28.31
Forfeited			(20,002	)			11.96				(47,472	)			42.31
Non-vested as of December 31, 2012			665,071				17.75
Non-vested as of December 31, 2014											267,284				38.72
Granted			112,494				37.82				193,117				41.31
Vested			(450,537	)			14.21				(183,362	)			32.56
Forfeited			(22,622	)			25.36				(33,999	)			47.77
Non-vested as of December 31, 2013			304,406				29.68
Non-vested as of December 31, 2015											243,040				44.16
Granted			115,473				54.35				232,295				33.56
Vested			(105,123	)			28.31				(95,858	)			41.93
Forfeited			(47,472	)			42.31				(18,074	)			38.30
Non-vested as of December 31, 2014			267,284				38.72
Non-vested as of December 31, 2016											361,403				38.18

 

As of December 31, 2014,2016, there was $5,394$7,192 of unrecognized compensation cost, net of expected forfeitures, related to non-vested restricted stock awards. That cost is expected to be recognized over the remaining service period, having a weighted-average period of 2.1 years.Total1.9 years. Total share-based compensation cost related to the restricted stock for 2016, 2015 and 2014 2013was $5,127, $4,043 and 2012 was $4,103, $3,074 and $3,645, respectively, which is recorded in operating expenses in the consolidated statements of comprehensive income.

 

During 2016, 2015 and 2014, 201319,326, 16,260 and 2012, 8,869 7,291 and 10,864 shares, respectively, of fully vested stock were granted to certain members of the Company’s boardBoard of directorsDirectors as a component of their compensation for their service on the board.Board. Total compensation cost for these share grants in 2016, 2015 and 2014 2013was $670, $615 and 2012 was $509, $260 and $300, respectively, which is recorded in operating expenses in the consolidated statements of comprehensive income.

 

16. Commitments and Contingencies

Commitments and Contingencies

 

The Company leases certainmanufacturing and office facilities, machinery and computer equipment, automobiles and warehouse space under operating leases with terms generally ranging between 3-5 years.

leases. The approximate aggregate minimum rental commitments at December 31, 2014,2016, are as follows:

 

Year		Amount
2015		$	2,585
2016			2,567
2017			1,571
2018			264
2019			-
2017						$	7,922
2018							7,314
2019							6,368
2020							5,559
2021							3,946
After 2021							5,730
Total		$	6,987			$	36,839

 

Total rent expense for thethe years ended December 31, 2014, 20132016, 2015 and 2012, which includes short-term data processing equipment rentals,2014, was approximately $9,146, $4,796, and $4,102, $2,457, and $2,870, respectively.

 

The Company has an arrangement with a finance company to provide floorfloor plan financing for certain dealers. The Company receives payment from the finance company after shipment of product to the dealer. The Company participates in the cost of dealer financing up to certain limits. The Companylimits and has agreed to repurchase products repossessed by the finance company, but does not indemnify the finance company for any credit losses they incur. The amount financed by dealers which remained outstanding under this arrangement at December 31, 20142016 and 20132015 was approximately $26,100$33,900 and $24,300,$32,400, respectively.

 

In the normal course of business, the Company is named as a defendant in various lawsuits in which claims are asserted against the Company. In the opinion of management, the liabilities, if any, which may result from such lawsuits are not expected to have a material adverse effect on the financial position, results of operations, or cash flows of the Company.

 

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17.	Quarterly Financial Information (Unaudited)

				Quarters Ended 2016
				Q1				Q2				Q3				Q4
Net sales				$	286,535			$	367,376			$	373,121			$	417,421
Gross profit					98,060				124,147				137,772				154,127
Operating income					26,964				44,082				56,340				77,231
Net income attributable to Generac Holdings Inc.					10,208				20,888				26,183				41,509
Net income attributable to common shareholders per common share - basic:				$	0.15			$	0.32			$	0.41			$	0.64
Net income attributable to common shareholders per common share - diluted:				$	0.15			$	0.31			$	0.40			$	0.64

		Quarters Ended 2015
		Q1				Q2				Q3				Q4
Net sales		$	311,818			$	288,360			$	359,291			$	357,830
Gross profit			102,603				95,897				130,326				131,124
Operating income			44,911				39,467				67,867				27,316
Net income attributable to Generac Holdings Inc.			19,685				14,844				34,036				9,182
Net income attributable to common shareholders per common share - basic:		$	0.29			$	0.22			$	0.50			$	0.14
Net income attributable to common shareholders per common share - diluted:		$	0.28			$	0.21			$	0.49			$	0.14

18.	Valuation and Qualifying Accounts

For t17. Special Cash Dividendshe years ended December 31, 2016, 2015 and 2014:

		Balance at Beginning of Year				Additions Charged to Earnings				Charges to Reserve, Net (1)				Reserves Established for Acquisitions				Balance at End of Year
Year ended December 31, 2016
Allowance for doubtful accounts		$	2,494			$	1,654			$	(1,110	)		$	2,604			$	5,642
Reserves for inventory			10,582				5,359				(5,357	)			2,447				13,031
Valuation of deferred tax assets			1,523				638				–				2,201				4,362
Year ended December 31, 2015
Allowance for doubtful accounts		$	2,275			$	481			$	(325	)		$	63			$	2,494
Reserves for inventory			9,387				3,739				(3,158	)			614				10,582
Valuation of deferred tax assets			1,385				138				–				–				1,523
Year ended December 31, 2014
Allowance for doubtful accounts		$	2,658			$	672			$	(1,264	)		$	209			$	2,275
Reserves for inventory			6,558				2,797				(2,250	)			2,282				9,387
Valuation of deferred tax assets			1,021				364				–				–				1,385

(1)

Deductions from the allowance for doubtful accounts equal accounts receivable written off, less recoveries, against the allowance. Deductions from the reserves for inventory excess and obsolete items equal inventory written off against the reserve as items were disposed of.

19.	Subsequent Events

 

On June 29, 2012,On January 1, 2017, the Company usedacquired Motortech GmbH and its affiliates (Motortech), headquartered in Celle, Germany. Motortech is a portionleading manufacturer of gaseous-engine control systems and accessories, which are sold primarily to European gas-engine manufacturers and to aftermarket customers. Motortech employs over 250 people at its German headquarters, manufacturing plant in Poland, and sales offices located in the proceeds from the May 30, 2012 debt refinancing (see Note 11, “Credit Agreements”United States and China. Prior to December 31, 2016, a cash deposit of $15,329 was paid, which is recorded in other current assets on the consolidated financial statements) together with cash on its balance sheet to pay a special cash dividend of $6.00 per share on its common stock, resulting in payments totaling $404,332 to stockholders. Related dividends declared but unpaid as of December 31, 2014 of $731, which relate to dividends earned on unvested restricted stock awards, are included in other accrued liabilities in the consolidated balance sheet. Payment of these dividends will be made when the underlying restricted stock awards vest. The 2012 dividend was recorded as a reduction to additional paid-in capital as the Company had an accumulated deficit balance as of the dividend declaration date.

On June 21, 2013, the Company used a portion of the proceeds from the May 31, 2013 debt refinancing (see Note 11, “Credit Agreements” to the consolidated financial statements) to pay a special cash dividend of $5.00 per share on its common stock, resulting in payments totaling $340,772 to stockholders. Related dividends declared but unpaid as of December 31, 2014 of $810, which relate to dividends earned on unvested restricted stock awards, are included in other accrued liabilities in the consolidated balance sheet. Payment of these dividends will be made when the underlying restricted stock awards vest. The balance of retained earnings as of the 2013 dividend declaration date was $4,934. As such, the dividends were first charged to retained earnings and dividends in excess of retained earnings were recorded as a reduction to additional paid-in capital.

In connection with the special dividends, and pursuant to the terms of the Company’s stock option plan, certain adjustments were made to stock options outstanding under the plan in order to avoid dilution of the intended benefits which would otherwise result as a consequence of the special dividend. As such, the strike price for all outstanding stock options at that time of the dividend was modified by the $6.00 and $5.00 special dividend amount, respectively, for the 2012 and 2013 special dividends. There was no change to compensation expense as a result of this adjustment.

18. Quarterly Financial Information (Unaudited)2016.

		Quarters Ended 2014
		Q1				Q2				Q3				Q4
Net sales		$	342,008			$	362,609			$	352,305			$	403,997
Gross profit			119,514				128,012				130,283				138,410
Operating income			65,306				78,160				70,794				79,115
Net income			34,701				54,025				36,497				49,390
Net income per common share, basic:		$	0.51			$	0.79			$	0.53			$	0.72
Net income per common share, diluted:		$	0.50			$	0.77			$	0.52			$	0.70

		Quarters Ended 2013
		Q1				Q2				Q3				Q4
Net sales		$	399,572			$	346,688			$	363,269			$	376,236
Gross profit			153,462				130,953				139,463				145,682
Operating income			96,525				76,433				87,289				91,218
Net income			50,674				28,254				47,093				48,518
Net income per common share, basic:		$	0.75			$	0.41			$	0.69			$	0.71
Net income per common share, diluted:		$	0.73			$	0.40			$	0.67			$	0.69

 

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Item19. Valuation and Qualifying Accounts

For the years ended December 31, 2014, 2013 and 2012:

		Balance at Beginning of Year				Reserves Assumed in Acquisition				Additions Charged to Earnings				Charges to Reserve, Net (1)				Balance at End of Year
Year ended December 31, 2014
Allowance for doubtful accounts		$	2,658			$	209			$	672			$	(1,264	)		$	2,275
Reserves for inventory			6,558				2,282				2,797				(2,250	)			9,387
Valuation of deferred tax assets			1,021				-				364			-					1,385
Year ended December 31, 2013
Allowance for doubtful accounts		$	1,166			$	496			$	1,037			$	(41	)		$	2,658
Reserves for inventory			6,999				1,131				72				(1,644	)			6,558
Valuation of deferred tax assets			806				(120	)			335			-					1,021
Year ended December 31, 2012
Allowance for doubtful accounts		$	789			$	383			$	204			$	(210	)		$	1,166
Reserves for inventory			4,717				1,694				1,785				(1,197	)			6,999
Valuation of deferred tax assets			-				827				(21	)		-					806

(1) Deductions from the allowance for doubtful accounts equal accounts receivable written off, less recoveries, against the allowance. Deductions from the reserves for inventory excess and obsolete items equal inventory written off against the reserve as items were disposed of.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

There were no changesIn April 2016, the Company dismissed Ernst & Young LLP as its independent registered public accounting firm, and appointed Deloitte & Touche LLP as its new independent registered public accounting firm. See the Company's 8-K filed as of April 20, 2016 for full disclosures related to the change in or disagreements with, accountants reportable herein.accountants. 

ItemItem 9A. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by us in reports we file or submit under the SecuritiesSecurities Exchange Act of 1934 (Exchange Act), is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure.

 

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, has conducted an evaluation of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act as of the end of the period covered by this report on Form 10-K. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective in providing reasonable assurance that the information required to be disclosed in this report on Form 10-K has been recorded, processed, summarized and reported as of the end of the period covered by this report on Form 10-K.

 

ManagementManagement’s’s Report on Internal Control Over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed under the supervision of our Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the consolidated financial statements in accordance with U.S. GAAP.

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Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of the financial statements in accordance with U.S. GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the Company’s financial statements.

 

There are inherent limitations to the effectiveness of any internal control over financial reporting, including the possibility of human error or the circumvention or overriding of the controls. Accordingly, even an effective internal control over financial reporting can provide only reasonable assurance of achieving its objective. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate, because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, our management conducted an assessment of the effectiveness of internal control over financial reportingreporting as of December 31, 20142016 based on the criteria established in the 2013Internal Control -– Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, our management has concluded that our internal control over financial reporting was effective as of December 31, 2014.2016. In conducting this assessment, our management excluded the PowermatePramac business, which was acquired on March 1, 2016 and MAC businesses because they were not acquired untilwhose financial statements constitute 22.5% and 11.1% of net and total assets, respectively, 12.6% of revenues, and 0.7% of net income of the thirdtotal consolidated financial statement amounts as of and fourth quartersfor the year ended December 31, 2016.

In January 2016, we implemented a new global enterprise resource planning (ERP) system for a majority of 2014, respectively.our business, with another subsidiary of the Company implementing in October 2016. In connection with this ERP system implementation, we have updated our internal controls over financial reporting, as necessary, to accommodate modifications to our business processes and accounting procedures. Additional implementations will occur at our remaining locations over a multi-year period.

 

Our independent registered public accounting firm has issued an attestation report on our internal control over financial reporting as of December 31, 2014.2016. Its report appears in the consolidated financial statements included in this Annual Report on Form 10-K on page 39.40.

 

Changes in Internal Control Over Financial Reporting

 

ThereOther than the assessment of controls for the ERP system implementation and Pramac acquisition noted above, there have been no changes in our internal control over financial reporting that occurred during the three monthsyear ended December 31, 20142016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

ItemItem 9B. Other Information

 

None.

NonePART III.

 

PART III

ItemItem 10. Directors, Executive Officers and Corporate Governance

 

The information required by Item 10 not already provided herein under “Item 1 -– Business -– Executive Officers”, will be included in our 20152017 Proxy Statement and is incorporated herein by reference herein.reference.

 

ItemItem 11. Executive Compensation

 

The information required by this itemitem will be included in our 20152017 Proxy Statement and is incorporated herein by reference.

 

ItemItem 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

The information required by this item, including under the heading “Securities Authorized for Issuance Under Equity Compensation Plans,”will be included in our 20152017 Proxy Statement and is incorporated herein by reference.

 

ItemItem 13. Certain Relationships and Related Transactions, and Director Independence

 

The information required by this item will be included in our 20152017 Proxy Statement and is incorporated herein by reference.

 

ItemItem 14. Principal Accountant Fees and Services

 

The information required by this item will be included in our 20152017 Proxy Statement and is incorporated herein by reference.

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PART IV

 

PART IV

ItemItem 15. Exhibits and Financial Statement Schedules

 

(a)(1) Financial Statements

 

Included in Part II of this report:

	Page
ReportReports of Independent Registered Public Accounting FirmFirms	3938
Consolidated balancebalance sheets as of December 31, 20142016 and 20132015	41
Consolidated statements of comprehensive income forfor years ended December 31, 2014, 20132016, 2015 and 20122014	42
Consolidated statements of stockholders’stockholders’ equity for years ended December 31, 2014, 20132016, 2015 and 20122014	43
Consolidated statements of cash flows for the yearsyears ended December 31, 2014, 20132016, 2015 and 20122014	44
Notes to consolidated financial statements	45

 

(a)(2) Financial Statement Schedules

 

All financial statement schedules have been omitted, since the required information is not applicable or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financialfinancial statements and notes thereto.

 

(a)(3) Exhibits

 

See the Exhibits Index following the signature pages for a list of the exhibits being filed or furnished with or incorporated by reference into this Annual Report on Form 10-K.

 

 

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

	Generac Holdings Inc.
	By:	/s/Aaron Jagdfeld
		Aaron Jagdfeld
		Chairman, President and Chief Executive Officer

 

Dated: February 27, 201524, 2017

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons and on behalf of the Registrant in the capacities and on the dates indicated.

 

Signature				Title				Date
/s/Aaron Jagdfeld			Chairman, President and Chief Executive				February 24, 2017
Aaron Jagdfeld			President, Chief Executive Officer and Director				February 27, 2015
/s/York A. Ragen
York A. Ragen			Chief Financial Officer and Chief Accounting Officer				February 27, 2015
/s/Todd A. Adams
Todd A. Adams			Director				February 27, 2015
/s/John D. BowlinYork A. Ragen
John D. Bowlin			DirectorChief Financial Officer and				February 27, 201524, 2017
York A. Ragen			Chief Accounting Officer
/s/Ralph W. CastnerTodd A. Adams			Lead Director				February 24, 2017
Todd A. Adams
Ralph W. Castner			Director				February 27, 2015
/s/RobertJohn D. DixonBowlin
Robert D. Dixon			Director				February 27, 201524, 2017
John D. Bowlin
/s/Barry J. GoldsteinRobert D. Dixon
Barry J. Goldstein			Director				February 27, 201524, 2017
Robert D. Dixon
/s/Andrew G. Lampereur
Andrew G. Lampereur			Director				February 27, 201524, 2017
Andrew G. Lampereur
/s/Bennett Morgan
Bennett Morgan			Director				February 27, 201524, 2017
Bennett Morgan
/s/David A. Ramon
David Ramon			Director				February 27, 201524, 2017
David A. Ramon
/s/Timothy WalshKATHRYN ROEDEL
Timothy Walsh			Director				February 27, 201524, 2017

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EXHIBIT INDEX

Exhibits Number Kathryn Roedel							Description
2.1/s/ DOMINICK ZARCONE			Director				February 24Agreement and Plan of Merger by and among Generac Power Systems, Inc., the representative named therein, GPS CCMP Acquisition Corp., and GPS CCMP Merger Corp., dated as of September 13, 2006 (incorporated by reference to Exhibit 2.1 of the Registration Statement on Form S-1 filed with the SEC on January 11, 2010).2017
Dominick Zarcone

EXHIBIT INDEX

2.2 Exhibits Number			Amendment to Agreement and Plan of Merger by and among Generac Power Systems, Inc., the representative named therein, GPS CCMP Acquisition Corp., and GPS CCMP Merger Corp (incorporated by reference to Exhibit 2.1 of the Registration Statement on Form S-1 filed with the SEC on January 11, 2010).Description
3.1			Third Amended and Restated Certificate of Incorporation of Generac Holdings Inc. (incorporated by reference to Exhibit 3.1 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010).
3.2			Amended and Restated Bylaws of Generac Holdings Inc. (incorporated by reference to Exhibit 3.1 of the Company’sCompany’s Current Report on Form 8-K filed with the SEC on April 10, 2013)February 16, 2016).
4.1			Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 of the Registration Statement on Form S-1 filed with the SEC on January 25, 2010).
10.1			Restatement Agreement, dated as of May 31, 2013, to that certain Credit Agreement, dated as of February 9, 2012, as amended and restated as of May 31, 2012, among Generac Power Systems, Inc., Generac Acquisition Corp., the lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, and Bank of America, N.A. and Goldman Sachs Bank USA, as syndication agents (incorporated by reference to Exhibit 10.1 to the Company’sCompany’s Current Report on Form 8-K filed with the SEC on June 4, 2013).
10.2			Guarantee and Collateral Agreement, dated as of February 9, 2012, as amended and restated as of May 30, 2012, among Generac Holdings Inc., Generac Acquisition Corp., Generac Power Systems, Inc., certain subsidiaries of Generac Power Systems, Inc. and JPMorgan Chase Bank, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.2 of the Company’sCompany’s Current Report on Form 8-K filed with the SEC on May 31, 2012).
10.3			Credit Agreement, dated as of February 9, 2012, as amended and restated as of May 30, 2012, as further amended and restated as of May 31, 2013, among Generac Power Systems, Inc., Generac Acquisition Corp., the lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent and Bank of America, N.A. and Goldman Sachs Bank USA, as syndication agent (incorporated by reference to Exhibit 10.2 to the Company’sCompany’s Current Report on Form 8-K filed with the SEC on June 4, 2013).
10.4			Guarantee and Collateral Agreement, dated as of May 30, 2012, among Generac Holdings Inc., Generac Acquisition Corp., Generac Power Systems, Inc., certain subsidiaries of Generac Power Systems, Inc. and Bank of America, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.4 of the Company’sCompany’s Current Report on Form 8-K filed with the SEC on May 31, 2012).
10.5			First Amendment to Guarantee and Collateral Agreement, dated as of May 31, 2013, to that certain Guarantee and Collateral Agreement, dated as of February 9, 2012, as amended and restated as of May 30, 2012, among Generac Holdings Inc., Generac Acquisition Corp., Generac Power Systems, Inc., certain subsidiaries of Generac Power Systems, Inc. and JPMorgan Chase Bank, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.3 to the Company’sCompany’s Current Report on Form 8-K filed with the SEC on June 4, 2013).
10.6			Credit Agreement, dated as of May 30, 2012, among Generac Power Systems, Inc., its Domestic Subsidiaries listed as Borrowers on the signature pages thereto, Generac Acquisition Corp., the lenders party thereto, Bank of America, N.A. as Administrative Agent, JPMorgan Chase Bank, N.A. and Goldman Sachs Bank USA, as syndication agents, and Wells Fargo Bank, National Association, as Documentation Agent (incorporated by reference to Exhibit 10.3 of the Company’sCompany’s Current Report on Form 8-K filed with the SEC on May 31, 2012).

 

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Exhibits Number					Description
					Description
10.7					Amendment No. 1 dated as of May 31, 2013 to the Credit Agreement, dated as of May 30, 2012, among Generac Power Systems, Inc., its Domestic Subsidiaries listed as Borrowers on the signature pages thereto, Generac Acquisition Corp., the lenders party thereto, Bank of America, N.A. as Administrative Agent, JPMorgan Chase Bank, N.A. and Goldman Sachs Bank USA, as syndication agents, and Wells Fargo Bank, National Association, as Documentation Agent (incorporated by reference to Exhibit 10.4 to the Company’sCompany’s Current Report on Form 8-K filed with the SEC on June 4, 2013)
10.8					First Amendment to the Guarantee and Collateral Agreement, dated as of May 31, 2013, to that certain Guarantee and Collateral Agreement, dated as of May 30, 2012, among Generac Holdings Inc., Generac Acquisition Corp., Generac Power Systems, Inc., certain subsidiaries of Generac Power Systems, Inc. and Bank of America, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed with the SEC on June 4, 2013).
10.9+10.9					Amendment No. 2 dated as of May 29, 2015 to the Credit Agreement, dated as of May 30, 2012, as amended by Amendment No. 1, dated as of May 31, 2013, among Generac Holdings, Inc., Generac Acquisition Corp., Generac Power Systems, Inc., certain subsidiaries of Generac Power Systems, Inc. and Bank of America, N.A., as Administrative Agent and the other agents named therein (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the SEC on June 1, 2015).
10.10					Replacement Term Loan Amendment dated as of November 2, 2016 to the Credit Agreement, dated as of February 9, 2012, as amended and restated as of May 30, 2012, as further amended and restated as of May 31, 2013, and as amended by the First Amendment dated as of May 18, 2015, among Generac Power Systems, Inc., Generac Acquisition Corp., the lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent and the other agents named therein.
10.11+					2009 Executive Management Incentive Compensation Program (incorporated by reference to Exhibit 10.46 of the Registration Statement on Form S-1 filed with the SEC on December 17, 2009).
10.10+ 10.12+					Generac Holdings Inc. Amended and Restated 2010 Equity Incentive Plan (incorporated by reference to Appendix A to the Definitive Proxy Statement on Schedule 14A of the Company filed with the SEC on April 27, 2012)
10.11+ 10.13+					Generac Holdings Inc. Annual Performance Bonus Plan (incorporated by reference to Exhibit 10.63 of the Registration Statement on Form S-1 filed with the SEC on January 25, 2010).
10.12+ 10.14+					Amended and Restated Employment Agreement, dated January 14, 2010,November 5, 2015, between Generac and Aaron Jagdfeld (incorporated by reference to Exhibit 10.6510.1 of the Registration StatementCompany’s Quarterly Report on Form S-110-Q filed with the SEC on January 25, 2010)November 6, 2015).
10.13+ 10.15+					Employment Letter with Terrence Dolan (incorporated by reference to Exhibit 10.62 of the Registration Statement on Form S-1 filed with the SEC on January 25, 2010).
10.14+		Form of Change in Control Severance Agreement (incorporated by reference to Exhibit 10.64 of the Registration Statement on Form S-1 filed with the SEC on January 25, 2010).
10.15 10.16					Form of Confidentiality, Non-Competition and Intellectual Property Agreement (incorporated by reference to Exhibit 10.40 of the Registration Statement on Form S-1 filed with the SEC on November 24, 2009).
10.16+ 10.17+					Form of Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.44 of the Registration Statement on Form S-1 filed with the SEC on January 25, 2010).
10.17+10.18+					Form of Nonqualified Stock Option Award Agreement (incorporated by reference to Exhibit 10.45 of the Registration Statement on Form S-1 filed with the SEC on January 25, 2010).
10.18+10.19+					Amended Form of Restricted Stock Award Agreement pursuant to the 2010 Equity Incentive Plan (incorporated by reference to Exhibit 10.3 of the Quarterly Report on Form 10-Q filed with the SEC on May 8, 2012).
10.19+10.20+					Amended Form of Nonqualified Stock Option Award Agreement pursuant to the 2010 Equity Incentive Plan (incorporated by reference to Exhibit 10.4 of the Quarterly Report on Form 10-Q filed with the SEC on May 8, 2012).
10.20+10.21+					Amended Form of Restricted Stock Award Agreement with accelerated vesting pursuant to the 2010 Equity Incentive Plan (incorporated by reference to Exhibit 10.5 of the Quarterly Report on Form 10-Q filed with the SEC on May 8, 2012).

Exhibits Number
10.21		Form of Generac Holdings Inc. Director Indemnification Agreement for Stephen Murray and Timothy Walsh (incorporated by reference to Exhibit 10.50 of the Registration Statement on Form S-1 filed with the SEC on January 11, 2010).

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Table Of Contents

Exhibits Number		Description
10.22					Form of Generac Holdings Inc. Director Indemnification Agreement for Barry Goldstein, John D. Bowlin, Robert Dixon, David Ramon, Timothy W. Sullivan, Bennett Morgan, Todd A. Adams, Andrew G. Lampereur and Ralph W. Castner (incorporated by reference to Exhibit 10.51 of the Registration Statement on Form S-1 filed with the SEC on January 11, 2010).
10.23					Form of Generac Holdings Inc. Officer Indemnification Agreement (incorporated by reference to Exhibit 10.52 of the Registration Statement on Form S-1 filed with the SEC on January 11, 2010).
10.24 +					Form of Generac Power Systems, Inc. Director Indemnification Agreement for Stephen Murray and Timothy Walsh (incorporated by reference to Exhibit 10.53 of the Registration Statement on Form S-1 filed with the SEC on January 25, 2010).
10.25+		Form of Performance Share Award Agreement (incorporated by reference to Exhibit 10.1 of the Quarterly Report on Form 10-Q filed with the SEC on May 5, 2014).
21.1*					List of Subsidiaries of Generac Holdings Inc.
23.1*					Consent of ErnstDeloitte & Young,Touche, Independent Registered Public Accounting Firm.
23.2*					Consent of Ernst & Young, Independent Registered Public Accounting Firm.
31.1*					Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*					Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**					Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**					Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002.
101*					The following financial information from the Company’sCompany’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014,2016, filed with the SEC on February 27, 2015,24, 2017, formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets at December 31, 20142016 and December 31, 2013;2015; (ii) Consolidated Statements of Comprehensive Income for the Fiscal Years Ended December 31, 2014,2016, December 31, 20132015 and December 31, 2012;2014; (iii) Consolidated Statements of Stockholders' Equity (Deficit) for the Fiscal Years Ended December 31, 2014,2016, December 31, 20132015 and December 31, 2012;2014; (iv) Consolidated Statements of Cash Flows for the Fiscal Years Ended December 31, 2014,2016, December 31, 20132015 and December 31, 2012;2014; (v) Notes to Consolidated Financial Statements.
				*	*Filed herewith.
					**	Furnished herewith.
				+	+Indicates management contract or compensatory plan or arrangement.

 

 

 

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