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

Item 1. Business

We areFounded in 1959, Generac Holdings Inc. (the Company or Generac) is a leading global designer and manufacturer of a wide range of energy technology solutions. The Company provides power generation equipment, energy storage systems, and other engine poweredpower products serving thethe residential, light commercial and industrial markets.

Power generation is our primarya key focus of the Company, which differentiates us from our primary competitors thatwho also have broad operations outside of the generatorpower equipment market. As the only significant market participant focused predominantly on these products, we havemaintain one of the leading market positions in the power generationequipment market in North America and an expanding presence internationally. We believe we have one of the widest ranges 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. A key strategic focus for the Company in recent years has been leveraging our leading position in the growing market for cleaner burning, more cost-effective natural gas fueled generators to expand into applications beyond standby power. We have also been focused on “connecting” the equipment we manufacture to the users of that equipment, helping to drive additional value to our customers and our distribution partners over the product lifecycle.

During 2019, we began providing energy storage systems as a clean energy solution for residential use that capture and store electricity from solar panels or other power sources and help reduce home energy costs while also protecting homes from brief power outages.

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 and pumps used in the oil & gas, construction and other industrial markets; and a broad product line of outdoor power equipment for residential and commercial use.

We design, manufacture, source and modify engines, alternators, transfer switches and other components necessary for our power products, which are fueled by natural gas, liquid propane, gasoline, diesel and Bi-Fuel™. We also design, source, modify and integrate batteries, inverters, power electronics, controls, energy monitoring devices and other components into our energy storage systems. Our products are available globally through a broad network of independent dealers, distributors, retailers, ecommerce partners, wholesalers and equipment rental companies under 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 markets for automatic standby generators, which we believe 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 comprehensive support programs, and programsleads from the factory. In addition, we are a leading provider of light towers, mobile generators, flameless heaters, outdoor power equipment and industrial diesel generators ranging in sizes up to 3,250kW. As we enter the rapidly developing market for energy storage, we offer energy storage systems ranging in configurations up to 34kWh, and expect to gain share by leveraging our capabilities that we have developed to grow the residential standby generator market.

History

Generac Holdings Inc. (the Company or Generac) is a Delaware corporation, which 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 toOver the residential, light-commercial and industrial markets.

Key events in our history include the following:

Additionally,years, we have executed a number of acquisitions that support our strategic plan. A summary of theserecent 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

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 wide range of power generation equipment and other engine powered products, which are discussed in further detail below in the context of our product classes. Refer to Note 6, “Segment Reporting,” to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K for further information.

Products

We design and manufacture stationary, portable and mobile generators with single-engine outputs ranging between 800W and 3,250kW. We have the ability to expand the power range for certain stationary generator solutions to much larger multi-megawatt systems through an integrated paralleling configuration called Modular Power Systems (MPS). Other engine powered products and solutions that we design and manufactureprovide include light towers, mobile heaters, power washers and water pumps, along with a broad line of outdoor power equipment. We now have a complete line of energy storage systems and energy monitoring solutions as we enter the clean energy markets. 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.products & services. 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 $1,899 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.150kW. We also provide a cellular-based remote monitoring system with various options for home standby generators called Mobile Link™, which. This remote monitoring capability is a standard, WiFi-enabled feature on every home standby generator that we offer, and allows our customers to check the status of their generator conveniently from a desktop PC, tablet computer or smartphone,online, and also provides the capability to similarly receive maintenance and service alerts. Our remote monitoring platform also allows our distribution partners to monitor their installed base of customers through a feature that we call “Fleet”, enabling them to offer a more proactive experience to service a customer’s generator.

We provide a broad product line of portable and inverter generators that are fueled predominantly by gasoline, with certain models running on propane and diesel fuel, which range in size from 800W to 17,500W.17.5kW. 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; at professional contractors, starting at the value end through the premium contractor segment; and inverter generators targeted at the recreational market.market with our inverter product line. In addition, we offer manual transfer switches to supplement our portable generator product offering. The acquisition of PR Industrial S.r.l. (Pramac) in March 2016 added a broad product line of portable generators that are sold globally and used for numerous residential, light construction and recreational purposes.

WeWe provide a broad product line of engine driven power washers for residential and commercial use, 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 We also provide a broad product line of outdoor power equipment that includes water pumps, 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 online catalogs, retail hardware stores and outdoor power equipment dealers primarily under the DR® brand name.

The acquisitions of Neurio Technology Inc. in March 2019 and Pika Energy, Inc. in April 2019 accelerated our entrance into the energy storage and energy monitoring markets. Late in 2019 we began selling complete energy storage systems – marketed under the names PWRcell^TM and PWRview^TM. This clean energy solution consists of a system of batteries, an inverter, power electronic controls, energy monitoring hardware & software, and other components. These systems capture and store electricity from solar panels or the electric grid and help reduce home energy costs while also protecting homes from brief power outages, and range in size from 8kWh up to 34kWh.

Residential products comprised 53.5%51.9%, 51.2%51.5% and 49.5%51.8%, respectively, of total net sales in 2016, 20152019, 2018 and 2014.2017.

Commercial & Industrial Products

We offer a full line of C&I generators fueled by diesel, natural gas, liquid propane and Bi-Fuel™. We believe we have one of the broadest product offerings in the 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 includingsuch as 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 design and manufacture a broad product line of standard and configured stationary 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. During 2018, we introduced a new 750kW gaseous-fueled generator, our largest and most powerful generator to date, with plans going forward to expand these cleaner-fuel generators into larger applications. 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 largelarger applications in the healthcare, telecom, datacom, commercial office, retail, municipal and manufacturing customers.markets.

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 offersoffer superior reliability given itstheir built-in redundancy which allows individual units to be taken off-line for routine maintenance while retaining coverage for critical circuits.

We also offer a full line of industrial transfer switches to meet varying needs from light industrial applications all the way to the most demanding critical installations. Generac’s industry-leading feature set and flexible platforms offer a variety of switching technologies for customized solutions to meet any project needs.

We provide a broad product 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 systemsdust-suppression equipment for a wide variety of wastewater applications.

The acquisition of Pramac in March 2016 added a broad product line of C&I stationary We also manufacture various gaseous-engine control systems and mobile generators thataccessories, which are sold in over 150 countries through a broad distribution network. to gas-engine manufacturers and aftermarket customers.

C&I products comprised 38.6%39.5%, 41.6%40.6% and 44.6%40.8% respectively, of total net sales in 2016, 20152019, 2018 and 2014.2017.

Other Products and Services

Our “Other Products”Products and Services” category includes primarily consists of aftermarket service parts and product accessories sold to our dealers, product accessoriescustomers, the amortization of extended warranty deferred revenue, and proprietary engines to third-party original equipment manufacturers (OEMs).the service offerings in various parts of our business, including integration, project management, remote monitoring services, and energy monitoring services.

Other power products comprised 7.9%8.6%, 7.2%7.9% and 5.9%7.4%, respectively, of total net sales in 2016, 20152019, 2018 and 2014.2017.

Distribution Channels and Customers

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

We believe our global distribution network is a competitive advantage that has strengthened over the yearsyears as a result of adding, expanding and developing the various distribution channels through which we sell our products. We offer a broad set of tools, programs, factory support, and leads to help our distribution partners be successful. Our network is well balanced with no customer providing more than 7%5% of our sales in 2016.2019.

Our overall dealer network located in the United States, Canada and Latin America, isAt over 6,000 strong, we have the industry's largest network of factory direct independent generator contractorsdealers in North America. We further expanded our dealer network on a global basis with the acquisition of Pramac in 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. These initiatives have helped to improve lead quality and develop our dealers, thereby increasing close rates and lowering our cost per lead. We intend to leverage these practices to grow the rapidly developing markets for energy storage and energy monitoring.

Our industrial network consists of a combination of primary distributors as well as a support network of dealers serving the United Statesglobal market. Over the past several years, we have been expanding our dealer network globally through acquisitions and Canada.organic means, in order to expand our international sales opportunities. The industrial distributors and dealers provide industrial and commercial end users with ongoing sales, installation and product support. Our industrial distributors and dealers help maintain the local relationships with commercial electrical contractors, specifying engineers and national account regional buying offices. In recent years, we have been expanding our dealer network globally through the Ottomotores acquisition in December 2012 and Pramac acquisition in March 2016, along with organic means, in order to expand our international sales opportunities.

Our retail distribution network includes thousands of locations across 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 growing presence of e-commerce retailers, along with a number of catalog and e-commerce retailers. This network primarily sells our residential standby, portable and light-commercial generators, as well as our 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 now our energy storage systems. The channel consists of selling branches of both national and local distribution houses for electrical, HVAC and HVAC products.solar products on a wholesale basis. They typically sell to electrical dealers and solar installers who are not in our dealer network.

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 C&I 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 provideinternational acquisitions have provided 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, energy, healthcare, convenience stores, grocery stores and other light commercial applications. Additionally, a portion of our portable generators and other engine powered toolsresidential products are also sold direct to individual consumers, who are the end users of the product.

Business Strategy

Business Strategy

We have been executing on our “Powering Ahead” strategic plan, which serves as the framework for the significant investments we have made to capitalize on the long-term growth prospects of Generac. Our strategic plan centers around a number of key mega-trends that we believe will drive significant secular growth opportunities for our business. Significant changes in the energy landscape, climate change, the abundance of natural gas globally, an aging infrastructure, and 5G telecommunications are all major themes that we believe will drive future long-term growth. As we continue to move the Powering Aheadour strategic plan into the future, we are focused on a number of initiatives that are driven by the samefollowing four key objectives:objectives, which are called “Powering Our Future”:

Growing the residential standby generator market.As the leader in the home standby generator 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.world. Central to this strategy is to increase the awareness, availability and affordability of home standby generators. Ongoing power outage activity due to more severe weather and an aging electrical grid, combined with expanding and developing 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 focusing on a variety of strategic initiatives targeted toward generating more sales leads, improving close rates and reducing the total overall cost of a home standby system. In addition, we intend to continue to focus on innovation in this growing product category and introduce new products and solutions into the marketplace. With only approximately 4.0%4.75% penetration of the addressable market of homes in the United States (which we define as single-family detached, owner-occupied households with a home value of over $100,000,$125,000, as defined by the U.S. Census Bureau's 20152017 American Housing Survey for the United States), we believe there are opportunities to further penetrate the residential standby generator market.

Gaining commercialmarket both domestically and industrial market share. Our growth strategy for commercialinternationally. As the energy landscape continues to change and industrialfavor on-site renewable power, generation products is focused on incremental market share gains. Key to this objective are effortswe intend to leverage our expanding platform of dieselsignificant experience and natural gas offerings by better optimizingcompetencies developed over the past two decades in growing the residential standby generator market to accelerate our industrial distribution partners’ capabilities torecent entrance into the emerging residential energy storage and monitoring markets.

Gaining market sellshare and support these products. Specifically, weentering new markets. We continue to pursue certain initiatives to expandput a strong focus on improving our distributors’ interactionsshare of the power equipment markets in which we participate around the world by emphasizing our innovation and continually expanding our product lines and services. We design and build a wide range of products from portable, stationary and mobile generators, light towers, mobile heaters, pumps, brush mowers and trimmers, and other engine powered equipment. We have many advantages over our competitors with strengths in our engineering, firmssourcing and electrical contractors responsibleoperations capabilities as well as a global distribution network that we believe can be leveraged further for specifying and selecting our products within C&I power generation applications.continued market share gains in the markets we serve around the world. We are also committed to a number of sales process initiatives to improvefocused on expanding our addressable market opportunities by entering new markets, be it with new products or new geographies around the overall specification rates for our products which should increase quoting activity and close rates for our industrial distributors.world.

Lead with natural gas power generation productsproducts.. 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 standby 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. WeGiven the abundance of natural gas as a global source for base-load power, we also intend to explore new gaseous generator related market opportunities, including increasing our product capabilities for applications beyond standby generation including continuous-duty, and prime rated, applications,distributed generation, demand response and combined heat and power. We plan to do this by leveraging our deep technical capabilities for gaseous-fueled products, leading position for natural gas standby generators and growing market acceptance for these products. As part of this strategy, we plan to continue to expand our natural gas product offering into larger power nodes to take advantage of the continuing shift from diesel to natural gas generators.

ExpandingConnect with customers, partners and product. global presence.We will work to diversify our business model from solely “equipment centric” to a systems and services provider through connectivity solutions and subscription based applications deployed enterprise wide. This includes an important emphasis on improving the end-user experience and helping customers to lower utility costs. The initial focus is increasing connection with our products to unlock opportunities and revenue streams. We have increased our revenues shipped outsidedeveloped tools and programs that add value to dealers and end-users that will result in recurring revenue from subscriptions and parts. We will leverage data obtained from connected devices by developing predictive analytics that result in continuously improving product quality, sales processes and tools, energy optimization, aftermarket penetration, customer experience and alignment with dealers. Finally, we will build or acquire energy management capabilities to monetize an ecosystem of devices that relate to energy use, storage, generation, control and optimization.

Expansion globally is a core piece to the U.S. and Canada in recent years, with sales outside this region accounting for approximately 20%success of each of our revenues during 2016, as compared to approximately 10% and 9% in 2015 and 2014, respectively. This increase is largely the result ofstrategic objectives. The recent acquisitions made that now comprise our International segment – Ottomotores, Tower Light and Pramac. These businesses have significantly increased our global presence by adding product, manufacturing and distribution capabilities that serve local markets around the world, and have resulted in us becoming a leading global player in the markets for backup power and mobile power equipment. As we look forward, we intend to leverage our increased international footprint attained from these acquisitions to serve the over $13 billion annual marketsignificant global markets for power generation equipmentand power storage 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 existing markets with additional investment and focus, including the expanding opportunity for global gaseous-fueled products. We will continue to evaluate other opportunities to expand into additional regions of the world through both organic initiatives and potential acquisitions.

We believe the 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 numerous manufacturing plants, distribution facilities and inventory warehouses located throughout the world. We maintain inventory warehousesstore finished goods at third-party logistics providers 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 power generation equipment, energy storage systems, and other engine poweredpower products drives technological innovation, specialized engineering and manufacturing competencies. Research and development (R&D) is a core competency and includes a staff of over 300500 engineers working on numerous projects. Our sponsored research and development expense was $37.2 million, $32.9 million and $31.5 million for the years ended December 31, 2016, 2015 and 2014, respectively. Research and development is conductedprojects at several of our manufacturingvarious facilities worldwide and isworldwide. These activities are 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 3035 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. The Pika Energy and Neurio Technologies acquisitions have built out resources and expertise in the energy storage and energy monitoring markets. They provide advanced capabilities with power electronics and battery management software, along with proprietary inverter technologies and hardware and software for energy monitoring and management. We believe that our expertise in engine poweredpower 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 wewe rely on a combination of patents and trademarks to establish and protect our proprietary rights. Our patents 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. 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 brands and competitive position. We also use proprietary manufacturing processes that require customized equipment. With our continuous focus on research and development, we expect to develop new intellectual property on an ongoing basis.

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 internationally. Our strategic global sourcingaround the world. We believe our Strategic Global Sourcing function is a competitive strength and continuously evaluates the quality and cost structure of our productspurchased components 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.

Competition

The market for power generation equipment, energy storage systems, and other engine powered products is competitive. We face competition from a variety of large diversified industrial companies as well as smaller generator manufacturers, along with mobile equipment, and engine powered tools, solar inverter and battery storage providers, both domestic and internationally. However, specifically

Specifically in the generator market, most of the traditional participants compete on a more specializedfocused basis, focused ontargeting specific applications within their larger diversified product mix. We are the only significant market participant with a primary focus on power generationequipment with a corekey emphasis on standby, portable and mobile generators with broad capabilities across the residential, light-commercial and industrial markets. We believe that our engineering capabilities and core focus on generators provide us with manufacturing flexibility and enables us to maintain a first-mover advantage over our competition for product innovation. We also believe our broad product offering, diverse omni-channel 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 products – Kohler, Briggs & Stratton, Cummins, Honda, Champion, Techtronics International, Husqvarna, Ariens, LG Chem, Tesla, Enphase, and Ariens,Solar Edge, along with a number of smaller domestic and foreign competitors; certain of which also have broad operations in other manufacturing businesses.

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

In a continuously evolving 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,, 2016, 2019, we had 4,2025,689 employees (3,608(5,412 full time and 594277 part-time and temporary employees). Of those, 2,2662,953 employees were directly involved in manufacturing at our manufacturing facilities.

Domestically, wewe have had an “open shop” bargaining agreement for the past 50 years. The current agreement, which expires October 17, 2021, covers our Waukesha and Eagle, Wisconsin facilities.facility. Additionally, our plants in Mexico, Italy and BrazilSpain are operated under various local or national union groups. Our other facilities are not unionized.

Regulation, including Environmental Matters

As a manufacturing company, our operations are subject to a variety of federal, state,, local and foreign 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, storage, transport, 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. OtherIn addition, certain products in the United States are subject to safety standards as established by various other standards and rule making bodies, or state and local agencies, including the U.S. Consumer Product Safety Commission (CPSC).

Similarly, other countries have varying degrees of regulation for our products, depending upon product application and fuel types.

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 website is www.generac.com. The Company’s annual reportreports 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”“Investor Relations” portion of the Company’s web site, www.generac.com, as soon as reasonably practicalpracticable 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.

Information About Our 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, as a director since November 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.Enerpac Tool Group. Mr. Ragen began his career at Arthur Andersen in the Audit division of Arthur Andersen's Milwaukee, Wisconsin office.office audit practice. Mr. Ragen holds a Bachelor of Business Administration in Accounting from the University of Wisconsin-Whitewater.

Russell S. Minick began serving as our Chief Marketing Officer in August 2016. Prior to thishis appointment, he served as our Executive Vice President, Residential Products since October 2011, with this responsibility being expanded in January 2014 to Executive Vice President, Global Residential 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.

Tom Pettit began serving as our Chief Operations Officer in February 2020. Since 2017, Mr. Pettit was Executive Vice President and Chief Integrated Supply Chain Officer of nVent Electric plc, a leading global provider of electrical connection and protection solutions and a former subsidiary of Pentair plc (“Pentair”), a global industrial company. Mr. Pettit previously served as the Operations Vice President of Pentair since 2015, and as the Chief Operating Officer for BioScrip, Inc., a provider of infusion and home care management solutions, from 2014-2015. Mr. Pettit holds a B.S. in General Engineering from West Point Military Academy and an MBA from the University of Hawaii.

Erik Wilde began serving as our Executive Vice President, North America Industrial, Americas in July 2016. Mr. Wilde was Vice President and General Manager of the Mining Division for Komatsu America Corp., a manufacturer of construction, mining, and compact construction equipment, 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 toat Komatsu America Corp. beginning in 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 has served as our Executive Vice President of Global Engineering since re-joining Generac in July 2015. Mr. Forsythe was Vice President, Global Engineering & Technology of Hayward Industries, a producer of residential and commercial pool and spa equipment, from 2008 to 2015, Vice President, Global Engineering at Ingersoll Rand Company (and the acquired Doosan Infracore International) from 2004 to 2008, and Director of Engineering at Ingersoll Rand Company from 2002 to 2004. Prior to 2002, Mr. Forsythe worked in various engineering management capacities with Generac from 1995 to 2002. Mr. Forsythe holds a Higher National Diploma (HND) in Mechanical Engineering from the University of Ulster (United Kingdom), a B.S. in Mechanical Engineering, and an M.S. in Manufacturing Management & Technology from The Open University (United Kingdom).

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. 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 related to our business and industry

Demand for the majority of our products is significantly affected by unpredictable power-outagepower 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 for the majority of our products is affected by power outage events caused by thunderstorms, hurricanes, ice storms, blackouts, public safety power shutoffs, 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. There 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-outagepower outage events and fluctuations to the baseline levels of power-outagepower 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 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. Also, the availability of renewable energy mandates and investment tax credits and other subsidies can have an impact on the demand for energy storage systems.

Decreases in the availability and quality, or increases in the cost, of raw materials and, key components and labor 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, commodity prices, currencies, 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.components, including diesel engines. If we are unable to obtain adequate, cost efficient or timely deliveries of required raw materials and components, or sufficient labor resources, 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. For example, in December 2019, a strain of coronavirus was reported to have surfaced in Wuhan, China, resulting in temporary closures or production delays at certain of our suppliers. At this point, the extent to which the coronavirus may impact our results is uncertain.

The industry in which we compete is highly competitive, and our failure to compete successfully could 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 which have substantially greater financial 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”.

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, delayed introductions, higher than expected production costs or 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,national, 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,national, retail and other customers are typically not exclusive, and many of the distributors with whom we do business offer competitors’ products and 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, including increasing the number of energy storage distributors, 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 consider our intellectual property rights to be important assets, and seek to protect them 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 might 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.

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, noise, labeling, transport, product content, and noise,data privacy, including standards imposed by the EPA, CARB and other regulatory agencies around the world. Also, as we increase our connectivity with our products and customers, we may be required to comply with additional data privacy and cybersecurity regulations. 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.emissions and carbon monoxide. 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.

We may incur costs and liabilities as a result ofof 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, a 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, logistical challenges, weather events or natural disasters.

As a U.S. corporation that conducts business in a variety of foreign countries, 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.

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.

Policy changes affecting international trade could adversely impact the demand for our products and our competitive position.

Changes in government policies on foreign trade and investment can affect the demand for our products, impact the competitive position of our products or prevent us from being able to sell products in certain countries. Our business benefits from free trade agreements, and efforts to withdraw from, or substantially modify such agreements, in addition to the implementation of more restrictive trade policies, such as more detailed inspections, higher tariffs, import or export licensing requirements, exchange controls or new barriers to entry, could have a material adverse effect on our results of operations, financial condition or cash flows. For example, starting in 2018 and continuing through 2019, we experienced increased tariffs on many of our products and product components, although these tariffs did not ultimately have a material adverse effect on our results due to the implementation of various mitigation efforts in conjunction with our supply chain and end market partners.

Additionally, the United Kingdom’s exit from EU membership, and discussions regarding its exit from the EU, have caused and may continue to cause significant volatility in global stock markets, currency exchange rate fluctuations and global economic uncertainty. Although it is unknown what the terms of the United Kingdom’s future relationship with the EU will be, it is possible that there will be greater restrictions on imports and exports between the United Kingdom and EU and increased regulatory complexities. Any of these factors could adversely impact customer demand, our relationships with customers and suppliers and our results of operations.

Our total assets include goodwill and other indefinite-lived intangibles. If we determine these have become impaired, our 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 tradenames.tradenames. At December 31, 2016,2019, goodwill and other indefinite-lived intangibles totaled $833.0$933.6 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.comprehensive income. 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. 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. Refer to the Critical Accounting Policies in Item 7 of this Annual Report on Form 10-K for further information regarding the Company’s process for evaluating its goodwill for impairment.

We are unable to determine the specific impact of changes in selling prices or changes in volumes or mix 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, the different accounting systems utilized, 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 or mix 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 combinationintegration 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 may 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, could 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.

We may encounter difficulties in operating or implementing or operating a new enterprise resource planning (ERP) system across our subsidiaries, which may adversely affect our operations and financial reportinreporting.g.

In 2016, weOver the past four years, we have 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 implementingsystems. We expect to implement 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.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. Government agencies and security experts have warned about growing risks of hackers, cyber-criminals, malicious insiders and other actors targeting confidential information and all types of IT systems. These actors may engage in fraudulent activities, theft of confidential or proprietary information and sabotage.

Our IT systems, our connected products, and our confidential information may be vulnerable to damage or intrusion from a variety of attacks including computer viruses, worms or other malicious software programs. The risk of such attacks may increase as we integrate newly acquired companies or develop new connected products and related software. These attacks pose a risk to the security of theour products, systems and networks and those of our customers, suppliers and third-party service providers, as well as to the confidentiality of our information and the integrity and availability of our data. While we attempt to mitigate these risks through board oversight, controls, due diligence, employee training and communication, third party intrusion testing, system hardening, email and web filters, regular patching, surveillance, encryption, and other measures, we remain vulnerable to information security threats.threats

Despite the precautions we take, an intrusion or infection of our systems or connected products could result in the disruption of our business, or a loss of proprietary or confidential information, or injuries to people or property.information. Similarly, an attack on our IT systems or connected products could result in theft or disclosure of trade secrets or other intellectual property, or a breach of confidential customer or employee information.information, or product failure or misuse. Any such events could have an adverse impact on sales, harm our reputation and 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 data and infrastructure of networks and devices.

Certain current favorable tax attributes may no longer be realized in the future, resulting in less cash on hand available to invest in other business activities.

As of December 31, 2019, we had approximately $225 million of tax-deductible goodwill and intangible asset amortization remaining from our acquisition by CCMP Capital Advisors, LLC in 2006 that we expect to generate aggregate cash tax savings of approximately $57 million through 2021, assuming continued profitability of our U.S. business and a combined federal and state tax rate of 25.3%. The recognition of the tax benefit associated with these assets for tax purposes is expected to be $122 million annually in 2020 and $102 million in 2021, which generates annual cash tax savings of $31 million in 2020 and $26 million in 2021. Based on current business plans, we believe that our cash tax obligations through 2021 will be significantly reduced by these tax attributes, after which our cash tax obligation will increase. 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.

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.

We do not have plans to pay dividends on our common stock in the foreseeable future.

We currently do not have plans to pay dividends in the foreseeable future on our common stock. We intend to use future earnings for the operation and expansion of our business, as well as for repayment of outstanding debt, acquisitions, 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 you that we will make such a change.

Risks related to our capital structure

We have a significant amount ofhave 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 significant amount of indebtedness. As of December 31, 2016,2019 we had total indebtedness of $1,052.9$898.9 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 abovebased on LIBOR or other base rate. In connection with our term loan amendment in December 2019, language was added to the agreement to include a certainbenchmark replacement rate, selected by the administrative agent and the borrower, as a replacement to LIBOR floor.that would take affect at the time LIBOR ceases. The Company plans to work with its lenders in the near future to amend other LIBOR based debt agreements to add a replacement rate should the use of LIBOR cease. 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. 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. In the future, if we are unable to refinance our credit facilities on acceptable terms, our liquidity could be adversely affected.

Item 1B. Unresolved Staff Comments

None.

ItemItem 2. Properties

We own operate or lease manufacturing, distribution and office facilities globally totaling over fourfive 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 that accommodate material storage and rapid response requirements of our customers.

The following table provides information about our principal facilities exceeding 10,00020,000 square feet:

In addition to the countries represented above, the Company has other operations or sales offices in the United Arab Emirates, Singapore, Canada and the Dominican Republic, as well as several other countries throughout Europe.

As of December 31, 2016,2019, substantially all of our domestically-owned and a portion of our internationally-owned properties are subject to collateral provisions under our senior secured credit facilities.

Item 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, 2016,2019, we believe that there is no litigation pending that would have a material effect on our results of operations or financial condition.

ItemItem 4. Mine Safety Disclosures

Not Applicable.

PPART IIART II

Item 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 2016 and 2015, respectively.

​2016		High				Low
Fourth Quarter		$	43.49			$	35.74
Third Quarter		$	38.00			$	33.13
Second Quarter		$	39.25			$	33.86
First Quarter		$	38.51			$	27.26

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

 

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, 2016,2019, which consisted of the withholding of shares upon the vesting of restricted stock awards to pay related withholding taxes on behalf of the recipient and shares repurchased under the Company’s $250.0 million stock repurchase program authorized in October 2016:recipient:

 

		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

		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
10/01/19 - 10/31/19			-				-				-			$	250,000,000
11/01/19 - 11/30/19			1,409			$	93.38				-			$	250,000,000
12/01/19 - 12/31/19			682				98.11				-			$	250,000,000
Total			2,091			$	95.54

 

For equity compensation plan information, please refer to Note 15,17, “Share Plans,” to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K. For information on the Company’s stock repurchase plans, refer to Note 13, “Stock Repurchase Programs,” to the consolidated financial statements.

17

---

Table of Contents

 

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 five-year period ended December 31, 2016.2019. The graph and table assume that $100 was invested on December 31, 20112014 in each of our common stock, the S&P 500 Index, the S&P 500 IndustrialsMidCap 400 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.

 

 

Company / Market / Peer Group		12/31/2011				12/31/2012				12/31/2013				12/31/2014				12/31/2015				12/31/2016				12/31/2014				12/31/2015				12/31/2016				12/31/2017				12/31/2018				12/31/2019
Generac Holdings Inc.		$	100.00			$	157.76			$	296.17			$	244.51			$	155.67			$	213.03			$	100.00			$	63.67			$	87.13			$	105.90			$	106.29			$	215.12
S&P 500 Index - Total Returns			100.00				116.00				153.57				174.60				177.01				198.18				100.00				101.38				113.51				138.29				132.23				173.86
S&P 500 Industrials Index			100.00				115.35				162.27				178.22				173.70				206.46
S&P MidCap 400 Index																											100.00				96.29				114.33				130.85				114.50		��		142.04
Russell 2000 Index			100.00				116.35				161.52				169.42				161.95				196.45				100.00				95.59				115.95				132.94				118.30				148.49

 

Holders

 

As of February 17, 2017,19, 2020, there were approximately 199194 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

 

We 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 factors that our boardBoard of directorsDirectors may deem relevant, we may change this policy and choose to pay dividends. Our ability to pay dividends on our common stock is currently restrictedlimited 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.subsidiaries.

 

Securities Authorized for Issuance Under Equity Compensation Plans

 

For information on securities authorized for issuance under our equity compensation plans, seerefer to “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.

 

18

---

Table of Contents

Item 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, 2016, 20152019, 2018 and 20142017 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, 20132016 and 20122015 is derived from our audited historical consolidated financial statements not included in this annual report.

 

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—7 - Management's Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes thereto in Item 8 of this Annual Report on Form 10-K.

 

		Year Ended December 31,
(U.S. Dollars in thousands, except per share data)		2016				2015				2014				2013				2012
Statement of Operations Data:
Net sales		$	1,444,453			$	1,317,299			$	1,460,919			$	1,485,765			$	1,176,306
Costs of goods sold			930,347				857,349				944,700				916,205				735,906
Gross profit			514,106				459,950				516,219				569,560				440,400
Operating expenses:
Selling and service			164,607				130,242				120,408				107,515				101,448
Research and development			37,229				32,922				31,494				29,271				23,499
General and administrative			74,700				52,947				54,795				55,490				46,031
Amortization of intangibles (1)			32,953				23,591				21,024				25,819				45,867
Tradename and goodwill impairment (2)			-				40,687				-				-				-
Gain on remeasurement of contingent consideration (3)			-				-				(4,877	)			-				-
Total operating expenses			309,489				280,389				222,844				218,095				216,845
Income from operations			204,617				179,561				293,375				351,465				223,555
Other income (expense):
Interest expense			(44,568	)			(42,843	)			(47,215	)			(54,435	)			(49,114	)
Investment income			44				123				130				91				79
Loss on extinguishment of debt (4)			(574	)			(4,795	)			(2,084	)			(15,336	)			(14,308	)
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			902				(5,487	)			(1,462	)			(1,983	)			(2,798	)
Total other expense, net			(48,235	)			(56,578	)			(35,013	)			(72,749	)			(67,203	)
Income before provision for income taxes			156,382				122,983				258,362				278,716				156,352
Provision for income taxes			57,570				45,236				83,749				104,177				63,129
Net income			98,812				77,747				174,613				174,539				93,223
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		$	21,465			$	16,742			$	13,706			$	10,955			$	8,293
Amortization of intangible assets			32,953				23,591				21,024				25,819				45,867
Expenditures for property and equipment			(30,467	)			(30,651	)			(34,689	)			(30,770	)			(22,392	)
Other Financial Data:
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

Over the years, we have executed a number of acquisitions that support our strategic plan. A summary of the recent 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. In addition, in August 2015, we closed the Country Home Products acquisition, and in March 2016, we acquired a majority ownership interest in PR Industrial S.r.l. and its subsidiaries (Pramac).

		Year Ended December 31,
(U.S. Dollars in thousands, except per share data)		2019				2018				2017				2016				2015
Statement of Operations Data:
Net sales		$	2,204,336			$	2,023,464			$	1,679,373			$	1,447,743			$	1,317,299
Costs of goods sold			1,406,584				1,298,424				1,094,587				935,322				857,349
Gross profit			797,752				725,040				584,786				512,421				459,950
Operating expenses:
Selling and service			217,683				191,887				174,841				164,860				130,242
Research and development			68,394				50,019				42,869				37,163				32,922
General and administrative			110,868				103,841				87,581				74,693				52,947
Amortization of intangibles (1)			28,644				22,112				28,861				32,953				23,591
Tradename and goodwill impairment (2)			-				-				-				-				40,687
Total operating expenses			425,589				367,859				334,152				309,669				280,389
Income from operations			372,163				357,181				250,634				202,752				179,561
Other (expense) income:
Interest expense			(41,544	)			(40,956	)			(42,667	)			(44,568	)			(42,843	)
Investment income			2,767				1,893				298				44				123
Loss on extinguishment of debt (3)			(926	)			(1,332	)			-				(574	)			(4,795	)
Loss on pension settlement (4)			(10,920	)			-				-				-				-
Loss on change in contractual interest rate (5)			-				-				-				(2,957	)			(2,381	)
Other, net			(1,933	)			(5,710	)			(4,566	)			(1,000	)			(6,682	)
Total other expense, net			(52,556	)			(46,105	)			(46,935	)			(49,055	)			(56,578	)
Income before provision for income taxes			319,607				311,076				203,699				153,697				122,983
Provision for income taxes (6)			67,299				69,856				44,142				56,519				45,236
Net income			252,308				241,220				159,557				97,178				77,747
Net income attributable to noncontrolling interests			301				2,963				1,749				24				-
Net income attributable to Generac Holdings Inc.		$	252,007			$	238,257			$	157,808			$	97,154			$	77,747
Net income attributable to common shareholders per common share - diluted:		$	4.03			$	3.54			$	2.53			$	1.47			$	1.12
Statement of Cash Flows data:
Depreciation		$	32,265			$	25,296			$	23,127			$	21,465			$	16,742
Amortization of intangible assets			28,644				22,112				28,861				32,953				23,591
Expenditures for property and equipment			(60,802	)			(47,601	)			(33,261	)			(30,467	)			(30,651	)
Other Financial Data:
Adjusted EBITDA attributable to Generac Holdings Inc. (7)		$	449,150			$	416,793			$	311,225			$	272,738			$	270,816
Adjusted net income attributable to Generac Holdings Inc. (8)			317,822				292,213				211,869				195,572				198,436

 

19

---

Table of Contents

 

																						As of December 31,
(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				2019				2018				2017				2016				2015
Balance Sheet Data:
Current assets		$	683,509			$	632,017			$	707,637			$	627,310			$	473,866			$	1,195,829			$	1,120,769			$	824,557			$	687,794			$	632,017
Property, plant and equipment, net			212,793				184,213				168,821				146,390				104,718
Property and equipment, net																							316,976				278,929				230,380				212,793				184,213
Goodwill			704,640				669,719				635,565				608,287				552,943				805,284				764,655				721,523				704,640				669,719
Other intangibles and other assets			260,742				292,686				352,396				394,237				459,470
Other intangibles and other assets (9)																							347,580				261,961				249,505				260,742				292,686
Total assets		$	1,861,684			$	1,778,635			$	1,864,419			$	1,776,224			$	1,590,997			$	2,665,669			$	2,426,314			$	2,025,965			$	1,865,969			$	1,778,635
Total current liabilities		$	341,939			$	213,224			$	240,522			$	250,845			$	294,859			$	497,064			$	560,706			$	396,423			$	347,926			$	213,224
Long-term borrowings, less current portion			1,006,758				1,037,132				1,065,858				1,155,298				785,031				837,767				876,396				906,548				1,006,758				1,037,132
Other long-term liabilities			78,737				62,408				68,240				53,010				47,479
Other long-term liabilities (9)																							236,760				166,947				124,745		��		80,968				62,408
Redeemable noncontrolling interests			33,138				-				-				-				-				61,227				61,004				43,929				33,138				-
Stockholders' equity			401,112				465,871				489,799				317,071				463,628
Total stockholders' equity																							1,032,851				761,261				554,320				397,179				465,871
Total liabilities and stockholders' equity		$	1,861,684			$	1,778,635			$	1,864,419			$	1,776,224			$	1,590,997			$	2,665,669			$	2,426,314			$	2,025,965			$	1,865,969			$	1,778,635

 

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

 

(2) 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 to the Generac® tradename. This brand strategy change resulted in a reclassification to a two year remaining useful life for the impacted tradenames and a $36.1 million non-cash charge to write-down the impacted tradenames to net realizable value. Additionally, during the fourth quarter of 2015, 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 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 the Tower Light acquisition.

(4)  For the years ended December 31, 2016, 2015, 2014 and 2013, representsRepresents 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 10,12, “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.

 

(5)(4) Represents pre-tax settlement charges related to the termination of the Company’s domestic pension plan in the fourth quarter of 2019. Refer to Note 16, “Benefit Plans,” to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K for further information regarding the Company’s pension plans.

(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 times based on current projections.projections at that time. 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 in the third quarter 2015 and expected to remain above 3.0 times based on projections at that time. ForFollowing the year ended December 31, 2014, represents a non-cash gain relating to a 25 basis point reduction in borrowing costs as a result ofMay 2017 Term Loan amendment, which removed the credit agreementpricing grid based on leverage ratio falling below 3.0 times effective second quarter 2014 and expected to remain below 3.0 times basedachieved, gains or losses on projections at that time.changes in contractual interest rate will no longer be recorded in the statements of comprehensive income. Refer to Note 10,12, “Credit Agreements,” to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K for further information on the gains and losses on changes in the contractual interest rate.

 

(6)(6) On December 22, 2017, the U.S. Government enacted a comprehensive tax reform bill commonly referred to as the Tax Cuts and Jobs Act (the Tax Act, or Tax Reform). As a result of the Tax Act, we recognized a one-time, non-cash benefit of $28.4 million in the fourth quarter of 2017 primarily from the impact of the revaluation of the Company’s net deferred tax liabilities. Refer to Note 15, “Income Taxes,” to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K for further information on the Tax Act and its impact.

(7) 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 the Term Loan and Amended ABL Facility (terms defined in Note 10,12, “Credit Agreements,” to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K), which.

(8) Adjusted Net Income is substantiallydefined as net income before noncontrolling interests and provision for income taxes adjusted for the same definition that was containedfollowing items: cash income tax expense, amortization of intangible assets, amortization of deferred financing costs and original issue discount related to our debt, intangible impairment charges, certain transaction costs and other purchase accounting adjustments, losses on extinguishment of debt, business optimization expenses, certain other non-cash gains and losses, and adjusted net income attributable to noncontrolling interests, as set forth in the reconciliation table below.

(9) On January 1, 2019, the Company adopted ASU 2016-02, Leases. The Company adopted this standard using the modified retrospective approach as of the date of adoption, meaning no prior period balances were impacted by the adoption. The adoption of the standard had a material impact on the Company’s previous credit agreements.consolidated balance sheet primarily related to the recognition of right-of-use (ROU) assets and lease liabilities for operating leases. At December 31, 2019, the Company had $36.0 million in ROU assets included in other assets and $37.0 million in lease liabilities included in other liabilities. Refer to Note 10, “Leases,” to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K for further information regarding the Company’s leases.

20

---

Table of Contents

 

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 becauseas 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;

●

for planning purposes, includingto allocate resources to enhance the preparationfinancial performance of our annual operating budget and developing and refining our internal projections for future periods;business;

●

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

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 Board 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 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 and similar non-GAAP measures are widely used by investorsas a supplemental measure to measure a company'sevaluate the overall operating performance without regardof our company, including our ability to items that can vary substantially from company to company depending upon financingservice our debt and accounting methods, book values of assets, tax jurisdictions, capital structuresother cash needs; 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 Term Loan and Amended ABL Facility, and also are presented to illustrate the operating performance of our business in a manner consistent with the presentation used by our management and boardBoard of directors.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-downswrite-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. expense.

 

We explain in more detail in footnotes (a) through (h)(i) 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 ourchanges in, or cash expenditures, or future requirements for, our working capital expenditures or contractual commitments;needs;

●

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;

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 of 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.

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

21

---

Table of Contents

 

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 adjustments in calculating Adjusted EBITDA (subject ultimately to review by our Board of Directors in the context of the Board'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 all of these adjustments are appropriate, and while the calculations are subject to review by our Board of Directors in the context of the Board's review of our financial statements, and certification by our Chief Financial Officer in a compliance certificate provided to the lenders under our Term Loan and Amended ABL 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 attributable to Generac Holdings Inc.:

 

		Year Ended December 31,																				Year Ended December 31,
(U.S. Dollars in thousands)		2016				2015				2014				2013				2012				2019				2018				2017				2016				2015
Net income attributable to Generac Holdings Inc.		$	98,788			$	77,747			$	174,613			$	174,539			$	93,223			$	252,007			$	238,257			$	157,808			$	97,154			$	77,747
Net income attributable to noncontrolling interests (a)			24				-				-				-				-				301				2,963				1,749				24				-
Net income			98,812				77,747				174,613				174,539				93,223				252,308				241,220				159,557				97,178				77,747
Interest expense			44,568				42,843				47,215				54,435				49,114				41,544				40,956				42,667				44,568				42,843
Depreciation and amortization			54,418				40,333				34,730				36,774				54,160				60,767				47,408				51,988				54,418				40,333
Provision for income taxes			57,570				45,236				83,749				104,177				63,129				67,299				69,856				44,142				56,519				45,236
Non-cash write-down and other adjustments (b)			357				3,892				(3,853	)			78				247				240				3,532				2,923				357				3,892
Non-cash share-based compensation expense (c)			9,493				8,241				12,612				12,368				10,780				16,694				14,563				10,205				9,493				8,241
Tradename and goodwill impairment (d)			-				40,687				-				-				-				-				-				-				-				40,687
Loss on extinguishment of debt (e)			574				4,795				2,084				15,336				14,308				926				1,332				-				574				4,795
(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				-				-				-
Loss on pension settlement (f)																							10,920				-				-				-				-
Loss on change in contractual interest rate (g)																							-				-				-				2,957				2,381
Transaction costs and credit facility fees (h)																							2,724				3,883				2,145				2,442				2,249
Business optimization expenses (i)																							1,572				952				2,912				7,316				1,947
Other			(120	)			465				296				1,043				731				(879	)			850				761				700				465
Adjusted EBITDA			278,387				270,816				337,283				402,613				289,809				454,115				424,552				317,300				276,522				270,816
Adjusted EBITDA attributable to noncontrolling interests			3,784				-				-				-				-				4,965				7,759				6,075				3,784				-
Adjusted EBITDA attributable to Generac Holdings Inc.		$	274,603			$	270,816			$	337,283			$	402,613			$	289,809			$	449,150			$	416,793			$	311,225			$	272,738			$	270,816

 

(a)   For the year ended December 31, 2016, includes Includes the noncontrolling interests’ share of expenses related to Pramac purchase accounting, including the step-up in value of inventories and intangible amortization of $4.2 million, $4.6 million, $4.7 million, and $8.0 million.million for the years ended December 31, 2019, 2018, 2017, and 2016, respectively.

 

(b)(b) Represents the following non-cash charges: gains/losses on disposal of assets, unrealized mark-to-market adjustments on commodity contracts, transactional 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.

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

 

●

The gains/losses on disposals of assets 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 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

●

The adjustment to a certain earn-out obligation in connection with the Tower Light acquisition recorded in the year ended December 31, 2014, is a one-time charge that we believe does not reflect our ongoing operations.operations

 

22

---

Table of Contents

(c)

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

 

(d)(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 to the Generac® tradename. This brand strategy change resulted in a reclassification to a two year remaining useful life for the impacted tradenames and a $36.1 million non-cash charge to write-down the impacted tradenames to net realizable value. Additionally, during the fourth quarter of 2015, 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 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.

 

(e)   For the years ended December 31, 2016, 2015, 2014 and 2013, represents(e) 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 extinguishmentprepayments 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.Term Loan debt. Refer to Note 10,12, “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.

 

(f)(f) Represents pre-tax settlement charges related to the termination of the Company’s domestic pension plan in the fourth quarter of 2019. Refer to Note 16, “Benefit Plans,” to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K for further information regarding the Company’s pension plans.

(g) For the year ended December 31, 2016, represents a non-cash loss in the third quarter 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 times based on current projections.projections at that time. 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 that time. ForFollowing the year ended December 31, 2014, represents a non-cash gain relating to a 25 basis point reduction in borrowing costs as a result ofMay 2017 Term Loan amendment, which removed the credit agreementpricing grid based on leverage ratio falling below 3.0 times effective second quarter 2014 and expected to remain below 3.0 times basedachieved, gains or losses on projections at that time.changes in contractual interest rate will no longer be recorded in the statements of comprehensive income. Refer to Note 10,12, “Credit Agreements,” to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K for further information on the gains and losses on changes in the contractual interest rate.

 

(g)(h) 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:as administrative agent fees and credit facility commitment fees under our Term Loan and ABL 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, and transaction costs relating to the acquisition of businesses.

●

administrative agent fees and revolving credit facility commitment fees under our Term Loan and Amended ABL 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.

 

(h)   For(i) Represents severance and non-recurring plant consolidation costs. Additionally, the year ended December 31, 2016 primarily represents charges relating to business optimization and restructuring costs to address the significant and extended downturnsdownturn for capital spending within the oil & gas industry. For the year ended December 31, 2015, represents severance and non-recurring restructuringThese 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 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, intangible impairment charges, certain transaction costs and other purchase accounting adjustments, losses on extinguishment of debt, business optimization expenses, certain other non-cash gains and losses, 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 company’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 ongoing results of operations, 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.attributes, causing our cash tax rate to be lower than our U.S GAAP tax rate.

 

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;

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.

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

23

---

Table of Contents

 

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

 

		Year Ended December 31,																				Year Ended December 31,
(U.S. Dollars in thousands)		2016				2015				2014				2013				2012				2019				2018				2017				2016				2015
Net income attributable to Generac Holdings Inc.		$	98,788			$	77,747			$	174,613			$	174,539			$	93,223			$	252,007			$	238,257			$	157,808			$	97,154			$	77,747
Net income attributable to noncontrolling interests			24				-				-				-				-				301				2,963				1,749				24				-
Net income			98,812				77,747				174,613				174,539				93,223				252,308				241,220				159,557				97,178				77,747
Provision for income taxes			57,570				45,236				83,749				104,177				63,129				67,299				69,856				44,142				56,519				45,236
Income before provision for income taxes			156,382				122,983				258,362				278,716				156,352				319,607				311,076				203,699				153,697				122,983
Amortization of intangible assets			32,953				23,591				21,024				25,189				45,867				28,644				22,112				28,861				32,953				23,591
Amortization of deferred finance costs and original issue discount			3,940				5,429				6,615				4,772				3,759				4,712				4,749				3,516				3,940				5,429
Tradename and goodwill impairment			-				40,687				-				-				-				-				-				-				-				40,687
Loss on extinguishment of debt			574				4,795				2,084				15,336				14,308				926				1,332				-				574				4,795
(Gain) loss on change in contractual interest rate			2,957				2,381				(16,014	)			-				-
Loss on pension settlement																							10,920				-				-				-				-
Loss on change in contractual interest rate																							-				-				-				2,957				2,381
Transaction costs and other purchase accounting adjustments (a)			5,653				2,710				(3,623	)			2,842				3,317				874				2,578				1,706				5,653				2,710
Business optimization expenses			7,316				1,947				-				-				-				1,572				952				2,912				7,316				1,947
Adjusted net income before provision for income taxes			209,775				204,523				268,448				326,855				223,603				367,255				342,799				240,694				207,090				204,523
Cash income tax expense (b)			(9,299	)			(6,087	)			(34,283	)			(25,821	)			(2,811	)			(47,945	)			(47,064	)			(25,624	)			(9,299	)			(6,087	)
Adjusted net income			200,476				198,436				234,165				301,034				220,792				319,310				295,735				215,070				197,791				198,436
Adjusted net income attributable to noncontrolling interests			2,219				-				-				-				-				1,488				3,522				3,201				2,219				-
Adjusted net income attributable to Generac Holdings Inc.		$	198,257			$	198,436			$	234,165			$	301,034			$	220,792			$	317,822			$	292,213			$	211,869			$	195,572			$	198,436

 

(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, and certain purchase accounting adjustments. Additionally,

(b) For the yearyears ended December 31, 2014 includes a gain of $4.9 million related to an adjustment to an earn-out obligation in connection with2019, 2018, 2017, and 2016, the Tower Light acquisition.

(b) For the year ended December 31, 2016, amount is based on a cash income tax rate of 15.0%, 15.1%, 12.5% and 5.9%., respectively. Cash income tax expense for 2019, 2018, 2017 and 2016 is based on the projected taxable income and corresponding cash tax ratetaxes payable 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 yearsyear ended December 31, 2015, 2014, 2013 and 2012, amounts arethe amount is based on actual cash income taxes paid during eachthat year.

 

Item 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 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 global designer and manufacturer of a wide range of energy technology solutions. The Company provides power generation equipment, energy storage systems, and other engine poweredpower products serving the residential, light commercial and industrial markets. Power generation is our primarya key focus, which differentiates us from our primarymain competitors that also have broad operations outside of the power 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 ranges 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. A key strategic focus for the Company in recent years has been leveraging our leading position in the growing market for cleaner burning, more cost effective natural gas fueled generators to expand into applications beyond standby power. We have also been focused on “connecting” the equipment we manufacture to the users of that equipment, helping to drive additional value to our customers and our distribution partners over the product lifecycle. Other engine poweredpower products that we design and manufacture include light towers which provide temporary lighting for various end markets; commercial and industrial mobile heaters and pumps used in the oil & gas, construction and other industrial markets; and a broad product line of outdoor power equipment for residential and commercial use. During 2019, we began providing energy storage systems as a clean energy solution for residential use that capture and store electricity from solar panels or other power sources and help reduce home energy costs while also protecting homes from brief power outages.

 

Over the past several years, we have executed a number

24

---

Table 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.

Contents

 

Business Drivers and Operational FFactorsactors

 

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 Trends

 

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

 

Increasing penetration opportunity.    Many potential customers are still not aware of the costs and benefits of automatic backup power solutions. We estimate that penetration rates for home standby generators are only approximately 4.0%4.75% of U.S. single-family detached, owner-occupied households with a home valuethe addressable market of over $100,000, as defined by the U.S. Census Bureau's 2015 American Housing Survey forhomes in 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 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 increase the penetration of standby generators over the past decade in the light-commercial market. In addition, the installed base of backup power for telecommunications infrastructure is still increasing due to a variety of factors including the impending rollout of next-generation 5G wireless networks enabling new technologies and the growing importance for critical communications and other uninterrupted voice and data services. We believe by expanding our distribution network, continuing to develop our product line,lines, 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 scale and baseline power disruptions.    Power disruptions are an important driver of customer awareness for back-up power and have historically influenced demand for 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 portablestandby or standbyportable generator during the immediate and subsequent period, which we believe may last for ninesix to twelve months following a major power outage event for standby generators. For example, the major outage events that occurred during the second half of 2017 drove strong demand for portable and home standby generators, and the increased awareness of these products contributed to strong revenue growth in both 2017 and 2018. 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 United States that drive the baseline level of demand for back-up power solutions. The level of baseline power outage activity occurring across the United States can also fluctuate, and may cause our financial results to fluctuate from year to year.

Energy storage and monitoring markets developing quickly. During 2019, we entered the rapidly developing energy storage and monitoring markets with the acquisitions of Pika Energy and Neurio Technologies. We believe the electric power landscape will undergo significant changes in the decade ahead as a result of rising utility rates, grid instability and power utility quality issues, environmental concerns, and the continuing performance and cost improvements in renewable energy and batteries. On-site power generation from solar, wind, geothermal, and natural gas generators is projected to become more prevalent as will the need to manage, monitor and store this power – potentially developing into a significant market opportunity annually. The capabilities provided by Pika and Neurio have enabled us to bring an efficient and intelligent energy-savings solution to the energy storage and monitoring markets which we believe will position Generac as a key participant going forward. Although very different from the emergency backup power space we serve today, we believe this market will develop similarly as the home standby generator market has over the past two decades. Our efforts to develop a cost-effective global supply chain, omni-channel distribution, targeted consumer-based marketing content, and proprietary in-home sales tools have played a critical role in creating the market for home standby generators, and we intend to leverage our expertise and capabilities in these areas as we work to grow the energy storage and monitoring markets.

California market for backup power increasing.    During 2019, the largest utility in the state of California along with other utilities announced their intention and ultimately executed a number of Public Safety Power Shutoff (PSPS) events in large portions of their service areas. These events were pro-active measures to prevent their equipment from potentially causing catastrophic wildfires during the dry and windy season of the year. The occurrence of these events, along with the utilities warning these actions could continue in the future as they upgrade their transmission and distribution infrastructure, have resulted in significant awareness and increased demand for our generators in California, where penetration rates of home standby generators stand at approximately 1%. We have a significant focus on expanding distribution in California and are working together with local regulators, inspectors, and gas utilities to increase their bandwidth and sense of urgency around approving and providing the infrastructure necessary for home standby and other backup power products. Our efforts in this part of the country will also be helpful in developing the market for energy storage and monitoring where the installed base of solar and other renewable sources of electricity are some of the highest in the U.S., and the regulatory environment is mandating renewable energy on new construction starting in 2020.

 

25

---

Table of Contents

Impact of residential investment cycle.    The market for residential generators and energy storage systems 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.generators and energy storage systems. Trends in the new housing market highlighted by residential housing starts can also impact demand for our residential generators.these products. Demand for outdoor power equipment is also impacted by several of these factors, as well as weather precipitation patterns. Finally, the existence of renewable energy mandates and investment tax credits and other subsidies can also have an impact on the demand for energy storage systems.

 

Impact of business capital investment and other economic cycles.    The global market for our commercial and industrial products is affected by different capital investment cycles, 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, office, 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 as 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.

 

Factors Affecting Results of Operations

 

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, cost control and cost control. hedging. 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, along with other components we use in our products, as well as changes in labor costs required to produce our products, can have a material impact on our results of operations. Also, with the Pramac acquisitionAcquisitions in 2016, werecent years have further expanded our commercial and operational presence outside of the United States. This acquisition,These international acquisitions, along with our existing international presence, exposesglobal supply chain, expose us to fluctuations in foreign currency exchange rates and regulatory tariffs that can also have a material impact on our results of operations.

 

We have historically attempted to mitigate the impact of rising commodity, currency and component pricesany inflationary pressures 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 accepted by our customers and in other cases are paid by us.

 

Seasonality.    Although there is demand for our products throughout the year, in each of the past five years, approximately 23%20% to 27%24% of our net sales occurred in the first quarter, 20%22% to 25% in the second quarter, 24%26% to 27%28% in the third quarter and 25%27% to 29% in the fourth quarter, with different seasonality depending on the 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. The seasonality experienced during a major power outage, and for the subsequent quarters following the event, 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.

 

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 interestindebtedness, and amendments to our credit agreements. In connection with our term loan amendment in December 2019, language was added to the agreement to include a benchmark replacement rate, selected by the administrative agent and the borrower, as a replacement to LIBOR that would take affect at the time LIBOR ceases. We plan to work with our lenders in the future to amend other LIBOR based debt agreements to add a replacement rate should the use of LIBOR cease. Interest expense increased slightly during 20162019 compared to 2015,2018, primarily due additional debt assumed in recent acquisitions,to increased borrowings at otherby our foreign subsidiaries and an increase in the LIBOR rate. subsidiaries. Refer to Note 10,12, “Credit Agreements,” to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K for further information.

 

Factors influencing provision for income taxes and cash income taxes paid.    On December 22, 2017, the U.S. government enacted the Tax Act, which significantly changed how the U.S. taxes corporations. During 2018, the U.S. Treasury Department (Treasury) issued several new regulations and other guidance which we have incorporated into our final tax calculations. At December 31, 2019, we consider the tax expense recorded for the impact of Tax Reform to be complete. It is possible additional regulations or guidance could be issued by Treasury or by a state which may create an additional tax expense or benefit. We will update our future tax provisions based on new regulations or guidance accordingly.

26

---

Table of Contents

As a result of the Tax Act, we recognized a one-time, non-cash benefit of $28.4 million in the fourth quarter of 2017 primarily from the impact of the revaluation of our net deferred tax liabilities. This non-cash benefit resulted primarily from the Federal rate reduction from 35% to 21%.

As of December 31, 2019, we had approximately $592$225 million of tax-deductible goodwill and intangible asset amortization remaining as of December 31, 2016 related tofrom our acquisition by CCMP Capital Advisors, LLC in 2006 that we expect to generate aggregate cash tax savings of approximately $231$57 million through 2021, assuming continued profitability of our U.S. business and a 39%combined federal and state tax rate.rate of 25.3%. The recognition of the tax benefit associated with these assets for tax purposes is expected to be $122 million annually throughin 2020 and $102 million in 2021, which generates annual cash tax savings of $48$31 million throughin 2020 and $40$26 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 $38.0 million of incremental tax deductible goodwill and intangible assets remaining as of December 31, 2016. We expect these assets to generate aggregate cash tax savings of $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.2021. Based on current business plans, we believe that our cash tax obligations through 20262021 will be significantly reduced by these tax attributes.attributes, after which our cash tax obligation will increase. 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’sour consolidated financial statements.

 

Components of Net Sales and Expenses

 

Net Sales

 

Substantially allOur net sales primarily consist of product sales to our customers. This includes sales of our net sales are generated through the sale of our power generatorgeneration equipment, energy storage systems, and other engine poweredpower products to the residential, light commercial and industrial markets. We also sell engines to certain customers andmarkets, as well as service parts to our dealer network. Net sales whichalso include shipping and handling charges billed to customers, are generally recognized upon shipment of products to our customers. Relatedwith the related freight costs are included in cost of sales.goods sold. Additionally, we offer other services, including extended warranties, remote monitoring, installation and maintenance services. However, these services accounted for less than three percent of our net sales for the year ended December 31, 2019. Refer to Note 2, “Significant Accounting Policies - Revenue Recognition,” to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K for further information on our revenue streams and related revenue recognition accounting policies.

 

We are not dependent on any one channel or customer for our net sales, with no single customer representing more than 7%5% of our sales, and our top ten customers representing less than 22%19% of our totalnet sales for the year ended December 31, 2016.2019.

 

Costs of Goods Sold

 

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 approximately 78%75% of costs of goods sold for the year ended December 31, 2016.2019. The principal component parts are engines, alternators, and alternators.batteries. We design and manufacture air-cooled engines for certain of our generators up to 22kW, along with certain liquid-cooled, natural gas engines. We source engines for certain of our smaller products and all of our 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 of those engines. We design and manufacture many 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, thereWe are also impacted by foreign currency fluctuations given our global supply chain. 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 Expenses

 

Our operating expenses consist of costs incurred to support our sales, marketing, distribution, service parts, engineering, information systems, human resources, accounting, finance, risk management, legal and tax functions, among others. These expenses include personnel costs such as salaries, bonuses, employee benefit costs, taxes, and taxes,share-based compensation cost, 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.

27

---

Table of Contents

 

Selling and service.    Our selling and service expenses consist primarily of personnel expense, marketing expense, standard assurance 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. WarrantyStandard 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.our products, and general brand awareness marketing efforts.

 

Research and development.    Our research and development expenses support numerous projects covering all of our product lines. They also support our connectivity, remote monitoring, and energy monitoring initiatives. We operate engineering facilities with extensive capabilities at many locations globally and employ over 300500 personnel with focus on new product development, existing product improvement and cost containment. We are committed to research and development, and rely on a combination of patents and 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; accounting, legal and professional services fees; information technology costs; insurance; travel and entertainment expense; and other corporate expenses.

 

Amortization of intangibles.    Our amortization of intangibles expense includes the straight-line amortization of finite-lived tradenames, customer lists, patents and technology, and other intangibles assets.

Other Income (Expense)(Expense) Income

 

Other (expense) income (expense) includes the interest expense on our outstanding borrowings, amortization of debt financing costs and original issue discount,, and expensescash flows related to interest rate swap agreements. Other (expense) income (expense) also includes other financial items such as losses on extinguishment of debt, gains (losses) on changechanges in contractual interest rate, interestloss on pension settlement, and investment 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 transaction expenses related to the acquisitions of Powermate and MAC. Refer to Note 3, “Acquisitions” and Note 19, “Subsequent Events” to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K for additional information on the Company’s recent acquisitions.equivalents.

 

Results of Operations

 

Year ended DecemberDecember 31, 20169 compared to year ended December 31, 20152018

 

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

 

		Year Ended December 31,																Year Ended December 31,
(U.S. Dollars in thousands)		2016				2015				$ Change				% Change				2019				2018				$ Change				% Change
Net sales		$	1,444,453			$	1,317,299				127,154				9.7	%		$	2,204,336			$	2,023,464			$	180,872				8.9	%
Cost of goods sold			930,347				857,349				72,998				8.5	%			1,406,584				1,298,424				108,160				8.3	%
Gross profit			514,106				459,950				54,156				11.8	%			797,752				725,040				72,712				10.0	%
Operating expenses:
Selling and service			164,607				130,242				34,365				26.4	%			217,683				191,887				25,796				13.4	%
Research and development			37,229				32,922				4,307				13.1	%			68,394				50,019				18,375				36.7	%
General and administrative			74,700				52,947				21,753				41.1	%			110,868				103,841				7,027				6.8	%
Amortization of intangible assets			32,953				23,591				9,362				39.7	%			28,644				22,112				6,532				29.5	%
Tradename and goodwill impairment			-				40,687				(40,687	)			-100.0	%
Total operating expenses			309,489				280,389				29,100				10.4	%			425,589				367,859				57,730				15.7	%
Income from operations			204,617				179,561				25,056				14.0	%			372,163				357,181				14,982				4.2	%
Total other expense, net			(48,235	)			(56,578	)			8,343				-14.7	%			(52,556	)			(46,105	)			(6,451	)			14.0	%
Income before provision for income taxes			156,382				122,983				33,399				27.2	%			319,607				311,076				8,531				2.7	%
Provision for income taxes			57,570				45,236				12,334				27.3	%			67,299				69,856				(2,557	)			-3.7	%
Net income			98,812				77,747				21,065				27.1	%			252,308				241,220				11,088				4.6	%
Net income attributable to noncontrolling interests			24				-				24				N/A				301				2,963				(2,662	)			-89.8	%
Net income attributable to Generac Holdings Inc.		$	98,788			$	77,747				21,041				27.1	%		$	252,007			$	238,257			$	13,750				5.8	%

 

28

---

Table of Contents

 

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

 

		Net Sales																Net Sales by Segment
		Year Ended December 31,																Year Ended December 31,
(U.S. Dollars in thousands)		2016				2015				$ Change				% Change				2019				2018				$ Change				% Change
Domestic		$	1,173,559			$	1,204,589				(31,030	)			-2.6	%		$	1,742,898			$	1,566,520			$	176,378				11.3	%
International			270,894				112,710				158,184				140.3	%			461,438				456,944				4,494				1.0	%
Total net sales		$	1,444,453			$	1,317,299				127,154				9.7	%		$	2,204,336			$	2,023,464			$	180,872				8.9	%

 

		Adjusted EBITDA																Adjusted EBITDA by Segment
		Year Ended December 31,																Year Ended December 31,
		2016				2015				$ Change				% Change				2019				2018				$ Change				% Change
Domestic		$	261,428			$	254,882				6,546				2.6	%		$	428,667			$	388,495			$	40,172				10.3	%
International			16,959				15,934				1,025				6.4	%			25,448				36,057				(10,609	)			-29.4	%
Total Adjusted EBITDA		$	278,387			$	270,816				7,571				2.8	%		$	454,115			$	424,552			$	29,563				7.0	%

 

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

 

		Year Ended December 31,																Year Ended December 31,
(U.S. Dollars in thousands)		2016				2015				$ Change				% Change				2019				2018				$ Change				% Change
Residential products		$	772,436			$	673,764				98,672				14.6	%		$	1,143,723			$	1,042,739			$	100,984				9.7	%
Commercial & industrial products			557,532				548,440				9,092				1.7	%			871,595				820,270				51,325				6.3	%
Other			114,485				95,095				19,390				20.4	%			189,018				160,455				28,563				17.8	%
Total net sales		$	1,444,453			$	1,317,299				127,154				9.7	%		$	2,204,336			$	2,023,464			$	180,872				8.9	%

 

Net sales.    The decreaseincrease in Domestic segment sales for the year ended December 31, 20162019 was primarily due to significant declines instrong shipments of mobile products into oil &home standby generators due to increased trends of power outage activity across the U.S. and Canada, inclusive of public utility power shut-offs in California. In addition, C&I stationary generator shipments were also strong, particularly for natural gas and general rental markets. Partially offsetting these impactstelecom applications. The Pika and Neurio acquisitions provided a modest contribution of sales in 2019 given their start-up nature. The overall Domestic segment sales growth was the contribution from the CHP acquisition, along with increasedpartially offset by lower shipments of portable generators and home standby generators. C&I mobile products.

 

The slight increase in International segment 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, 20162019 was $236.6 million.primarily due to contributions from the Selmec and Captiva acquisitions. International segment sales in 2019 were impacted by the unfavorable results of foreign currency and geopolitical headwinds that caused economic softness in certain key regions of the world in which we operate.

 

Net income attributable to Generac Holdings Inc.    Net income attributable to Generac Holdings Inc.Total contribution from non-annualized recent acquisitions for the year ended December 31, 2016 includes2019 was $36.1 million.

Gross profit. Gross profit margin for the year ended December 31, 2019 was 36.2% compared to 35.8% for the year ended December 31, 2018. The increase reflected a favorable sales mix towards higher margin home standby generators and price increases implemented since the prior period. These items were partially offset by the impact of $7.1recent acquisitions and the realization of higher input costs, including regulatory tariffs, logistics costs, and labor rates.

Operating expenses. The increase in operating expenses was primarily driven by incremental variable operating expense on the strong sales growth, recurring operating expenses from recent acquisitions, an increase in employee headcount related to strategic initiatives, higher marketing and promotional spend, and higher intangible amortization expenses.

Other expense. The increase in other expense, net was primarily due to a $10.9 million of non-recurring, pre-tax charges relatingsettlement charge related to business optimization and restructuring costs to address the impacttermination of the significantCompany’s domestic pension plan in the fourth quarter of 2019, partially off-set by more favorable foreign currency adjustments compared to the prior year. 

Provision for income taxes.    The effective income tax rates for the years ended December 31, 2019 and extended downturn for capital spending within2018 were 21.1% and 22.5%, respectively. The decrease in the oil & gas industry. The cost-reduction actions taken includeeffective tax rate is primarily due to a reduction in the consolidation of production facilities, headcount reductions, certain non-cash asset write-downsU.S. state income tax expense 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.lower foreign earnings, which are subject to higher jurisdictional tax rates.

Net income attributable to Generac Holdings Inc.    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 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, 2016 was 35.6% compared to 34.9% for the year ended December 31, 2015, which includes the impact of 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 was 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 prior year was negatively impacted by temporary increases in certain costs associated with the west coast port congestion as well as other overhead-related costs that did not repeat in the current year. These factors were partially offset by the mix impact from the Pramac acquisition.

Operating expenses. Excluding 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 $65.4 million, or 27.3%, to $305.1 million for the year ended December 31, 2016 from $239.7 million for the year ended December 31, 2015. The increase was primarily due to the addition of recurring operating expenses associated with recent acquisitions and increased amortization expense.

Other expense. Other expense in the prior year included a non-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 our 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%.above.

 

Adjusted EBITDA.    Adjusted EBITDA margins for the Domestic segment for the year ended December 31, 20162019 were 22.3%24.6% of net sales as compared to 21.2%24.8% of net sales for the year ended December 31, 2015. This increase was primarily due to overall2018. Adjusted EBITDA margin in the current year benefited from favorable product mix; lower commodity costssales mix, pricing initiatives, and overseas sourcing benefits from a stronger U.S. Dollar; andfixed operating cost leverage on the benefit of cost-reduction actions within domestic mobile products, partiallyhigher sales volumes. These favorable impacts were more than offset by higher input costs, including regulatory tariffs, increased employee headcount, higher marketing and promotional activities.spend, and recurring operating expenses from recent acquisitions.

 

29

---

Table of Contents

Adjusted EBITDA margins for the International segment, before deducting for non-controlling interests, for the year ended December 31, 20162019 were 6.3%5.5% of net sales as compared to 14.1%7.9% of net sales for the year ended December 31, 2015. This2018. The decrease in Adjusted EBITDA margin as compared to the prior year 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,higher input costs, and to a lesser extent, the Pramac acquisition sales mix.incremental operating expense investments.

 

Adjusted net income. income.    Adjusted Net Income of $198.3$317.8 million for the year ended December 31, 2016 decreased 0.1%2019 increased 8.8% from $198.4$292.2 million for the year ended December 31, 2015. The increased earnings2018, due to the factors outlined aboveabove.

In the fourth quarter of 2019, management determined that the Latin American export operations of the legacy Generac business should have been included in the International reportable segment beginning in 2018. Previously, this was reported in the Domestic segment, in amounts that were offset by an increasenot material. Refer to Note 7, “Segment Reporting,” to the consolidated financial statements in cash income tax expense and adjusted net income attributable to noncontrolling interests.Item 8 of this Annual Report on Form 10-K for further information regarding this correction.

 

Year ended December 31, 20158 compared to year ended December 31, 20147

 

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

 

		Year Ended December 31,																Year Ended December 31,
(U.S. Dollars in thousands)		2015				2014				$ Change				% Change				2018				2017				$ Change				% Change
Net sales		$	1,317,299			$	1,460,919				(143,620	)			-9.8	%		$	2,023,464			$	1,679,373			$	344,091				20.5	%
Cost of goods sold			857,349				944,700				(87,351	)			-9.2	%			1,298,424				1,094,587				203,837				18.6	%
Gross profit			459,950				516,219				(56,269	)			-10.9	%			725,040				584,786				140,254				24.0	%
Operating expenses:
Selling and service			130,242				120,408				9,834				8.2	%			191,887				174,841				17,046				9.7	%
Research and development			32,922				31,494				1,428				4.5	%			50,019				42,869				7,150				16.7	%
General and administrative			52,947				54,795				(1,848	)			-3.4	%			103,841				87,581				16,260				18.6	%
Amortization of intangible assets			23,591				21,024				2,567				12.2	%			22,112				28,861				(6,749	)			-23.4	%
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	%			367,859				334,152				33,707				10.1	%
Income from operations			179,561				293,375				(113,814	)			-38.8	%			357,181				250,634				106,547				42.5	%
Total other expense, net			(56,578	)			(35,013	)			(21,565	)			61.6	%			(46,105	)			(46,935	)			830				-1.8	%
Income before provision for income taxes			122,983				258,362				(135,379	)			-52.4	%			311,076				203,699				107,377				52.7	%
Provision for income taxes			45,236				83,749				(38,513	)			-46.0	%			69,856				44,142				25,714				58.3	%
Net income		$	77,747			$	174,613				(96,866	)			-55.5	%			241,220				159,557				81,663				51.2	%
Net income attributable to noncontrolling interests																			2,963				1,749				1,214				N/A
Net income attributable to Generac Holdings Inc.																		$	238,257			$	157,808			$	80,449				51.0	%

 

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

 

		Net Sales																Net Sales by Segment
		Year Ended December 31,																Year Ended December 31,
(U.S. Dollars in thousands)		2015				2014				$ Change				% Change				2018				2017				$ Change				% Change
Domestic		$	1,204,589			$	1,343,367				(138,778	)			-10.3	%		$	1,566,520			$	1,271,678			$	294,842				23.2	%
International			112,710				117,552				(4,842	)			-4.1	%			456,944				407,695				49,249				12.1	%
Total net sales		$	1,317,299			$	1,460,919				(143,619	)			-9.8	%		$	2,023,464			$	1,679,373			$	344,091				20.5	%

 

		Adjusted EBITDA																Adjusted EBITDA by Segment
		Year Ended December 31,																Year Ended December 31,
		2015				2014				$ Change				% Change				2018				2017				$ Change				% Change
Domestic		$	254,882			$	322,769				(67,887	)			-21.0	%		$	388,495			$	282,450			$	106,045				37.5	%
International			15,934				14,514				1,420				9.8	%			36,057				34,850				1,207				3.5	%
Total Adjusted EBITDA		$	270,816			$	337,283				(66,467	)			-19.7	%		$	424,552			$	317,300			$	107,252				33.8	%

 

30

---

Table of Contents

 

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

 

		Year Ended December 31,																Year Ended December 31,
(U.S. Dollars in thousands)		2015				2014				$ Change				% Change				2018				2017				$ Change				% Change
Residential products		$	673,764			$	722,206				(48,442	)			-6.7	%		$	1,042,739			$	870,491			$	172,248				19.8	%
Commercial & industrial products			548,440				652,216				(103,776	)			-15.9	%			820,270				684,352				135,918				19.9	%
Other			95,095				86,497				8,598				9.9	%			160,455				124,530				35,925				28.8	%
Total net sales		$	1,317,299			$	1,460,919				(143,620	)			-9.8	%		$	2,023,464			$	1,679,373			$	344,091				20.5	%

Net sales. sales. The decreaseincrease in Domestic sales for the year ended December 31, 20152018 was primarily due to lower demandstrong broad-based growth in shipments of home standby generators, as a resultportable generators, outdoor power equipment and service parts. Shipments 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 contributionresidential products were particularly strong with demand climbing from the CHP acquisition.elevated outage environment which continued to drive awareness around the home standby category and the need for homeowners to have back-up power. Sales of our C&I mobile and stationary products were also strong during the year with rental, telecom, and healthcare market verticals experiencing growth.

 

The decreaseincrease in International sales for the year ended December 31, 20152018 was primarily due to the negative impact of foreign currency translation.

The$30.7 million contribution from non-annualized recent acquisitionsthe Selmec acquisition, and broad-based core growth from the Pramac, Ottomotores and Motortech businesses as we continue to drive market penetration across the year ended December 31, 2015 was $62.8 million.globe.

 

Gross profit. Gross profit margin for the year ended December 31, 2015 decreased2018 was 35.8% compared to 34.9% from 35.3%34.8% for the year ended December 31, 2014.2017. The declineincrease reflected a favorable mix of home standby generators, improved leverage of fixed manufacturing costs on the increase in gross margin was primarily duesales, favorable pricing environment, and focused initiatives to unfavorable absorption of manufacturing overhead-related costs,improve margins. These items were partially offset by the favorable impact of lower commodity costsgeneral inflationary pressures from higher commodities, currencies, wages and overseas sourcing benefits from a stronger U.S. dollar.logistics costs.

 

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,The increase in operating expenses for the year ended December 31, 2014 include a $4.9 million gain relating to a remeasurement of a contingent earn-out obligation from the Tower Light acquisition. Excluding the impact of these items,was primarily driven by an increase in employee and incentive compensation costs, higher selling-related variable operating expenses increased $12.0 million primarily due togiven the addition ofhigher sales volumes, and the recurring operating expenses associated withfrom the CHP acquisition, increased marketing and advertising expenses, and a $2.6 million increase in the amortization of intangible assets. This wasSelmec acquisition. These items were partially offset by reductions in variable operating expenses on lower sales volumes.promotion, marketing and intangible amortization expenses.

Other expense. The increasedecrease in other expense, net was primarily due to a $16.0 million non-cash gain recorded inlower interest expense and higher investment income, partially offset by the year ended December 31, 2014 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 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 non-cash $4.8$1.3 million loss on extinguishment of debt compared toresulting from a $50.0 million voluntary prepaymentsprepayment of Term Loan debt of $87.0 million indebt.

Provision for income taxes.The effective income tax rates for the yearyears ended December 31, 2014, which resulted in a non-cash $2.1 million loss on extinguishment2018 and 2017 were 22.5% and 21.3%, respectively. The reduction of debt. The debt repayments resulted in a year-over-year decrease in interest expense of $4.4 million.

Income tax expense. The effectivethe U.S. federal statutory tax rate for 2015from 35% to 21% as a result of the Tax Act was 36.8% as compared to 32.4% for 2014. The increasemore than offset by the 2017 one-time, non-cash $28.4 million benefit from revaluing our net deferred tax liabilities in income tax rate was primarily attributable to a decrease inaccordance with the Company’s federal domestic production activity deduction due to lower pre-tax income.Tax Act.

 

Net income. income attributable to Generac Holdings Inc.As a result of    The increase in net income attributable to Generac Holdings Inc. was primarily due to the factors identifiedoutlined above, we generatedpartially offset by an increase in net income of $77.7 million for the year ended December 31, 2015 comparedattributable to $174.6 million for the year ended December 31, 2014.noncontrolling interests.

 

Adjusted EBITDA. Adjusted EBITDA margins for the Domestic segment for the year ended December 31, 20152018 were 21.2%24.8% of net sales as compared to 24.0%22.2% of net sales for the year ended December 31, 2014. This decrease was primarily due to increased marketing2017. Adjusted EBITDA margin in 2018 benefitted from improved operating leverage, favorable sales mix from higher shipments of home standby generators, a favorable pricing environment, lower promotional costs, and advertising expenses, and reduced overall leverage of fixed operating expenses,focused margin improvement initiatives. These benefits were partially offset by the favorable impact of lower commodityan increase in employee costs and overseas sourcing benefits from a stronger U.S. Dollar.general inflationary pressures.

 

Adjusted EBITDA margins for the International segment, before deducting for non-controlling interests, for the year ended December 31, 20152018 were 14.1%7.9% of net sales as compared to 12.3%8.5% of net sales for the year ended December 31, 2014. This increase was primarily2017. The slight decrease in EBITDA margin is due to loweran unfavorable sales mix as 2017 included higher shipments of portable generators following large-scale outages from Hurricane Maria. This unfavorable sales mix was partially offset by increased leverage of fixed operating expenses.costs in 2018.

 

Adjusted net income. Adjusted Net Income of $198.4$292.2 million for the year ended December 31, 2015 decreased 15.3%2018 increased 37.9% from $234.2$211.9 million for the year ended December 31, 2014,2017, due to the factors outlined above, partially offset by a decreasean increase in cash income tax expense.

 

Liquidity and Financial Position

 

Our primary cash requirements include payment for our raw material and component supplies, salaries & benefits, facility and lease costs, 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 Facility.

 

31

---

Table of Contents

The Company’s

Our credit agreements originally provided for a $1.2 billion Term Loanterm loan B credit facility (Term Loan) and include a $300.0 million uncommitted incremental term loan facility. The Term Loan currently matures on May 31, 2023. The Term Loan initially boreDecember 13, 2026 and bears interest at rates based upon either a base rate plus an applicable margin of 1.75%0.75% or adjusted LIBOR rate plus an applicable margin of 2.75%, subject to a LIBOR floor of 0.75%1.75%. Beginning in the second quarter of 2014, and measured each subsequent quarter thereafter, the applicable margin related to base rate loans is reduced to 1.50% and the applicable margin related to LIBOR rate loans is reduced to 2.50%, to the extent that the Company’s net debtThe Term Loan does not require an Excess Cash Flow payment if our secured leverage ratio as defined in the Term Loan, is maintained below 3.003.75 to 1.00 for that measurement period. The Company’s net debt leverage ratio as of December 31, 2016 was above 3.00 to 1.00.times. As of December 31, 2016, the Company is2019, our secured leverage ratio was 1.50 to 1.00 times, and we were in compliance with all covenants of the Term Loan. There are no financial maintenance covenants on the Term Loan.

 

The Company’sOur credit agreements also provide for the $250.0$300.0 million Amended ABL Facility. The maturity date of the Amended ABL Facility, is May 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.matures on June 12, 2023. As of December 31, 2016,2019, there was $100.0were $31.0 million of borrowings outstanding under the Amended ABL Facility, and the Company is in compliance with all of its covenants.

At December 31, 2016, we had cash and cash equivalents of $67.3 million and $145.6$268.6 million of availability under our revolvingthe ABL credit facility,Facility, net of outstanding letters of credit. We were in compliance with all covenants of the ABL Facility as of December 31, 2019.

 

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 new $250.0 million stock repurchase program, which expired in the fourth quarter of 2018. In September 2018, the Board of Directors approved another stock repurchase program, which commenced in October 2018, and under which we may repurchase an additional $250.0 million of common stock over 24 months from time to time;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 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. ForDuring the year ended December 31, 2016,2019, no repurchases were made. Since the inception of all programs, we have repurchased 3,968,7068,676,706 shares of our common stock for $149.9$305.5 million and for the year ended December 31, 2015, the Company repurchased 3,303,500 shares(an average repurchase price of its common stock for $99.9 million,$35.21 per share), all funded with cash on hand.

Refer to Note 10, “Credit Agreements,” to the consolidated financial statements 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 availability under our Amended ABL Facility and other short-term lines of credit, combined with relatively low ongoing capital expenditure requirements andour 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 willmay 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, 20169 compared to year ended December 31, 20152018

 

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

 

		Year Ended December 31,																Year Ended December 31,
(U.S. Dollars in thousands)		2016				2015				Change				% Change				2019				2018				$ Change				% Change
Net cash provided by operating activities		$	253,409			$	188,619			$	64,790				34.3	%		$	308,887			$	247,227			$	61,660				24.9	%
Net cash used in investing activities			(105,822	)			(104,328	)			(1,494	)			1.4	%			(170,078	)			(108,894	)			(61,184	)			56.2	%
Net cash used in financing activities			(195,705	)			(154,483	)			(41,222	)			26.7	%			(41,918	)			(52,034	)			10,116				-19.4	%

 

The34.3% increase in net cash provided by operating activities was primarily driven by a reduction inthe monetization of previous working capital investment during the current year as compared to the larger investment that was incurred in the prior year,investments and an overall increase in operating earnings.earnings compared to prior year.

 

Net cash used in investing activities for the year ended December 31, 20162019 primarily representsrepresented cash payments of $76.7$112.0 million related to the acquisitionsacquisition of businesses and $30.5$60.8 million for the purchase of property and equipment. Net cash used in investing activities for the year ended December 31, 20152018 primarily representsconsisted of cash payments of $74.6$65.4 million related to the acquisition of CHPbusinesses and $30.7$47.6 million for the purchase of property and equipment.

 

Net cash used in financing activities for the year ended December 31, 20162019 primarily represents $149.9 million payments for the repurchaseconsisted of the Company’s common stock, $65.4$112.6 million of debt repayments ($37.653.1 million of long-term borrowings and $27.8$59.5 million of short-term borrowings) and $12.4, $6.4 million of taxes paid related to equity awards, and $5.5 million of contingent consideration for acquired businesses. These payments were partially offset by $75.0 million cash proceeds from borrowings ($73.3 million for short-term borrowings and $1.7 million for long-term borrowings) and $9.4 million of proceeds from the net settlementexercise of stock options.

Net cash used in financing activities for the year ended December 31, 2018 primarily consisted of $129.7 million of debt repayments ($101.8 million of long-term borrowings and $27.9 million of short-term borrowings), $25.7 million for the repurchase of our common stock, and $5.7 million of taxes paid related to equity awards. These payments were partially offset by $28.7$105.4 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 $99.954.0 million for the repurchase of its common stockshort-term borrowings and $13.0$51.4 million for the net share settlement of equity awards, which was partially offset by $9.6long-term borrowings) and $5.6 million of excess tax benefitsproceeds from equity awards.the exercise of stock options.

 

32

---

Table of Contents

Year ended December 31, 20152018 compared to year ended December 31, 20142017

 

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

 

		Year Ended December 31,																Year Ended December 31,
(U.S. Dollars in thousands)		2015				2014				Change				% Change				2018				2017				$ Change				% Change
Net cash provided by operating activities		$	188,619			$	252,986			$	(64,367	)			-25.4	%		$	247,227			$	257,322			$	(10,095	)			-3.9	%
Net cash used in investing activities			(104,328	)			(95,491	)			(8,837	)			9.3	%			(108,894	)			(28,128	)			(80,766	)			287.1	%
Net cash used in financing activities			(154,483	)			(116,023	)			(38,460	)			33.1	%			(52,034	)			(160,143	)			108,109				-67.5	%

 

The 25.4% decrease in netnet cash provided by operating activities was primarily attributable to lower operating earnings during the year ended December 31, 2015, along with higherdriven by increased working capital investment primarily due to a decrease in accounts payable,strong organic growth and incremental inventory purchases ahead of expected tariff changes, which was partially offset by lower cash tax payments.an increase in operating earnings.

 

Net cash used in investing activities for the year ended December 31, 2015 was2018 primarily related torepresented cash payments of $74.6$65.4 million related to the acquisition of CHPbusinesses and $30.7$47.6 million for the purchase of property and equipment. Net cash used in investing activities for the year ended December 31, 2014 was2017 primarily attributable toconsisted of 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 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.

Net cash used in financing activities for the year ended December 31, 20142018 primarily represents $120.4consisted of $129.7 million of debt repayments ($94.0101.8 million of long-term borrowings and $26.4$27.9 million of short-term borrowings);, $25.7 million for the repurchase of our common stock, and $5.7 million of taxes paid related to equity awards. These payments were partially offset by $6.6$105.4 million of cash proceeds from borrowings ($54.0 million for short-term borrowings and $51.4 million for long-term borrowings) and $5.6 million of proceeds from the exercise of stock options.

Net cash used in financing activities for the year ended December 31, 2017 primarily consisted of $232.4 million of debt repayments ($117.5 million of long-term borrowings and $114.9 million of short-term borrowings), $30.0 million for the repurchase of our common stock, $5.9 million of taxes paid related to equity awards and $3.9 million of payments for debt issuance costs. These payments were partially offset by $105.1 million cash proceeds from short-term borrowings. In addition, the Company paid $12.2borrowings ($102.0 million for the net share settlement of equity awards, which was partially offset by $11.0short-term borrowings and $3.1 million for long-term borrowings) and $7.0 million of excess tax benefitsproceeds from equity awards.the exercise of stock options.

 

Senior Secured Credit Facilities

 

Refer to Note 10,12, “Credit Agreements,” to the consolidated financial statements 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 Term Loan contains restrictions on the Company’s ability to pay distributions and dividends. Payments can be made 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 Term Loan 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 Term Loan 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 Term Loan does not contain any financial maintenance covenants.

 

The Term Loan 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 Term Loan). A bankruptcy or insolvency event of default will cause the obligations under the Term Loan to automatically become immediately due and payable.

 

TheAmended ABL Facility also contains covenants and events of default substantially similar to those in the Term Loan, as described above. 

33

---

Table of Contents

 

Contractual Obligations

 

The following table summarizes our expected paymentspayments for significant contractual obligations as of December 31, 2016:2019, using the interest rates in effect as of that date:

 

(U.S. Dollars in thousands)		Total				Less than 1 Year				2 - 3 Years				4 - 5 Years				After 5 Years				Total				Less than 1 Year				2 - 3 Years				4 - 5 Years				After 5 Years
Long-term debt, including curent portion (1)		$	1,043,753			$	14,399			$	320			$	100,034			$	929,000
Capital lease obligations, including current portion			4,647				566				1,064				1,034				1,983
Interest on long-term debt			212,971				36,369				67,782				64,176				44,644
Long-term debt, including current portion (1)																						$	832,236			$	553			$	1,683			$	-			$	830,000
Finance lease obligations, including current portion																							25,962				1,830				3,479				2,174				18,479
Interest on long-term debt and finance lease obligations																							218,085				30,479				60,539				60,336				66,731
Operating leases(2)			36,839				7,922				13,682				9,506				5,730				50,542				9,511				14,302				10,755				15,974
Total contractual cash obligations (2)		$	1,298,210			$	59,256			$	82,848			$	174,750			$	981,357			$	1,126,825			$	42,373			$	80,003			$	73,265			$	931,184

 

(1)The Term Loan provides for a $1.2 billion term loan B credit facility and includes a $300.0 million uncommitted incremental term loan facility. The Term Loan matures on May 31, 2023.December 13, 2026. The Amended ABL Facility provides for a $250.0$300.0 million senior secured ABL revolving credit facility, which matures on May 29, 2020.June 12, 2023. There was $100.0 millionno outstanding balance on the Amended ABL Facility classified as long-term as of December 31, 2016.2019.

 

(2) Pension obligations are excluded from this table as we are unable to estimate(2) Includes future cash disbursements for three leases entered into in December 2019 for which there is not a corresponding right of use asset or lease liability recorded in the timing of paymentConsolidated Balance Sheets for the year ended December 31, 2019, due to the inherent assumptions underlyingleases having a commencement date in 2020. Total payments to be made over the obligation. However,lease term for these three leases total $5.8 million.

In 2019, the Company estimates we will contribute $0.6 million to our pension plansterminated its domestic Pension Plan. In connection with the termination, all obligations were settled in 2017.the fourth quarter of 2019 through the purchase of annuities and lump sum distributions.

 

Capital Expenditures

 

Our operations require capital expenditures for technology, research & development, tooling, equipment, capacity expansion,, IT systems & infrastructure and upgrades. Capital expenditures were $30.5$60.8 million, $47.6 million and $30.7$33.3 million for the years ended December 31, 20162019, 2018 and 2015,2017, 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.company. 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%11% and 9%10% of net sales for the years ended December 31, 20162019 and 2015,2018, respectively. The amount financed by dealers which remained outstanding was $33.9$49.6 million and $32.4$47.2 million as of December 31, 20162019 and 2015,2018, 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 our supplemental information disclosures, of the Company, including information about contingencies, risk and financial condition. The Company believes,We believe, given current facts and circumstances, that itsour 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 makesWe make routine estimates and judgments in determining net realizable value of accounts receivable, inventories, property and equipment, prepaid expenses, product warranties and prepaid expenses.other reserves. Management believes the Company’sour 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 product warranty and other contingencies; income taxes and share based compensation.taxes.

 

Goodwill and Other Indefinite-Lived Intangible Assets

 

Refer to 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 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 2016, 20152019, 2018 and 2014,2017, 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 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.impairment.

 

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.

34

---

Table of Contents

In our October 31, 2019 impairment test calculation, the Latin America reporting unit had an estimated fair value that exceeded its carrying value by approximately 10%. The carrying value of the Latin America goodwill was $48.1 million. Key financial assumptions utilized to determine the fair value of the reporting unit includes revenue growth levels that reflect recovering end markets, an expanding customer and project pipeline, increased sales of service parts and service contracts, improving profit margins, a 3% terminal growth rate and an 11.1% discount rate. The reporting unit’s fair value would approximate its carrying value with a 100 basis point increase in the discount rate or a 100 basis point reduction in the sales continuous annual growth rate and terminal growth rate. As of the October 31, 2019 impairment test date, there was no other reporting unit with a carrying value that was at risk of exceeding its fair value.

 

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 decreaseadverse change in legal factors or in the demand for our products;business climate;

●

the inability to develop new and enhanced products and services inan adverse action or assessment by a timely manner;regulator;

●

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;

inability to effectively integrate acquired businesses;

●

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

●

●business divestitures.

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 Combinations and Purchase Accounting

 

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, earningsprofit margins, and forecasted cash flows based on the discount rate and terminal growth rate. SeeRefer to 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 Obligations

The Company’s pension benefit obligation and related pension expense or income are calculated in accordance with the 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. Such rates are evaluated on an annual basis considering factors including market interest rates and historical asset performance. Actuarial valuations for fiscal year 2016 used a discount rate of 4.14% for the salaried pension plan and 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. 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 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 $0.6 million in contributions to our pension plans in 2017.

Product Warranty Reserves and Other Contingencies

The reserves, if any, for product warranty, product liability, litigation and customer 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, 9, and 16 to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K.

 

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.

 

In assessing the realizability of the 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.

 

Refer to Note 13,15, “Income Taxes” to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K for further information on the Company’s income taxes.

 

Share Based Compensation

Under the fair value recognition provisions

35

---

Table 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.

Contents

New Accounting Standards

 

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

 

Item 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, 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 transactions denominated in currencies 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 twelve 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 onin the statements of comprehensive income.

 

The following is a summary of the forty-three foreign currency contracts outstanding as of December 31, 2016 (in2019 (notional amount in thousands):

 

Currency Denomination

Trade Dates

Effective Dates

Notional Amount

Expiration Dates

GBP

9/28/16

–

12/20/16

9/28/16

–

1/9/17

5,850

1/27/17

–

6/28/17

USD

9/26/16

–

12/19/16

9/26/16

–

12/19/16

7,950

1/13/17

–

6/30/17

Currency Denomination		Trade Dates		Effective Dates		Notional Amount		Expiration Date
GBP		11/11/19 - 12/16/19		11/11/19 - 12/16/19		$                     5,110		1/15/20 - 4/30/20
USD		10/24/19 - 12/16/19		10/24/19 - 12/16/19		$                     6,300		1/15/20 - 2/19/20
AUD		11/25/19 - 12/16/19		11/25/19 - 12/16/19		$                     4,800		1/29/20 - 2/19/20

 

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 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 to mitigate the impact of potential price fluctuations on our financial results. These derivatives typically have maturities of less than eighteen months. As of December 31, 2016,2019, we had the following commodity forward contract outstanding (in thousands):

Hedged Item	Trade Date	Effective Date		Notional Amount				Fixed Price (per LB)			Expiration Date
Copper	October 19, 2016	October 20, 2016		$	3,502			$	2.118		December 31, 2017

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

 

Interest Rates

 

As of December 31, 2016,2019, all of the outstanding debt under our Term Loan and ABL Facility was subject to floating interest rate risk. As of December 31, 2016,2019, we had the following interest rate swap contracts outstanding (in thousands)(notional amount in thousands of US dollars):

 

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

Hedged Item		Contract Date		Effective Date		Notional Amount		Fixed LIBOR Rate		Expiration Date
Interest Rate		June 19, 2017		July 1, 2019		125,000		1.9053%		July 1, 2020
Interest Rate		June 19, 2017		July 1, 2020		125,000		2.1263%		July 1, 2021
Interest Rate		June 19, 2017		July 1, 2021		125,000		2.2733%		July 1, 2022
Interest Rate		June 19, 2017		July 1, 2022		125,000		2.3673%		May 31, 2023
Interest Rate		June 30, 2017		July 1, 2019		125,000		1.9750%		July 1, 2020
Interest Rate		June 30, 2017		July 1, 2020		125,000		2.2062%		July 1, 2021
Interest Rate		June 30, 2017		July 1, 2021		125,000		2.3717%		July 1, 2022
Interest Rate		June 30, 2017		July 1, 2022		125,000		2.5000%		May 31, 2023
Interest Rate		August 9, 2017		July 1, 2019		125,000		1.8598%		July 1, 2020
Interest Rate		August 9, 2017		July 1, 2020		125,000		2.0740%		July 1, 2021
Interest Rate		August 9, 2017		July 1, 2021		125,000		2.2367%		July 1, 2022
Interest Rate		August 9, 2017		July 1, 2022		125,000		2.2948%		May 31, 2023
Interest Rate		August 30, 2017		July 1, 2019		125,000		1.7553%		July 1, 2020
Interest Rate		August 30, 2017		July 1, 2020		125,000		1.9737%		July 1, 2021
Interest Rate		August 30, 2017		July 1, 2021		125,000		2.1508%		July 1, 2022
Interest Rate		August 30, 2017		July 1, 2022		125,000		2.2998%		May 31, 2023

 

In conjunction with the December amendment to our term loan, we also amended the interest swaps to remove the LIBOR floor, which resulted in minor reductions to our future dated swap rates. At December 31, 2016,2019, the fair value of these interest rate swaps was a liability of $1.7$10.6 million. For additional information on the Company’s interest rate swaps, including amounts charged to the statement of comprehensive income during 2016, see Note 4, “Derivative Instruments and Hedging Activities,” and Note 5, “Accumulated Other Comprehensive Loss,” to our consolidated financial statements 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 Loan and ABL Facility that is 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 $6.3$4.0 million (or, without the swaps in place, $9.3$9.0 million) in 2016. The existence2019.

For additional information on the Company’s foreign currency and commodity forward contracts and interest rate swaps, including amounts charged to the statement of a 0.75% LIBOR floor provisioncomprehensive income during 2019, 2018, and 2017, refer to Note 5, “Derivative Instruments and Hedging Activities,” and Note 6, “Accumulated Other Comprehensive Loss,” to our consolidated financial statements in our Term Loan limits the impactItem 8 of a hypothetical 100 basis point change in LIBOR at current December 31, 2016 LIBOR rates.this Annual Report on Form 10-K.

 

36

---

Table of Contents

 

Item 8. Financial Statements and Supplementary Data

 

Report of Independent Registered Public Accounting Firm

 

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

Waukesha, WisconsinWI

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheetsheets of Generac Holdings Inc. and subsidiaries (the "Company""Company") as of December 31, 2016,2019 and 2018, the related consolidated statements of  comprehensive income, stockholders' equity, and cash flows, for each of the yearthree years in the period ended December 31, 2016. 2019, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 25, 2020, expressed an unqualified opinion on the Company's internal control over financial reporting.

Change in Accounting Principle

As discussed in Note 10 to the financial statements, effective January 1, 2019, the Company adopted FASB Accounting Standards Update 2016-02, Leases (Topic 842), using the modified retrospective approach.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidatedthe Company's financial statements based on our audit.audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audit audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. 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 includesmisstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the financial statements. An auditOur audits also includes assessingincluded evaluating 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 standardspresentation of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (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.

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,Critical Audit Matters

The critical audit matters communicated below are matters arising from the current-period audit of the financial statements referredthat were communicated or required to above present fairly,be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in all material respects,any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Acquisitions – Neurio and Pika –Intangible Assets — Refer to Note 3 to the consolidated financial positionstatements.

Critical Audit Matter Description

As discussed in Note 3 to the consolidated financial statements, on March 12, 2019, the Company acquired Neurio for a purchase price of Generac Holdings Inc. at December 31, 2015,$59.1 million. The Company accounted for the acquisition under the acquisition method of accounting for business combinations. Accordingly, the purchase price was allocated based on the estimates of the fair value of the acquired assets and assumed liabilities. As a result, the Company recorded approximately $58.8 million of intangible assets, including $17.9 million of goodwill as of the acquisition date.

On April 26, 2019, the Company acquired Pika for a purchase price of $49.1 million. The Company accounted for the acquisition under the acquisition method of accounting for business combinations. Accordingly, the purchase price was allocated based on the estimates of the fair value of the acquired assets and assumed liabilities. As a result, the Company recorded approximately $58.2 million of intangible assets, including $19.9 million of goodwill as of the acquisition date.

37

---

Table of Contents

For both acquisitions, acquired intangible assets, excluding goodwill, were valued using certain discounted cash flow methodologies based on future cash flows specific to the type of intangible asset purchased. This methodology incorporated various estimates and assumptions, the most significant being projected revenue growth rates, earnings margins, and forecasted cash flows based on a discount rate and terminal growth rate.

The principle consideration for our determination that the purchase accounting for these acquisitions is a critical audit matter is that there is a high degree of auditor effort, judgment and subjectivity involved in designing and performing procedures to evaluate the reasonableness of management’s estimates and assumptions related to the projected revenue growth rates, earnings margins and forecasted cash flows based on the discount rate and terminal growth rate.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the projected revenue growth rates, earnings margins, and forecasted cash flows and the consolidatedselection of the discount rate and terminal growth rate for the intangible assets included the following, among others:

●

We tested the effectiveness of controls over management’s process to estimate the fair value of the intangible assets, including those over projected revenue growth rates, earnings margins and forecasted cash flows based on the discount rate and terminal growth rate.

●

We assessed the reasonableness of management’s future cash flow projections and terminal growth rate by comparing the projections to historical results and relevant industry data.

●

With the assistance of our fair value specialists, we evaluated the reasonableness of the (1) valuation methodology and (2) discount rate selected, including testing the source information underlying the determination of the discount rate, testing the mathematical accuracy of the calculation, and developing a range of independent estimates and comparing those to the discount rate selected by management.

●

We evaluated whether the estimated future cash flows were consistent with evidence obtained in other areas of the audit, including impairment analyses and tax projections.

Goodwill – Refer to Note 9 to the financial statements.

Critical Audit Matter Description

The Company’s evaluation of goodwill for impairment involves the comparison of the fair value of each reporting unit to its carrying value. The Company’s estimate for each reporting unit is based on the present value of estimated future cash flows attributable to the respective reporting unit. This requires management to make significant estimates and assumptions including estimates of future growth rates and inflation rates and discount rates based on the estimated weighted average cost of capital for the business. Changes in the assumptions could have a significant impact on the fair value, which could result in an impairment charge. The Company performed their annual impairment assessment of its operations andreporting units as of October 31, 2019.  In the October 31, 2019 impairment test calculation, the Latin America reporting unit had an estimated fair value that exceeded its cash flows for eachcarrying value by approximately 10%. Because the estimated fair value exceeded the carrying value, no impairment was recorded.  The carrying value of the two yearsCompany’s Latin America reporting unit goodwill was approximately $48.1 million. Key financial assumptions utilized to determine the fair value of the reporting unit include revenue growth levels that reflect recovering end markets, an expanding customer and project pipeline, increased sales of service parts and service contracts, improving profit margins, a 3% terminal growth rate and an 11.1% discount rate.

The principle consideration for our determination that the evaluation of goodwill is a critical audit matter is that there is a high degree of auditor effort, judgment and subjectivity involved in designing and performing procedures to evaluate the reasonableness of management’s key financial assumptions utilized to determine the fair value of the Latin America reporting unit.

How the Critical Audit Matter Was Addressed in the period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles.Audit

Our audit procedures related to the forecasts of future revenue growth rates, improving profit margins, the terminal growth rate and the selection of the discount rate for the Latin America reporting unit included the following, among others:

●

Evaluated the design and effectiveness of the controls over management’s goodwill impairment evaluation, including those over the determination of the fair value of the reporting unit, such as controls related to management’s forecast and the selection of the discount rate.

●

Obtained the Company’s discounted cash flow model and evaluated the valuation analysis for mathematical accuracy.

●

Utilized fair value specialists to evaluate whether the valuation techniques applied by management were appropriate.

●

Assessed management’s historical ability to accurately forecast the Company’s results of operations.

●

Assessed management’s intent and/or ability to take specific actions included in the discounted cash flow model.

●

Evaluated the reasonableness of management’s forecasts by comparing the forecasts to (1) historical results, (2) internal communications to the Board of Directors, and (3) forecasted information included in industry reports.

●

Independently calculated a discount rate and compared it to the rate utilized by the Company.

 

/s/ ErnstDeloitte & YoungTouche LLP

 

Milwaukee, WIWisconsin

February 26, 2016 (except for Note 6, Segment Reporting, and Note 2, New Accounting Pronouncements, as to which the date is February 24, 2017)25, 2020

 

We have served as the Company’s auditor since 2016.

 

38

---

Table of Contents

  

Report of Independent Registered Public Accounting Firm

 

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

Waukesha, Wisconsin

 

Opinion on Internal Control over Financial Reporting

We have audited the internal control over financial reporting of Generac Holdings Inc. and its subsidiaries (the "Company"“Company”) as of December 31, 2016,2019, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2019, of the Company and our report dated February 25, 2020, expressed an unqualified opinion on those financial statements and included an explanatory paragraph regarding the Company's adoption of FASB Accounting Standards Update 2016-02, Leases (Topic 842), using the modified retrospective approach.

As described in Management’s Report on Internal Control Overover Financial Reporting, management excluded from its assessment the internal control over financial reporting at the PR Industrial business ("Pramac")Neurio Technology Inc. (Neurio), which was acquired onin March 1, 20162019, and Pika Energy, Inc (Pika), which was acquired in April 2019, and whose financial statements constitute 22.5%5.0% and 11.1%2.8% of net and total assets, respectively, 12.6%0.4% of revenues,net sales, and 0.7%(2.2)% of net income of the total consolidated financial statement amounts as of and for the year ended December 31, 2016.2019. Accordingly, our audit did not include the internal control over financial reporting at Pramac. Neurio and Pika.

Basis for Opinion

The Company'sCompany’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 over Financial Reporting. Our responsibility is to express an opinion on the Company'sCompany’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. 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.

Definition and Limitations of Internal Control over Financial Reporting

 

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 theits 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 be preventedprevent or detected on a timely basis.detect misstatements. 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.

 

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

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2016 and the related consolidated statement of comprehensive income, stockholders’ equity and cash flows for the year ended December 31, 2016 of Generac Holdings Inc. and our report dated February 24, 2017 expressed an unqualified opinion on those financial statements.

/s/ Deloitte & Touche LLP

 

Milwaukee, WIWisconsin

February 24, 201725, 2020

 

39

---

Table of Contents

 

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.

Generac Holdings Inc.

Consolidated Statements of Comprehensive Income

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

		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

See notes to consolidated financial statements.

Generac Holdings Inc.

Consolidated Statements of Stockholders' Equity

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

 

		December 31,
		2019				2018
Assets
Current assets:
Cash and cash equivalents		$	322,883			$	224,482
Accounts receivable, less allowance for doubtful accounts of $6,968 and $4,873 at December 31, 2019 and 2018, respectively			319,538				326,133
Inventories			522,024				544,750
Prepaid expenses and other assets			31,384				25,404
Total current assets			1,195,829				1,120,769
Property and equipment, net			316,976				278,929
Customer lists, net			55,552				61,194
Patents and technology, net			85,546				29,970
Other intangible assets, net			8,259				3,043
Tradenames, net			148,377				152,283
Goodwill			805,284				764,655
Deferred income taxes			2,933				163
Operating lease and other assets			46,913				15,308
Total assets		$	2,665,669			$	2,426,314
Liabilities and stockholders’ equity
Current liabilities:
Short-term borrowings		$	58,714			$	45,583
Accounts payable			261,977				328,091
Accrued wages and employee benefits			41,361				40,819
Other accrued liabilities			132,629				144,236
Current portion of long-term borrowings and finance lease obligations			2,383				1,977
Total current liabilities			497,064				560,706
Long-term borrowings and finance lease obligations			837,767				876,396
Deferred income taxes			96,328				71,300
Operating lease and other long-term liabilities			140,432				95,647
Total liabilities			1,571,591				1,604,049
Redeemable noncontrolling interest			61,227				61,004
Stockholders’ equity:
Common stock, par value $0.01, 500,000,000 shares authorized, 71,667,726 and 71,186,418 shares issued at December 31, 2019 and 2018, respectively			717				712
Additional paid-in capital			498,866				476,116
Treasury stock, at cost, 9,103,013 and 9,047,060 shares at December 31, 2019 and 2018, respectively			(324,551	)			(321,473	)
Excess purchase price over predecessor basis			(202,116	)			(202,116	)
Retained earnings			1,084,383				831,123
Accumulated other comprehensive loss			(24,917	)			(23,813	)
Stockholders’ equity attributable to Generac Holdings Inc.			1,032,382				760,549
Noncontrolling interests			469				712
Total stockholders’ equity			1,032,851				761,261
Total liabilities and stockholders’ equity		$	2,665,669			$	2,426,314

 

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.

40

---

Table of Contents

						Generac Holdings Inc.
Consolidated Statements of Comprehensive Income
(U.S. Dollars in Thousands, Except Share and Per Share Data)

		Year Ended December 31,
		2019				2018				2017
Net sales		$	2,204,336			$	2,023,464			$	1,679,373
Costs of goods sold			1,406,584				1,298,424				1,094,587
Gross profit			797,752				725,040				584,786
Operating expenses:
Selling and service			217,683				191,887				174,841
Research and development			68,394				50,019				42,869
General and administrative			110,868				103,841				87,581
Amortization of intangibles			28,644				22,112				28,861
Total operating expenses			425,589				367,859				334,152
Income from operations			372,163				357,181				250,634
Other (expense) income:
Interest expense			(41,544	)			(40,956	)			(42,667	)
Investment income			2,767				1,893				298
Loss on extinguishment of debt			(926	)			(1,332	)			–
Loss on pension settlement			(10,920	)			–				–
Other, net			(1,933	)			(5,710	)			(4,566	)
Total other expense, net			(52,556	)			(46,105	)			(46,935	)
Income before provision for income taxes			319,607				311,076				203,699
Provision for income taxes			67,299				69,856				44,142
Net income			252,308				241,220				159,557
Net income attributable to noncontrolling interests			301				2,963				1,749
Net income attributable to Generac Holdings Inc.		$	252,007			$	238,257			$	157,808
Other comprehensive income (loss):
Foreign currency translation adjustment		$	2,210			$	(5,976	)		$	15,191
Net unrealized gain (loss) on derivatives			(13,855	)			2,924				3,712
Pension liability adjustment			10,541				437				62
Other comprehensive income (loss)			(1,104	)			(2,615	)			18,965
Total comprehensive income			251,204				238,605				178,522
Comprehensive income (loss) attributable to noncontrolling interests			(635	)			1,647				5,549
Comprehensive income attributable to Generac Holdings Inc.		$	251,839			$	236,958			$	172,973
Net income attributable to common shareholders per common share - basic:		$	4.09			$	3.57			$	2.56
Weighted average common shares outstanding - basic:			61,926,986				61,662,031				62,040,704
Net income attributable to common shareholders per common share - diluted:		$	4.03			$	3.54			$	2.53
Weighted average common shares outstanding - diluted:			62,865,446				62,233,225				62,642,872

See notes to consolidated financial statements.

41

---

Table of Contents

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, 2016			70,261,481			$	702			$	449,049				(7,564,874	)		$	(262,402	)		$	(202,116	)		$	452,119			$	(40,163	)		$	397,189			$	(10	)		$	397,179
Change in noncontrolling interest share			–				–				(2,124	)			–				–				–				–				–				(2,124	)			184				(1,940	)
Unrealized gain on interest rate swaps, net of tax of $2,384			–				–				–				–				–				–				–				3,712				3,712				–				3,712
Foreign currency translation adjustment			–				–				–				–				–				–				–				15,191				15,191				(14	)			15,177
Common stock issued under equity incentive plans, net of shares withheld for employee taxes and strike price			558,692				6				2,686				–				–				–				–				–				2,692				–				2,692
Net share settlement of restricted stock awards			–				–				–				(39,500	)			(1,591	)			–				–				–				(1,591	)			–				(1,591	)
Stock repurchases			–				–				–				(844,500	)			(30,012	)			–				–				–				(30,012	)			–				(30,012	)
Share-based compensation			–				–				10,205				–				–				–				–				–				10,205				–				10,205
Pension liability adjustment, net of tax of $21			–				–				–				–				–				–				–				62				62				–				62
Redemption value adjustment			–				–				–				–				–				–				909				–				909				–				909
Net income			–				–				–				–				–				–				157,808				–				157,808				119				157,927
Balance at December 31, 2017			70,820,173			$	708			$	459,816				(8,448,874	)		$	(294,005	)		$	(202,116	)		$	610,836			$	(21,198	)		$	554,041			$	279			$	554,320
Unrealized gain on interest rate swaps, net of tax of $1,027			–				–				–				–				–				–				–				2,924				2,924				–				2,924
Foreign currency translation adjustment			–				–				–				–				–				–				–				(5,976	)			(5,976	)			(2	)			(5,978	)
Common stock issued under equity incentive plans, net of shares withheld for employee taxes and strike price			366,245				4				1,737				–				–				–				–				–				1,741				–				1,741
Net share settlement of restricted stock awards			–				–				��				(38,186	)			(1,812	)			–				–				–				(1,812	)			–				(1,812	)
Stock repurchases			–				–				–				(560,000	)			(25,656	)			–				–				–				(25,656	)			–				(25,656	)
Cash dividends paid to noncontrolling interest of subsidiary			–				–				–				–				–				–				–				–				–				(314	)			(314	)
Share-based compensation			–				–				14,563				–				–				–				–				–				14,563				–				14,563
Pension liability adjustment, net of tax of $154			–				–				–				–				–				–				–				437				437				–				437
Redemption value adjustment			–				–				–				–				–				–				(17,970	)			–				(17,970	)			–				(17,970	)
Net income			–				–				–				–				–				–				238,257				–				238,257				749				239,006
Balance at December 31, 2018			71,186,418			$	712			$	476,116				(9,047,060	)		$	(321,473	)		$	(202,116	)		$	831,123			$	(23,813	)		$	760,549			$	712			$	761,261
Change in noncontrolling interest share			–				–				–				–				–				–				–				–				–				(154	)			(154	)
Unrealized loss on interest rate swaps, net of tax of ($4,877)			–				–				–				–				–				–				–				(13,855	)			(13,855	)			–				(13,855	)
Foreign currency translation adjustment			–				–				–				–				–				–				–				2,210				2,210				(30	)			2,180
Common stock issued under equity incentive plans, net of shares withheld for employee taxes and strike price			481,308				5				6,056				–				–				–				–				–				6,061				–				6,061
Net share settlement of restricted stock awards			–				–				–				(55,953	)			(3,078	)			–				–				–				(3,078	)			–				(3,078	)
Cash dividends paid to noncontrolling interest of subsidiary			–				–				–				–				–				–				–				–				–				(285	)			(285	)
Share-based compensation			–				–				16,694				–				–				–				–				–				16,694				–				16,694
Pension liability adjustment and settlement, net of tax			–				–				–				–				–				–				–				10,541				10,541				–				10,541
Redemption value adjustment			–				–				–				–				–				–				1,253				–				1,253				–				1,253
Net income			–				–				–				–				–				–				252,007				–				252,007				226				252,233
Balance at December 31, 2019			71,667,726			$	717			$	498,866				(9,103,013	)		$	(324,551	)		$	(202,116	)		$	1,084,383			$	(24,917	)		$	1,032,382			$	469			$	1,032,851

See notes to consolidated financial statements.

42

---

Table of Contents

Generac Holdings Inc.

Consolidated Statements of Cash Flows

(U.S. Dollars in Thousands)

		Year Ended December 31,
		2019				2018				2017
Operating activities
Net income		$	252,308			$	241,220			$	159,557
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation			32,265				25,296				23,127
Amortization of intangible assets			28,644				22,112				28,861
Amortization of original issue discount and deferred financing costs			4,712				4,749				3,516
Loss on extinguishment of debt			926				1,332				–
Loss on pension settlement			10,920				–				–
Deferred income taxes			18,733				23,600				19,502
Share-based compensation expense			16,694				14,563				10,205
Other			1,086				2,474				410
Net changes in operating assets and liabilities, net of acquisitions:
Accounts receivable			8,231				(43,243	)			(32,857	)
Inventories			26,369				(152,594	)			(22,986	)
Other assets			(358	)			(6,362	)			(14,783	)
Accounts payable			(69,404	)			86,359				42,788
Accrued wages and employee benefits			(3,724	)			12,626				6,105
Other accrued liabilities			(16,252	)			16,972				37,029
Excess tax benefits from equity awards			(2,263	)			(1,877	)			(3,152	)
Net cash provided by operating activities			308,887				247,227				257,322
Investing activities
Proceeds from sale of property and equipment			95				214				82
Proceeds from beneficial interest in securitization transactions			2,630				3,933				3,794
Expenditures for property and equipment			(60,802	)			(47,601	)			(33,261	)
Acquisition of business, net of cash acquired			(112,001	)			(65,440	)			1,257
Net cash used in investing activities			(170,078	)			(108,894	)			(28,128	)
Financing activities
Proceeds from short-term borrowings			73,340				53,965				101,991
Proceeds from long-term borrowings			1,660				51,425				3,069
Repayments of short-term borrowings			(59,518	)			(27,880	)			(114,874	)
Repayments of long-term borrowings and finance lease obligations			(53,049	)			(101,827	)			(117,475	)
Stock repurchases			–				(25,656	)			(30,012	)
Payment of contingent acquisition consideration			(5,550	)			–				–
Payment of debt issuance costs			(1,473	)			(1,702	)			(3,901	)
Cash dividends paid to noncontrolling interest of subsidiary			(285	)			(314	)			–
Taxes paid related to equity awards			(6,438	)			(5,659	)			(5,892	)
Proceeds from the exercise of stock options			9,395				5,614				6,951
Net cash used in financing activities			(41,918	)			(52,034	)			(160,143	)
Effect of exchange rate changes on cash and cash equivalents			1,510				(289	)			2,149
Net increase in cash and cash equivalents			98,401				86,010				71,200
Cash and cash equivalents at beginning of period			224,482				138,472				67,272
Cash and cash equivalents at end of period		$	322,883			$	224,482			$	138,472
Supplemental disclosure of cash flow information
Cash paid during the period
Interest		$	35,465			$	41,007			$	41,105
Income taxes			61,767				41,044				23,836

See notes to consolidated financial statements.

 

43

---

Table of Contents

 

Generac Holdings Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 20169, 20158, and 20147

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

 

1.	Description of Business

 

Founded in 1959, Generac Holdings Inc. (the Company) is a leading global designer and manufacturer of a wide range of energy technology solutions. The Company provides power generation equipment, energy storage systems, and other engine poweredpower products serving the residential, light-commerciallight commercial and industrial markets. Generac’s power products and solutions are available globally through a broad network of independent dealers, distributors, retailers, e-commerce partners, wholesalers, and equipment rental companies, as well as sold direct to certain end user customers.

 

Over the years, the Company has executed a number of acquisitions that support ourits strategic plan (refer to Item 1 in this Annual Report on Form 10-K10-K for discussion of our Powering Ahead"Powering Our Future" strategic plan). A summary of these acquisitions includeaffecting the following:reporting periods presented include:

 

●

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

●

In December 2012, the 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.

●

In August 2013, the 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.

●

In November 2013, the 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, which expands the Company’s commercial and industrial product lines.

●

In September 2014, the 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. This acquisition expands Generac’s residential product portfolio in the portable generator category.

●

In October 2014, the Company acquired MAC, Inc. (MAC). MAC is a leading manufacturer of premium-grade commercial and industrial mobile heaters for the United States and 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.

●

In June 2018, the Company acquired Selmec Equipos Industriales, S.A. de C.V. (Selmec), headquartered in Mexico City, Mexico. Selmec is a designer and manufacturer of industrial generators ranging from 10kW to 2,750kW. Selmec offers a market-leading service platform and specialized engineering capabilities, together with robust integration, project management and remote monitoring services.

●

In February 2019, the Company acquired a majority share of Captiva Energy Solutions Private Limited (Captiva). Captiva, founded in 2010 and headquartered in Kolkata, India, specializes in customized industrial generators for the India market.

●

In March 2019, the Company acquired Neurio Technology Inc. (Neurio), founded in 2005 and headquartered in Vancouver, British Columbia. Neurio is a leading energy data company focused on metering technology and sophisticated analytics to optimize energy use within a home or business.

●

In April 2019, the Company acquired Pika Energy, Inc. (Pika), founded in 2010 and located in Westbrook, Maine. Pika is a designer and manufacturer of battery storage technologies that capture and store solar or grid power for homeowners and businesses, and is also a manufacturer of advanced power electronics, software and controls for smart energy storage and management.

 

2.	SignificantSummary of Accounting Policies

 

Principles of Consolidation

 

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

 

Cash and Cash Equivalents

 

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

 

Concentration of Credit Risk

 

The Company maintains the majority of its domestic 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.

 

44

---

Table of Contents

One customer accounted for approximately 9% and 11% of accounts receivable at December 31, 2016 2019 and 2015,2018, respectively. Noone customer accounted for greater than 7%5%, 7%6%, and 8%6%, of net sales during the years ended December 31, 2016, 2015,2019, 2018, or 2014,2017, 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.basis, and certain balances are protected by credit insurance.

 

Inventories

 

Inventories are stated at the lower of cost or market, with cost determined generally using the first-in, first-outfirst-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. Finance lease right of use assets are included in property and equipment. Refer to Note 10, "Leases," to the consolidated financial statements for the Company's lease disclosure.

 

Land improvements			15	–	20			8	–	20
Buildings and improvements			10	–	40			10	–	40
Machinery and equipment			3	–	10			3	–	15
Dies and tools			3	–	10			3	–	10
Vehicles			3	–	6			3	–	6
Office equipment and systems			3	–	15			3	–	15
Leasehold improvements			2	–	20			2	–	20

 

Total depreciation expense was $21,465, $16,742,$32,265, $25,296, and $13,706$23,127 for the years ended December 31, 2016, 2015,2019, 2018, and 2014,2017, respectively.

 

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 as 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 either a qualitative assessment to determineor quantitative test. The qualitative assessment determines 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 testingthe quantitative test 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 impairmentthe quantitative test. In the first step,quantitative test, the calculated 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. impaired. 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. Forexcess, limited to the total amount of goodwill allocated to that 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.

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.unit.

 

Other indefinite-lived intangible assets consist of certain tradenames. The Company tests the carrying value of these tradenames annually as of October 31, or more frequently when an event occurs or circumstances change that indicates the carrying value may not be recoverable, 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 tradename is the discounted cash flows of the amount that would be paid had the Company not owned the tradename and instead licensed the tradename from another company. The Company conducts its annual impairment test for indefinite-lived intangible assets as of October 31 of each year.

 

In the fourth quarter of 2015, theThe Company’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 performed the required annual impairment tests for goodwill and other indefinite-lived intangible assets for the fiscal year 2015. There can be years 2019,2018 and 2017, and found no assurance that future impairment tests will not result in a charge to earnings.impairment.

 

Impairment of Long-Lived Assets

 

The Company periodically evaluates the carrying value of long-lived assetsassets (excluding goodwill and 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.

 

45

---

Table of Contents

Debt Issuance Costs

 

Debt discounts and direct and incrementaldirect 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,$4,712, $4,749, and $6,615$3,516 of deferred financing costs and original issue discount were amortized to interest expense during fiscal years 2016, 20152019,2018 and 2014,2017, respectively. Excluding the impact of any future long-term debt issuances or prepayments, estimated amortization to interest expense for the next five years is as follows: 20172020 - $2,516; 2018$2,598;2021 - $4,314; 2019$2,640;2022 - $4,466; 2020$2,689;2023 - $4,420; 2021$2,579;2024 - $4,419.$2,508.

 

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

The Company’s revenues primarily consist of product sales to its customers. The Company considers the purchase orders, which in some cases are governed by master sales agreements, to be the contracts with the customers. For each contract, the Company considers the commitment to transfer products, each of which is distinct, to be the identified performance obligations. Revenue is measured as the amount of consideration the Company expects to be entitled in exchange for the transfer of product, which is generally the price stated in the contract specific for each item sold, adjusted for the value of expected returns, discounts, rebates, or other promotional incentives or allowances offered to our customers. Expected returns for damaged or defective product are estimated using the expected value method based upon historical product return experience. Discounts and rebates offered to customers are typically defined in the master sales agreements with customers and, therefore, are recorded using the most likely amount method based on the terms of the contract. Promotional incentives are defined programs offered for short, specific periods of time and are estimated using the expected value method based upon historical experience. The Company does not expect the transaction price for revenue recognized will be subject to a significant revenue reversal. As the Company’s product sale contracts and standard payment terms have a duration of less than one year, it uses the practical expedient applicable to such contracts and does not consider the time value of money. Sales, netuse, value add and other similar taxes assessed by governmental authorities and collected concurrent with revenue-producing activities are excluded from revenue. The Company has elected to recognize the cost for freight activities when control of estimated returns and allowances,the product has transferred to the customer as an expense within cost of goods sold in the consolidated statements of comprehensive income. Product revenues are recognized upon shipmentat the point in time when control of the product is transferred to the customer, which typically occurs upon shipment or delivery to the customer. To determine when control has transferred, the Company considers if there is generally whena present right to payment and if legal title, passes,physical possession, and the significant risks and rewards of ownership of the asset has transferred to the customer. As substantially all of the Company’s product revenues are recognized at a point in time, the amount of unsatisfied performance obligations at each period end is not material. The Company’s contracts have an original expected duration of one year or less. As a result, the Company has no further obligations, andelected to use the customer is requiredpractical expedient to pay subject to agreed upon payment terms. The Company, atnot disclose its remaining performance obligations.

At the request of certain customers, the Company 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 andproduct.

While the Company’s obligation to deliverstandard payment terms are less than one year, the goodsspecific payment terms and conditions in its customer contracts vary. In some cases, customers prepay for their goods; in other cases, after appropriate credit evaluation, an open credit line is completed. Customer advancesgranted and payment is due in arrears. Contracts with payment in arrears are includedrecognized in the consolidated balance sheets as accounts receivable upon revenue recognition, while contracts where customers pay in advance are recognized as customer deposits and recorded in other accrued liabilities in the consolidated balance sheets.sheets until revenue is recognized. The balance of customer deposits (contract liabilities) was $9,952 and $14,174 at December 31, 2019 and December 31, 2018, respectively. During the year ended December 31, 2019, the Company recognized revenue of $9,589 related to amounts included in the December 31, 2018 customer deposit balance. The Company typically recognizes revenue within one year of the receipt of the customer deposit.

46

---

Table of Contents

The Company offers standard warranty coverage on substantially all products that it sells and accounts for this standard warranty coverage as an assurance warranty. As such, no transaction price is allocated to the standard warranty, and the Company records a liability for product warranty obligations at the time of sale to a customer based upon historical warranty experience. Refer to Note 11, “Product Warranty Obligations,” to the consolidated financial statements for further information regarding the Company’s standard warranties.

 

The Company providesalso sells extended warranty coverage for certain estimated sales programs, discounts and incentive expensesproducts, which are recognizedit accounts for as service warranties. In most cases, the extended warranty is sold as a reduction of sales.

Shipping and Handling Costs

Shipping and handling costs billed to customersseparate contract. As such, extended warranty sales are included in net sales,considered a separate performance obligation, and the related costs are includedextended warranty transaction is separate and distinct from the product. The extended warranty transaction price is initially recorded as deferred revenue in cost of goods soldthe consolidated balance sheets and amortized on a straight-line basis to net sales in the consolidated statements of comprehensive income.income over the life of the contracts following the standard warranty period. For extended warranty contracts that the Company sells under a third-party marketing agreement, it is required to pay fees to the third-party service provider and classifies these fees as costs to obtain a contract. The contract costs are deferred and recorded as other assets in the consolidated balance sheets. The deferred contract costs are amortized to net sales in the consolidated statements of comprehensive income consistent with how the related deferred revenue is recognized. Refer to Note 11, “Product Warranty Obligations,” to the consolidated financial statements for further information regarding the Company’s extended warranties.

 

In addition to extended warranties, the Company offers other services, including remote monitoring, installation and maintenance services in limited circumstances. Total service revenues account for less than three percent of revenue during the year ended December 31, 2019.

Refer to Note 7, “Segment Reporting,” to the consolidated financial statements for the Company’s disaggregated revenue disclosure. The information discussed above is applicable to each of the Company’s product classes.

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. Expenditures for advertising production costs are expensed when the related advertisement is first run. Total expenditures for advertising were $45,488, $39,258,$44,153, $34,792, and $32,352$45,926 for the years ended December 31, 2016, 2015,2019, 2018, and 2014,2017, respectively.

 

Research and Development

 

The Company expenses research and development costs as incurred. Total expenditures incurred for research and development were $37,229, $32,922,$68,394, $50,019, and $31,494$42,869 for the years ended December 31, 2016, 20152019, 2018, and 2014,2017, respectively.

 

Foreign Currency Translation and Transactions

 

Balance sheet amounts for non-U.S. Dollar functional currency businesses are translated into U.S. Dollars at the rates of exchange in effect at the end of the fiscal year-end.year. 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) 820-10,ASC 820-10, Fair Value Measurement, 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 820-10820-10 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-tierthree-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows: (Level 1)1) observable inputs such as quoted prices in active markets; (Level 2)2) inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and (Level 3)3) unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

 

The Company believes the carrying amount of its financial instruments (cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, short-term borrowings and ABL facility borrowings), excluding Term Loan borrowings, approximates the fair value of these instruments based upon their short-term nature. The fair value of Term Loan borrowings, which have an aggregate carrying value of $903,673,$812,953, was approximately $904,780$833,092 (Level 2)2) at December 31, 2016, 2019, as calculated based on independent valuations whose inputs and significant value drivers are observable.

 

47

---

Table of Contents

For the fair value of the assets and liabilities measured on a recurring basis, seerefer to the fair value table in Note 4,5, “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 820-10.820-10.

 

Use of Estimates

 

The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the 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 onin 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. Refer to Item 7A of this Annual Report on Form 10-K for further information on the Company’s derivatives.

 

Stock-Based

Share-Based Compensation

 

Stock-basedShare-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. Refer to Note 17, “Share Plans,” to the consolidated financial statements for further information on the Company’s share-based compensation plans and accounting.

 

New Accounting Pronouncements

 

New Accounting Standards Not Yet Adopted

In May 2014, June 2016, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. This guidance is the culmination of the FASB’s joint project with the InternationalFinancial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13,Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which represents a new credit loss standard that will change the impairment model for most financial assets and certain other financial instruments. Specifically, this guidance will require entities to clarify the principlesutilize a new “expected loss” model as it relates to trade and other receivables. In addition, entities will be required to recognize an allowance for recognizing revenue. The core principalestimated credit losses on available-for-sale debt securities, regardless of the guidance islength of time that an entity should recognize revenue to depict the transfer of promised goods or services to customersa security has been in an amount that reflects the consideration to which the entity expects tounrealized loss position. This guidance will 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. ASU 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 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 standardannual reporting periods beginning after December 15, 2019, including interim periods within those annual reporting periods, and early adoption 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.permitted. The Company has not yet determined its method of adoption.

In February 2016,established a project plan and an implementation team to adopt and apply 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.new standard. The Company is currently assessingin the process of implementing necessary changes to accounting policies, processes, and controls to enable compliance with this new standard. The Company continues to evaluate the impact the adoption of this guidancestandard will have on its results of operationsconsolidated financial statements, 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,does not believe 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 guidancenew standard 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.material impact.

 

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.

 

Recently Adopted Accounting Standards

On January 1, 2019, the Company adopted ASU 2016-02,Leases(Topic 842). This guidance was issued to increase transparency and comparability among organizations by requiring the recognition of lease assets and lease liabilities in the balance sheet and by disclosing key information about leasing arrangements. The Company adopted this standard using the modified retrospective approach as of the date of adoption, meaning no prior period balances were impacted by the adoption. Additionally, the Company elected to adopt the standard using the package of practical expedients permitted under the standard’s transition guidance, which allowed the Company to carry forward its historical lease classifications, and embedded lease and initial direct cost assessments. The adoption of the standard had a material impact on the Company’s consolidated balance sheet primarily related to the recognition of right-of-use (ROU) assets and lease liabilities for operating leases. However, the adoption did not have a material impact on the consolidated statement of comprehensive income and statement of cash flows. Refer to Note 10, “Leases,” for further information regarding the Company’s leases.

48

---

Table of Contents

On January 1, 2019, the Company adopted ASU 2018-02,Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This guidance was issued to address the impact of the change in the U.S. federal corporate income tax rate from the 2017 U.S. Tax Cuts and Jobs Act (the “Tax Act”) on items recorded as a component of accumulated other comprehensive income (AOCI). This guidance allows companies to reclassify to retained earnings the stranded tax effects lodged in AOCI as a result of the Tax Act. Upon adoption of the ASU, the Company elected to not reclassify the stranded income tax effects from AOCI to retained earnings.

On January 1, 2019, the Company adopted ASU 2017-12,Derivatives and Hedging – Targeted Improvements to Accounting for Hedging Activities. This guidance was issued to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements and to make certain targeted improvements to simplify the application of the hedge accounting guidance. The adoption of this standard did not have an impact on the Company’s hedging strategies, and did not have a material impact on the Company’s results of operations and financial position.

On April 1, 2019, the Company adopted ASU 2018-15,Intangibles – Goodwill and Other – Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract. This guidance was issued to address the diversity in practice related to the accounting for costs of implementation activities performed in a cloud computing arrangement that is a service contract. The Company adopted this standard prospectively, impacting all implementation costs incurred after adoption. The adoption did not have a material impact on the Company’s results of operations and financial position.

3.	Acquisitions

 

Acquisition of PramacPika

On March 1, 2016, April 26, 2019, the Company acquired a 65% ownership interest in PramacPika 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.$49,068. 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 the 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 firstsecond quarter of 2016,2019, which was updatedtrued-up 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 20152019, based upon its estimates of the fair value of the acquired assets and assumed liabilities. As a result, the Company recorded approximately $81,726$58,196 of intangible assets, including approximately $30,076$19,896 of goodwill recorded in the Domestic segment, as of the acquisition date. The goodwill ascribed to the acquisition is not deductible for tax purposes. The accompanying consolidated financial statements include the results of Pika from the date of acquisition through December 31, 2019. The preliminary allocation of the purchase price is based on a preliminary valuation performed to determine the fair value of the net assets as of the acquisition date. The purchase price allocation was finalized inis subject to further analysis and review, primarily around the fourth quarterreview and final valuation of 2015, resulting in a $6,552 decrease to totalacquired 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.assets.

 

Acquisition of MACNeurio

 

On October 1, 2014, March 12, 2019, the Company acquired MACNeurio for a purchase price of $59,071, net of cash acquired and inclusive of $53,747. MAC is a leading manufacturerdeferred payment of premium-grade commercial and industrial mobile heaters within$7,922 which was made during the United States and Canada.third quarter of 2019. The acquisition purchase price was funded solely through cash on hand.

 

The Company recorded a preliminary purchase price allocation duringin the fourthsecond quarter of 20142019, which was trued-up in the fourth quarter of 2019, based upon its estimates of the fair value of the acquired assets and assumed liabilities. As a result, the Company recorded approximately $49,378$58,762 of intangible assets, including approximately $25,898$17,862 of goodwill recorded in the Domestic segment, as of the acquisition date. The purchase price allocation was finalized duringSubstantially all of the third quarter of 2015, resulting in a $4,229 decrease to totalgoodwill and other intangible assets including an increase of $2,481 to goodwill. The goodwill ascribed to this acquisition is notare deductible for tax purposes. The accompanying consolidated financial statements include the results of MACNeurio from the date of acquisition through December 31, 2016.2019. The preliminary allocation of the purchase price is based on a preliminary valuation performed to determine the fair value of the net assets as of the acquisition date. The purchase price allocation is subject to further analysis and review, primarily around the review and final valuation of acquired intangible assets.

 

Acquisition of Selmec

On June 1, 2018, the Company acquired Selmec for a purchase price of $79,972, net of cash acquired and inclusive of earnout payments of $14,902. Changes in the fair value of the earnout liability during 2019 of $(977), which included interest accretion of $2,740 and other fair value remeasurement adjustments of $(3,717), were recognized as a component of operating income in the Company’s consolidated statements of comprehensive income for the year ended December 31, 2019. The acquisition purchase price was funded solely through cash on hand.

49

---

Table of Contents

The Company finalized the Selmec purchase price allocation during the second quarter of 2019 based upon its estimates of the fair value of the acquired assets and assumed liabilities. The final purchase price allocation as of the June 1, 2018 opening balance sheet date was as follows:

		June 1, 2018
Accounts receivable		$	14,302
Inventories			8,000
Prepaid expense and other assets			4,323
Property and equipment			5,572
Intangible assets			33,631
Goodwill			46,196
Deferred income taxes			3,252
Other assets			597
Total assets acquired			115,873
Accounts payable			7,216
Accrued wages and employee benefits			397
Other accrued liabilities			13,671
Deferred income taxes			10,974
Other long-term liabilities			3,643
Net assets acquired		$	79,972

The goodwill ascribed to the acquisition is not deductible for tax purposes. The accompanying consolidated financial statements include the results of Selmec from the date of acquisition through December 31, 2019.

Pro Forma Information

 

The following unaudited pro forma information of the Company gives effect to theseall acquisitions as though the transactions had occurred on January 1, 2014:2017. Refer to Note 1, “Description of Business,” for further information on the acquisitions included in the table.

 

		Year Ended December 31,												Year Ended December 31,
		2016				2015				2014				2019				2018				2017
Net Sales:
As reported		$	1,444,453			$	1,317,299			$	1,460,919			$	2,204,336			$	2,023,464			$	1,679,373
Pro forma			1,473,799				1,556,459				1,776,843				2,206,952				2,067,737				1,755,358
Net income attributable to Generac Holdings Inc.:
As reported		$	98,788			$	77,747			$	174,613			$	252,007			$	238,257			$	157,808
Pro forma			100,907				78,618				174,926				248,335				230,379				151,764
Net income attributable to Generac Holdings Inc. per common share - diluted
As reported		$	1.50			$	1.12			$	2.49			$	4.03			$	3.54			$	2.53
Pro forma			1.53				1.14				2.49				3.97				3.41				2.44

 

This unaudited pro forma information is presented for informational purposes only and is not necessarily indicative of the results of operations that actually would have been achieved had the acquisitions beenbeen consummated on January 1, 2014.2017.

 

4.	Redeemable Noncontrolling Interest

On March 1, 2016, the Company acquired a 65% ownership interest in PR Industrial S.r.l. and its subsidiaries (Pramac). 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 the noncontrolling interest holder had within its control the right to require the Company to redeem its interest in Pramac. In February 2019, the Company amended its agreement with the noncontrolling interest holder of Pramac, extending the agreement by five years, allowing the Company to exercise its call option rights in partial increments at certain times during the five year period, and providing that the noncontrolling interest holder no longer holds the right to put its shares to the Company until April 1, 2021.

50

---

Table of Contents

On February 1, 2019, the Company acquired a 51% ownership interest in Captiva Energy Solutions, Ltd (Captiva). The 49% noncontrolling interest in Captiva has an acquisition date fair value of $3,165, and was recorded as a redeemable noncontrolling interest in the consolidated balance sheet, as the noncontrolling interest holder had within its control the right to require the Company to redeem its interest in Captiva. The noncontrolling interest holder has a put option to sell his interest to the Company any time after five years from the date of acquisition, or earlier upon the occurrence of certain circumstances. The put option price is based on a multiple of earnings, subject to the terms of the acquisition. Further, the Company has a call option that it may redeem any time after 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, subject to the terms of the acquisition.

For both transactions, the redeemable noncontrolling interest is recorded at the greater of the initial fair value, increased or decreased for the noncontrolling interests’ share of comprehensive income (loss), or the estimated redemption value, with any adjustments 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 14, “Earnings Per Share,” to the consolidated financial statements. The following table presents the changes in the redeemable noncontrolling interest:

		Year Ended December 31,
		2019				2018				2017
Balance at beginning of period		$	61,004			$	43,929			$	33,138
Noncontrolling interest			3,165		(1)		-				1,540		(2)
Net income			75				2,214				1,631
Foreign currency translation			(1,764	)			(3,109	)			8,529
Redemption value adjustment			(1,253	)			17,970				(909	)
Balance at end of period		$	61,227			$	61,004			$	43,929

(1) Represents the noncontrolling interest of Captiva Energy calculated at the date of acquisition, February 1, 2019.

(2) Represents the additional noncontrolling interest of Pramac resulting from a common control transaction between Generac Mobile Products S.r.l. and Pramac UK Limited legal entities.

5.	Derivative Instruments and Hedging Activities

 

Commodities

 

The Company is exposed to significant price fluctuations in commodities it uses as raw materials,including steel, copper and aluminum; and periodically utilizes commodity derivatives to mitigate the impact of these potential price fluctuations on its financial results and its economic well-being.results. These derivatives typically have maturities of less than eighteen months. At both December 31, 2016 2019 and 2015,2018, the Company had one nocommodity contract outstanding, covering the purchases of copper.contracts outstanding.

 

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 pre-tax gains (losses) recognized were $739, $(1,909)$(174), $(874), and $(629)$377 for the years ended December 31, 2016, 2015,2019, 2018, and 2014,2017, respectively.

Foreign Currencies

 

The Company is exposed to foreign currency exchange risk as a result of transactions denominated in currencies other 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. As of December 31, 2016 2019 and 2015,2018, the Company had thirty-eightforty-three and sixforty foreign currency contracts outstanding, respectively.

 

Because these contracts do not qualify for hedge accounting, the related gains and losses are recorded in cost of goods sold"other, net" in the Company’s consolidated statements of comprehensive income. Net lossespre-tax gains (losses) recognized for the years ended December 31, 2016, 20152019, 2018, and 20142017 were $385, $624$(1,195), $(653), and $149,$697, respectively.

 

51

---

Table of Contents

Interest Rate Swaps

 

In October 2013,In 2017, the Company entered into twotwenty interest rate swap agreements, and agreements. In December 2019, in May 2014,conjunction with the amendment to its term loan, the Company entered into an additionalamended those interest rate swaps to remove the LIBOR floor, which also resulted in minor reductions to the future dated swap agreement.fixed rates. 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 variousthese hedge transactions. These interest rate swap agreements qualify as cash flow hedges and accordingly,therefore, the effective portions of the gains or losses are reported as a component of accumulated other comprehensive loss (AOCL). in the consolidated balance sheets. The amount of gains (losses) recognized for the years ended December 31, 2019, 2018, and 2017 were $(13,855), $2,924, and $3,712, respectively. The cash flows of the swaps are recognized as adjustments to interest expense each period. The ineffective portions of the derivatives’ changes in fair value, if any, are immediately recognized in earnings.

 

Fair Value

 

The following table presents the fair value of the Company’sCompany’s derivatives:

 

		December 31, 2016				December 31, 2015				December 31, 2019				December 31, 2018
Commodity contracts		$	623			$	(400	)		$	6			$	(160	)
Foreign currency contracts			(150	)			(171	)			31				(117	)
Interest rate swaps			(1,739	)			(2,618	)			(10,425	)			8,307

 

The fair value of the commodity contract is included in other assets, the fair value of theand foreign currency contracts are included in prepaid expenses and other accrued liabilities,current assets, and the fair value of the interest rate swaps are included in other accrued liabilities and other long-term liabilities in the consolidated balance sheet as of December 31, 2016. 2019. 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 long-term liabilitiesassets in the consolidated balance sheet as of December 31, 2015. 2018. Excluding the impact of credit risk, the fair value of the derivative contracts as of December 31, 2016 2019 and 20152018 is a liability of $1,295$10,588 and $3,248,an asset of $8,220, respectively, which represents the amount the Company would need to pay toor receive upon exit of the agreements on those dates.

 

The amount of gains (losses) recognized in AOCL in the consolidated balance sheets on the effective portion of interest rate swaps designated as hedging instruments for the years ended December 31, 2016, 2015 and 2014 were $535, $(965) and $(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.

5.6.	Accumulated Other Comprehensive Loss

 

The following presents a tabular disclosure of changes in AOCL during the years ended December 31, 2016 2019 and 2015,2018, net of tax:

 

		Foreign Currency Translation Adjustments				Defined Benefit Pension Plan				Unrealized Gain (Loss) on Cash Flow Hedges				Total				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	)
Beginning Balance – January 1, 2019																		$	(18,832	)		$	(10,541	)		$	5,560			$	(23,813	)
Other comprehensive income (loss) before reclassifications			(18,545	)			(273	)			535				(18,283	)			2,210				1,474		(1)		(13,855	)	(2)		(10,171	)
Amounts reclassified from AOCL			-				595				-				595				-				9,067		(3)		-				9,067
Net current-period other comprehensive income (loss)			(18,545	)			322				535				(17,688	)			2,210				10,541				(13,855	)			(1,104	)
Ending Balance – December 31, 2016		$	(28,047	)		$	(11,040	)		$	(1,076	)		$	(40,163	)
Ending Balance – December 31, 2019																		$	(16,622	)		$	-			$	(8,295	)		$	(24,917	)

 

		Foreign Currency Translation Adjustments				Defined Benefit Pension Plan				Unrealized Loss on Cash Flow Hedges				Total				Foreign Currency Translation Adjustments				Defined Benefit Pension Plan				Unrealized Gain (Loss) on Cash Flow Hedges				Total
Beginning Balance – January 1, 2015		$	(1,878	)		$	(13,243	)		$	(646	)		$	(15,767	)
Beginning Balance – January 1, 2018																		$	(12,856	)		$	(10,978	)		$	2,636			$	(21,198	)
Other comprehensive income (loss) before reclassifications			(7,624	)			1,105				(965	)			(7,484	)			(5,976	)			(156	)	(4)		2,924		(5)		(3,208	)
Amounts reclassified from AOCL			-				776				-				776				-				593		(6)		-				593
Net current-period other comprehensive income (loss)			(7,624	)			1,881				(965	)			(6,708	)			(5,976	)			437				2,924				(2,615	)
Ending Balance – December 31, 2015		$	(9,502	)		$	(11,362	)		$	(1,611	)		$	(22,475	)
Ending Balance – December 31, 2018																		$	(18,832	)		$	(10,541	)		$	5,560			$	(23,813	)

 

(1)

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

(2)(1)

Represents unrealized unrecognized actuarial gains of $876,$1,992 net of tax effect of $(341) for the year ended December 31, 2016.

(3)

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

(4)

Represents unrecognized actuarial gains of $1,829, net of tax effect of $(724)$(518), included in the computation of net periodic pension cost for the year ended December 31, 2015. See2019. Refer to Note 14,16, “Benefit Plans,” to the consolidated financial statements for additional information.

(5)(2)

Represents unrealized losses of $(1,574)$(18,732), net of tax effect of $4,877 for the year ended December 31, 2019.

52

---

Table of Contents

(3)

Details of reclassifications from AOCL during 2019 are as follows:

		Amounts reclassified from AOCL
Loss on pension settlement		$	10,920
Amortization of net loss			843
Total before tax			11,763
Income tax impact			(2,696	)
Amounts reclassified from AOCL		$	9,067

(4)

Represents unrecognized actuarial losses of $(211), net of tax benefit of $609$55, included in the computation of net periodic pension cost for the year ended December 31, 2015.2018. Refer to Note 16, “Benefit Plans,” to the consolidated financial statements for additional information.

(6)(5)

Represents unrealized gains of $3,951, net of tax effect of $(1,027) for the year ended December 31, 2018.

(6)

Represents actuarial losses of $1,228,$802, net of tax effect of $(452)$(209), amortized to net periodic pension cost for the year ended December 31, 2015. See2018. Refer to Note 14,16, “Benefit Plans,” to the consolidated financial statements for additional information.

 

6.7.	Segment Reporting

 

Effective in the second quarter of 2016, theThe Company changed its segmenthas two reportable segments for financial reporting from one reportable segment to two reportable segmentspurposes – Domestic and International – as a result of the recent Pramac acquisition and the ongoing strategy to expand the business internationally.International. The Domestic segment includes the legacy Generac business, (excluding its traditional Latin American export operations), and the impact of acquisitions that are based in the United States,U.S. and Canada, all of which have revenues that are substantially derived from the U.S. and Canada. The International segment includes the legacy Generac business's Latin American export operations, and the Ottomotores, Tower Light, Pramac, Motortech and PramacSelmec acquisitions, all of which have revenues that are substantially derived from outside of the U.S and Canada. Both reportable segments design and manufacture a wide range of power generation equipment, energy technology solutions, and other engine poweredpower products. The Company has multiple operating segments, which it aggregates into the two reportable segments, based on materially similar economic characteristics, products, production processes, classes of customers, distribution methods and distribution methods. All segment information has been retrospectively applied to all periods presented to reflect the new reportable segment structure.regional considerations.

		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, energy technology solutions, and other engine poweredpower products geared for varying end customer uses. Residential products and commercial & industrial (C&I) products are each a similar class of products based on similar power output and end customer. The breakout of net sales between residential, commercial & industrial,C&I, and other products by product classreportable segment is as follows:

 

		Net Sales												Net Sales by Segment
		Year Ended December 31,												Year Ended December 31, 2019
Product Classes		2016				2015				2014				Domestic				International				Total
Residential products		$	772,436			$	673,764			$	722,206			$	1,086,019			$	57,704			$	1,143,723
Commercial & industrial products			557,532				548,440				652,216				513,482				358,113				871,595
Other			114,485				95,095				86,497				143,397				45,621				189,018
Total		$	1,444,453			$	1,317,299			$	1,460,919
Total net sales														$	1,742,898			$	461,438			$	2,204,336

		Year Ended December 31, 2018
Product Classes		Domestic				International				Total
Residential products		$	980,707			$	62,032			$	1,042,739
Commercial & industrial products			461,415				358,855				820,270
Other			124,398				36,057				160,455
Total net sales		$	1,566,520			$	456,944			$	2,023,464

		Year Ended December 31, 2017
Product Classes		Domestic				International				Total
Residential products		$	796,237			$	74,253			$	870,490
Commercial & industrial products			372,635				311,718				684,353
Other			102,806				21,724				124,530
Total net sales		$	1,271,678			$	407,695			$	1,679,373

53

---

Table of Contents

Residential products consist primarily of automatic home standby generators ranging in output from 6kW to 60kW, portable generators, energy storage and monitoring solutions, and other outdoor power equipment. These products are sold through independent residential dealers, national and regional retailers, e-commerce merchants, electrical/HVAC/solar wholesalers, solar installers, and outdoor power equipment dealers. The residential products revenue consists of the sale of the product to our distribution partners, which in turn sell or rent the product to the end consumer, including installation and maintenance services. In some cases, residential products are sold direct to the end consumer. Substantially all of the residential products revenues are transferred to the customer at a point in time.

C&I products consist of larger output stationary generators used in C&I applications and fueled by diesel, natural gas, liquid propane and bi-fuel, with power outputs ranging from 10kW up to 3,250kW. Also included in C&I products are mobile generators, light towers, mobile heaters and mobile pumps. These products are sold through industrial distributors and dealers, equipment rental companies and equipment distributors. The C&I products revenue consists of the sale of the product to our distribution partners, which in turn sell or rent the product to the end customer, including installation and maintenance services. In some cases, C&I products are sold direct to the end customer. Substantially all of the C&I products revenues are transferred to the customer at a point in time.

Other products consist primarily of aftermarket service parts and product accessories sold to our dealers, the amortization of extended warranty deferred revenue, and remote monitoring subscription revenue. The aftermarket service parts and product accessories are generally transferred to the customer at a point in time, while the extended warranty and subscription revenue are recognized over the life of the contract.

 

Management evaluates the performance of its segments based primarily on Adjusted EBITDA, 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

		Adjusted EBITDA
		Year Ended December 31,
		2019				2018				2017
Domestic		$	428,667			$	388,495			$	282,450
International			25,448				36,057				34,850
Total adjusted EBITDA		$	454,115			$	424,552			$	317,300
Interest expense			(41,544	)			(40,956	)			(42,667	)
Depreciation and amortization			(60,767	)			(47,408	)			(51,988	)
Non-cash write-down and other adjustments (1)			(240	)			(3,532	)			(2,923	)
Non-cash share-based compensation expense (2)			(16,694	)			(14,563	)			(10,205	)
Loss on extinguishment of debt (3)			(926	)			(1,332	)			-
Loss on pension settlement (4)			(10,920	)			-				-
Transaction costs and credit facility fees (5)			(2,724	)			(3,883	)			(2,145	)
Business optimization expenses (6)			(1,572	)			(952	)			(2,912	)
Other			879				(850	)			(761	)
Income before provision for income taxes		$	319,607			$	311,076			$	203,699

 

(1)(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.adjustments, gains/losses on disposal of assets and unrealized mark-to-market adjustments on commodity contracts.

(2)(2)

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

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

(3)(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 thenon-cash write-off of original issue discount and capitalized debt issuancedeferred financing costs due to a voluntary debt prepayments.prepayment of Term Loan debt.

(5)(4)

ForRepresents pre-tax settlement charges related to the year ended December 31, 2016, represents a non-cash loss termination of the Company’s domestic pension plan in the thirdfourth 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.2019.

(6)(5)

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

(7)(6)

Represents severance and other non-recurring restructuring charges relatingrelated to business optimization and restructuring costs.the consolidation of certain of our facilities.

54

---

Table of Contents

In the fourth quarter of 2019, management has determined that the Latin American export operations of the legacy Generac business (GPS LATAM) should have been included in the International reportable segment beginning in 2018. Previously, GPS LATAM was reported in the Domestic segment, in amounts that were not material. This change is to reflect the current leadership structure as well as how the Company makes financial decisions and allocates resources for the overall Latin America reporting unit. To reflect this change, management has chosen to correct the net sales and adjusted EBITDA by segment included in this Form 10-K for the years ended December 31, 2019, 2018, and 2017. The following table details the amounts adjusted from the Domestic segment to the International segment.

		Year Ended December 31,
		2019				2018				2017
Residential Products		$	7,129			$	9,924			$	18,888
Commercial & industrial products			5,724				2,651				12,940
Other			998				1,230				-
Total Net Sales		$	13,851			$	13,805			$	31,828
Adjusted EBITDA		$	984			$	190			$	7,840

There was no impact to the Company’s reporting of total assets, depreciation and amortization, and capital expenditures by segment as a result of this change.

 

The following tables summarize additional financial information by reportable segment:

 

		Assets												Assets
		Year Ended December 31,												Year Ended December 31,
		2016				2015				2014				2019				2018				2017
Domestic		$	1,521,665			$	1,605,043			$	1,672,336			$	2,123,251			$	1,868,554			$	1,612,607
International			340,019				173,592				192,083				542,418				557,760				413,358
Total		$	1,861,684			$	1,778,635			$	1,864,419			$	2,665,669			$	2,426,314			$	2,025,965

 

		Depreciation and Amortization												Depreciation and Amortization
		Year Ended December 31,												Year Ended December 31,
		2016				2015				2014				2019				2018				2017
Domestic		$	42,346			$	35,327			$	29,410			$	46,145			$	35,586			$	37,962
International			12,072				5,006				5,320				14,764				11,822				14,026
Total		$	54,418			$	40,333			$	34,730			$	60,909			$	47,408			$	51,988

 

		Capital Expenditures												Capital Expenditures
		Year Ended December 31,												Year Ended December 31,
		2016				2015				2014				2019				2018				2017
Domestic		$	26,936			$	29,368			$	33,976			$	36,007			$	38,242			$	29,258
International			3,531				1,283				713				24,795				9,359				4,003
Total		$	30,467			$	30,651			$	34,689			$	60,802			$	47,601			$	33,261

 

The Company’sCompany’s sales in the United States represent approximately 77%75%, 85%74%, and 84%74% of total sales for the years ended December 31, 2016, 20152019, 2018 and 2014,2017, respectively. Approximately 87% and 93%80% of the Company’s identifiable long-lived assets are located in the United States as of December 31, 2016 2019 and 2015, respectively.2018.

 

7.8.	Balance Sheet Details

 

Inventories consist of the following:

 

		December 31,								December 31,
		2016				2015				2019				2018
Raw material		$	218,911			$	179,769			$	328,021			$	348,980
Work-in-process			2,950				2,567				10,387				6,971
Finished goods			127,870				143,039				183,616				188,799
Total		$	349,731			$	325,375			$	522,024			$	544,750

 

55

---

Table of Contents

 

As of December 31, 2016 2019 and 2015,2018, inventories totaling $10,598$18,684 and $11,253,$8,488, respectively, were on consignment at customer locations.

 

Property and equipment consists of the following:

 

		December 31,								December 31,
		2016				2015				2019				2018
Land and improvements		$	12,079			$	8,553			$	18,252			$	15,975
Buildings and improvements			122,747				104,774				177,079				163,161
Machinery and equipment			81,687				72,280				117,114				103,726
Dies and tools			23,269				20,066				22,040				28,198
Vehicles			1,474				1,244				3,955				2,070
Office equipment and systems			66,929				29,395				99,124				82,638
Leasehold improvements			2,319				3,338				4,293				2,137
Construction in progress			8,654				30,482				36,299				26,543
Gross property and equipment			319,158				270,132				478,156				424,448
Accumulated depreciation			(106,365	)			(85,919	)			(161,180	)			(145,519	)
Total		$	212,793			$	184,213			$	316,976			$	278,929

 

Total property and equipment included finance leases of $20,158 at December 31, 2018, primarily made up of buildings and improvements. Amortization of finance lease right of use assets is recorded within depreciation expense in the consolidated statements of comprehensive income. The initial measurement of new finance lease right of use assets is accounted for as a non-cash item in the consolidated statement of cash flows. Refer to Note 10, “Leases,” for further information regarding the Company’s accounting for leases under ASC 842,Leases, in 2019.

8.9.	Goodwill and Intangible Assets

 

The changes in the carrying amount of goodwill by reportable segment for the years ended December 31, 2016 2019 and 20152018 are as follows:

 

		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

		Domestic				International				Total
Balance at December 31, 2017		$	621,451			$	100,072			$	721,523
Acquisitions of businesses, net			-				46,788				46,788
Foreign currency translation			-				(3,656	)			(3,656	)
Balance at December 31, 2018			621,451				143,204				764,655
Acquisitions of businesses, net			37,758				3,078				40,836
Foreign currency translation			-				(207	)			(207	)
Balance at December 31, 2019		$	659,209			$	146,075			$	805,284

 

The details of the gross goodwill allocatedRefer 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.

The details of the gross goodwill applicable to each reportable segment at December 31, 2019 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.2018 are as follows:

		Year Ended December 31, 2019												Year Ended December 31, 2018
		Gross				Accumulated Impairment				Net				Gross				Accumulated Impairment				Net
Domestic		$	1,162,402			$	(503,193	)		$	659,209			$	1,124,644			$	(503,193	)		$	621,451
International			150,686				(4,611	)			146,075				147,815				(4,611	)			143,204
Total		$	1,313,088			$	(507,804	)		$	805,284			$	1,272,459			$	(507,804	)		$	764,655

 

56

---

Table of Contents

 

The following table summarizes intangible assets by major category as of DecemberDecember 31, 2016 2019 and 2015:2018:

 

		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, 2015.

		Weighted Average				December 31, 2019												December 31, 2018
		Amortization Years				Gross				Accumulated Amortization				Net Book Value				Gross				Accumulated Amortization				Net Book Value
Finite-lived intangible assets:
Tradenames			9			$	56,669			$	(36,613	)		$	20,056			$	56,378			$	(32,416	)		$	23,962
Customer lists			12				369,932				(314,380	)			55,552				368,343				(307,149	)			61,194
Patents			13				131,086				(110,554	)			20,532				131,030				(101,060	)			29,970
Developed technology			9				82,886				(17,872	)			65,014				13,169				(12,058	)			1,111
Software			-				1,046				(1,046	)			-				1,046				(1,046	)			-
Non-compete/other			4				12,063				(3,804	)			8,259				3,829				(1,897	)			1,932
Total finite-lived intangible assets						$	653,682			$	(484,269	)		$	169,413			$	573,795			$	(455,626	)		$	118,169
Indefinite-lived tradenames							128,321				-				128,321				128,321				-				128,321
Total intangible assets						$	782,003			$	(484,269	)		$	297,734			$	702,116			$	(455,626	)		$	246,490

 

Amortization of intangible assets was $32,953, $23,591$28,644, $22,112 and $21,024$28,861 in 2016, 20152019,2018 and 2014,2017, respectively. Excluding the impact of any future acquisitions, the Company estimates amortization expense for the next five years will be as follows: 20172020 - $27,856;$31,237;2021 - $29,473;2022 - $22,226;2023 - $18,344;2024 - $16,156.

10.

Leases

The Company determines if an arrangement is or contains a lease at contract inception. The Company recognizes a right of use (“ROU”) asset and lease liability at the lease commencement date based on the present value of the lease payments over the lease term. As the Company’s leases generally do not provide an implicit rate, the incremental borrowing rate is used to determine the present value of lease payments. The incremental borrowing rate is a collateralized rate determined based on the lease term, the Company’s credit rating, and other market information available at the commencement date. The ROU asset also includes any lease payments made prior to the commencement date and is reduced by any lease incentives. The lease term may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for operating leases is recognized on a straight-line basis over the lease term, while lease expense for finance leases is recognized as depreciation and interest expense using the effective interest method. The Company’s variable lease expense generally consists of property tax and insurance payments that are variable in nature, however, these amounts are immaterial to the consolidated financial statements.

The Company has lease agreements with both lease and nonlease components, which it elected to account for as a single lease component. However, the Company did not elect to apply the recognition exception for short-term leases. The Company is applying these elections to all asset classes.

The Company leases certain manufacturing facilities, distribution centers, office space, warehouses, automobiles, machinery and computer equipment globally under both finance and operating leases. The Company’s leases have remaining lease terms of up to 20 years, of which certain leases, primarily within the buildings and improvements asset class, include options to extend the leases for up to 10 additional years. Further, the Company leases certain buildings from a noncontrolling interest holder, which the Company has determined to be arms’ length transactions.

The Company is a lessor of one building that it leases to a third party. The lease income related to this arrangement is not material to the consolidated financial statements.

The Company records its operating lease cost and amortization of finance lease ROU assets within cost of goods sold or operating expenses in the consolidated statements of comprehensive income depending on the cost center of the underlying asset. The Company records its finance lease interest cost within interest expense in the consolidated statements of comprehensive income.

57

---

Table of Contents

The components of total lease cost consist of the following:

		Twelve Months Ended December 31, 2019
Operating lease cost		$	9,647
Finance lease cost:
Amortization of ROU assets			2,531
Interest on lease liabilities			2,227
Total lease cost		$	14,405

Prior to the adoption of ASC 842, lease expense consisted of payments on operating leases. Total rent expense related to operating leases for the years ended December 31, 2018 - $19,511;and 2017 was approximately $10,739 and $10,845, respectively.

As of January 1, 2019, the date of the adoption of ASU 2016- $17,816; 2020 - $17,743; 2021 - $15,958.02, the Company recognized ROU assets and lease liabilities related to operating leases of $42,024 and $42,056, respectively, and there was 0 cumulative effect adjustment made to retained earnings. Supplemental balance sheet information related to the Company’s leases is as follows:

		December 31, 2019
Operating Leases
Operating lease ROU assets (1)		$	35,950
Operating lease liabilities - current (2)		$	7,231
Operating lease liabilities - noncurrent (3)			29,778
Total operating lease liabilities		$	37,009
Finance Leases
Finance lease ROU assets, gross		$	29,142
Accumulated depreciation - finance lease ROU assets			(3,079	)
Finance lease ROU assets, net (4)		$	26,063
Finance lease liabilities - current (5)		$	1,830
Finance lease liabilities - noncurrent (6)			24,132
Total finance lease liabilities		$	25,962

(1)

Recorded in the operating lease and other assets line within the consolidated balance sheets

(2)

Recorded in the other accrued liabilities line within the consolidated balance sheets

(3)

Recorded in the operating lease and other long-term liabilities line within the consolidated balance sheets

(4)

Recorded in the property and equipment, net line within the consolidated balance sheets

(5)

Recorded in the current portion of long-term borrowings and finance lease obligations line within the consolidated balance sheets

(6)

Recorded in the long-term borrowings and finance lease obligations line within the consolidated balance sheets

Supplemental cash flow information related to the Company’s leases is as follows:

		Three Months Ended December 31, 2019				Twelve Months Ended December 31, 2019
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases		$	2,174			$	10,125
Operating cash flows from finance leases			471				1,864
Financing cash flows from finance leases			976				3,237
ROU assets obtained in exchange for lease liabilities
Operating leases			239				4,021
Finance leases			632				8,797

58

---

Table of Contents

Weighted average remaining lease term and discount rate information related to the Company’s leases is as follows:

 

		December 31, 2019
9.Weighted average remaining lease term (in years)
Operating Leases			6.90
Finance Leases			13.87
Weighted average discount rate
Operating Leases			4.59	%
Finance Leases			7.83	%

The maturities of the Company’s lease liabilities are as follows:

		As of December 31, 2019
		Finance Leases				Operating Leases
2020		$	3,769			$	9,086
2021			3,352				7,029
2022			3,536				5,472
2023			2,659				4,629
2024			2,650				4,288
After 2024			29,371				14,232
Total minimum lease payments			45,337				44,736
Interest component			(19,375	)			(7,727	)
Present value of minimum lease payments		$	25,962			$	37,009

11.	Product Warranty Obligations

 

The Company records a liability for standard product warranty obligations accounted for as assurance warranties 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. The following is a tabular reconciliation of the Company’s standard product warranty liability accounted for as an assurance warranty:

		Year Ended December 31,
		2019				2018				2017
Balance at beginning of period		$	41,785			$	35,422			$	31,695
Product warranty reserve assumed in acquisition			1,062				-				43
Payments			(26,096	)			(20,029	)			(18,861	)
Provision for warranty issued			32,060				26,910				21,347
Changes in estimates for pre-existing warranties			505				(518	)			1,198
Balance at end of period		$	49,316			$	41,785			$	35,422

Additionally, the Company sells extended warranty coverage for certain products.products, which it accounts for as a service warranty. The sales of extended warranties are recorded as deferred revenue, which is recognized over the lifeand typically have a duration of the contracts.

five to ten years. 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,
		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

coverage is amortized over the duration of the extended warranty contract period, following the standard warranty period, using the straight-line method. The Company believes the straight-line method is appropriate because the performance obligation is satisfied based on the passage of time. The amortization of deferred revenue is recorded to net sales in the consolidated statements of comprehensive income. The following is a tabular reconciliation of the deferred revenue related to extended warranty coverage:coverage:

 

		Year Ended December 31,												Year Ended December 31,
		2016				2015				2014				2019				2018				2017
Balance at beginning of period		$	28,961			$	27,193			$	23,092			$	68,340			$	57,854			$	36,139
Deferred revenue contracts assumed in acquisition			-				291				-
Deferred revenue contracts issued			7,733				5,978				7,343				24,483				21,440				29,262
Amortization of deferred revenue contracts			(5,614	)			(4,501	)			(3,242	)			(14,085	)			(10,954	)			(7,547	)
Balance at end of period		$	31,080			$	28,961			$	27,193			$	78,738			$	68,340			$	57,854

 

59

---

Table of Contents

 

Product

The timing of recognition of the Company’s deferred revenue balance related to extended warranties at December 31, 2019 is as follows:

2020		$	15,535
2021			16,798
2022			14,705
2023			11,367
After 2023			20,333
Total		$	78,738

In 2017, the Company launched a post-sale extended warranty marketing program with a third party. In the program’s agreement, the Company is required to pay fees to the third-party service provider based on the number of extended warranty contracts that they sell, which it classifies as costs to obtain a contract. The contract costs are deferred and recorded as other assets in the consolidated balance sheets. The deferred contract costs are amortized to net sales in the consolidated statements of comprehensive income over the same period that the underlying deferred revenue is recognized. The balance of deferred contract costs as of December 31, 2019 and 2018 was $6,190 and $4,782, respectively. Amortization of deferred contract costs recorded during the years ended December 31, 2019, 2018 and 2017 was $869, $615 and $193, respectively.

Standard product warranty obligations and extended warranty related deferred revenues are included in the consolidated balance sheets as follows:

 

		December 31,								December 31,
		2016				2015				2019				2018
Product warranty liability
Current portion - other accrued liabilities		$	20,763			$	21,726			$	27,885			$	25,396
Long-term portion - other long-term liabilities			10,932				8,471				21,431				16,389
Total		$	31,695			$	30,197			$	49,316			$	41,785
Deferred revenue related to extended warranties
Current portion - other accrued liabilities		$	6,728			$	6,026			$	15,519			$	13,646
Long-term portion - other long-term liabilities			24,352				22,935				63,219				54,694
Total		$	31,080			$	28,961			$	78,738			$	68,340

 

10.12.

Credit Agreements

 

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

 

		December 31,								December 31,
		2016				2015				2019				2018
ABL facility		$	-			$	-			$	30,961			$	18,459
Other lines of credit			31,198				8,594				27,753				27,124
Total		$	31,198			$	8,594			$	58,714			$	45,583

 

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

 

		December 31,								December 31,
		2016				2015				2019				2018
Term loan		$	929,000			$	954,000			$	830,000			$	879,000
Original issue discount and deferred financing costs			(26,677	)			(29,905	)			(18,048	)			(22,440	)
ABL facility			100,000				100,000				-				-
Capital lease obligation			4,647				1,694
Finance lease obligation											25,962				20,171
Other			14,753				12,000				2,236				1,642
Total			1,021,723				1,037,789				840,150				878,373
Less: current portion of debt			14,399				500				553				1,075
Less: current portion of capital lease obligation			566				157
Less: current portion of finance lease obligation											1,830				902
Total		$	1,006,758			$	1,037,132			$	837,767			$	876,396

 

60

---

Table of Contents

Maturities of long-term borrowings outstanding at December 31, 2016,2019, excluding finance lease obligations as their maturities are disclosed in Note 10, “Leases,” and before considering original issue discount and deferred financing costs, are as follows:

 

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

2020		$	553
2021			1,683
2022			-
2023			-
After 2023			830,000
Total		$	832,236

 

The Company’s credit agreements originally provided for a $1,200,000 term loan B credit facility (Term Loan) and currently include a $300,000 uncommitted incremental term loan facility. In November 2016,The maturity date of the Company amended its Term Loan to extend the maturity date from May 31, 2020 to May 31, 2023. is currently December 13, 2026. The Term Loan is guaranteed by all of the Company’s wholly-owned domestic restricted subsidiaries, and is secured by associated collateral agreements which pledge a first priority lien on virtually all of the Company’s assets, including fixed assets and intangibles, other than all cash, trade accounts receivable, inventory, and other current assets and proceeds thereof, which are secured by a second priority lien. The 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 quarterly period thereafter, the applicable margin related to base rate loans iswas reduced to 1.50% and the applicable margin related to LIBOR rate loans iswas reduced to 2.50%, in each case, if the Company’s net debt leverage ratio, as defined in the Term Loan, fallsfell below 3.00 to 1.00 for that measurement period.

 

Because In May 2017, the Company’s amended its Term Loan, modifying the pricing of the facility by reducing the applicable margin rates to base rate plus a fixed applicable margin of 1.25% or adjusted LIBOR rate plus a fixed applicable margin of 2.25%. Further, the amendment removed the pricing grid that would reduce the applicable margin if a net debt leverage ratio was belowof 3.00 to 1.00 on April 1, 2014, it realized a 25 basis point reduction in borrowing costs in the second quarter of 2014. was achieved. As a result, the Company recorded a cumulativedoes not anticipate any future 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, 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 and as a gain on changegains or losses resulting from changes in contractual interest raterates to be recorded in the consolidated statements of comprehensive income.

BecauseAt the Company’s net debt leverage ratiotime, the amended Term Loan pricing was above 3.00still subject 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 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.

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, 2016 was above 3.00 to 1.00.

In May 2015, the Company amended certain provisions and covenants of the Term Loan.0.75% LIBOR floor. In connection with this amendment and in accordance with ASC 470-50,470-50, Debt Modifications and Extinguishments, the Company capitalized $1,528$1,432 of fees paid to creditors as deferred financing costs on long-term borrowings and expensed $85 of transaction fees in the second quarter of 2017.

In December 2017, the Company amended the Term Loan, which further reduced the applicable margin rates to base rate plus a fixed applicable margin of 1.00% or adjusted LIBOR rate plus a fixed applicable margin of 2.00%. Additionally, the amendment eliminated the Excess Cash Flow payment requirement for 2017, and will eliminate future requirements if the Company’s secured leverage ratio is maintained below 3.75 to 1.00 times. In connection with this amendment and in accordance with ASC 470-50, the Company capitalized $2,346 of fees paid to creditors as original issue discount and deferred financing costs on long-term borrowings and expensed $49$38 of transaction fees in the secondfourth quarter of 2015.2017.

 

In November 2016, June 2018, the Company amended the Term Loan, which further reduced the applicable margin rates to base rate plus a fixed applicable margin of 0.75% or adjusted LIBOR rate plus a fixed applicable margin of 1.75%. In connection with this amendment and in accordance with ASC 470-50, the Company capitalized $829 of fees paid to creditors as deferred financing costs on long-term borrowings and expensed $118 of transaction fees in the second quarter of 2018.

In December 2019, the Company amended its Term Loan to extend the maturity date from May 31, 2020 2023 to May 31, 2023.December 13, 2026, as well as removed the LIBOR floor of 0.75% from the adjusted LIBOR rate. In connection with this amendment and in accordance with ASC 470-50, Debt Modifications and Extinguishments,470-50, the Company capitalized $4,242$1,247 of fees paid to creditors as original issue discountdeferred financing costs on long-term borrowings and expensed $315$432 of transaction fees in the fourth quarter of 2016.2019. Additionally, the Company made a voluntary prepayment of $49,000 on the term loan, which resulted in the write-off of $926 of original issue discount and capitalized debt issuance costs as a loss on extinguishment of debt in the consolidated statements of comprehensive income.   

The Term Loan does not require an Excess Cash Flow payment if the Company’s net secured leverage ratio is maintained below 3.75 to 1.00 times. As of December 31, 2016,2019, the Company’s net secured leverage ratio was 1.50 to 1.00 times, and the Company iswas in compliance with all covenants of the Term Loan. There are no financial maintenance covenants on the Term Loan.

 

TheThe Company’s credit agreements also originally provided for a $150,000 senior secured ABL revolving credit facility (ABL Facility). The maturity date of the ABL Facility originally was May 31, 2018. is currently June 12, 2023. Borrowings under the ABL Facility are guaranteed by all of the Company’s wholly-owned domestic restricted subsidiaries, 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 Company and certain domestic subsidiaries. ABL Facility 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.

 

61

---

Table of Contents

In May 2015,

In June 2018, the Company amended itsthe ABL Facility. The amendment (i) increasedFacility; increasing it from $250,000 to $300,000 and extending the maturity date to June 12, 2023. In addition, the ABL Facility from $150,000amendment modified the pricing by reducing certain applicable interest rates to $250,000 (Amended ABL Facility), (ii) extended the maturity date from May 31, 2018 to May 29, 2020, (iii) increased the uncommitted incremental facility from $50,000 to $100,000, (iv) reduced the interesteither a base 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)plus an applicable margin of 0.375% or an adjusted LIBOR rate plus an applicable margin of 1.375%. In connection with this amendment and in accordance with ASC 470-50,470-50, the Company capitalized $540$755 of new debt issuance costs as deferred financing costs on long-term borrowings and wrote-off $34 of capitalized debt issuance costs as a loss on extinguishment of debt in 2015.the second quarter of 2018.

 

In May 2015, In June 2018, the Company borrowed $100,000$50,000 under the Amended ABL Facility, the proceeds of which were used as a voluntary prepayment towards the Term Loan. As of December 31, 2016, there was $100,000 outstanding under the Amended ABL Facility, leaving $145,593 of availability, net of outstanding letters of credit.

In April, September and December 2014, the Company made voluntary prepayments of the 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 Term Loan. As a result of the prepayments,prepayment of the Term Loan, the Company wrote off $2,084wrote-off $1,298 of original issue discount and capitalized debt issuance costs during the year ended December 31, 2014second quarter of 2018 as a loss on extinguishment of debt in the consolidated statementstatements of comprehensive income.

In March and May 2015, In October 2018, the Company made voluntary prepayments ofrepaid 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 lossoutstanding ABL Facility balance with cash on extinguishment of debt in the consolidated statement of comprehensive income.

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.hand.

 

As of December 31, 2016 and 2019, there was $30,961 outstanding under the ABL Facility, leaving $268,608 of availability, net of outstanding letters of credit.

As of December 31, 2015, 2019 and December 31, 2018, short-term borrowings consisted primarily of borrowings by ourthe Company’s foreign subsidiaries on local lines of credit and the ABL Facility, which totaled $31,198$58,714 and $8,594,$45,583, respectively.

 

11.13.

Stock Repurchase ProgramPrograms

 

In In August 2015, the Company’s Board of Directors approved a $200,000 stock repurchase program. Under the program, which 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.

In In October 2016, the Company’s Board of Directors approved a new $250,000 stock repurchase program. Underprogram, which expired in the fourth quarter of 2018. In September 2018, the Company’s Board of Directors approved another stock repurchase program, which commenced in October 2018, and under which 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 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 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. ForDuring the year ended December 31, 2016,2019, the Company did not repurchase any shares of its common stock. During the years ended December 31, 2018 and 2017, the Company repurchased 3,968,706560,000 and 844,500 shares of its common stock, respectively, for $25,656 and $30,012, respectively, all funded with cash on hand. Since the inception of the above noted programs, the Company has repurchased 8,676,706 shares of its common stock for $149,937. Since the inception$305,547 (at an average cost per share of the programs, the Company has repurchased 7,272,206 shares of its common stock for $249,879,$35.21), all funded with cash on hand.

 

12.14.

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, exclusive of restricted shares. Except where the result would be anti-dilutive, diluted 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. options. Refer to Note 4, “Redeemable Noncontrolling Interest,” to the consolidated financial statements for further information regarding the accounting for redeemable noncontrolling interests.

62

---

Table of Contents

The following table reconciles the numerator and the denominator used to calculate basic and diluted earnings per share:

 

		Year Ended December 31,												Year Ended December 31,
		2016				2015				2014				2019				2018				2017
Numerator
Net income attributable to Generac Holdings Inc.		$	98,788			$	77,747			$	174,613			$	252,007			$	238,257			$	157,808
Redeemable noncontrolling interest redemption value adjustment			(909	)			-				-				1,253				(17,970	)			909
Net income attributable to common shareholders		$	97,879			$	77,747			$	174,613			$	253,260			$	220,287			$	158,717
Denominator
Weighted average shares, basic			64,905,793				68,096,051				68,538,248				61,926,986				61,662,031				62,040,704
Dilutive effect of stock compensation awards (1)			476,981				1,104,246				1,632,796				938,460				571,194				602,168
Diluted shares			65,382,774				69,200,297				70,171,044				62,865,446				62,233,225				62,642,872
Net income attributable to common shareholders per share
Basic		$	1.51			$	1.14			$	2.55			$	4.09			$	3.57			$	2.56
Diluted		$	1.50			$	1.12			$	2.49			$	4.03			$	3.54			$	2.53

 

(1) Excludes approximately 15,800, 161,400 and 81,600 stock options for the years ended December 31, 2016, 2015 and 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.

(1)

Excludes approximately 26,100 and 147,400 stock options for the years ended December 31, 2018 and 2017, respectively, as the impact of such awards was anti-dilutive. There were no awards with an anti-dilutive impact for the year ended December 31, 2019.

 

13.15.

Income Taxes

 

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

 

		Year Ended December 31,												Year Ended December 31,
		2016				2015				2014				2019				2018				2017
Current:
Federal		$	11,717			$	13,614			$	38,161			$	41,686			$	32,072			$	15,753
State			2,047				1,966				1,645				4,211				9,639				1,775
Foreign			4,460				3,588				5,701				2,660				4,546				4,585
			18,224				19,168				45,507				48,557				46,257				22,113
Deferred:
Federal			41,264				31,869				42,474				19,393				22,225				18,213
State			3,029				1,387				(3,134	)			1,390				1,910				4,139
Foreign			(5,585	)			(7,326	)			(1,462	)			(1,263	)			479				(2,777	)
			38,708				25,930				37,878				19,520				24,614				19,575
Change in valuation allowance			638				138				364				(778	)			(1,015	)			2,454
Provision for income taxes		$	57,570			$	45,236			$	83,749			$	67,299			$	69,856			$	44,142

 

The Company files U.S federal, U.S. state and foreign jurisdiction tax returns which are subject to examination up to the expiration of the statute of limitations. The Company believes the tax positions taken on its returns would be sustained upon an exam, or where a position is uncertain, adequate reserves have been recorded. As of DecemberDecember 31, 2016, due2019, the Company is no longer subject to income tax examinations for United States federal income taxes for tax years prior to 2016. Due to the carryforward of net operating losses and research and& development credits, the Company is open to U.S. federal andCompany’s Wisconsin state income tax examinationsreturns for the tax years 20062009 through 2015.2018 remain open. In addition, the Company is subject to audit by various foreign taxing jurisdictions for the tax years 20112013 through 2015. During 2015,2018.

The Company is regularly under examination in the Internal Revenue Service completed field work on incomevarious jurisdictions in which we operate. The Company is actively managing the examinations and working to address any open matters. While the Company does not believe any material taxes or penalties are due, there is a possibility that the ultimate tax audits foroutcome of an examination may result in differences from what was recorded. Such differences may affect 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.taxes in the period in which the determination is made, and could impact the Company’s financial results.

 

63

---

Table of Contents

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

 

		December 31,								December 31,
		2016				2015				2019				2018
Deferred tax assets:
Accrued expenses		$	22,758			$	18,982			$	21,053			$	16,745
Deferred revenue			10,645				9,389				14,697				12,418
Inventories			10,159				9,772				9,879				8,500
Pension obligations			7,512				7,684				-				1,062
Stock-based compensation			7,291				7,974				7,490				5,960
Operating loss and credit carryforwards			20,927				15,677				28,356				25,585
Bad debt											1,094				1,363
Other			2,822				2,842				4,275				2,516
Valuation allowance			(4,362	)			(1,523	)			(5,024	)			(5,802	)
Total deferred tax assets			77,752				70,797				81,820				68,347
Deferred tax liabilitites:
Deferred tax liabilities:
Goodwill and intangible assets			58,133				12,455				142,159				108,899
Depreciation			25,194				19,507				27,864				25,429
Debt refinancing costs			7,193				7,732				4,119				4,206
Prepaid expenses			1,173				1,241				1,073				950
Total deferred tax liabilities			91,693				40,935				175,215				139,484
Net deferred tax assets (liabilities)		$	(13,941	)		$	29,862
Net deferred tax liabilities										$	(93,395	)		$	(71,137	)

 

As of December 31, 2016 2019 and 2015,2018, deferred tax assets of $3,337$2,933 and $34,812,$163, and deferred tax liabilities of $17,278$96,328 and $4,950,$71,300, respectively, were reflected on the consolidated balance sheets.

 

The Company had approximately $592,000 of tax-deductible goodwill and intangible asset amortization remaining as of December 31, 2016 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 andmaintains 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, acquired 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 ofvaluation allowance against the deferred tax assets associated with these net operating lossesof an entity when it is uncertain so athe entity will generate sufficient taxable income to utilize the asset. During 2019, the valuation allowance was recordeddecreased by $778 primarily due to an increase in the opening balance sheet asincome allowing for a utilization of December 8, 2012 and continued through December 31, 2016.

In addition, the Company recorded a valuation allowancetax credits, partially offset by current losses in the opening balance sheet and 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.certain foreign subsidiaries.

 

At December 31, 2016, 2019, the Company had various state research and& development credits, and state manufacturing tax credit carryforwards of approximately $17,498$8,291 and $3,736,$12,747, respectively, which expire between 20172020 and 2031.2034. The Company believes it will generate sufficient taxable income in these jurisdictions to fully utilize the credits prior to their expiration.

 

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

 

		December 31,								December 31,
		2016				2015				2019				2018
Unrecognized tax benefit, beginning of period		$	7,239			$	6,394			$	5,635			$	7,122
Increase in unrecognized tax benefit for positions taken in prior period											633				-
Increase in unrecognized tax benefit for positions taken in current period			704				845				495				580
Statute of limitation expirations											(43	)			(1,818	)
Settlements											-				(249	)
Unrecognized tax benefit, end of period		$	7,943			$	7,239			$	6,720			$	5,635

 

The unrecognized tax benefit as of December 31, 20162019 and 2015,2018, if recognized, would favorably impact the effective tax rate.

 

As of December 31,2019 and 2018, total accrued interest of approximately $71 and $37, respectively, and accrued penalties of approximately $195 and $136, respectively, associated with net unrecognized tax benefits are included in the consolidated balance sheets. 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 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 December31, 2017.2020.

 

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Company considers theTax Act includes a mandatory one-time tax on accumulated earnings of certain non-U.S.foreign 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 plansas a result, all previously unremitted earnings for reinvestment of those subsidiary earnings. The Company has not provided for additionalwhich no U.S. income taxes on approximately $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 onhad been accrued have now been subject to U.S. tax. Notwithstanding the U.S. taxation of these amounts, the Company intends to continue to invest these earnings, as well as the capital in these subsidiaries, indefinitely outside of the U.S. and do not expect to incur any significant additional taxes related to such earnings.amounts.

 

64

---

Table of Contents

A reconciliation of the statutory tax rates and the effective tax rates for thethe years ended December 31, 2016, 20152019, 2018 and 20142017 are as follows:

 

		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	%

		Year Ended December 31,
		2019				2018				2017
U.S. statutory rate			21.0	%			21.0	%			35.0	%
State taxes			4.3				4.7				4.1
State tax rate differential			(1.0	)			-				-
Research and development credits			(0.8	)			(1.3	)			(1.4	)
State credits			(1.0	)			(1.0	)			(0.2	)
Share-based compensation (1)			(0.6	)			(0.5	)			(1.4	)
Tax Act impact (2)			-				(0.2	)			(13.9	)
Other			(0.8	)			(0.2	)			(0.9	)
Effective tax rate			21.1	%			22.5	%			21.3	%

 

	(1)	With the adoption of ASU 2016-09 in 2017, excess tax benefits from equity awards are reflected within the provision for income taxes rather than within the consolidated balance sheet.
	(2)	As a result of the Tax Act, we recognized a one-time, non-cash benefit of $28.4 million in the fourth quarter of 2017 primarily from the impact of the revaluation of our net deferred tax liabilities. This non-cash benefit resulted primarily from the Federal rate reduction from 35% to 21%.

14.16.

Benefit Plans

 

Medical and Dental Plan

 

The Company maintains medical and dental benefit plans covering its full-time domestic employees 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 $15,019, $14,352,$18,290, $14,660, and $11,701$14,992 for the years ended December 31, 2016, 2015,2019, 2018, and 2014,2017, respectively.

 

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.

 

SavingsSavings Plan

 

The Company maintains a defined-contribution 401(k)401(k) savings plansplan for eligible domestic employees. Under the plans,plan, 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 Company2008 that were impacted by the freezing of the Company’s pension plans. The Company’s matching contributions and non-elective contributions are subject to vesting. Forfeitures may be applied against plan expenses and company contributions. The Company recognized $3,400, $3,000$4,791, $4,193 and $3,400$3,600 of expense related to this planthese plans in 2016, 20152019,2018 and 2014,2017, respectively.

 

Pension Plans

 

TheHistorically, the Company hasmaintained frozen noncontributory salaried and hourly pension plans (Pension Plans) covering certain domestic employees. The Pension Plans were frozen effective December 31, 2008. Effective December 31, 2018, the Pension Plans were merged into the same plan (Pension Plan), resulting in no change to benefits for participants. The benefits under the salaried plan arewere based upon years of service and the participants’ defined final average monthly compensation. The benefits under the hourly plan arewere based on a unit amount at the date of termination multiplied by the participant’s years of credited service.

In 2019, the Company completed the termination of its Pension Plan.  In connection with the Company’s activities to terminate the plan, lump sum distributions were made in the fourth quarter of 2019 to individuals who elected lump sum distributions, including rolling over their accounts to the Company’s 401(k) savings plan. Also in the fourth quarter of 2019, annuity contracts were purchased to settle obligations for the remaining participants. Upon settlement of the pension liability, the Company reclassified related unrecognized pension losses recorded in AOCL to the consolidated statements of comprehensive income. As a result, the Company recorded pre-tax settlement charges of $10,920 in the fourth quarter of 2019.

65

---

Table of Contents

The Company’s historical funding policy for the Pension Plans iswas to contribute amounts at least equal to the minimum annual amount required by applicable regulations. In the year ended December 31, 2018, the Company made a voluntary pension prepayment of $9,400. In the year ended December 31, 2019, the Company made required contributions of $1,017 in connection with the plan termination. No additional contributions will be required in future years as the pension plan termination was finalized in 2019.

 

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

 

		Year Ended December 31,								Year Ended December 31,
		2016				2015				2019				2018
Accumulated benefit obligation at end of period		$	65,956			$	63,894			$	-			$	65,978
Change in projected benefit obligation
Projected benefit obligation at beginning of period		$	63,894			$	68,376			$	65,978			$	72,631
Interest cost			2,747				2,681				2,401				2,575
Net actuarial loss (gain)			1,363				(5,254	)
Net actuarial (gain) loss											3,452				(6,820	)
Benefits paid			(2,048	)			(1,909	)			(31,321	)			(2,408	)
Annuities purchased											(40,510	)			-
Projected benefit obligation at end of period		$	65,956			$	63,894			$	-			$	65,978
Change in plan assets
Fair value of plan assets at beginning of period		$	43,985			$	45,452			$	61,870			$	58,014
Actual return (loss) on plan assets			3,820				(384	)
Actual return on plan assets											8,944				(3,507	)
Company contributions			731				826				1,017				9,771
Benefits paid			(2,048	)			(1,909	)			(31,321	)			(2,408	)
Annuities purchased											(40,510	)			-
Fair value of plan assets at end of period		$	46,488			$	43,985			$	-			$	61,870
Funded status: accrued pension liability included in other long-term liabilities		$	(19,468	)		$	(19,909	)		$	-			$	(4,108	)
Amounts recognized in accumulated other comprehensive loss
Net actuarial loss, net of tax		$	(11,040	)		$	(11,362	)		$	-			$	(10,541	)

 

The actuarial loss for the Pension PlansPlan that was amortized from AOCL into net periodic (benefit)pension cost during 2016 is $941. The amount in AOCL as of December 31, 2016 that is expected2019 prior to be recognized as a component of net periodicthe pension expense during the next fiscal year is $883.plan termination was $843.

 

The actuarial assumption used in the determination of the benefit obligation of the above data is:

		2019				2018
Weighted average discount rate			N/A				4.24%

The following table sets forth the components of net periodic pension cost (benefit) cost are as follows:for the years ended December 31, 2019, 2018 and 2017:

 

		Year Ended December 31,												Year Ended December 31,
		2016				2015				2014				2019				2018				2017
Interest cost		$	2,747			$	2,681			$	2,591			$	2,401			$	2,575			$	2,688
Expected return on plan assets			(2,868	)			(3,041	)			(2,933	)			(3,500	)			(3,525	)			(3,011	)
Amortization of net loss			941				1,228				106				843				802				883
Net periodic pension (benefit) cost		$	820			$	868			$	(236	)
Loss on pension settlement															10,920				-				-
Net periodic pension cost (benefit)														$	10,664			$	(148	)		$	560

 

66

---

Table of Contents

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

 

		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

		Year Ended December 31,
		2019				2018				2017
Discount Rate			4.24%				3.60%				4.14%
Expected long-term rate of return on plan assets			6.60%				6.19%				6.58%
Rate of compensation increase (1)			N/A				N/A				N/A

 

(1)

(1)  No compensation increase was assumed as the plans werePension Plan was frozen effective December 31, 2008.

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

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

(1)

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

 

To determine the long-term rate of return assumption for planthe plans’ assets, the Company studiesstudied historical markets and preservespreserved the long-term historical relationshipsrelationship 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 evaluatesevaluated current market factors such as inflation and interest rates before it determinesdetermined long-term capital market assumptions and reviewsreviewed peer data and historical returns to check for reasonableness and appropriateness.

 

The fair value of the qualified pension plan assets was $0 at December 31,2019 and $61,870 at December 31, 2018. The Pension Plans’Plan’s weighted-average asset allocation at December 31, 2016 and 2015, 2018, by asset category, is as follows:

 

						December 31, 2016								December 31, 2015								Target Allocation								December 31, 2018
Asset Category		Target				Dollars				%				Dollars				%				Minimum				Maximum				Dollars				%
Fixed Income			20	%		$	7,812				17	%		$	8,571				19	%
Fixed income																							15.0	%			25.0	%		$	12,257				20	%
Domestic equity			49	%			19,615				42	%			20,479				47	%			36.5	%			61.5	%			30,731				50	%
International equity			21	%			13,466				29	%			9,687				22	%			17.0	%			25.0	%			12,380				20	%
Real estate			10	%			5,595				12	%			5,248				12	%			7.0	%			15.0	%			6,502				10	%
Total			100	%		$	46,488				100	%		$	43,985				100	%											61,870				100	%

 

The fair values of the Pension Plans’Plans’ assets at December 31, 2016 are2018 were as follows:

 

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

The fair values of the Pension Plan's assets at December 31, 2015 are as follows:

		Total				Quoted Prices in Active Markets for Identical Asset (Level 1)				Significant Observable Inputs (Level 2)				Significant Unobservable I nputs (Level 3)				Total				Quoted Prices in Active Markets for Identical Asset (Level 1)				Significant Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Mutual funds		$	40,310			$	40,310			$	–			$	–
Other investments			3,675				–				–				3,675
Mutual funds																		$	51,736			$	51,736			$	–			$	–
Other investments																			10,134				–				–				10,134
Total		$	43,985			$	40,310			$	–			$	3,675			$	61,870			$	51,736			$	–			$	10,134

 

A reconciliation of beginningbeginning and ending balances for Level 3 assets for the yearsyear ended December 31, 2016 and 2015 2018 is as follows:

 

		Year Ended December 31,								Year Ended December 31,
		2016				2015				2018
Balance at beginning of period		$	3,675			$	3,185			$	9,700
Purchases			4,400				408				3,805
Redemptions											(3,795	)
Realized gains			553				82				424
Balance at end of period		$	8,628			$	3,675			$	10,134

 

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’splans’ 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, and therefore is classified within Level 3 of the fair value hierarchy.

 

67

---

Table of Contents

The Company’sCompany’s historical target allocation for equity securities and real estate iswas generally between 65% -75% to 85%, with the remainder allocated primarily to fixed income (bonds). The Company regularly reviewsreviewed its actual asset allocation and periodically rebalancesrebalanced its investments to the targeted allocation when considered appropriate.

The Company expects to make estimated contributions of $568 to the Pension Plans in 2017.

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

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 statutory 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 benefitsother long-term liabilities in the Company’s consolidated balance sheets and are not material.

 

15.17.

Share Plans

 

The Company adopted an equity incentive plan (Plan) on February 10, 2010 in connection with its initial public offering. The Plan, as amended, allows for granting of up to 9.1 million stock-basedshare-based awards to executives, directors and employees. Awards available for grant under the Plan include stock options, stock appreciation rights, restricted stock, other stock-basedshare-based awards and performance-based compensation awards. Total share-based compensation expense related to the Plan, net of estimated forfeitures, was $9,493, $8,241$15,738, $14,563 and $12,612$10,205 for the years ended December 31, 2016, 20152019, 2018 and 2014,2017, respectively, net of estimated forfeitures, which is recorded in operating expenses in the consolidated statements of comprehensive income.

 

On June 13, 2019, the stockholders of Generac Holdings Inc. approved the Company’s 2019 Equity Incentive Plan (2019 Plan). The 2019 Plan allows for granting of up to 2.7 million share-based awards to executives, directors and employees. Awards available for grant under the Plan include stock options, stock appreciation rights, restricted stock, other share-based awards and performance-based compensation awards. Total share-based compensation expense related to the 2019 Plan, net of estimated forfeitures, was $956 for the year ended December 31, 2019, which is recorded in operating expenses in the consolidated statements of comprehensive income.

 

Stock Options - Stock options granted in 20162019 have an exercise price between $33.23 per share and $35.37of $52.07 per share; stock options granted in 20152018 have an exercise price between $28.36$43.88 per share and $49.70$45.29 per share,share; and the stock options granted in 20142017 have an exercise price between $42.20$40.12 per share and $59.01$48.98 per share.

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

 

StockStock option exercises can 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, 272,29632,211, 63,817 and 235,6449,033 in 2016, 20152019,2018 and 2014,2017, 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' tax obligations to the taxing authorities were $13,056, $9,768 and $10,411 in 2016, 2015 and 2014, respectively, and are reflected as a financing activity within the consolidated statements of cash flows.

 

Employees can also utilize a cashless for cash exercise of stock options, such that all exercised shares will be sold in the market immediately. Cash equivalent to the exercise price of the awards plus the employees’ minimum statutory tax obligations is retained byremitted to the Company, with the remaining cash being transferred to the employee. Total net proceeds from the cashless for cash exercise of stock options were $1,623$9,395, $5,614 and $6,951 in 2016,2019,2018 and 2017, respectively, and are reflected as a financing activity in the consolidated statement of cash flows.

Total payments made by the Company to the taxing authorities for the employees’ tax obligations related to stock option exercises were $3,360, $3,846 and $4,301 in 2019,2018 and 2017, respectively, and are reflected as a financing activity in the consolidated statements of 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. Expected volatility is calculated based on an analysis of historic and implied volatility measures for a set of peer companies.the Company’s stock price. 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-couponzero-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.

68

---

Table of Contents

The weighted-average assumptions used in the Black-Scholes-Merton option pricing model for 2016, 20152019,2018 and 20142017 are as follows:

 

		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, 2016, 2015 and 2014.

		2019				2018				2017
Weighted average grant date fair value		$	19.33			$	17.86			$	16.84
Assumptions:
Expected stock price volatility			33	%			37	%			40	%
Risk free interest rate			2.52	%			2.60	%			1.92	%
Expected annual dividend per share		$	-			$	-			$	-
Expected life of options (years)			6.25				6.25				6.25

 

A summary of the Company’sCompany’s stock option activity and related information for the years ended December 31, 2016, 20152019, 2018 and 20142017 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, 2013			2,937,301			$	5.74				9.5			$	148,369
Outstanding as of December 31, 2016																			1,482,964			$	27.49				7.5			$	23,840
Granted			187,189				57.21												346,421				40.13
Exercised			(549,282	)			3.44												(287,375	)			10.58
Expired			(259	)			15.94
Forfeited			(32,810	)			12.68												(69,880	)			41.12
Outstanding as of December 31, 2014			2,542,139				9.94				8.5			$	96,518
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
Outstanding as of December 31, 2017																			1,472,130				33.11				7.3			$	25,281
Granted			398,313				33.24												366,231				43.88
Exercised			(995,469	)			2.89												(267,909	)			19.90
Forfeited			(47,894	)			37.41												(49,285	)			43.34
Outstanding as of December 31, 2016			1,482,964				27.49				7.5			$	23,840
Outstanding as of December 31, 2018																			1,521,167				37.70				7.0			$	19,212
Exercisable as of December 31, 2016			787,654				17.64				6.7			$	19,897
Granted																			369,779				52.07
Exercised																			(263,250	)			30.75
Forfeited																			(35,010	)			43.79
Outstanding as of December 31, 2019																			1,592,686				42.04				6.9			$	93,242
Exercisable as of December 31, 2019																			726,817				37.78				5.3			$	45,649

 

As of December 31, 2016, 2019, there was $8,051$10,649 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 2.72.5 years. Total share-based compensation cost related to the stock options for 2016, 20152019,2018 and 20142017 was $4,366, $4,198$5,597, $4,998 and $8,509,$4,503, respectively, which is recorded in operating expenses in the consolidated statements of comprehensive income.