UNITED STATES
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One) | |
☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, Or | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to |
Commission File Number 001-34627
GENERAC HOLDINGS INC.
(Exact name of registrant as specified in its charter)
DELAWARE (State or other jurisdiction of incorporation or organization) | 20-5654756 (IRS Employer Identification No.) |
S45 W29290 Hwy. 59, Waukesha, WI | 53189 (Zip Code) |
(262) 544-4811 | |
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: | |
Common Stock, $0.01 par value | New York Stock Exchange (Name of exchange on which registered) |
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:None |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x☒ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o☐ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x☒ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x☒ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐
o
Large accelerated filer | Accelerated filer | Non-accelerated filer ☐ (Do not check if a smaller reporting company) | Smaller reporting company |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o☐ No x
The aggregate market value of the voting common equity held by non-affiliates of the registrant on June 30, 2012,2014, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $621,912,000$3,302,158,395 based upon the closing price reported for such date on the New York Stock Exchange.
As of March 1, 2013, 68,278,598February 20, 2015, 69,093,775 shares of registrant's common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Annual Report to Shareholders for the year ended December 31, 2014 furnished to the Securities and Exchange Commission are incorporated by reference into Part II of this Form 10-K. Portions of the registrant’s Proxy Statement for the 20132015 Annual Meeting of Stockholders (the “2013“2015 Proxy Statement”), which will be filed by the registrant on or prior to 120 days following the end of the registrant’s fiscal year ended December 31, 2012,2014, are incorporated by reference into Part III of this Form 10-K.
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PART I | ||
Item 1. | 1 | |
Item 1A. | 9 | |
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PART II | ||
Item 5. | 17 | |
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PART III | ||
Item 10. | 70 | |
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PART IV | ||
Item 15. | 71 |
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, “project,” “plan,” “intend,” “believe,” “confident,” “may,” “should,” “can have,” “likely,” “future”“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:
● | our business, financial and operating results and future economic performance; |
● | proposed new product and service offerings; and |
● | management's goals, expectations and objectives and other similar expressions concerning matters that are not historical facts. |
Factors that could affect our actual financial results and cause them to differ materially from those anticipated in the forward-looking statements include:
● | demand for our products; |
● | frequency and duration of |
● | availability, cost and quality of raw materials and key components used in producing our products; |
● | the impact on our results of |
● | the possibility that the expected synergies, efficiencies and cost savings of |
● | the risk that |
● | difficulties we may encounter as our business expands globally; |
● | competitive factors in the industry in which we operate; |
● | our dependence on our distribution network; |
● | our ability to invest in, develop or adapt to changing technologies and manufacturing techniques; |
● | loss of our key management and employees; |
● | increase in product and other liability claims; and |
● | changes in environmental, health and safety laws and regulations. |
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.
Any forward-looking statement made by us in this report speaks only as of the date on which we make it.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.
We are a leading designer and manufacturer of a wide range of generatorspower generation equipment and other engine powered products forserving the residential, light commercial, industrial, oil & gas, and construction markets. Power generation is our primary focus, which differentiates us from our primary competitors that also have broad operations outside of the generator 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. America and an expanding presence internationally. We believe we have one of the widest range of products in the marketplace, including residential, commercial and industrial standby generators, as well as portable and mobile generators used in a variety of applications. Other engine powered products that we design and manufacture include light towers which provide temporary lighting for various end markets; commercial and industrial mobile heaters used in the oil & gas, construction and other industrial markets; and a broad product line of power washers for residential and commercial use.
We design, manufacture, source and modify engines, alternators, transfer switches and other components necessary for our products. Our products, which are fueled by natural gas, liquid propane, gasoline, diesel and Bi-Fuel™. Our products are available primarily across the U.S and Canada, with an expanding presence internationally in Latin America, Europe, the Middle East, Africa and Asia/Pacific regions. Products are availablesold into these regions through a broad network of independent dealers, distributors, retailers, wholesalers and equipment rental companies.
We have a significant market share in the residential and light commercial generator markets, which we believe are currently under penetrated. 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. Innetwork to whom we offer the most comprehensive support and programs from the factory.In addition, through recent acquisitions, we are also a leading provider of light towers, mobile generators and flameless heaters, as well as a supplier of industrial diesel gensets for international marketsgenerators ranging in sizes up to 2,500kW.
Generac Holdings Inc. (Generac)(the Company) is a Delaware corporation that was founded in 2006.whose principal operating subsidiary is Generac Power Systems, Inc., or(collectively Generac). Generac Power Systems, our principal operating subsidiary, is a Wisconsin corporation, which was founded in 1959 to market a line of affordable portable generators that offered superior performance and features. We expanded beyond portable generators in 1980 into the industrial market with the introduction of our first stationary generators that provided upThrough innovation and focus, we have grown to 200 kWbe a leading provider of power output. We enteredgeneration equipment to the residential, marketlight commercial, industrial, oil & gas and construction markets.
Key events in 1989 with a residential standby generator, and expanded our product development and global distribution system inhistory include the 1990s, forming a series of alliances that tripled our higher output generator sales. following:
● | In 1980, we expanded beyond portable generators into the industrial market with the introduction of our first stationary generators that provided up to 200 kW of power output. | |
● | We introduced our first residential standby generator in 1989, and expanded our industrial product development and global distribution system in the 1990s, forming a series of alliances that tripled our higher output generator sales. | |
● | In 1998, we sold our Generac® portable products business (which included portable generator and pressure washer product lines) to a private equity firm who eventually sold this business to another company. | |
● | Our growth accelerated in 2000 as we expanded our residential automatic standby generator product offering, implemented our multi-layered distribution philosophy, and introduced our quiet-running QT Series generators in 2005, accelerating our penetration in the commercial market. | |
● | In 2006, the founder of Generac Power Systems sold the company to affiliates of CCMP Capital Advisors, LLC (CCMP), together with certain other investors and members of our management (CCMP Transaction). | |
● | In 2008, we successfully expanded our position in the portable generator market after the expiration of our non-compete agreement that was entered into when we sold our Generac® portable products business in 1998. | |
● | In February 2010, we completed our initial public offering (IPO) of 20.7 million primary shares of our common stock (including additional share overallotment). | |
● | In early 2011, we re-entered the market for gasoline-powered pressure washers (or power washers), which we previously exited in 1998 with the sale of our Generac® portable products business. | |
● | In August 2013, CCMP completed the last of a series of sale transactions that began in November 2012 by which it sold substantially all of the shares of common stock that it owned as of the initial public offering. |
Additionally, over the past several years, we have executed a number of acquisitions that support our strategic plan. A summary of these acquisitions can be found in Note 1, “Description of Business,” to the Beacon Group, a private equity firm, which eventually soldconsolidated financial statements in Item 8 of this business to Briggs & Stratton. Our growth accelerated in 2000 asAnnual Report on Form 10-K.
Today, we expanded our automatic residential standby generator product offering, implemented our multi-layered distribution philosophy,design and introduced our quiet-running QT Series generators in 2005, accelerating our penetration in the commercial market. In 2008, we successfully expanded our position in the portable generator market after the expiration of our non-compete agreement with the Beacon Group entered into in connection with the aforementioned Beacon Group transaction. In late 2011, we purchased substantially all the assets of the Magnum Products business (Magnum or Magnum Products) which is the number one light tower manufacturer in the U.S. and has a growing share of the mobile generator market. In February 2012, we purchased substantially all the assets of GenTran, a leading transfer switch and portable generator accessory manufacturer. In December 2012, we purchased all of the equity of Ottomotores UK Limited and its affiliates (Ottomotores) which is one of the largest manufactures of industrial generators in Mexico. Today, we manufacture a full line of power generation equipment and other engine powered products for a wide variety of applications and markets. We have demonstrated a long track record of achieving significant revenue growth through product innovation, expanded distribution and increased awareness of our products. Our success is built on engineering expertise, manufacturing & sourcing excellence and our innovative approaches to the market.
Products
We design and manufacture stationary, portable and mobile generators with single-engine outputs ranging between800W and 3,250kW, with the ability to expand the power range for certain other investors and members ofstationary generator solutions to much larger multi-megawatt systems through our management, purchased an aggregate of $689 million of our equity capital. In addition, on November 10, 2006, GeneracModular Power Systems borrowed(MPS), an aggregate of $1.38 billion, consisting of an initial drawdown of $950 million under a $1.1 billion first lien secured credit facility and $430 million under a $430 million second lien secured credit facility. With the proceeds from these equity and debt financings, together with cash on hand at Generac Power Systems, we (1) acquired all of the capital stock of Generac Power Systems and repaid certain pre-transaction indebtedness of Generac Power Systems for $2.0 billion, (2) paid $66 million in transaction costs related to the transaction and (3) retained $3.0 million for general corporate purposes.
Residential power products
Our residential automatic residential standby generators range in output from 6kW to 60kW, with manufacturer's suggested retail prices or MSRPs,(MSRPs) from approximately $1,900 to $16,700. They$1,799 to$16,199. These products operate on either natural gas, or 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 20kW,22kW, are available in steel and aluminum enclosures and serve as an emergency backup for small to mediummedium-sized homes. Liquid-cooled engine generators serve as emergency backup for larger homes and small businesses and range in output from 22kW to 60kW. Liquid-cooled brands includeWe also providea cellular-based remote monitoring system for home standby generators calledMobileLink™, which allows our customers to check the Guardian® Seriesstatus of their generator conveniently from a desktop PC, tablet computer or smartphone and also provides the premium Quietsource® Series,capability to receive maintenance or service alerts.
In 2014, we introduced a new 22kW air-cooled engine standby generator which haveprovides the highest output for an air-cooled generator currently available in the marketplace. Another new product introduction during 2014 was the Guardian Synergy, the industry’s first variable-speed residential standby generator and is a quiet, low-speed engine and a standard aluminum enclosure.
We provide a broad product line of portable generators that are fueled predominantly by gasoline, thatwith certain models running on propane, which range in size from 800W to 17,500W.to17,500W. These products serve as an emergency home backup source of electricity and are also used for construction and recreational purposes. Following the expiration of a non-compete agreement in 2007, we expanded our portable product offering to introduceOur portable generators below 12,500W. We currently have four portable product lines: the GP series,are targeted at homeowners, with price points ranging from 1,800W to 17,500W;between the XG series, targeted atconsumer value end of the market through the premium homeowner markets, ranging from 4,000 to 10,000W; the XP series, targetedmarket, at professional contractors, starting at the professionalvalue end through the premium contractor market, ranging from 3,600 to 10,000W; and the iX series,segment, as well as inverter generators targeted atfor the recreational market, ranging from 800W to 2,000W. With our acquisition of Gen-Tran in February 2012,market. In addition, we now offer manual transfer switches to supplement our portable generator product offering.
We also provide a broad product line of engine driven power washers, produce line, which was first introducedare fueled by gasoline, that range in the first quarter of 2011, includes modelsPSI from 2,000 to 4,200 that are used for residential and commercial use.
Residential power products comprised 60.0%49.5%, 62.0%56.8% and 62.9%60.0%, respectively, of total net sales in 2012, 20112014, 2013 and 2010.
Commercial & Industrial Products
We offer a full line of C&I generators fueled by diesel, natural gas, liquid propane and commercial power products
Our light-commercial standby generators include a full range of affordable generatorssystems from 22kW to 150kW and related transfer switches, providing three-phase power sufficient for most small and mid-sized businesses including grocery stores, convenience stores, restaurants, gas stations, pharmacies, retail banks, and small health care facilities.facilities and other small-footprint retail applications. Our light-commercial generators run on natural gas, or liquid propane thereby eliminating the fuel spillages, spoilage, environmental or odor concerns common with traditionaland diesel units.fuel.
We also manufacture a broad line of standard and configured stationary standby generators and related transfer switches for industrial applications. Our single-engine industrial generators range in output from 10kW up to 2,500kW3,250kW, with our Modular Power System (MPS)MPS technology extending our product range up to 9mW.much larger multi-megawatt systems through an integrated paralleling configuration. We offer four fuel options for our industrial generators, including diesel, natural gas, liquid propane or Bi-Fuel™. Bi-Fuel™ generators operate on a combination of both diesel and natural gas to allow our customers the advantage of multiple fuel sources and extended run times. These unitsOur industrial standby generators are primarily used as emergency backup for large healthcare, telecom, datacom, commercial office, municipal and manufacturing customers.
The acquisition of Baldor Generators in November 2013 enabled us to offer single-engine industrial generators larger than 600kW within the U.S.and Canada. The Baldor Generators product offering includes stationary and containerized packages up to 2,500kW that can be used in standby applications and in certain configurations in prime or continuous-duty power applications. The addition of these products significantly expanded our industrial product offering and the addressable domestic market that our distribution partners can serve.
Our MPS technology combines the power of several smaller generators to produce the output of a larger generator, providing our customers with redundancy and scalability in a cost-effective manner. For larger industrial applications, our MPS products offer customers an efficient, affordable way to scale their standby power needs. By offering a series of smaller Generac generators integrated with Generac's proprietary PowerManager control system, we provide a lower cost alternative to traditional large, single-engine generators. The MPS product lineneeds, and also offers superior reliability given its built-in redundancy which allows individual units to be taken off-line for routine maintenance while retaining coverage for critical circuits.
Our light towers, mobile generators and mobile generatorsheaters provide temporary lighting, power and powerheat for various end markets, such as road and commercial construction, energy, mining, military and special events. We also manufacture commercial mobile pumps which utilize wet and dry-priming pump systems for a wide variety of wastewater applications.
We introduced several new commercial and commercialindustrial products in 2014. We further expanded our broad line up of natural gas generators with the introduction of a new 400kW power node at an industry leading price point. In addition to new stationary products, we also introduced a new vertical-mast light tower called the MLT6S, which provides the most compact footprint in the industry, improved ease of use, transportation, run time and serviceability.
C&I power products comprised 34.9%44.6%, 31.6%38.4% and 31.0%,34.9% respectively, of total net sales in 2012, 20112014, 2013 and 2010.
We sell aftermarket service parts to our dealers and proprietary engines to third-party original equipment manufacturers or OEMs.
Other power products comprisecomprised 5.9%, 4.8% and 5.1%, 6.4% and 6.1%, respectively, of total net sales in 2012, 20112014, 2013 and 2010.
Distribution channelsChannels and customers
We distribute our productproducts through several distribution channels to increase awareness of our product categories and the Generac®, Magnum®, and Ottomotores brands, and to ensure our products reach a broad customer base. This distribution network includes independentincludesindependent residential dealers, industrial distributors and industrial dealers, national and regional retailers, e-commerce merchants, electrical and HVAC wholesalers national accounts,(including certain private label arrangements, retailers,arrangements), catalogs, e-commerce merchants, equipment rental companies and equipment dealersdistributors. We also sell direct to certain national and construction companies. regional account customers that are the end users of our products.
We believe our distribution network is a competitive advantage that has strengthened over the last decade byas a result of adding and expanding the various distribution channelsthrough which we sell our network from our base of industrial dealers to include other channels of distribution as product offerings have increased.products. Our network is well balanced with no single sales channel providing more than 24% of our sales and no customer providing more than 7%8% of our sales in 2012.
Our overall dealer network, which is located principally in the United States, Canada and Latin America, is the industry's largest network of factory direct independent generator contractors.
Our residential/light commercial dealer network sells, installs and services our residential and light-commerciallight commercial products to end users. We have developed a number of proprietary dealer management programs to evaluate, manage and incentivizeincreased our dealers, which we believe has an important impact on the high level of customer service we provide to end customers. These programs include both technical and sales training, under which we train new and existing dealers about our products, service and installation. In addition, we have investedinvestment in marketing and sales toolsrecent years by focusing on a variety of initiatives to more effectively market and sell our home standby products. We regularly perform market analyses to determine if a given market is either under-served or has poor residentialproducts and better align our dealer representation. Within these locations, we selectively add distribution or invest resources in existing dealer support and training to improve dealer performance.
Our industrial dealer network providesconsists of a combination of primary distributors as well as a support network of dealers serving the U.S. and Canada. The industrial distributors and dealers provide industrial and commercial end-usersend users with on-goingongoing sales and product support. Our industrial distributors and dealers maintain the local relationships with commercial electrical contractors, specifying engineers and national account regional buying offices. Our sales group works in conjunction with our industrial dealers to ensure that national accounts receive engineering support, competitive pricing and nationwide service. We promote our industrial generators through the use of product demonstrations, specifying engineer education events, dealer forums and training. In recent years, we have been particularly focused on expanding our dealer network in Latin America and other regions of the world in order to expand our international sales opportunities.
Our retail distribution network includes thousands of locations and includes a variety of regional and national home improvement chains, retailers, clubs, buying groups and farm supply stores. These physical retail locations are supplemented by a number of catalog and e-commerce retailers. This network primarily sells our residential standby, portable and light-commercial generators as well as our power washers. The placement of our products at retail locations drives significant awareness for our brands and the automatic home standby product category.
Our wholesaler network distributes our residential and light-commercial generators and consists of selling branches of both national and local distribution houses for electrical and HVAC products. Our wholesalers distribute our residential and light-commercial generators and are a key introduction to the standby generator category for electrical and HVAC contractors who may not be Generac dealers.
On a selective basis, we have established private label and licensing arrangements with third party partners to provide residential, light-commercial and industrial generators. TheThese partners include leading home equipment, electrical equipment and construction machinery companies, each of which provides access to incremental channels of distribution for our products. We have agreements in place with these partners having terms of between three and four years and further establishing additional terms and conditions of these arrangements.
The distribution for our mobile products includes international, national, regional and regionalspecialty equipment rental companies, equipment dealersdistributors and construction companies.
We sell direct to certain national and regional account customers that are the end users of our products covering a number of end market verticals, including telecommunication, retail, banking, convenience stores, grocery stores and other light commercial applications.
BusinessStrategy
Growing the residential standby generator market.As the leader in the lawn, gardenhome standby generator category, it is incumbent upon us to continue to drive growth and rentalincrease the penetration rate of these products in households across the United States and Canada. Central to this strategy is to increase the awareness, availability and affordability of home standby generators. Ongoing power outage activity, combined with expanding our residential/light commercial dealer base and overall distribution in affected regions, are key drivers in elevating the awareness of home standby generators over the long term. We intend to continue to supplement these key growth drivers by further optimizing our innovative sales and marketing techniques introduced in recent years to further extend the awareness of home standby generators. In addition, we intend to continue to focus on innovation in this emerging product category and introduce new products into the marketplace. With only approximately 3.5% penetration of the addressable market of U.S. homes (which we define as single-family detached, owner-occupied households with a home value of over $100,000, as defined by the U.S. Census Bureau's 2013 American Housing Survey for the United States), we believe there are opportunities to further penetrate the residential standby generator market.
Gaining commercial and industrial market share.Our growth strategy for commercial and industrial power generation products is focused on incremental market share gains. Key to this objective are our efforts to develop and improve our industrial distribution, further increase our addressable market with new products and increase the rate at which our products are specified in C&I power generation applications. In addition, we will attempt to gain incremental market share through our leading position in the growing market for cleaner burning, more cost effective natural gas fueled back-up power solutions. While still a much smaller portion of the overall C&I market, we believe demand for these products continues to increase at a faster rate than traditional diesel fueled generators as a result of their lower capital investment and operating costs. We also believe there is an opportunity to provide smaller, more cost effective generators marketed aggressively towards the underpenetrated “optional” standby generator market which includes smaller footprint commercial buildings.
Diversifying end markets by expanding product offerings and services.In recent years, we have diversified our end markets with new product and service platforms. Much of this diversification has been achieved with our strategic acquisitions over the last four years. We now have access to several new products, new markets and new customers through the purchase of Magnum in October 2011, Ottomotores in December 2012, Tower Light in August 2013, Baldor Generators in November 2013 and MAC in October 2014. As a result of these acquisitions, we now have access to a broader lineup of mobile power products and higher-output generators, including products that serve the oil & gas and other infrastructure power markets.
Expanding into new geographies.During 2014, approximately 9% of our revenues were shipped to regions outside the U.S. and Canada. Given that the global market for power generation equipment is estimated to exceed $16 billion annually, we believe there are growth opportunities for Generac by expanding into new geographies. Prior to 2012, these efforts had been mostly organic with the creation of a dedicated sales team and the addition of new distribution points around the globe, with a focus in Latin America. The acquisitions of Ottomotores, located in Latin America, and Tower Light, located in Europe, provide us with an enhanced platform and immediate scale for our international growth initiatives, and also accelerate our efforts to become a more global player in the markets for backup power and mobile power equipment. As we look forward, we expect to drive growth in the key markets they serve with additional investment and focus, and we intend to leverage these acquisitions while also evaluating other opportunities to expand into other regions of the world. This is targeted to be accomplished through both organic growth and potential acquisitions, and by establishing and developing additional distribution globally and building the Generac brand internationally.
We believe the investments we have made to date, due in part to our value engineering philosophy,Powering Ahead strategy, have helped to capitalize on the macro, secular growth drivers for our strategic foreign sourcing,business and are an important part of our scale,efforts to diversify and globalize our investmentbusiness. 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 several manufacturing plants, distribution facilities and inventory warehouses located principallyin the United States, Mexico, Italy and Brazil totaling over three and a half million square feet. We maintain inventory warehouses in advancedthe United States that accommodate material storage and rapid response requirements of our customers.
In recent years, we have added manufacturing technologycapacity through investments in automation, improved utilization and adherence to leanthe expansion of our manufacturing principles.footprint through organic means as well as through acquisitions. We believe we have sufficient capacity to achieve our business goals for the nearnear-to-intermediate term.
Our primary focus on generators and engine powered equipment drives technological innovation, specialized engineering and manufacturing competencies. Research and development is a core competency and includes a staff of over 200250 engineers working on numerous active projects. Our sponsored research and development expense was $23.5$31.5 million, $16.5$29.3 million and $14.7$23.5 million for the years ended December 2012, 201131, 2014, 2013 and 2010,2012, respectively. Research and development is conducted at each of our manufacturing facilities worldwide and additionally at our technical center in Suzhou, China with dedicated teams for each product line. Research and development is focused on developing new technologies and product enhancements as well as maintaining product competitiveness by improving manufacturing costs, safety characteristics, reliability and performance while ensuring compliance with governmentalregulatory standards. We have had over 30 years of experience using natural gas engines and have developed specific expertise with fuel systems and emissions technology. In the residential and light commercial markets, we have developed proprietary engines, cooling packages, controls, fuel systems and emissions systems. We believe that our expertise in engine powered equipment gives us the capability to develop new products that will allow continued diversification in our end markets.
Intellectual Property
We rely on a combination of patents and trademarks to establish and protect our proprietary rights. Our commitment to research andresearchand development has resulted in a portfolio of approximately 90over 170 U.S. and international patents and patent applications. Our patents expire between 20162015 and 20312032 and protect certain features and technologies we have developed for use in our products including fuel systems, air flow, electronics and controls, noise reduction and air-cooled engines. U.S. trademark registrations generally have a perpetual duration if they are properly maintained and renewed. NewNewly issued U.S. patents that are issued generally have a life of 20 years from the date the patent application is initially filed. U.S. and international trademark registrations generally have a perpetual duration if they are properly maintained and renewed. We believe the existence of these patents and trademarks, along with our ongoing processes to register additional patents and trademarks, protect our intellectual property rights and enhance our competitive position. We also use proprietary manufacturing processes that require customized equipment.
Suppliers of raw materials
Our primary raw material inputs are steel, copper and aluminum, all of which are purchased from third parties and, in many cases, as part of machined or manufactured components. We have developed an extensive network of reliable low-cost suppliers in the United States and abroad. Our strategic global sourcing function continuously evaluates the quality and cost structure of our products and assesses the capabilities of our supply chain, and sources componentschain. Components are sourced accordingly based on this evaluation. In 2012,Our supplier quality engineers conduct on-site audits of major supply chain partners and help to maintain the reliability of critical sourced components.In 2014, we sourced approximately half55% of our materials and components from outside the United States.
The market for onsite standby generatorspower generation equipment and other engine powered products is competitive. We face competition from a variety of large diversified industrial companies as well as smaller generator manufacturers abroad.and mobile equipment providers, both domestic and internationally. However, specifically in the generator market, most of the traditional participants in the standby generator market compete on a more specialized basis, focused on specific applications within their larger diversified product mix. We are the only significant market participant focused predominantlywith a primary focus on power generation with a core emphasis on standby, portable and portablemobile generators with broad capabilities across the residential, light commercial, industrial, oil & gas, and light-commercialconstruction generator markets. We believe that our engineering capabilities and core focus on generators provide us with manufacturing flexibility and enable us to maintain a first-mover advantage over our competition for product innovation. We also believe our broad product offering, and diverse distribution model and strong factory support provide for additional advantages as well.
A summary of the market forprimary competitors across our main product classes are as follows:
Residential standby generators -Kohler, Briggs & Stratton and Cummins, each of which also have broad operations in other manufacturing businesses.
Portable generators - Honda, Briggs & Stratton, Champion and Techtronics International (TTI), along with a number of smaller domestic and foreign competitors.
Power washers - Briggs & Stratton, TTI, FNA Group, Mi-T-M and Karcher.
Standby commercial and industrial generators our primary competitors are - Caterpillar, Cummins, Kohler, MTU, Stemac and MTU, mostFG Wilson, certain of which focus on the market for diesel generators as they are also diesel engine manufacturers. InAlso includes other regional packagers that serve local markets throughout the market for residential standbyworld.
Mobile generators our primary competitors include - Doosan, Wacker and MultiQuip
Light towers - Terex, Briggs & Stratton Cummins (Onan division)(Allmand), Wacker and Kohler, which also have broad operations in other manufacturing businesses. In the portable generator market, our primary competitors includeAtlas Copco
Mobileheaters - Wacker, Briggs & Stratton Honda(Allmand), Flagro and Techtronics International (TTI), along with a number of smaller domestic and foreign competitors. In the market for mobile generators, our primary competitors are Doosan/IR, Multi Quip, Caterpiller and Wacker. Our competitors in the market for light towers include Terex, Allmand and Wacker.
In a continuously evolving sector, we believe our sizescale and broad capabilities make us well positioned to remain competitive.
Employees
As of December 31, 2012,2014, we had 3,0483,587 employees (2,700(3,198 full time and 348389 part-time and temporary employees). Of those, 1,9352,221 employees were directly involved in manufacturing at our manufacturing facilities.
Domestically, we have had an “open shop” bargaining agreement for the past 4749 years. Our current agreement is with the Communication Workers of America, Local 4603. The current agreement, which expires October 17, 2016, covers our Waukesha and Eagle, Wisconsin facilities. Currently, less than 1% ofAdditionally, our workforce is a member of a labor union.plants in Mexico, Italy and Brazil are operated under various local or national union groups. Our other facilities in Whitewater, Wisconsin, Jefferson, Wisconsin and Berlin, Wisconsin are not unionized.
As a manufacturing company, our operations are subject to a variety of foreign, federal, state, and local laws and regulations covering environmental, health and safety matters. Applicable laws and regulations includinginclude those governing, among other things, emissions to air, discharges to water, noise and employee safety, as well as the generation, handling, storage, transportation, treatment, and disposal of waste and other materials. In addition, our products are subject to various laws and regulations relating to, among other things, emissions and fuel requirements, as well as labeling and marketing.
Our products sold in the United States are regulated by the U.S. Environmental Protection Agency (“EPA”)(EPA), California Air Resources Board (“CARB”)(CARB) and various other state and local air quality management districts. These governing bodies continue to pass regulations that require us to meet more stringent emission standards, and all of our engines and engine-driven products are regulated within the United States and its territories. Other countries have various degrees of regulation depending upon product application and fuel types. New regulations could require us to redesign our products and could affect market growth for our products.
Segment information
We refer you to Note 2,7, “Segment Reporting,” of ourto the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for information about our business segment and geographic areas.
Available Information
The Company’s principal executive offices are located at S45 W29290 Highway 59, Waukesha, Wisconsin, 53189 and the Company’s telephone number is (262) 544-4811. The Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports are available free of charge through the “Investors” portion of the Company’s web site, www.generac.com, as soon as reasonably practical after they are filed with the Securities and Exchange Commission or the “SEC”(SEC). The SEC maintains a web site, www.sec.gov, which contains reports, proxy and information statements, and other information filed electronically with the SEC by the Company. The information provided on these websites is not part of this report and is therefore not incorporated herein by reference.
Executive officers
The following table sets forth information regarding our executive officers:
Name | Age | Position | ||
Aaron P. Jagdfeld | 43 | President, Chief Executive Officer and Director | ||
York A. Ragen | 43 | Chief Financial Officer | ||
Terrence J. Dolan | 49 | Executive Vice President, | ||
Russell S. Minick | 54 | Executive Vice President, | ||
Roger F. Pascavis | 54 | Executive Vice President, Strategic Global Sourcing | ||
Allen | 58 | Executive Vice President, Global Engineering | ||
Clement Feng | 51 | Senior Vice President, | ||
Aaron P. Jagdfeld has served as our Chief Executive Officer since September 2008 and as a director since November 2006. Prior to becoming Chief Executive Officer, Mr. Jagdfeld worked for Generac for 15 years. He began his career in the finance department in 1994 and became our Chief Financial Officer in 2002. In 2007, he was appointed President and was responsible for sales, marketing, engineering and product development. Prior to joining Generac, Mr. Jagdfeld worked in the audit practice of the Milwaukee, Wisconsin office of Deloitte and Touche. Mr. Jagdfeld holds a Bachelor of Business Administration in Accounting from the University of Wisconsin-Whitewater.
York A. Ragen has served as our Chief Financial Officer since September 2008. Prior to becoming Chief Financial Officer, Mr. Ragen held Director of Finance and Vice President of Finance positions at Generac. Prior to joining Generac in 2005, Mr. Ragen was Vice President, Corporate Controller at APW Ltd., a spin-off from Applied Power Inc., now known as Actuant Corporation. Mr. Ragen began his career in the Audit division of Arthur Andersen's Milwaukee, Wisconsin office. Mr. Ragen holds a Bachelor of Business Administration in Accounting from the University of Wisconsin-Whitewater.
Dawn A. Tabat has served as our Chief Operating Officer since 2002. Ms. Tabat joined Generac in 1972 and served as Personnel Manager and Personnel Director before being promoted to Vice President of Human Resources in 1992. During this period, Ms. Tabat was responsible for creating the human resource function within Generac, including recruiting, compensation, training and workforce relations. In her current position, Ms. Tabat oversees manufacturing, logistics, global supply chain, quality, safety and information services.
Allen A. Gillette isRoger Pascavis has served as our SeniorExecutive Vice President, Strategic Global Sourcing since March 2013. Prior to becoming Executive Vice President of Engineering. Mr. Gillette joined Generac in 1998 and hasStrategic Global Supply, he served as Engineering Manager, Director of Engineering and Vice President of Engineering. Prior to joining Generac, Mr. Gillette was Manager of Engineering at Transamerica Delaval Enterprise Division, Chief Engineer—High-Speed Engines at Ajax-Superior Division and Manager of Design & Development, Cooper-Bessemer Reciprocating Products Division. Mr. Gillette holds an M.S. in Mechanical Engineering from Purdue University and a B.S. in Mechanical Engineering from Gonzaga University.
Allen D. Gillette is our Executive Vice President of Global Engineering. Mr. Gillette joined Generac in 1998 and has served in numerous engineering positions involving increasing levels of responsibilities and corresponding titles. Prior to joining Generac, Mr. Gillette was Manager of Engineering at Transamerica Delaval Enterprise Division, Chief Engineer—High-Speed Engines at Ajax-Superior Division and Manager of Design & Development, Cooper-Bessemer Reciprocating Products Division. Mr. Gillette holds an M.S. in Mechanical Engineering from Purdue University and a B.S. in Mechanical Engineering from Gonzaga University.
Clement Feng has served as our Senior Vice President of Marketing since August 2013 when he re-joined Generac after three years as Vice President - Global Marketing with the Fluke Corporation. Mr. Feng served as our Senior Vice President of Marketing from 2007 until 2010. Mr. Feng holds a B.S. in Chemical Engineering from Stanford University and an M.B.A. from the University of Chicago- Booth School of Business.
You should carefully consider the following risks. These risks could materially affect our business, results of operations or financial condition, cause the trading price of our common stock to decline materially or cause our actual results to differ materially from those expected or those expressed in any forward-looking statements made by us or on our behalf. 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 our products is significantly affected by unpredictable major power-outage eventsactivity 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 our products is affected by power outage events caused by thunderstorms, hurricanes, ice storms, blackouts and other power grid reliability issues. The impact of these outage events on our sales can vary depending on the location, frequency and severity of the outages. Sustained periods without major power disruptions can lead to reduced consumer awareness of the benefits of standby and portable generator products and can result in reduced sales growth rates and excess inventory. In addition, 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-outage events can affect our net sales inand fluctuations to the years following a given storm season. Unpredictable fluctuations in demandbaseline levels of power-outage activity are therefore 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 major power outagesdisruptions 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. If general economic conditions or consumer confidence were to worsen, or if the non-residential construction sector or rate of capital investments were to decline, our net sales and profits would likely be adversely affected. Additionally, timing of capital spending by our national account customers can vary from quarter-to-quarter based on capital availability and internal capital spending budgets.
Decreases in the availability and quality, or increases in the cost, of raw materials and key components we use could materially reduce our earnings.
The principal raw materials that we use to produce our products are steel, copper and aluminum. We also source a significant number of component parts from third parties that we utilize to manufacture our products. The prices of those raw materials and components are susceptible to significant fluctuations due to trends in supply and demand, transportation costs, government regulations and tariffs, price controls, economic conditions and other unforeseen circumstances beyond our control. We do not have long-term supply contracts in place to ensure the raw materials and components we use are available in necessary amounts or at fixed prices. If we are unable to mitigate raw material or component price increases through product design improvements, price increases to our customers, manufacturing productivity improvements, or hedging transactions, our profitability could be adversely affected. Also, our ability to continue to obtain quality materials and components is subject to the continued reliability and viability of our suppliers, including in some cases, suppliers who are the sole source of certain important components. If we are unable to obtain adequate, cost efficient or timely deliveries of required raw materials and components, we may be unable to manufacture sufficient quantities of products on a timely basis. This could cause us to lose sales, incur additional costs, delay new product introductions or suffer harm to our reputation.
The industry in which we compete is highly competitive, and our failure to compete successfullycould adversely affect our results of operations and financial condition.
We operate in markets that are highly competitive. Some of our competitors have established brands and are larger in size or are divisions of large diversified companies and have substantially greater financial resources. 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 morefurther information, see “Item 1—Business—Competition.”
Our industry is subject to technologicaltechnological change, and our failure to continue developing new and improved products and to bring these products rapidly to market could have an adverse impact on our business.
New products, or refinements and improvements of existing products, may have technical failures, their introduction may be delayed, they may have higher production costs than originally expected or they may not be accepted by our customers. If we are not able to anticipate, identify, develop and market high quality products in line with technological advancements that respond to changes in customer preferences, demand for our products could decline and our operating results could be adversely affected.
We rely on independent dealers and distribution partners, and the loss of these dealers and distribution partners, or of any of our sales arrangements with significant private label, telecommunications, retail or equipment rental customers, would adversely affect our business.
In addition to our direct sales force and manufacturer sales representatives, we depend on the services of independent distributors and dealers to sell our products and provide service and aftermarket support to our end customers. We also rely upon our distribution channels to drive awareness for our product categories and our brands. In addition, we sell our products to end users through private label arrangements with leading home equipment, electrical equipment and construction machinery companies,companies; arrangements with top retailers and equipment rental companies,companies; and our direct national accounts with telecommunications and industrial customers. Our distribution agreements and any contracts we have with large telecommunications, retail and other customers are typically not exclusive, and many of the distributors and customers with whom we do business offer products and services of our competitors. Impairment of our relationships with our distributors, dealers or large customers, loss of a substantial number of these distributors or dealers or of one or more large customers, or an increase in our distributors' or dealers' sales of our competitors' products to our customers or of our large customers' purchases of our competitors' products could materially reduce our sales and profits. Also, our ability to successfully realize our growth strategy is dependent in part on our ability to identify, attract and retain new distributors at all layers of our distribution platform, and we cannot be certain that we will be successful in these efforts.
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 view our intellectual property rights as very important assets. We seek to protect our intellectual property rights 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 In addition, we cannot be certain that we do not or will not infringe third parties' intellectual property rights. Any such claim, even if it is without merit, may be expensive and time-consuming to defend, subject us to damages, cause us to cease making, using or selling certain products that incorporate the disputed intellectual property, require us to redesign our products, divert management time and attention, and/or require us to enter into costly royalty or licensing arrangements. Furthermore, in connection with our sale of Generac Portable Products to 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 Our products are subject to substantial government regulation. Our products are subject to extensive statutory and regulatory requirements governing, among other things, emissions and noise, including standards imposed by the We may incur costs and liabilities as a result of product liability claims. We face a risk of exposure to product liability claims in the event that the use of our products is alleged to have resulted in injury or other damage. Although we currently maintain product liability insurance coverage, we may not be able to obtain such insurance on acceptable terms in the future, if at all, or obtain insurance that will provide adequate coverage against potential claims. Product liability claims can be expensive to defend and can divert the attention of management and other personnel for long periods of time, regardless of the ultimate outcome. A significant unsuccessful product liability defense could have a material adverse effect on our financial condition and results of operations. In addition, we believe our business depends on the strong brand reputation we have developed. If our reputation is damaged, we may face difficulty in maintaining our market share and pricing with respect to some of our products, which could reduce our sales and profitability.get a conclusionresolve and we may 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.the Beacon Groupa private equity firm in 1998, we granted the Beacon Groupprivate equity firm an exclusive perpetual license for the use of the “Generac Portable Products” trademark in connection with the manufacture and sale of certain engine driven consumer products. This perpetual license was eventually transferred to Briggs and Stratton (Briggs)another company when the Beacon Groupprivate equity firm sold that business to Briggs.business. Currently, this trademark is not being used in commerce and, as such, there is a rebuttable presumption that Briggsthe trademark has abandoned the trademark.been abandoned. However, in the event that the Beacon Group or Briggs use this trademark is used in the future, we could suffer competitive confusion and our business could be negatively impacted.air,air; discharges to water, noise,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. 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.federal Environmental Protection Agency (“EPA”), state regulatory agencies, such as California Air Resources Board (“CARB”),EPA, CARB and other regulatory agencies around the world. These laws are constantly evolving and many are becoming increasingly stringent. Changes in applicable laws or regulations, or in the enforcement thereof, could require us to redesign our products and could adversely affect our business or financial condition in the future. Developing and marketing products to meet such new requirements could result in substantial additional costs that may be difficult to recover in some markets. In some cases, we may be required to modify our projectsproducts or develop new products to comply with new regulations, particularly those relating to air emissions. For example,we were required to modify our spark-ignited air-cooled gaseous engines to comply with the 2011 EPA and CARB regulations, as well as the continued implementation of Tier 4 nonroad diesel engine changes associated with acquisitions serving the Magnum acquisition.mobile product markets. Typically, additional costs associated with significant compliance modifications are passed on to the market. While we have been able to meet previous deadlines, failure to comply with other existing and future regulatory standards could adversely affect our position in the markets we serve.We
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 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. 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 or information technology infrastructure failure; ● disruptions in the transportation infrastructure including roads, bridges, railroad ● fires, floods, tornados, earthquakes, or other catastrophes; and ● other operational problems. In addition, the majority of our manufacturing and production facilities are located in Wisconsin within a 100-mile 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: ● inflation or changes in political and economic conditions; ● unstable regulatory environments; ● changes in import and export duties; ● domestic and foreign customs and tariffs; ● currency rate fluctuations; ● trade restrictions; ● labor unrest; ● logistical ● communications challenges; and ● other restraints and burdensome taxes. 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 As a U.S. corporation that conducts business in a variety of foreign countries including, but not limited to, Mexico, Italy and Brazil, we are subject to the Foreign Corrupt As a U.S. corporation that conducts business in a variety of foreign countries including, but not limited to, Mexico, Italy and Brazil, we are subject to the regulations imposed by a variety of anti-corruption laws worldwide. The U.S. Foreign Corrupt Practices Act Our total assets include goodwill and other indefinite-lived intangibles. If we determine these have become impaired in the future, net income could be materially adversely affected. Goodwill represents the excess of cost over the fair market value of net assets acquired in business combinations. Indefinite-lived intangibles are comprised of certain trade names. At December 31, Goodwill and identifiable intangible assets are recorded at fair value on the date of acquisition. In accordance with We are unable to determine the specific impact of changes in selling prices or changes in volumes of our products on our net sales. Because of the wide range of products that we sell, the level of customization for many of our products, the frequent rollout of new products and the fact that we do not apply pricing changes uniformly across our entire portfolio of products, we are unable to determine with specificity the effect of volume changes or changes in selling prices on our net sales.disputesdisputes or organized labor activities could harm our business.machinesequipment within an otherwise operational facility, could cease operations unexpectedly due to a number of events, including:· · tracks; tracks and container ports;· · radius.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.· · · · · · · · and challenges, including extended container port congestion;· single-sourcedsingle-source certain types of parts in our product designs during 2012.designs. Any delay in our suppliers’ deliveries may impair our ability to deliver products to our customers. A wide variety of factors could cause such delays including, but not limited to, lack of capacity, economic downturns, availability of credit, weather events or natural disasters.PracticesPractices 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.or the FCPA,(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 or the UKBA,(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.We have significant tax assets, usage of which may be subject to limitations in the future.As of December 31, 2012, we had approximately $54.1 million of net operating loss carryforwards for U.S. federal income tax purposes. Any subsequent accumulations of common stock ownership leading to a change of control under Section 382 of the U.S. Internal Revenue Code of 1986, including through sales of stock by large stockholders, all of which are outside of our control, could limit and defer our ability to utilize our net operating loss carryforwards to offset future federal income tax liabilities. However, we believe any limitation would not be material.2012,2014, goodwill and other indefinite-lived intangibles totaled $711.8$818.2 million, most of which arose from the CCMP Transactions.Transaction. We review goodwill and other intangibles at least annually for impairment and any excess in carrying value over the estimated fair value is charged to the statement of operations. A reduction in net income resulting from the write-down or impairment of goodwill or indefinite-lived intangibles such as the $9.4 million non-cash charge recorded in the fourth quarter of 2011 primarily related to the write down of a certain trade name as we strategically transition to the Generac brand, could have a material adverse effect on our financial statements.FASBthe Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 350-20,Intangibles - Goodwill and Other, goodwill and indefinite lived intangibles are reviewed at least annually for impairment and definite-lived intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable. Future impairment may result from, among other things, deterioration in the performance of an acquired business or product line, adverse market conditions and changes in the competitive landscape, adverse changes in applicable laws or regulations, including changes that restrict the activities of an acquired business or product line, and a variety of other circumstances. The amount of any impairment is recorded as a charge to the statement of operations. We may never realize the full value of our intangible assets. Any future determination requiring the write-off of a significant portion of intangible assets would have an adverse effect on our financial condition and results of operations. See “Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operations” for details.We may need additional capitalfurther information on the Company’s impairment tests and at-risk goodwill for the Ottomotores reporting unit, and see Note 2, “Significant Accounting Policies,” to finance our growth strategy or to refinance our existing credit facilities, and we may not be able to obtain itthe consolidated financial statements included in Item 8 of this Annual Report on acceptable terms, or at all, which may limit our ability to grow.We may require additional financing to expand our business. Financing may not be available to us or may be available to us only on terms that are not favorable. The terms of our senior secured credit facilities limit our ability to incur additional debt. In addition, economic conditions, including a downturn in the credit markets, could impact our ability to finance our growth on acceptable terms or at all. If we are unable to raise additional funds or obtain capital on acceptable terms, we may have to delay, modify or abandon some or all of our growth strategies. On May 30, 2012, the Company completed a refinancing of its senior secured credit facilities, pursuant to which it has incurred $900 million of senior secured term loans to replace its prior $575 million term loan facilities. Following the refinancing, the Company used the available proceeds from the new term loans and cash on hand to fund a special cash dividend to its stockholders of $6.00 per share and to pay related financing fees and expenses. In the future, if we are unable to refinance such facilities on acceptable terms, our liquidity could be adversely affected.
We may not realize all of the anticipated benefits of our Our ability to realize the anticipated benefits of In addition, the overall integration of The difficulties of combining the operations of acquired businesses with ours include, among others: ● managing a larger company; ● maintaining employee morale and retaining key management and other employees; ● integrating two business cultures, which may prove to be incompatible; ● the possibility of faulty assumptions underlying expectations regarding the integration process; ● retaining existing customers and attracting new customers; ● consolidating corporate and administrative infrastructures and eliminating duplicative operations; ● the diversion of management's attention from ongoing business concerns and performance shortfalls as a result of the diversion of management's attention to the acquisition; ● unanticipated issues in integrating information technology, communications and other systems; ● unanticipated changes in applicable laws and regulations; ● managing tax costs or inefficiencies associated with integrating the operations of the combined company; ● unforeseen expenses or delays associated with the acquisition; ● difficulty comparing financial reports due to differing financial and/or internal reporting systems; and ● making any necessary modifications to internal financial control standards to comply with the Sarbanes-Oxley Act of 2002 and the rules and regulations promulgated thereunder. 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 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. acquisition of the Ottomotores business or other acquisitions or those benefits may take longer to realize than expected. We may also encounter significant unexpected difficulties in integrating acquired businesses.the Ottomotores acquisition, which was consummated on December 8, 2012, or otherour acquisitions will depend, to a large extent, on our ability to integrate the acquired businesses with our business. The combination of two independent businesses is a complex, costly and time-consuming process. Further, integrating and managing businesses with international operations such as the Ottomotores business, may pose challenges not previously experienced by our management. As a result, we will 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, would 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.the Ottomotores business or otherour 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.· · · · · · · · · · · · · Ottomotores or otherour 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 Ottomotores or otherour acquisitions with our business will result in the realization of the full benefits anticipated from the transaction.12
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: ● permit our board of directors to issue preferred stock with such terms as they determine, without stockholder approval; ● provide that only one-third of the members of the board are elected at each stockholders meeting and prohibit removal without cause; ● require advance notice for stockholder proposals and director nominations; and ● contain limitations on convening stockholder meetings. These provisions make it more difficult for stockholders or potential acquirers to acquire us without negotiation and could discourage potential takeover attempts and could adversely affect the market price of our common stock. Wecurrentlydo not While we declared a special dividend in both June 2012 and June 2013, we currently do not We have a significant amount of indebtedness which could adversely affect our cash flow and our ability to remain in compliance with debt covenants and make payments on our indebtedness. We have a significant amount of indebtedness. As of December 31, ● make it more difficult for us to satisfy our obligations with respect to our indebtedness, which could result in an event of default under the agreements governing our indebtedness; ● make us more vulnerable to adverse changes in general economic, industry and competitive conditions and adverse changes in government regulation; ● require us to dedicate a portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flows to fund working capital, capital expenditures, acquisitions and other general corporate purposes; ● limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; ● place us at a competitive disadvantage compared to our competitors that have less debt; and ● limit our ability to borrow additional amounts for working capital, capital expenditures, acquisitions, debt service requirements, execution of our business strategy or other purposes. Any of the above-listed factors could materially adversely affect our business, financial condition, results of operations and cash flows. While we maintain interest rate swaps covering a portion of our outstanding debt, our interest expense could increase if interest rates increase because debt under our credit facilities bears interest at a variable rate once above a certain LIBOR floor. If we do not have sufficient earnings to service our debt, we may be required to refinance all or part of our existing debt, sell assets, borrow more money or sell securities, none of which we can guarantee we will be able to do. The terms of our credit facilities restrict our current and future operations, particularly our ability to respond to changes in our business or to take certain actions. Our credit facilities contain, and any future indebtedness of ours or our subsidiaries would likely contain, a number of restrictive covenants that impose significant operating and financial restrictions on us and our subsidiaries, including restrictions on our ability to engage in acts that may be in our best long-term interests. These restrictions include, among other things, our ability to: ● incur liens; ● incur or assume additional debt or guarantees or issue preferred stock; ● pay dividends, or make redemptions and repurchases, with respect to capital stock; ● prepay, or make redemptions and repurchases of, subordinated debt; ● make loans and investments; ● make capital expenditures; ● engage in mergers, acquisitions, asset sales, sale/leaseback transactions and transactions with affiliates; ● change the business conducted by us or our subsidiaries; and ● amend the terms of subordinated debt. 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 We may need additional capital to 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 None. We own, operate or lease manufacturing and distribution facilities located principally in · · · · anticipate paying have plans to paydividends on our common stock in the foreseeable future.anticipate paying any furtherhave plans to pay dividends in the foreseeable future on our common stock. We intend to retain all future earnings for the operation and expansion of our business and the repayment of outstanding debt. In addition, the terms of our senior secured credit facilities limit our ability to pay dividends on our common stock. As a result, capital appreciation, if any, of our common stock will be the sole source of gain for the foreseeable future. While we may change this policy at some point in the future, we cannot assure that we will make such a change.2012,2014, we had total indebtedness of $881.3$1,082.7 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 lease and other financial obligations and contractual commitments could have other important consequences. For example, it could:· · · · · · · · · · · · · · · borrowings. Ourborrowings.Our existing credit facilities do not contain any financial maintenance covenantsOur principal stockholder continueshave substantial control over us.Affiliates of CCMP collectively beneficially own approximately 34.4%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.outstanding common stock. Priorsenior secured credit facilities limit our ability to sales ofincur additional debt. In addition, economic conditions, including a portion of their holdingsdownturn in us in February 2013 and November 2012, affiliates of CCMP owned approximately 58.6% ofthe credit markets, could impact our outstanding common stock. Notwithstanding this reduction, CCMPability to finance our growth on acceptable terms or its affiliates remain ableat all. If we are unable to exert a significant degree of influence over our management and affairs and will exert a significant degree of influence in matters requiring stockholder approval, including the election of directors, a merger, consolidationraise additional funds or sale of allobtain capital on acceptable terms, we may have to delay, modify or substantiallyabandon some or all of our assets, and any other significant transaction. The interests of this stockholder may not always coincide with our interests or the interests of our other stockholders. For instance, this concentration of ownership may have the effect of delaying or preventing a change in control of us otherwise favored by our other stockholders and could depress our stock price.Conflicts of interest may arise because some of our directors are principals of our principal stockholder.Representatives of CCMP and its affiliates currently occupy two of eight seats on our board of directors. CCMP or its affiliates could invest in entities that directly or indirectly compete with us or companies in which CCMP or its affiliates are currently invested may already compete with us. As a result of these relationships, when conflicts arise between the interests of CCMP or its affiliates and the interests of our stockholders, these directors may not be disinterested. The representatives of CCMP and its affiliates on our board of directors, by the terms of ourgrowth strategies. On May 31, 2013, we amended and restated certificateour term loan credit agreement, pursuant to which we incurred $1,200 million of incorporation,a senior secured term loan, which matures in 2020, to replace our prior $900 million term loan facility. In the future, if we are not requiredunable to offer us any transaction opportunity of which they become aware andrefinance such facilities on acceptable terms, our liquidity could take any such opportunity for themselves or offer it to other companies in which they have an investment, unless such opportunity is expressly offered to them solely in their capacity as our directors.Wisconsinthe United States, Mexico, Italy and Brazil totaling over 23.5 million square feet. We also operate a dealer training center at our Eagle, Wisconsin facility, which allows us to train new industrial and residential dealers on the service and installation of our products and provide existing dealers with training on product innovations. We also have inventory warehouses in the United States that accommodate material storage and rapid response requirements of our customers. We also operate manufacturing facilities in Mexico and Brazil.
The following table shows the location and activities of our principal operations:
Location | Owned/ Leased | |||||||
Square Footage | Activities | |||||||
Waukesha, WI | Owned | 307,000 | Corporate headquarters, manufacturing, storage, research and development, service parts distribution | |||||
Eagle, WI | Owned | 242,000 | Manufacturing, office, training | |||||
Whitewater, WI | Owned | 491,000 | Manufacturing, office, distribution | |||||
Oshkosh, WI | Owned | 255,000 | Manufacturing, storage, research and development | |||||
Berlin, WI | Owned | 129,000 | ||||||
Manufacturing, office | ||||||||
Berlin, WI | ||||||||
Leased | 192,500 | Storage | ||||||
Fort Atkinson, WI | Leased | |||||||
85,000 | Storage | |||||||
Edgerton, WI | ||||||||
Leased | 235,000 | |||||||
Storage | ||||||||
Jefferson, WI | Owned | 253,000 | Manufacturing, distribution | |||||
Jefferson, WI | Leased | 556,000 | Storage | |||||
Maquoketa, IA | Owned | 137,000 | Storage, rental property | |||||
Bismarck, ND | Owned | 50,000 | Manufacturing and office | |||||
Glenburn, ND | Owned | 20,000 | Manufacturing and office | |||||
Marietta, GA | Leased | 49,000 | Office, distribution and warehouse | |||||
Kearney, NE | Leased | 160,000 | Manufacturing, office, distribution, warehouse | |||||
Mexico City, Mexico | Owned | 180,000 | Manufacturing, sales, distribution, storage, office | |||||
Mexico City, Mexico | Leased | 71,000 | Storage and warehouse | |||||
Curitiba, Brazil | Leased | 26,000 | Manufacturing, sales, distribution, storage, office | |||||
Milan, Italy | Leased | 91,000 | Manufacturing, sales, distribution, storage, office | |||||
Milton Keynes, England | Leased | 9,000 | Sales, distribution, storage, office |
As of December 31, 2012,2014, substantially all of our owned properties are subject to collateral provisions under our senior secured credit facilities.
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, 2012,2014, we believe that there is no litigation pending that would have a material effect on our results of operations or financial condition.
Not Applicable.
PART II
Price Range of Common Stock
Shares 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 20122014 and 2011,2013, respectively.
2014 | High | Low | ||||||
Fourth Quarter | $ | 48.00 | $ | 38.85 | ||||
Third Quarter | $ | 48.02 | $ | 40.54 | ||||
Second Quarter | $ | 60.36 | $ | 46.27 | ||||
First Quarter | $ | 61.17 | $ | 45.72 |
2012 | ||||||||
High | Low | |||||||
Fourth Quarter | $ | 39.18 | $ | 24.43 | ||||
Third Quarter | $ | 25.33 | $ | 18.35 | ||||
Second Quarter | $ | 30.61 | $ | 22.40 | ||||
First Quarter | $ | 30.50 | $ | 24.27 |
2011 | ||||||||
High | Low | |||||||
Fourth Quarter | $ | 29.06 | $ | 18.29 | ||||
Third Quarter | $ | 21.41 | $ | 15.41 | ||||
Second Quarter | $ | 21.10 | $ | 17.10 | ||||
First Quarter | $ | 20.85 | $ | 14.72 |
Total Number of Shares Purchased | Average Price Paid per Share | Total Number Of Shares Purchased AsPart OfPublicly AnnouncedPlans Or Programs | ApproximateDollar ValueOf Shares ThatMay YetBe Purchased Under ThePlans Or Programs | |||||||||
10/01/14 | - | 10/31/14 | 615 | $ | 44.25 | N/A | N/A | |||||
11/01/14 | - | 11/30/14 | 6,185 | $ | 41.52 | N/A | N/A | |||||
12/01/14 | - | 12/31/14 | 122 | $ | 41.93 | N/A | N/A | |||||
Total | 6,922 | $ | 41.77 |
For equity compensation plan information, please refer to Note 15, “Share Plans,” to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K.
Stock Performance Graph
The line graph below compares the cumulative total stockholder return on our common stock with the cumulative total return of the Standard & Poor’s S&P 500 Index, andthe S&P 500 Industrials Index and the Russell 2000 Index for the yearapproximate five-year period ended December 31, 2012.2014. The graph and table assume that $100 was invested on February 11, 2010 (first day of trading) in each of our common stock, the S&P 500 Index, the S&P 500 Industrials Index, the Russell 2000 Index, and that all dividends were reinvested. Cumulative total stockholder returns for our common stock, the S&P 500 Index, and the S&P 500 Industrials Index and the Russell 2000 Index are based on our fiscal year.
Company/ Market/ Peer Group | 2/11/2010 | 3/31/2010 | 6/30/2010 | 9/30/2010 | 12/31/2010 | 3/31/2011 | 6/30/2011 | 9/30/2011 | 12/31/2011 | 3/31/2012 | 6/30/2012 | 9/30/2012 | 12/31/2012 | |||||||||||||||||||||||||||
Generac Holdings Inc. | $ | 100.00 | $ | 109.11 | $ | 109.11 | $ | 106.23 | $ | 125.93 | $ | 158.02 | $ | 151.09 | $ | 146.50 | $ | 218.30 | $ | 191.20 | $ | 187.38 | $ | 229.77 | $ | 344.40 | ||||||||||||||
S&P 500 Index | $ | 100.00 | $ | 108.73 | $ | 96.30 | $ | 107.17 | $ | 118.70 | $ | 125.73 | $ | 125.85 | $ | 108.40 | $ | 121.21 | $ | 136.46 | $ | 132.71 | $ | 141.14 | $ | 140.60 | ||||||||||||||
S&P 500 Industrials Index | $ | 100.00 | $ | 113.01 | $ | 99.09 | $ | 113.27 | $ | 126.65 | $ | 137.74 | $ | 136.82 | $ | 108.06 | $ | 125.90 | $ | 140.14 | $ | 135.16 | $ | 140.04 | $ | 145.23 |
Company / Market / Peer Group | 2/11/2010 | 12/31/2010 | 12/31/2011 | 12/31/2012 | 12/31/2013 | 12/31/2014 | ||||||||||||||||||
Generac Holdings Inc. | $ | 100.00 | $ | 125.93 | $ | 218.30 | $ | 344.40 | $ | 646.54 | $ | 533.76 | ||||||||||||
S&P 500 Index - Total Returns | 100.00 | 118.71 | 121.22 | 140.62 | 186.16 | 211.65 | ||||||||||||||||||
S&P 500 Industrials Index | 100.00 | 126.65 | 125.90 | 145.23 | 204.30 | 224.38 | ||||||||||||||||||
Russell 2000 Index | 100.00 | 130.86 | 125.40 | 145.94 | 202.61 | 212.53 |
Holders
As of February 1, 2013,20, 2015, there were approximately 124169 registered holders of record of Generac’s common stock. A substantially greater number of holders of Generac common stock are “street name” or beneficial holders, whose shares are held of record by banks, brokers, and other financial institutions.
Dividends
On June 21, 2013, the Company used a portion of the proceeds from the May 31, 2013 debt refinancing (see Note 11, “Credit Agreements,” to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K) to pay a special cash dividend of $5.00 per share on its common stock, resulting in payments totaling $340.8 million to stockholders.
On June 29, 2012, the Company used a portion of the proceeds from the May 30, 2012 debt refinancing (see footnote #6 – Credit AgreementNote 11, “Credit Agreements,” to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K) together with cash on its balance sheet to pay a special cash dividend of $6.00 per share on its common stock, resulting in payments totaling $404.3 million to stockholders.
We currently do not have plans to pay any further dividends on our common stock in the near term.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 such other factors that our board of directors may deem relevant, we may change this policy and choose to pay dividends. Our ability to pay dividends on our common stock is currently restricted by the terms of our senior secured credit facilities and may be further restricted by any future indebtedness we incur. Our business is conducted through our subsidiaries, including our principal operating subsidiary, Generac Power Systems. Dividends from, and cash generated by our subsidiaries will be our principal sources of cash to repay indebtedness, fund operations and pay dividends. Accordingly, our ability to pay dividends to our stockholders is dependent on the earnings and distributions of funds from our subsidiaries, including Generac Power Systems.
Securities Authorized for Issuance Under Equity Compensation Plans
For information required by this item will be included inon securities authorized for issuance under our 2013 Proxy Statementequity compensation plans, see “Item 12 - Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters,” which is incorporated herein by reference.
Recent Sales of Unregistered Securities
None.
Use of Proceeds from Registered Securities
Not applicable.
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, 2012, 20112014, 2013 and 20102012 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, 20092011 and December 31, 2008 are2010 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 future performance. YouThis information should be read this information together with “Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes thereto included in Item 8 of this Annual Report on Form 10-K.
(Dollars in thousands, except per share data) | Year ended December 31, 2012 | Year ended December 31, 2011 | Year ended December 31, 2010 | Year ended December 31, 2009 | Year ended December 31, 2008 | |||||||||||||||
Statement of operations data: | ||||||||||||||||||||
Net sales | $ | 1,176,306 | $ | 791,976 | $ | 592,880 | $ | 588,248 | $ | 574,229 | ||||||||||
Costs of goods sold | 735,906 | 497,322 | 355,523 | 352,398 | 372,199 | |||||||||||||||
Gross profit | 440,400 | 294,654 | 237,357 | 235,850 | 202,030 | |||||||||||||||
Operating expenses: | ||||||||||||||||||||
Selling and service | 101,448 | 77,776 | 57,954 | 59,823 | 57,449 | |||||||||||||||
Research and development | 23,499 | 16,476 | 14,700 | 10,842 | 9,925 | |||||||||||||||
General and administrative | 46,031 | 30,012 | 22,599 | 14,713 | 15,869 | |||||||||||||||
Amortization of intangibles (1) | 45,867 | 48,020 | 51,808 | 51,960 | 47,602 | |||||||||||||||
Goodwill and trade name impairment charge (2) | — | 9,389 | — | — | 583,486 | |||||||||||||||
Total operating expenses | 216,845 | 181,673 | 147,061 | 137,338 | 714,331 | |||||||||||||||
Income (loss) from operations | 223,555 | 112,981 | 90,296 | 98,512 | (512,301 | ) | ||||||||||||||
Other income (expense): | ||||||||||||||||||||
Interest expense | (49,114 | ) | (23,718 | ) | (27,397 | ) | (70,862 | ) | (108,022 | ) | ||||||||||
Gain (loss) on extinguishment of debt (3) | (14,308 | ) | (377 | ) | (4,809 | ) | 14,745 | 65,385 | ||||||||||||
Investment income | 79 | 110 | 235 | 2,205 | 600 | |||||||||||||||
Costs related to acquisition | (1,062 | ) | (875 | ) | — | — | — | |||||||||||||
Other, net | (2,798 | ) | (1,155 | ) | (1,105 | ) | (1,206 | ) | (1,217 | ) | ||||||||||
Total other expense, net | (67,203 | ) | (26,015 | ) | (33,076 | ) | (55,118 | ) | (43,254 | ) | ||||||||||
Income (loss) before provision for income taxes | 156,352 | 86,966 | 57,220 | 43,394 | (555,555 | ) | ||||||||||||||
Provision (benefit) for income taxes (4) | 63,129 | (237,677 | ) | 307 | 339 | 400 | ||||||||||||||
Net income (loss) | $ | 93,223 | $ | 324,643 | $ | 56,913 | $ | 43,055 | $ | (555,955 | ) | |||||||||
Income (loss) per share - diluted: | ||||||||||||||||||||
Common Stock (formerly Class A non-voting common stock) (5) | 1.35 | 4.79 | (1.65 | ) | (41,111 | ) | (357,628 | ) | ||||||||||||
Class B Common Stock (5) | n/a | n/a | 505 | 4,171 | 3,780 | |||||||||||||||
Statement of cash flows data: | ||||||||||||||||||||
Depreciation | 8,293 | 8,103 | 7,632 | 7,715 | 7,168 | |||||||||||||||
Amortization | 45,867 | 48,020 | 51,808 | 51,960 | 47,602 | |||||||||||||||
Expenditures for property and equipment | (22,392 | ) | (12,060 | ) | (9,631 | ) | (4,525 | ) | (5,186 | ) | ||||||||||
Other financial data: | ||||||||||||||||||||
Adjusted EBITDA (6) | 289,809 | 188,476 | 156,249 | 159,087 | 129,858 | |||||||||||||||
Adjusted Net Income (7) | 220,792 | 147,176 | 115,954 | 83,643 | 13,758 |
(Dollars in thousands) | As of December 31, 2012 | As of December 31, 2011 | As of December 31, 2010 | As of December 31, 2009 | As of December 31, 2008 | |||||||||||||||
Balance sheet data: | ||||||||||||||||||||
Current assets | $ | 522,553 | $ | 383,265 | $ | 272,519 | $ | 345,017 | $ | 274,997 | ||||||||||
Property, plant and equipment, net | 104,718 | 84,384 | 75,287 | 73,374 | 76,674 | |||||||||||||||
Goodwill | 552,943 | 547,473 | 527,148 | 525,875 | 525,875 | |||||||||||||||
Other intangibles and other assets | 423,633 | 537,671 | 334,929 | 392,977 | 448,668 | |||||||||||||||
Total assets | $ | 1,603,847 | $ | 1,552,793 | $ | 1,209,883 | $ | 1,337,243 | $ | 1,326,214 | ||||||||||
Total current liabilities | $ | 294,859 | $ | 165,390 | $ | 86,685 | $ | 131,971 | $ | 127,981 | ||||||||||
Long-term borrowings, less current portion | 799,018 | 575,000 | 657,229 | 1,052,463 | 1,121,437 | |||||||||||||||
Other long-term liabilities | 46,342 | 43,514 | 24,902 | 17,418 | 43,539 | |||||||||||||||
Redeemable stock (8) | — | — | — | 878,205 | 843,451 | |||||||||||||||
Stockholders' equity | 463,628 | 768,889 | 441,067 | (742,814 | ) | (810,194 | ) | |||||||||||||
Total liabilities, redeemable stock and stockholders' equity (8) | $ | 1,603,847 | $ | 1,552,793 | $ | 1,209,883 | $ | 1,337,243 | $ | 1,326,214 |
(Dollars in thousands, except per share data) | Year Ended December 31, 2014 | Year Ended December 31, 2013 | Year Ended December 31, 2012 | Year Ended December 31, 2011 | Year Ended December 31, 2010 | |||||||||||||||
Statement of Operations Data: | ||||||||||||||||||||
Net sales | $ | 1,460,919 | $ | 1,485,765 | $ | 1,176,306 | $ | 791,976 | $ | 592,880 | ||||||||||
Costs of goods sold | 944,700 | 916,205 | 735,906 | 497,322 | 355,523 | |||||||||||||||
Gross profit | 516,219 | 569,560 | 440,400 | 294,654 | 237,357 | |||||||||||||||
Operating expenses: | ||||||||||||||||||||
Selling and service | 120,408 | 107,515 | 101,448 | 77,776 | 57,954 | |||||||||||||||
Research and development | 31,494 | 29,271 | 23,499 | 16,476 | 14,700 | |||||||||||||||
General and administrative | 54,795 | 55,490 | 46,031 | 30,012 | 22,599 | |||||||||||||||
Amortization of intangibles (1) | 21,024 | 25,819 | 45,867 | 48,020 | 51,808 | |||||||||||||||
Trade name write-down (2) | - | - | - | 9,389 | - | |||||||||||||||
Gain on remeasurement of contingent consideration (3) | (4,877 | ) | - | - | - | - | ||||||||||||||
Total operating expenses | 222,844 | 218,095 | 216,845 | 181,673 | 147,061 | |||||||||||||||
Income from operations | 293,375 | 351,465 | 223,555 | 112,981 | 90,296 | |||||||||||||||
Other income (expense): | ||||||||||||||||||||
Interest expense | (47,215 | ) | (54,435 | ) | (49,114 | ) | (23,718 | ) | (27,397 | ) | ||||||||||
Investment income | 130 | �� | 91 | 79 | 110 | 235 | ||||||||||||||
Loss on extinguishment of debt (4) | (2,084 | ) | (15,336 | ) | (14,308 | ) | (377 | ) | (4,809 | ) | ||||||||||
Gain on change in contractual interest rate (4) | 16,014 | - | - | - | - | |||||||||||||||
Costs related to acquisition | (396 | ) | (1,086 | ) | (1,062 | ) | (875 | ) | - | |||||||||||
Other, net | (1,462 | ) | (1,983 | ) | (2,798 | ) | (1,155 | ) | (1,105 | ) | ||||||||||
Total other expense, net | (35,013 | ) | (72,749 | ) | (67,203 | ) | (26,015 | ) | (33,076 | ) | ||||||||||
Income before provision for income taxes | 258,362 | 278,716 | 156,352 | 86,966 | 57,220 | |||||||||||||||
Provision (benefit) for income taxes (5) | 83,749 | 104,177 | 63,129 | (237,677 | ) | 307 | ||||||||||||||
Net income | $ | 174,613 | $ | 174,539 | $ | 93,223 | $ | 324,643 | $ | 56,913 | ||||||||||
Income (loss) per share - diluted: | ||||||||||||||||||||
Common Stock (formerly Class A non-voting common stock) (6) | $ | 2.49 | $ | 2.51 | $ | 1.35 | $ | 4.79 | $ | (1.65 | ) | |||||||||
Class B Common Stock (6) | n/a | n/a | n/a | n/a | 505.00 | |||||||||||||||
Statement of Cash Flows data: | ||||||||||||||||||||
Depreciation | $ | 13,706 | $ | 10,955 | $ | 8,293 | $ | 8,103 | $ | 7,632 | ||||||||||
Amortization of intangible assets | 21,024 | 25,819 | 45,867 | 48,020 | 51,808 | |||||||||||||||
Expenditures for property and equipment | (34,689 | ) | (30,770 | ) | (22,392 | ) | (12,060 | ) | (9,631 | ) | ||||||||||
Other Financial Data: | ||||||||||||||||||||
Adjusted EBITDA (7) | $ | 337,283 | $ | 402,613 | $ | 289,809 | $ | 188,476 | $ | 156,249 | ||||||||||
Adjusted Net Income (8) | 234,165 | 301,664 | 220,792 | 147,176 | 115,954 |
(Dollars in thousands) | As of December 31, 2014 | As of December 31, 2013 | As of December 31, 2012 | As of December 31, 2011 | As of December 31, 2010 | |||||||||||||||
Balance Sheet Data: | ||||||||||||||||||||
Current assets | $ | 730,478 | $ | 654,179 | $ | 522,553 | $ | 383,265 | $ | 272,519 | ||||||||||
Property, plant and equipment, net | 168,821 | 146,390 | 104,718 | 84,384 | 75,287 | |||||||||||||||
Goodwill | 635,565 | 608,287 | 552,943 | 547,473 | 527,148 | |||||||||||||||
Other intangibles and other assets | 347,678 | 389,349 | 423,633 | 537,671 | 334,929 | |||||||||||||||
Total assets | $ | 1,882,542 | $ | 1,798,205 | $ | 1,603,847 | $ | 1,552,793 | $ | 1,209,883 | ||||||||||
Total current liabilities | $ | 240,522 | $ | 250,845 | $ | 294,859 | $ | 165,390 | $ | 86,685 | ||||||||||
Long-term borrowings, less current portion | 1,082,101 | 1,175,349 | 799,018 | 575,000 | 657,229 | |||||||||||||||
Other long-term liabilities | 70,120 | 54,940 | 46,342 | 43,514 | 24,902 | |||||||||||||||
Stockholders' equity | 489,799 | 317,071 | 463,628 | 768,889 | 441,067 | |||||||||||||||
Total liabilities and stockholders' equity | $ | 1,882,542 | $ | 1,798,205 | $ | 1,603,847 | $ | 1,552,793 | $ | 1,209,883 |
(1) Our amortization of intangibles expensesexpense includes the straight-line amortization of customer lists, patents and other finite-lived intangibles assets.
(2) During the fourth quarter of 2011, the Companywe decided to strategically transition certain products to their more widely known Generac brand. Based on this decision, the Companywe recorded a $9.4 million non-cash charge which primarily related to the write down of the impacted trade name to net realizable value. As of October 31, 2008, as a result of our annual goodwill and trade name impairment test, we determined that an impairment of goodwill and trade names existed, and we recognized a non-cash charge of $583.5 million in 2008.
(3) During 2012, the Companysecond quarter of 2014, we recorded a lossgain of $4.9 million related to an adjustment to a certain earn-out obligation in connection with a recent acquisition.
(4) For the years ended December 31, 2014, 2013 and 2012, represents the losses on extinguishment of debt and gain on change in contractual interest rate as described in Note 11, “Credit Agreements,” to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K. For the years ended December 31, 2011 and 2010, represents the losses on extinguishment of debt related to the refinancing transactions that occurred on February 9, 2012 and May 30, 2012. During 2011 and 2010, the Company wrote-offwrite-off of a portion of deferred financing costs related to accelerated repayments of debt.
(5) The 2011 net tax benefit of $237.7 million includes a tax benefit of $271.4 million recorded due to the reversal of valuation allowances recorded on the Company’sour net deferred tax assets. See discussionRefer to Note 13, “Income Taxes,” to the consolidated financial statements in Item 8 – Financial Statements and Supplementary Data – Note 9of this Annual Report on Form 10-K for additional information.
(6) Diluted earnings per share reflects the impact of thea reverse stock split which occurred immediately prior to the initial public offering as discussed in “Item 8 – Financial Statements and Supplementary Data – Note 1”(IPO). At the time of the IPO on February 17, 2010, all shares of Class B common stock were converted into shares of Class A common stock, and the Class A common stock became the one class of outstanding common stock. See discussion of the IPO in Part 1, Item 1 – Initial Public Offering and Corporate Reorganization.
(7) Adjusted EBITDA represents net income (loss) before interest expense, taxes, depreciation and amortization, as further adjusted for the other items reflected in the reconciliation table set forth below. This presentationThe computation of adjusted EBITDA is substantially consistent withbased on the presentation useddefinition of EBITDA contained in ourGenerac's New Term Loan Credit Agreement and ABL Credit Agreement. Note that the definitions of EBITDA in the new Term Loan Credit Agreement andNew ABL Credit Agreement are(terms defined in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Financial Position” and Note 11, “Credit Agreements,” to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K), dated as of May 31, 2013, which is substantially the same asdefinition that was contained in the definitions of EBITDA inCompany’s previous credit agreements.
We view Adjusted EBITDA as a key measure of our performance. We present Adjusted EBITDA not only due to its importance for purposes of our Term Loan Credit Agreement and ABL Credit Agreementcredit agreements, but also because it assists us in comparing our performance across reporting periods on a consistent basis because it excludes items that we do not believe are indicative of our core operating performance. Our management uses Adjusted EBITDA:
● | for planning purposes, including the preparation of our annual operating budget and developing and refining our internal projections for future periods; |
● | to allocate resources to enhance the financial performance of our business; |
● | as a benchmark for the determination of the bonus component of compensation for our senior executives under our management incentive plan, as described further in our Proxy Statement; |
● | to evaluate the effectiveness of our business strategies and as a supplemental tool in evaluating our performance against our budget for each period; and |
● | in communications with our board of directors and investors concerning our financial performance. |
We believe Adjusted EBITDA is used by securities analysts, investors and other interested parties in the evaluation of our company. Management believes that the disclosure of Adjusted EBITDA offers an additional financial metric that, when coupled with results prepared in accordance with U.S. GAAP resultsgenerally 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;
● | Adjusted EBITDA and similar non-GAAP measures are widely used by investors to measure a company's operating performance without regard to items that can vary substantially from company to company depending upon financing and accounting methods, book values of assets, tax jurisdictions, capital structures and the methods by which assets were acquired; |
● | investors can use Adjusted EBITDA as a supplemental measure to evaluate the overall operating performance of our company, including our ability to service our debt and other cash needs; and |
● | by comparing our Adjusted EBITDA in different historical periods, our investors can evaluate our operating performance excluding the impact of items described below. |
The adjustments included in the reconciliation table listed below are provided for under our New Term Loan Credit Agreement and New ABL Credit Agreement and also are presented to illustrate the operating performance of our business in a manner consistent with the presentation used by our management and board of directors. These adjustments eliminate the impact of a number of items that:
● | we do not consider indicative of our ongoing operating performance, such as non-cash write-down 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; |
● | are non-cash in nature, such as share-based compensation; or |
● | were eliminated following the consummation of our initial public offering. |
• we do not consider indicative of our ongoing operating performance, such as non-cash impairment and other charges, transaction costs relating to the CCMP Transactions and repurchases of our debt by affiliates of CCMP, non-cash gains relating to the retirement of debt, severance costs and other restructuring-related business optimization expenses;
Adjusted EBITDA does not represent, and should not be a substitute for, net income or cash flows from operations as determined in accordance with U.S. GAAP. Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under U.S. GAAP. Some of the limitations are:
● | Adjusted EBITDA does not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments; |
● | Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; |
● | Adjusted EBITDA does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debt; |
● | although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements; |
● | several of the adjustments that we use in calculating Adjusted EBITDA, such as non-cash write-downs and other charges, while not involving cash expense, do have a negative impact on the value our assets as reflected in our consolidated balance sheet prepared in accordance with U.S. GAAP; and |
● | other companies may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure. |
Furthermore, as noted above, one of our uses of Adjusted EBITDA is as a benchmark for determining elements of compensation for our senior executives. At the same time, some or all of these senior executives have responsibility for monitoring our financial results, generally including the items that are included as adjustments in calculating Adjusted EBITDA (subject ultimately to review by our 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 that 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 New Term Loan Credit Agreement and New ABL Credit Agreement, 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.
(Dollars in thousands) | Year ended December 31, 2012 | Year ended December 31, 2011 | Year ended December 31, 2010 | Year ended December 31, 2009 | Year ended December 31, 2008 | |||||||||||||||
Net income (loss) | $ | 93,223 | $ | 324,643 | $ | 56,913 | $ | 43,055 | $ | (555,955 | ) | |||||||||
Interest expense | 49,114 | 23,718 | 27,397 | 70,862 | 108,022 | |||||||||||||||
Depreciation and amortization | 54,160 | 56,123 | 59,440 | 59,675 | 54,770 | |||||||||||||||
Income taxes provision (benefit) | 63,129 | (237,677 | ) | 307 | 339 | 400 | ||||||||||||||
Non-cash impairment and other charges (income) (a) | 247 | 10,400 | (361 | ) | (1,592 | ) | 585,634 | |||||||||||||
Non-cash share-based compensation expense (b) | 10,780 | 8,646 | 6,363 | — | — | |||||||||||||||
Loss (gain) on extinguishment of debt (c) | 14,308 | 377 | 4,809 | (14,745 | ) | (65,385 | ) | |||||||||||||
Transaction costs and credit facility fees (d) | 4,117 | 1,719 | 1,019 | 1,188 | 1,319 | |||||||||||||||
Other | 731 | 527 | 362 | 305 | 1,053 | |||||||||||||||
Adjusted EBITDA | $ | 289,809 | $ | 188,476 | $ | 156,249 | $ | 159,087 | $ | 129,858 |
(Dollars in thousands) | Year Ended December 31, 2014 | Year Ended December 31, 2013 | Year Ended December 31, 2012 | Year Ended December 31, 2011 | Year Ended December 31, 2010 | |||||||||||||||
Net income | $ | 174,613 | $ | 174,539 | $ | 93,223 | $ | 324,643 | $ | 56,913 | ||||||||||
Interest expense | 47,215 | 54,435 | 49,114 | 23,718 | 27,397 | |||||||||||||||
Depreciation and amortization | 34,730 | 36,774 | 54,160 | 56,123 | 59,440 | |||||||||||||||
Income taxes provision (benefit) | 83,749 | 104,177 | 63,129 | (237,677 | ) | 307 | ||||||||||||||
Non-cash write-down and other adjustments (a) | (3,853 | ) | 78 | 247 | 10,400 | (361 | ) | |||||||||||||
Non-cash share-based compensation expense (b) | 12,612 | 12,368 | 10,780 | 8,646 | 6,363 | |||||||||||||||
Loss on extinguishment of debt (c) | 2,084 | 15,336 | 14,308 | 377 | 4,809 | |||||||||||||||
Gain on change in contractual interest rate (c) | (16,014 | ) | - | - | - | - | ||||||||||||||
Transaction costs and credit facility fees (d) | 1,851 | 3,863 | 4,117 | 1,719 | 1,019 | |||||||||||||||
Other | 296 | 1,043 | 731 | 527 | 362 | |||||||||||||||
Adjusted EBITDA | $ | 337,283 | $ | 402,613 | $ | 289,809 | $ | 188,476 | $ | 156,249 |
(a) Represents the following non-cash charges:
● | for the year ended December 31, 2014, primarily $4.9 million adjustment to a certain earn-out obligation in connection with a recent acquisition. Also includes loss on disposal of assets and unrealized mark-to-market adjustments on commodity contracts; |
● | for the years ended December 31, 2013 and 2012, includes loss on disposals of assets, unrealized mark-to-market adjustments on commodity contracts and adjustments to an earn-out obligation in connection with a permitted business acquisition, as defined in our credit agreement; |
● | for the year ended December 31, 2011, primarily $9.4 million trade name write-down relating to the Company’s decision to strategically transition certain products to their more widely known Generac brand. Also includes loss on disposal of assets and unrealized mark-to-market adjustments on commodity contracts; |
● | for the year ended December 31, 2010, primarily unrealized mark-to-market adjustments on commodity and Euro forward contracts and loss on disposal of assets; |
We believe that adjusting net income for these non-cash charges is useful for the following reasons:
● | The loss on disposals of assets described above result from the sale of assets that are no longer useful in our business and therefore represent losses that are not from our core operations; |
● | The adjustments for unrealized mark-to-market gains and losses on commodity and Euro forward contracts represent non-cash items to reflect changes in the fair value of forward contracts that have not been settled or terminated. We believe it is useful to adjust net income for these items because the charges do not represent a cash outlay in the period in which the charge is incurred, although Adjusted EBITDA must always be used together with our U.S. GAAP statements of comprehensive income and cash flows to capture the full effect of these contracts on our operating performance; |
● | The adjustment to a certain earn-out obligation in connection with a recent acquisition recorded in the year ended December 31, 2014, and the trade name write-down recorded in the year ended December 31, 2011, are one-time charges that we believe do not reflect our ongoing operations; |
(b) Represents share-based compensation expense to account for stock options, restricted stock and other stock awards over their vesting period.
(c) RepresentsFor the loss (gain)years ended December 31, 2014, 2013 and 2012, represents the losses on extinguishment of debt from:
(d) 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 relatedrelating to our Term Loan Credit Agreement or ABL Credit Agreement,senior secured credit facilities, such as:
• administrative agent fees and revolving credit facility commitment fees under our Term Loan Credit Agreement and ABL Credit Agreement, 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;
● | administrative agent fees and revolving credit facility commitment fees under our New Term Loan Credit Agreement and New ABL Credit Agreement, 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; |
● | other financing costs incurred relating to the dividend recapitalization transactions completed in May 2012 and 2013; and |
● | pre-2011 transaction costs relating to repurchases of debt under our first and second lien credit facilities by affiliates of CCMP, who contributed the repurchased debt to our company in exchange for the issuances of securities, which repurchases we do not expect to recur; |
(8) Adjusted Net Income is defined as net income before provision (benefit) for income taxes adjusted for the following items: cash income tax expense, amortization of intangible assets, amortization of deferred financing costs and original issue discount related to the Company’sour debt, gains and losses (gains) on extinguishment of the Company’schanges in cash flows related to our debt, intangible asset impairment charges, transaction costs and other purchase accounting adjustments, and certain non-cash gains and losses as reflected in the reconciliation table set forth below (as applicable).
We believe Adjusted Net Income is used by securities analysts, investors and other interested parties in the evaluation of our company operations. Management believes the disclosure of Adjusted Net Income offers an additional financial metric that, when used in conjunction with U.S. GAAP results and the reconciliation to U.S. GAAP results, provides a more complete understanding of our results of operations, our cash flows, and the factors and trends affecting our business.
The adjustments included in the reconciliation table listed below are presented to illustrate the operating performance of our business in a manner consistent with the presentation used by investors and securities analysts. Similar to the Adjusted EBITDA reconciliation, these adjustments eliminate the impact of a number of items we do not consider indicative of our ongoing operating performance or cash flows, such as amortization costs, transaction costs and write-offs relating to the retirement of debt. We also make adjustments to present cash taxes paid as a result of our favorable tax attributes.
Similar to Adjusted EBITDA, Adjusted Net Income does not represent, and should not be a substitute for, net income or cash flows from operations as determined in accordance with U.S. GAAP. Adjusted Net Income has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under U.S. GAAP. Some of the limitations are:
● | Adjusted Net Income does not reflect changes in, or cash requirements for, our working capital needs; |
● | although amortization is a non-cash charge, the assets being amortized may have to be replaced in the future, and Adjusted Net Income does not reflect any cash requirements for such replacements; |
● | other companies may calculate Adjusted Net Income differently than we do, limiting its usefulness as a comparative measure. |
The following table presents a reconciliation of net income (loss) to Adjusted Net Income:
(Dollars in thousands) | Year ended December 31, 2012 | Year ended December 31, 2011 | Year ended December 31, 2010 | Year ended December 31, 2009 | Year ended December 31, 2008 | |||||||||||||||
Net income (loss) | $ | 93,223 | $ | 324,643 | $ | 56,913 | $ | 43,055 | $ | (555,955 | ) | |||||||||
Provision (benefit) for income taxes | 63,129 | (237,677 | ) | 307 | 339 | 400 | ||||||||||||||
Income (loss) before provision (benefit) for income taxes | 156,352 | 86,966 | 57,220 | 43,394 | (555,555 | ) | ||||||||||||||
Amortization of intangible assets | 45,867 | 48,020 | 51,808 | 51,960 | 47,602 | |||||||||||||||
Amortization of deferred finance costs and original issue discount | 3,759 | 1,986 | 2,439 | 3,417 | 3,905 | |||||||||||||||
Loss (gain) on extinguishment of debt | 14,308 | 377 | 4,809 | (14,745 | ) | (65,385 | ) | |||||||||||||
Trade name write-down | — | 9,389 | — | — | 583,486 | |||||||||||||||
Transaction costs and other purchase accounting adjustments | 3,317 | 875 | — | — | — | |||||||||||||||
Adjusted net income before provision for income taxes | 223,603 | 147,613 | 116,276 | 84,026 | 14,053 | |||||||||||||||
Cash income tax expense | (2,811 | ) | (437 | ) | (322 | ) | (383 | ) | (295 | ) | ||||||||||
Adjusted net income | $ | 220,792 | $ | 147,176 | $ | 115,954 | $ | 83,643 | $ | 13,758 |
(Dollars in thousands) | Year Ended December 31, 2014 | Year Ended December 31, 2013 | Year Ended December 31, 2012 | Year Ended December 31, 2011 | Year Ended December 31, 2010 | |||||||||||||||
Net income | $ | 174,613 | $ | 174,539 | $ | 93,223 | $ | 324,643 | $ | 56,913 | ||||||||||
Provision (benefit) for income taxes | 83,749 | 104,177 | 63,129 | (237,677 | ) | 307 | ||||||||||||||
Income before provision (benefit) for income taxes | 258,362 | 278,716 | 156,352 | 86,966 | 57,220 | |||||||||||||||
Amortization of intangible assets | 21,024 | 25,819 | 45,867 | 48,020 | 51,808 | |||||||||||||||
Amortization of deferred finance costs and original issue discount | 6,615 | 4,772 | 3,759 | 1,986 | 2,439 | |||||||||||||||
Loss on extinguishment of debt | 2,084 | 15,336 | 14,308 | 377 | 4,809 | |||||||||||||||
Gain on change in contractual interest rate | (16,014 | ) | - | - | - | - | ||||||||||||||
Trade name write-down | - | - | - | 9,389 | - | |||||||||||||||
Transaction costs and other purchase accounting adjustments (a) | (3,623 | ) | 2,842 | 3,317 | 875 | - | ||||||||||||||
Adjusted net income before provision for income taxes | 268,448 | 327,485 | 223,603 | 147,613 | 116,276 | |||||||||||||||
Cash income tax expense (b) | (34,283 | ) | (25,821 | ) | (2,811 | ) | (437 | ) | (322 | ) | ||||||||||
Adjusted net income | $ | 234,165 | $ | 301,664 | $ | 220,792 | $ | 147,176 | $ | 115,954 |
(a) Represents transaction costs incurred directly in connection with any investment, as defined in our Series A Preferred Stockcredit agreement, equity issuance or debt issuance or refinancing. The year ended December 31, 2014 also includes certain purchase accounting adjustments and Class B Common Stock.
(b) Amounts are based on actual cash income taxes paid during each 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 1 – Business,” “Item 6 - Selected Financial Data” and the consolidated financial statements and the related notes thereto included in Item 8 of this Annual Report on Form 10-K. This discussion contains forward-looking statements, based on current expectations and related to future events and our future financial performance, that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those set forth under “Item 1A - Risk Factors.”
Overview
We are a leading designer and manufacturer of a wide range of generatorspower generation equipment and other engine powered products forserving the residential, light commercial, industrial, oil & gas, and construction markets. Power generation is our primary focus, which differentiates us from our primary competitors that also have broad operations outside of the generator 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 United States, Canadawidest range of products in the marketplace, including residential, commercial and Mexico. Weindustrial standby generators, as well as portable and mobile generators used in a variety of applications. Other engine powered products that we design and manufacture sourceinclude light towers which provide temporary lighting for various end markets; commercial and modify engines, alternators, transfer switchesindustrial mobile heaters used in the oil & gas, construction and other components necessary for our products. Our products are fueled by natural gas, liquid propane, gasoline, dieselindustrial markets; and Bi-Fuel™ and are available through a broad networkproduct line of independent dealers, retailers, wholesalerspower washers for residential and equipment rental companies.
Over the past several years, we have executed a number of acquisitions that support our strategic plan. A summary of these acquisitions can be found in Note 1, “Description of Business,” to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K.
Business driversDrivers and measures
In operating our business and monitoring its performance, we pay attention to a number of industrybusiness drivers and trends performance measures andas 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 and other mobile product solutions 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 not aware of the costs and benefits of automatic backup power solutions. We estimate that penetration rates for residential productshome standby generators are only approximately 2.5%3.5% of U.S. single-family detached, owner-occupied households with a home value of over $100,000, as defined by the U.S. Census Bureau's 20092013 American Housing Survey for the United States, and penetration rates ofStates. The decision to purchase backup power for many light-commercial outletsbuildings such as convenience stores, restaurants drug stores, and gas stations are significantlyis more return-on-investment (ROI) driven and as a result these applications have relatively lower thanpenetration 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 accelerate the penetration of hospitalsstandby generators in the light-commercial market. In addition, the importance of backup power for telecommunications infrastructure is increasing due to the growing importance for uninterrupted voice and industrial locations.data services. Also, in recent years, a more stringent regulatory environment around the flaring of natural gas at oil & gas drilling and production sites has been a catalyst for increased demand for natural gas fueled generators, including mobile solutions. We believe by expanding our distribution network, continuing to develop our product line, and targeting our marketing efforts, we can continue to build awareness and increase penetration for our standby generators.
Impact of residential investment cycle. The market for residential generators is also affected by the residential investment cycle and overall consumer confidence and sentiment. When homeowners are confident of their household income, the value of their home and overall net worth, they are more likely to invest in their home. These trends can have an impact on demand for residential generators. Trends in the new housing market highlighted by residential housing starts can also impact demand for our residential products.
Impact of business capital investment cycle. The market for our commercial and industrial stationary and mobile generators and other power equipmentproducts is affected by the overall capital investment cycle, and overallincluding non-residential building construction, and 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 industrialcommercial and commercialindustrial end markets that we serve (industrial,including light commercial, retail, telecommunications, distribution, retail, health care facilities,industrial, data centers, healthcare, construction, energyoil & gas and municipal infrastructure, among others).others. The market for these products is also affected by general economic conditions and credit availability in the geographic regions that we serve. In addition, we believe demand for our mobile power products will continue to benefit 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 and cost control. Certain operational and other factors that affect our business include the following:
New product start-up costs. When we launch new products, we generally experience an increase in start-up costs, including engineering expenses, expediting costs, testing expenses, marketing expenses and warranty costs, resulting in lower gross margins after the initial launch of a new product. Margins on new product introductions generally increase over the life of the product as these start-up costs decline and we focus our engineering efforts on product cost reduction.
Seasonality. Although there is demand for our products throughout the year, in each of the past three years approximately 23% to 27% of our net sales occurred in the first quarter, 20% to 25% in the second quarter, 24% to 26% in the third quarter and 25% to 29% in the fourth quarter, with different seasonality depending on the presence, timing and severity of major power outage activity in each year. Major outage activity is unpredictable by nature and, as a result, our sales levels and profitability may fluctuate from period to period. For example, there were multiple major power outage events that occurred during the second half of both 2011 and 2012, which were significant in terms of severity. As a result, the seasonality experienced during this time period, and for the subsequent quarters following the time period, varied 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.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 and repayments of indebtedness. InterestCash interest expense increased in 2012decreased during 2014 compared to 2011,2013, primarily due to a slight increasereduction in interest rate from the weighted-average cost of debt associated with the Credit Agreement (see footnote #6 – Credit Agreement), for the period between February 9, 2012 andcredit agreement refinancing completed in May 29, 2012, as well as an increase in outstanding debt2013 and the weighted-average cost25 basis point reduction in borrowing costs during the second quarter of 2014 as a result of our net debt associated with theleverage ratio, as defined in our New Term Loan Credit Agreement, (defined below),falling below 3.0 times.Refer to Note 11, “Credit Agreements,” to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K for the period between May 30, 2012 and December 31, 2012.additional details.
Factors influencing provision for income taxes. Because we made a Section 338(h)(10) election in connection with the CCMP Transactions, we have $1.1 billiontaxes and cash income taxes paid. We had approximately $837 million of tax-deductible goodwill and intangible asset amortization remaining as of December 31, 20122014 related to our acquisition by CCMP in 2006 that we expect to generate cash tax savings of $422approximately $326 million through 2021, assuming continued profitability and a 39% tax rate. The amortizationrecognition of the tax benefit associated with these assets for tax purposes is expected to be $122 million annually through 2020 and $102 million in 2021, which generates annual cash tax savings of $48 million through 2020 and $40 million in 2021, assuming profitability and a 39% tax rate. Additionally, we have federal net operating loss, or NOL, carry-forwards of $54.1 million as of December 31, 2012, which we expect to generate an additional $18.9 million of federal cash tax savings at a 35% rate when and if utilized. Based on current business plans, we believe that our cash tax obligations through 2021 will be significantly reduced by these tax attributes. However, any subsequent accumulations of common stock ownership leading to a change of control under Section 382 of the U.S. Internal Revenue Code of 1986, including through sales of stock by large stockholders, all of which are outside of our control, could limit and defer our ability to utilize our net operating loss carryforwards to offset future federal income tax liabilities. We believe any limitations would not be material.
In the second quarter 26%of 2013, the dividend recapitalization discussed under “Liquidity and Financial Position” was completed. After considering the increased debt and related interest expense, the Company believes it will still generate sufficient taxable income to 30% infully utilize the third quarter and 27% to 34% in the fourth quarter, with different seasonality depending on the timing of major power outage activity in each year, such as the outage activity experienced in the third and fourth quarters of both 2011 and 2012. Due to the significant demand and awareness created by the outage events in the second half of 2012, our historical seasonality patterns may not apply in 2013.
In November 2006, affiliates of CCMP, together with certain other investors and members of our management, purchased an aggregate of $689 million of our equity capital. In addition, on November 10, 2006, Generac Power Systems borrowed an aggregate of $1.38 billion, consisting of an initial drawdown of $950 million under a $1.1 billion first lien secured credit facility and $430 million under a $430 million second lien secured credit facility. With the proceeds from these equity and debt financings, together with cash on hand at Generac Power Systems, we (1) acquired all of the capital stock of Generac Power Systems and repaid certain pre-transaction indebtedness of Generac Power Systems for $2.0 billion, (2) paid $66 million in transaction costs related to the transaction and (3) retained $3 million for general corporate purposes.
In August 2013, CCMP completed the last of a series of sale transactions that is to be offeredbegan in an initial public offering taking into accountNovember 2012 by which it sold substantially all of the value, rights and preferences of our Class B Common Stock. In accordance with the terms of our certificate of incorporation prior to the offering, at the time we entered into an underwriting agreement with respect to the initial public offering, each share of our Class B Common Stock automatically converted into a number of shares of our Class A Common Stock equal to one plus the quotient obtained by dividing (i)(x) the amount paid for such share of Class B Common Stock plus (y) an increase to such amount equal to 10% per annum calculated and compounded quarterly on the basis of a 360-day year of twelve 30-day months and which increased amount shall be deemed to have accrued on a daily basis, by (ii) the public offering price (net of underwriting discounts and commissions). We refer to this as the “Class B Conversion.” Each share of our Class B Common Stock converted into 1,118.440 shares of our Class A Common Stock. As a result of the Class B Conversion, we issued an aggregate of 88,484,700 shares of our Class A Common Stock.
Initial public offering
On February 17, 2010, the Company completed its initial public offeringIPO of 18,750,000 shares of its common stock at a price of $13.00 per share. In addition,the underwriters exercised their option and purchased an additional 1,950,500 shares of the Company’s common stock from the Company on March 18, 2010. We received a total of approximately $247.9 million in net proceeds from the initial public offering and underwriters’ option exercise, after deducting the underwriting discounts and expenses. All shares sold in this offering were primary shares. Immediately following the Corporate Reorganization, the IPO and underwriters’ option exercise, we had 67,529,290 total shares of common stock outstanding.
Components of net salesNet Sales and expenses
Net sales
Substantially all of our net sales are generated through the sale of our generators and other engine powered products for the residential, light commercial, industrial, oil & gas, and construction markets. We also sell engines to certain customers and service parts to our dealer network. Net sales, which include shipping and handling charges billed to customers, are generally recognized upon shipment of products to our customers. Related freight costs are included in cost of sales. Our generators and other products are fueled by natural gas, liquid propane, gasoline, diesel or Bi-Fuel™ systems with power output from 800W to 9mW. Our products are primarily manufactured and assembled at our Wisconsin and Mexico facilities and distributed through thousands of outlets across North America. Our smaller kW generators for the residential, portable and commercial markets are typically built to stock, while our larger kW products for the industrial markets are generally customized and built to order.
During 2012,2014, our net sales were affected primarily by the U.S. economymarket as sales outside of the United States represented only approximately 7%16% of total net sales.
We are not dependent on any one channel or customer for our net sales, with no single customer representing more than 7%8% of our net sales for the year ended December 31, 20122014 and our top ten customers representing less than 29%26% of our net sales for the same period.
The principal elements of costs of goods sold in our manufacturing operations are component parts, raw materials, factory overhead and labor. Component parts and raw materials comprised over 85% of costs of goods sold for the year ended December 31, 2012.2014. The principal component parts are engines and alternators. We design and manufacture air-cooled engines for certain of our products smaller than 20kW.up to 22kW. We source engines for certain of our smaller products and all of our products larger than 20kW.22kW. For natural gas engines, we are recognized as the OEM. We design all the alternators for our units and manufacture 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 and value oriented suppliers.
The principal raw materials used in our manufacturing processes and in the manufacturing of the components we sourceprocess 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, andmanufacturing efficiencies, price increases in our products.and select hedging transactions. However, there is typically a lag between raw material price fluctuations and their effect on our costs of goods sold.
Other sources of costs include our manufacturing and warehousing facilities, factory overhead, labor and shipping costs. Factory overhead includes utilities, support personnel, depreciation, general supplies, support and maintenance. Although we attempt to maintain a flexible manufacturing cost structure, our margins can be impacted when we cannot timely adjust labor and manufacturing costs to match fluctuations in net sales.
Operating expenses
Our operating expenses consist of costs incurred to support our sales, marketing, distribution, service parts, engineering, information systems, human resources, finance, risk management, legal and tax functions. All of these categoriesThese expenses include personnel costs such as salaries, bonuses, employee benefit costs and taxes. We typically classify our operating expensestaxes, and are classified into fourthree categories: selling and service, research and development, and general and administrative, andadministrative. Additionally, the amortization of intangibles.
Selling and service. Our selling and service expenses consist primarily of personnel expense, marketing expense, warranty expense and other sales expenses. Our personnel expense recorded in selling and services expenses includes the expense of our sales force responsible for our national accountsbroad customer base and other personnel involved in the marketing, sales and salesservice of our products. Warranty expense, which is recorded at the time of sale, is estimated based on historical trends. Our marketing expenses include direct mail costs, printed material costs, product display costs, market research expenses, trade show expenses, media advertising and media advertising.co-op advertising costs. Marketing expenses are generally increase as our sales efforts increase and are related to the launch of new product offerings, and opportunities within selected markets or associated with specific events such as awareness marketing in areas impacted by major power outages, participation in trade shows and other events.events, and opportunities to create market awareness for home standby generators in areas impacted by heightened power outage activity.
Research and development. Our research and development expenses support over 130 active research and development projects.numerous projects covering all of our product lines. We currently operate five advanced engineering facilities at eight locations globally and employ over 200 engineers who250 personnel with focus on new product development, existing product improvement and cost reduction.containment. Our commitment to research and development has resulted in a significant portfolio of approximately 90over 170 U.S. and international patents and patent applications. 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 and legal professional services fees, information technology costs, insurance, travel and entertainment expense and other corporate expense.
Amortization of intangibles. Our amortization of intangibles expenses include the straight-line amortization of definite-lived customer lists, patents and other intangibles assets.
Goodwill and trade name. Goodwill primarily represents the excess of amount paid over the fair market value of net tangible and intangible assets acquired in business combinations.
Other income (expense)
Costs related to acquisitions. In 2014, the other income (expense). We also recordedexpenses include one-time transaction-related expenses related to interest rate swap agreements, which had a notional amountthe acquisitions of $300.0 million outstanding at December 31, 2011 at an average rate of 1.5%,Powermate and a notional amount of $300.0 million outstanding at December 31, 2012 at an average rate of 2.0%. Other income (expense) may alsoMAC. In 2013, other expenses include other financial items such as gain/loss on extinguishment of debt.
Results of operations
Year ended December 31, 20122014 compared to year ended December 31, 2011
The following table sets forth our consolidated statement of operations data for the periods indicated:
Year ended December 31, | ||||||||
(Dollars in thousands) | 2012 | 2011 | ||||||
Net sales | $ | 1,176,306 | $ | 791,976 | ||||
Costs of goods sold | 735,906 | 497,322 | ||||||
Gross profit | 440,400 | 294,654 | ||||||
Operating expenses: | ||||||||
Selling and service | 101,448 | 77,776 | ||||||
Research and development | 23,499 | 16,476 | ||||||
General and administrative | 46,031 | 30,012 | ||||||
Amortization of intangibles | 45,867 | 48,020 | ||||||
Trade name write-down | - | 9,389 | ||||||
Total operating expenses | 216,845 | 181,673 | ||||||
Income from operations | 223,555 | 112,981 | ||||||
Total other expense, net | (67,203 | ) | (26,015 | ) | ||||
Income before provision for income taxes | 156,352 | 86,966 | ||||||
Provision for income taxes | 63,129 | (237,677 | ) | |||||
Net income | $ | 93,223 | $ | 324,643 |
Year ended December 31, | ||||||||
(Dollars in thousands) | 2012 | 2011 | ||||||
Residential power products | $ | 705,444 | $ | 491,016 | ||||
Commercial & Industrial power products | 410,341 | 250,270 | ||||||
Other | 60,521 | 50,690 | ||||||
Net sales | $ | 1,176,306 | $ | 791,976 |
(Dollars in thousands) | Year Ended December 31, 2014 | Year Ended December 31, 2013 | ||||||
Net sales | $ | 1,460,919 | $ | 1,485,765 | ||||
Costs of goods sold | 944,700 | 916,205 | ||||||
Gross profit | 516,219 | 569,560 | ||||||
Operating expenses: | ||||||||
Selling and service | 120,408 | 107,515 | ||||||
Research and development | 31,494 | 29,271 | ||||||
General and administrative | 54,795 | 55,490 | ||||||
Amortization of intangibles | 21,024 | 25,819 | ||||||
Gain on remeasurement of contingent consideration | (4,877 | ) | - | |||||
Total operating expenses | 222,844 | 218,095 | ||||||
Income from operations | 293,375 | 351,465 | ||||||
Total other expense, net | 35,013 | 72,749 | ||||||
Income before provision for income taxes | 258,362 | 278,716 | ||||||
Provision for income taxes | 83,749 | 104,177 | ||||||
Net income | $ | 174,613 | $ | 174,539 |
(Dollars in thousands) | Year Ended December 31, 2014 | Year Ended December 31, 2013 | ||||||
Residential power products | $ | 722,206 | $ | 843,727 | ||||
Commercial & Industrial power products | 652,216 | 569,890 | ||||||
Other | 86,498 | 72,148 | ||||||
Net sales | $ | 1,460,919 | $ | 1,485,765 |
Net sales.Net sales increased $384.3decreased $24.9 million, or 48.5%1.7%, to $1,176.3$1,460.9 million for the year ended December 31, 20122014 from $792.0$1,485.8 million for the year ended December 31, 2011. This increase was driven by a $214.4 million, or a 43.7% increase in residential2013. Residential product sales largely driven bydecreased 14.4% to $722.2 million from $843.7 million for the comparable period in 2013. Residential product sales declined on a year-over-year basis as the prior year benefited from approximately $140 million in incremental shipments as a result of satisfying the extended lead times that resulted from Superstorm Sandy in October 2012, which did not repeat in 2014. Excluding this benefit in the prior year, residential products increased demand created by major power outages in recent quarters along with expanded distribution and new product offerings. Commercial & industrialapproximately 3%. C&I product sales increased $160.1million, or 64.0%, driven14.4% to $652.2 million from $569.9 million for the comparable period in 2013, primarily due to the contributions from recent acquisitions along with strength in the oil & gas markets, partially offset by the additional Magnum Products revenue,reduced capital spending from certain telecom customers and to a lesser extent, increased shipments of natural gas backup generators.overall softness within Latin America.
Gross profit.Gross profit increased $145.7decreased $53.4 million, or 49.5%9.4%, to $440.4$516.2 million for the year ended December 31, 20122014 from $294.7$569.6 million for the year ended December 31, 2011.2013. Gross profit margin for the year ended December 31, 2012 increased2014 decreased to 37.4%35.3% from 37.2%38.3% for the year ended December 31, 2011. Gross2013. The decline in gross margin was driven by the combination of a higher mix of organic C&I product shipments, the impact of recent acquisitions, an increase in promotional activities in the current year, and an overall increase in product costs, including a temporary increase in certain costs associated with the slowdown of activity in west coast ports as well as short-term increases in other overhead-related costs.
Operating expenses.Operating expenses increased over$4.7 million to $222.8 million for the prior year ended December 31, 2014 from $218.1 million for the year ended December 31, 2013. Operating expenses increased primarily due to the positive impact of recent acquisitions, a more favorable adjustment to warranty reserves in 2013 as compared to the current year, and increased marketing and advertising expenses to support our Powering Ahead strategy. These increases were partially offset by a $4.9 million gain recorded in the second quarter of 2014 relating to a remeasurement of a contingent earn-out obligation from pricea recent acquisition and a $4.8 million year-over-year decline in amortization of intangible assets.
Other expense.Other expense decreased $37.7 million, or 51.9%, to $35.0 million for the year ended December 31, 2014 from $72.7 million for the year ended December 31, 2013. Beginning in the second quarter of 2014, there was a 25 basis point reduction in borrowing costs as a result of the Company’s net debt leverage ratio falling below 3.0 times, resulting in a $16.0 million non-cash gain being recorded in 2014. In conjunction with the May 2013 refinancing and other debt prepayments made in the prior year, a $15.3 million loss on extinguishment of debt was recorded. During 2014, $87.0 million of voluntary prepayments of term loan debt were made, which resulted in recording a $2.1 million loss on extinguishment of debt. Additionally, there was a $7.2 million year-over-year decrease in interest expense due to the refinancing of our debt in May 2013.
Income tax expense.Income tax expense decreased $20.5 million to $83.7 million for the year ended December 31, 2014 from $104.2 million for the year ended December 31, 2013. The effective tax rate for 2014 was 32.4% as compared to 37.4% for 2013. The decrease in effective tax rate was primarily attributable to tax planning related to the federal and state research credits, and utilization of the federal domestic production activity deduction due to sufficient taxable income.
Net income.As a result of the factors identified above, we generated net income of $174.6 million for the year ended December 31, 2014 compared to $174.5 million for the year ended December 31, 2013.
Adjusted EBITDA.Adjusted EBITDA, as defined and reconciled inItem 6, “Selected Financial Data,” decreased to $337.3 million in 2014 as compared to $402.6 million in 2013, due to the factors discussed above.
Adjusted net income.Adjusted Net Income, as defined and reconciled inItem 6, “Selected Financial Data,”decreased to $234.2 million in 2014 compared to $301.7 million in 2013, due to the factors discussed above.
Year ended December 31, 2013 compared to year ended December 31, 2012
(Dollars in thousands) | Year Ended December 31, 2013 | Year Ended December 31, 2012 | ||||||
Net sales | $ | 1,485,765 | $ | 1,176,306 | ||||
Costs of goods sold | 916,205 | 735,906 | ||||||
Gross profit | 569,560 | 440,400 | ||||||
Operating expenses: | ||||||||
Selling and service | 107,515 | 101,448 | ||||||
Research and development | 29,271 | 23,499 | ||||||
General and administrative | 55,490 | 46,031 | ||||||
Amortization of intangibles | 25,819 | 45,867 | ||||||
Total operating expenses | 218,095 | 216,845 | ||||||
Income from operations | 351,465 | 223,555 | ||||||
Total other expense, net | 72,749 | 67,203 | ||||||
Income before provision for income taxes | 278,716 | 156,352 | ||||||
Provision for income taxes | 104,177 | 63,129 | ||||||
Net income | $ | 174,539 | $ | 93,223 |
(Dollars in thousands) | Year Ended December 31, 2013 | Year Ended December 31, 2012 | ||||||
Residential power products | $ | 843,727 | $ | 705,444 | ||||
Commercial & Industrial power products | 569,890 | 410,341 | ||||||
Other | 72,148 | 60,521 | ||||||
Net sales | $ | 1,485,765 | $ | 1,176,306 |
Net sales.Net sales increased $309.5 million, or 26.3%, to $1,485.8 million for the year ended December 31, 2013 from $1,176.3 million for the year ended December 31, 2012. Residential product sales increased 19.6% to $843.7 million from $705.4 million for the comparable period in 2012. The increase in residential product sales was primarily driven by increases improved manufacturing overhead absorptionin shipments for home standby generators due to a combination of factors including the additional awareness and moderationadoption of our products created by major power outages in commodity costsrecent years, including Superstorm Sandy in 2012, the Company’s expanded distribution, increased sales and marketing initiatives, overall strong operational execution and an improving environment for residential investment. The strength in home standby generators was partially offset by a decline in shipments of portable generators due to less severe power outage events relative to the prior year. In addition, increased revenue from power washer products contributed to the year-over-year sales growth in residential products. C&I product sales increased 38.9% to $569.9 million from $410.3 million for the comparable period in 2012. The increase was driven by the impact of recent acquisitions along with strong organic growth for stationary and mobile generators. The increase in organic revenues was primarily driven by strong shipments to national account customers and increased sales of natural gas generators used in light commercial applications.
Gross profit.Gross profit increased $129.2 million, or 29.3%, to $569.6 million for the year ended December 31, 2013 from $440.4 million for the year ended December 31, 2012. Gross profit margin for the year ended December 31, 2013 increased to 38.3% from 37.4% for the year ended December 31, 2012. This gross margin improvement reflects improved product mix, improved pricing and a moderation in product costs due to lower commodity prices and execution of cost reduction initiatives. These margin improvements were partially offset by the mix impact from the addition of Magnum Products sales.recent acquisitions
Operating expenses.Operating expenses increased $35.2$1.3 million to $218.1 million for the year ended December 31, 2013 from $216.8 million for the year ended December 31, 20122012. This increase resulted from $181.7 million for the year ended December 31, 2011. These additional expenses were driven primarily by operating expenses associated with Magnum,impact of recent acquisitions, as well as increased sales, engineering and administrative infrastructure to support the strategic growth initiatives and higher baseline sales levels of the Company, increased incentive compensation expensesCompany. These increases were mostly offset by warranty rate improvements resulting in a $17.6 million favorable adjustment to warranty reserves driven by better claims experience, which impacted selling and service expense, as well as a resultdecline in the amortization of the Company’s financial performance during the year, and increased variable expenses resulting from the increase in organic sales.intangibles.
Other expense.Other expense increased $41.2$5.5 million, or 158.3%8.3%, to $72.7 million for the year ended December 31, 2013 from $67.2 million for the year ended December 31, 2012 from $26.02012. These additional expenses were primarily driven by a $5.3 million for the year ended December 31, 2011. Interestincrease in interest expense increased by $25.4 million, or 107.1% as a result ofdue to the higher debt levels from the May 2012 and 2013 refinancing transaction. In addition, lossestransactions, partially offset by a slight reduction in interest rate on extinguishment of debt increased $13.9 million in 2012 as a result of the February 2012 and May 2012 debt refinancing transactions.new credit facility.
Income tax expense.Income tax expense increased $300.8$41.1 million to a provision of$104.2 million for the year ended December 31, 2013 from $63.1 million for the year ended December 31, 2012. The increase was primarily driven by the increase in pre-tax income during 2013 compared to 2012, frompartially offset by a benefit of $237.7 million forlower effective tax rate. The decrease in the year ended December 31, 2011. The largeeffective income tax benefit inrate year-over-year is primarily due to the prior year consisted primarilylower tax rate of a foreign subsidiary acquired during the fourth quarter of 2012 and the reinstatement of the reversal of the full valuation allowance on the Company’s net deferredfederal research and development tax assets. We refer you to Note 9, “Income Taxes,” of our consolidated financial statements includedcredit in Item 8 of this Annual Report on Form 10-K for additional information.2013.
Net income.As a result of the factors identified above, we generated net income of $174.5 million for the year ended December 31, 2013 compared to $93.2 million for the year ended December 31, 2012 compared to net income of $324.6 million for the year ended December 31, 2011. The decrease in net income is due to the items previously described.2012.
Adjusted EBITDA.Adjusted EBITDA, as defined and reconciled in“Item 6, - Selected“Selected Financial Data,” increased to $402.6 million in 2013 as compared to $289.8 million compared to $188.5 million in 2011,2012 due to the factors discussed above.
Adjusted net income.Adjusted Net Income,, as defined and reconciled in“Item 6, - Selected“Selected Financial Data,”increased to $301.7 million in 2013 compared to $220.8 million in 2012 compared to $147.2 million in 2011, due to the factors discussed above.
Year ended December 31, | ||||||||
(Dollars in thousands) | 2011 | 2010 | ||||||
Net sales | $ | 791,976 | $ | 592,880 | ||||
Costs of goods sold | 497,322 | 355,523 | ||||||
Gross profit | 294,654 | 237,357 | ||||||
Operating expenses: | ||||||||
Selling and service | 77,776 | 57,954 | ||||||
Research and development | 16,476 | 14,700 | ||||||
General and administrative | 30,012 | 22,599 | ||||||
Amortization of intangibles | 48,020 | 51,808 | ||||||
Trade name write-down | 9,389 | - | ||||||
Total operating expenses | 181,673 | 147,061 | ||||||
Income (loss) from operations | 112,981 | 90,296 | ||||||
Total other expense, net | (26,015 | ) | (33,076 | ) | ||||
Loss before provision for income taxes | 86,966 | 57,220 | ||||||
Provision for income taxes | (237,677 | ) | 307 | |||||
Net loss | $ | 324,643 | $ | 56,913 |
Year ended December 31, | ||||||||
(Dollars in thousands) | 2011 | 2010 | ||||||
Residential power products | $ | 491,016 | $ | 372,782 | ||||
Commercial & Industrial power products | 250,270 | 183,555 | ||||||
Other | 50,690 | 36,543 | ||||||
Net sales | $ | 791,976 | $ | 592,880 |
Our primary cash requirements include the payment offor our raw material and components suppliers,component supplies, salaries & benefits, operating expenses, interest and principal payments on our debt and capital expenditures. We finance our operations primarily through cash flow generated from operations and, if necessary, borrowings under our ABL revolving credit facility. In November 2006, Generac Power Systems entered into a seven-year $950.0 million first lien term loan, a seven-and-a-half year $430.0 million second lien term loan, and a six-year $150.0 million revolving credit facility. During 2010 and 2011, we used the net proceeds of our initial public offering and a substantial portion of our cash and cash equivalents on hand totaling $493.8 million to pay down our second lien term loans in full and to repay a portion of our first lien term loan.
In February 2012, we paid in full our previously existing debt down further and entered into a new Credit Agreement.credit agreement (Credit Agreement). The Credit Agreement provided for borrowings under a $150.0 million revolving credit facility, a $325.0 million tranche A term loan facility and a $250.0 million tranche B term loan facility. Proceeds received by the Company from loans made under the Credit Agreement were used to repay in full all outstanding borrowings under the former credit agreement, dated as of November 10, 2006, as amended from time to time, and for general corporate purposes.
In May 2012, we amended and restated our then existing Credit Agreement by entering into the Terma new credit agreement (Term Loan Credit AgreementAgreement) and the ABLa new revolving credit agreement (ABL Credit Agreement.Agreement). The Term Loan Credit Agreement providesprovided for a $900.0 million Term Loanterm loan B credit facility (Term Loan) and included a $125.0 million uncommitted incremental term loan facility and the ABL Credit Agreement providesprovided for borrowings under a $150.0 million senior secured ABL Facilityrevolving credit facility and an uncommitted $50.0 million incremental revolving credit facility. ProceedsA portion of the proceeds from the Term Loan were used to repay outstanding borrowings under the Company’s previous Credit Agreement. The remaining proceeds from the Term Loan were used, alongtogether with cash on hand, to pay a special cash dividend of $6.00 per share on the Company’sour common stock (”(2012 dividend recapitalization”)recapitalization).
On May 31, 2013, we amended and restated our then existing Term Loan Credit Agreement by entering into a new term loan credit agreement (New Term Loan Credit Agreement). The New Term Loan Credit Agreement provided for a $1.2 billion term loan B credit facility (New Term Loan) and included a $300.0 million uncommitted incremental term loan facility. The New Term Loan Credit Agreement matures on May 31, 2020. Proceeds from the New Term Loan were used to repay outstanding borrowings under the previous Term Loan Credit Agreement and to fund a special cash dividend of $5.00 per share on our common stock (2013 dividend recapitalization). Remaining funds from the New Term Loan were used for general corporate purposes and to pay related financing fees and expenses. The New Term Loan initially bore interest at rates based upon either a base rate plus an applicable margin of 1.75% or adjusted LIBOR rate plus an applicable margin of 2.75%, subject to a LIBOR floor of 0.75%. Beginning in the second quarter of 2014, the applicable margin related to base rate loans has been reduced to 1.50% and the applicable margin related to LIBOR rate loans has been reduced to 2.50%, to the extent Generac Power Systems’ (Borrower) net debt leverage ratio, as defined in the New Term Loan Credit Agreement, is below 3.00 to 1.00 for that measurement period. For the fourth quarter of 2014, the Borrower’s net debt leverage ratio continued to be below 3.00 to 1.00.
Concurrent with the closing of the New Term Loan Credit Agreement, on May 31, 2013, we amended our existing ABL Credit Agreement. The amendment provides for a one year extension of the maturity date in respect of the $150.0 million senior secured ABL revolving credit facility provided under the previous ABL Credit Agreement (ABL Facility). The extended maturity date of the ABL Facility is May 31, 2018. As of December 31, 2012 is $881.3 million. 2014, no amounts were outstanding under the ABL facility.
At December 31, 2012,2014, we had cash and cash equivalents of $108.0$189.8 million and $147.0$148.5 million of availability under our revolving credit facility. Our total indebtedness was $893.8 million at December 31, 2012, which includes a local bank facility, at Ottomotores Mexico.
Refer to Note 11, “Credit Agreements,” to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for additional information.
Long-term liquidity
We believe that our cash flow from operations and our availability under our revolving credit facility, combined with our relatively low ongoing capital expenditure requirements and favorable tax attributes will(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 next twelve months and beyond.future. We will use a portion of our cash flow to pay principalinterest and interestprincipal on our outstanding debt, impacting the amount available for working capital, capital expenditures and other general corporate purposes. As we continue to expand our business, we may in the future require additional capital to fund working capital, capital expenditures or acquisitions.
Cash flow
Year ended December 31, 20122014 compared to year ended December 31, 2011
The following table summarizes our cash flows by category for the periods presented:
Year Ended December 31, | ||||||||||||||||
(Dollars in thousands) | 2014 | 2013 | Change | % Change | ||||||||||||
Net cash provided by operating activities | $ | 252,986 | $ | 259,944 | $ | (6,958 | ) | -2.7 | % | |||||||
Net cash used in investing activities | (95,491 | ) | (144,549 | ) | 49,058 | -33.9 | % | |||||||||
Net cash used in financing activities | (116,023 | ) | (73,399 | ) | (42,624 | ) | 58.1 | % |
Year ended December 31, | ||||||||||||||||
(Dollars in thousands) | 2012 | 2011 | Change | % Change | ||||||||||||
Net cash provided by operating activities | $ | 235,594 | $ | 169,712 | $ | 65,882 | 38.8 | % | ||||||||
Net cash used in investing activities | $ | (69,345 | ) | $ | (95,953 | ) | $ | 26,608 | 27.7 | % | ||||||
Net cash used in financing activities | $ | (151,352 | ) | $ | (59,216 | ) | $ | (92,136 | ) | (155.6 | )% |
Net cash provided by operating activities was $235.6$253.0 million for 20122014 compared to $169.7$259.9 million in 2011.2013. This increasedecrease of $65.9$6.9 million, or 38.8%2.7%, is primarily attributable to stronglower operating income, after adding back non-cash items, in the current year, partially offset by a reduction in working capital investment due to a slight decrease in inventory levels in 2014 as compared to a significant increase in inventory in 2013. The prior year period included a significant use of cash to replenish finished good inventory levels that had been depleted by demand driven from major power outages.
Net cash used for investing activities for the year ended December 31, 2014 was $95.5 million.This included cash payments of $61.2 million related to the acquisition of businesses and $34.7 million for the purchase of property and equipment. Net cash used for investing activities for the year ended December 31, 2013 was $144.6 million.This included cash payments of $116.1 million related to the acquisition of businesses and $30.8 million for the purchase of property and equipment, partially offset by cash proceeds of $2.3 million from the sale of a business.
Net cash used for financing activities was $116.0 million for the year ended December 31, 2014, primarily representing $120.4 million of debt repayments ($94.0 million repayment of long-term borrowings and $26.4 million repayment of short-term borrowings), partially offset by $6.6 million of cash proceeds from short-term borrowings. In addition, the Company paid $12.2 million of taxes related to the net share settlement of equity awards, which was partially offset by $11.0 million of cash inflow related to excess tax benefits of equity awards.
Net cash used for financing activities was $73.4 million for the year ended December 31, 2013, primarily representingthe net cash impact of debt prepayments and the dividend recapitalization transaction that occurred during the first half of 2013, including cash proceeds from long-term borrowings of $1,200.0 million offset by $901.2 million of long-term borrowing repayments. The Company paid $22.4 million for transaction fees incurred in connection with the May 2013 refinancing transaction. Following the refinancing, the Company paid a special cash dividend of $5.00 per share ($340.8 million) on the Company’s common stock (incremental to the $2.6 million cash dividends paid during 2013, related to the 2012 dividend, due to the vesting of restricted stock awards). In addition, the Company paid $15.0 million in taxes related to the net share settlement of equity awards which was partially offset by approximately $11.6 million of excess tax benefits of equity awards. Finally, the Company repaid $19.0 million of short-term borrowings, which were partially offset by $16.0 million of cash proceeds from short-term borrowings.
Year ended December 31, 2013 compared to year ended December 31, 2012
The following table summarizes our cash flows by category for the periods presented:
Year Ended December 31, | ||||||||||||||||
(Dollars in thousands) | 2013 | 2012 | Change | % Change | ||||||||||||
Net cash provided by operating activities | $ | 259,944 | $ | 235,594 | $ | 24,350 | 10.3 | % | ||||||||
Net cash used in investing activities | (144,549 | ) | (69,345 | ) | (75,204 | ) | -108.4 | % | ||||||||
Net cash used in financing activities | (73,399 | ) | (151,352 | ) | 77,953 | 51.5 | % |
Net cash provided by operating activities was $259.9 million for 2013 compared to $235.6 million in 2012. This increase of $24.4 million, or 10.3%, is primarily attributable to increased operating earnings as a result of strong organic sales growth and improved operating margins partially offset by increased working capital investments, such as increases in inventory levels to support higher production rates.
Net cash used for investing activities for the year ended December 31, 2013 was $144.6 million. This included cash payments of $116.1 million related to the acquisition of businesses and $30.8 million for the purchase of property and equipment, partially offset by cash proceeds of $2.3 million from the sale of a business. Net cash used for investing activities for the year ended December 31, 2012 was $69.3 million. This included $22.4 million used for the purchase of property and equipment and $47.0 million for the acquisition of the Ottomotores businesses. a business.
Net cash used for investingfinancing activities was $73.4 million for the year ended December 31, 2011 was $96.02013, primarily representingthe net cash impact of debt prepayments and the dividend recapitalization transaction that occurred during the first half of 2013, including cash proceeds from long-term borrowings of $1,200.0 million and included $12.1offset by $901.2 million used for the purchase of property and equipment and $83.9long-term borrowing repayments. The Company paid $22.4 million for transaction fees incurred in connection with the acquisitionMay 2013 refinancing transaction. Following the refinancing, the Company paid a special cash dividend of $5.00 per share ($340.8 million) on the Magnum Products business. The increaseCompany’s common stock (incremental to the $2.6 million cash dividends paid during 2013, related to the 2012 dividend, due to the vesting of restricted stock awards). In addition, the Company paid $15.0 million in purchasestaxes related to the net share settlement of property and equipmentequity awards which was primarily drivenpartially offset by approximately $11.6 million of excess tax benefits of equity awards. Finally, the purchaseCompany repaid $19.0 million of a manufacturing facility and expansionshort-term borrowings, which were partially offset by $16.0 million of our corporate headquarters and engineering lab facilities.cash proceeds from short-term borrowings.
Net cash used infor financing activities was $151.4 million for the year ended December 31, 2012, an increase of $92.1 million in net cash outflows from 2011 primarily representing the net cash impact of our refinancing activities and the dividend recapitalization transaction that occurred during the first half of 2012, including grosscash proceeds from long-term borrowings of $1,455.6 million offset by $1,175.1 million of long-term borrowing repayments. The Company made $25.7 million of cash payments for transaction fees incurred in connection with these refinancing transactions. Following the May 2012 refinancing, the Company paid a special cash dividend of $6.00 per share ($404.3 million, which excludes dividends for unvested restricted stock) on the Company’s common stock during the second quarter of 2012.
Senior Secured Credit Facilities
Refer to year ended December 31, 2010
Covenant Compliance
The following table summarizes our cash flows by category forNew Term Loan Credit Agreement contains restrictions on the periods presented:
Year ended December 31, | ||||||||||||||||
(Dollars in thousands) | 2011 | 2010 | Change | % Change | ||||||||||||
Net cash provided by operating activities | $ | 169,712 | $ | 114,481 | $ | 55,231 | 48.2 | % | ||||||||
Net cash used in investing activities | $ | (95,953 | ) | $ | (11,204 | ) | $ | (84,749 | ) | (756.4 | )% | |||||
Net cash used in financing activities | $ | (59,216 | ) | $ | (186,001 | ) | $ | 126,785 | 68.2 | % |
The New Term Loan Credit Agreement contains customary events of default, including, among others, nonpayment of principal, interest or other amounts, failure to perform covenants, inaccuracy of representations or warranties in any material respect, cross-defaults with other material indebtedness, certain undischarged judgments, the occurrence of certain ERISA, or bankruptcy or insolvency events, or the occurrence of a change in control (as defined in the New Term Loan Credit Agreement). A bankruptcy or insolvency event of default causes suchwill cause the obligations under the New Term Loan Credit Agreement to automatically become immediately due and payable.
The effective interest rate on the Term Loan on December 31, 2012, inclusive of the impact of outstanding interest rate swaps, was 6.5%. The effective interest rate, excluding the effect of interest rate swaps in place on the Term Loan on December 31, 2012, was 6.3%.
The following table summarizes our expected payments for significant contractual obligations as of December 31, 2012 (dollars in thousands):
Payment due by period | |||||||||||||||||||||
Contractual obligations | Total | Less than 1 year | 2-3 years | 4-5 years | After 5 years | ||||||||||||||||
Long-term debt, including current portion(1) | $ | 881,268 | $ | 82,250 | $ | - | $ | - | $ | 799,018 | |||||||||||
Interest on long-term debt(2) | 279,703 | 51,618 | 103,353 | 103,495 | 21,237 | ||||||||||||||||
Operating leases | 1,760 | 825 | 809 | 126 | - | ||||||||||||||||
Total contractual cash obligations(3) | $ | 1,162,731 | $ | 134,693 | $ | 104,162 | $ | 103,621 | $ | 820,255 |
(Dollars in thousands) | Total | Less than 1 Year | 2 - 3 Years | 4 - 5 Years | After 5 Years | |||||||||||||||
Long-term debt, including curent portion (1) | $ | 1,104,460 | $ | 389 | $ | 71 | $ | - | $ | 1,104,000 | ||||||||||
Capital lease obligations, including current portion | 2,059 | 168 | 368 | 389 | 1,134 | |||||||||||||||
Interest on long-term debt | 197,422 | 36,447 | 72,975 | 72,851 | 15,149 | |||||||||||||||
Operating leases | 6,987 | 2,585 | 4,138 | 264 | - | |||||||||||||||
Total contractual cash obligations (2) | $ | 1,310,928 | $ | 39,589 | $ | 77,552 | $ | 73,504 | $ | 1,120,283 |
(1)On May 30, 2012,31, 2013, the Borrower amended and restated its then existing Term Loan Credit Agreement by entering into a new credit agreement (“the New Term Loan Credit Agreement”)Agreement with certain commercial banks and other lenders. The New Term Loan Credit Agreement providesprovided for a $900.0$1,200.0 million term loan B credit facility (“New Term Loan”)Loan and a $125.0$300.0 million uncommitted incremental term loan facility. The New Term Loan Credit Agreement matures on May 30, 2018. In February 2013, the Borrower made an $80.0 million debt prepayment that was applied to all required future principal amortizations.
(2) Pension obligations are excluded from this table as we are unable to estimate the timing of payment due to the inherent assumptions underlying the obligation. However, the Company estimates we will contribute $1.0$1.2 million to our pension plans in 2013.2015.
Capital expenditures
Our operations require capital expenditures for technology, tooling, equipment, capacity expansion and upgrades. Capital expenditures were $22.4$34.7 million and $12.1$30.8 million for the years ended December 31, 20122014 and 2011,2013, respectively, and were funded through cash from operations.
Off-Balance Sheet Arrangements
We have an arrangement with a finance company to provide floor plan financing for selected dealers. This arrangement provides liquidity for our dealers by financing dealer purchases of products with credit availability from the finance company. We receive payment from the finance company after shipment of product to the dealer and our dealers are given a longer period of time to pay the finance provider. If our dealers do not pay the finance company, we may be required to repurchase the applicable inventory held by the dealer.
Total inventory financed accounted for approximately 6%8% of net sales for the yearyears ended December 31, 20112014 and approximately 7% of net sales for the year ended December 31, 2012.2013. The amount financed by dealers which remained outstanding was $10.0$26.1 million and $16.6$24.3 million as of December 31, 20112014 and 2012,2013, respectively.
Critical accounting policies
In preparing the financial statements in accordance with accounting principles generally accepted in the U.S., GAAP, management is required to make estimates and assumptions that have an impact on the asset, liability, revenue and expense amounts reported. These estimates can also affect supplemental information disclosures of the Company, including information about contingencies, risk and financial condition. The Company believes, given current facts and circumstances, that its estimates and assumptions are reasonable, adhere to accounting principles generally accepted in the U.S., GAAP, and are consistently applied. Inherent in the nature of an estimate or assumption is the fact that actual results may differ from estimates and estimates may vary as new facts and circumstances arise. The Company makes routine estimates and judgments in determining net realizable value of accounts receivable, inventories, property, plant and equipment, and prepaid expenses. Management believes the Company’s most critical accounting estimates and assumptions are in the following areas: goodwill and other indefinite-lived intangible asset impairment assessment,assessment; business combinations and purchase accounting; defined benefit pension obligations,obligations; estimates of allowance for doubtful accounts, excess and obsolete inventory reserves, product warranty and other contingencies,contingencies; derivative accounting,accounting; income taxes and share based compensation.
Goodwill and Other Intangible Assets
See Note 2, “Significant Accounting Policies - Goodwill and Other Indefinite-Lived Intangible Assets,” to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for further information on the Company’s policy regarding the accounting for goodwill and other intangible assets
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. Changes
In our October 31, 2014 impairment test calculation, the Ottomotores reporting unit had an estimated fair value that was approximately equal to carrying value. The carrying value of the Ottomotores goodwill was approximately $4.6 million as of December 31, 2014. Key financial assumptions utilized to determine the fair value of the reporting unit includes revenue growth levels that reflect a recovery of Latin American economies, impacts of Mexican energy reform, improving profit margins, a 3% terminal growth rate and a 16.8% discount rate. A 50 basis point increase in these key estimatesthe discount rate results in a decrease to the estimated fair value of the reporting unit of approximately 4%, while a reduction in the sales continuous annual growth rate of 100 basis points would decrease the estimated fair value by approximately 3%. As of the October 31, 2014 impairment test date, there were no other reporting units with a carrying value that was at risk of exceeding its fair value.
As noted above, a considerable amount of management judgment and assumptions orare required in other assumptions used in this process, could materially affect our impairment analysis for a given year. Additionally, since our measurement also considers a market approach, changes in comparable public company multiples can also materially impact our impairment analysis.
● | a prolonged global or regional economic |
● | a significant decrease in the demand for our products; |
● | the inability to develop new and enhanced products and services in a timely manner; |
● | a significant adverse change in legal factors or in the business climate; |
● | an adverse action or assessment by a regulator; |
● | successful efforts by our competitors to gain market share in our |
● | disruptions to the Company’s business; |
● | inability to effectively integrate acquired businesses; |
● | unexpected or planned changes in the use of assets or entity structure; and |
● | business divestitures. |
If management's estimates of future operating results change or if there are changes to other assumptions due to these factors, the estimate of the fair value of our businessvalues 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.
BusinessCombinations andPurchaseAccounting
We account for business combinations using the acquisition method of accounting, and accordingly, the assets and liabilities of the acquired business are recorded at their respective fair values. The excess of the purchase price over the estimated fair value of assets and liabilities is recorded as goodwill. Assigning fair market values to the assets acquired and liabilities assumed at the date of an acquisition requires knowledge of current market values, and the values of assets in use, and often requires the application of judgment regarding estimates and assumptions. While the ultimate responsibility resides with management, for material acquisitions we retain the services of certified valuation specialists to assist with assigning estimated values to certain acquired assets and assumed liabilities, including intangible assets and tangible long-lived assets. Acquired intangible assets, excluding goodwill, are valued using certain discounted cash flow methodologies based on future cash flows specific to the type of intangible asset purchased. This methodology incorporates various estimates and assumptions, the most significant being projected revenue growth rates, earnings margins, and forecasted cash flows based on the discount rate and terminal growth rate.
Defined benefit pension obligations
The funded status of our pension plans is more fully described in Note 9 to our audited consolidated financial statements included in Item 8 of this Annual Report on Form 10-K. As discussed in Note 9, theCompany’s pension benefit obligation and related pension expense or income are calculated in accordance with 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.
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 adjusted for future potential wage increases.
Our funding policy for our pension plans is to contribute amounts at least equal to the minimum annual amount required by applicable regulations. Given this policy, we expect to make $1.0$1.2 million in contributions to our pension plans in 2013.
Allowance for doubtful accounts, excessDoubtful Accounts, Excess & Obsolete InventoryReserves, Product Warranty Reserves and obsolete inventory reserves, product warranty reserves and other contingencies
The reserves, if any, for customer rebates, product warranty, product liability, litigation, excess and obsolete inventory, and doubtful accounts are fact-specific and take into account such factors as specific customer situations, historical experience, and current and expected economic conditions. TheseFurther information on these reserves are reflected under Notes 2, 4, 58, 10, 16 and 1619 to our auditedthe consolidated financial statements included in Item 8 of this Annual Report on Form 10-K.
See Note 2, “Significant Accounting Policies - Derivative Instruments and Hedging Activities,” and Note 4, “Derivative Instruments and Hedging Activities,” to the incorporationconsolidated financial statements included in Item 8 of a new interest rate floor provision inthis Annual Report on Form 10-K for further information on the Term Loan Credit Agreement, which constitutes a change in critical terms, the Company concluded that as of May 30, 2012, the outstanding swaps would no longer be highly effective in achieving offsetting changes in cash flows during the periods the hedges are designated. As a result, the Company was requiredCompany’s policy and assumptions related to de-designate the hedges as of May 30, 2012. Beginning May 31 2012, the effective portion of the swaps prior to the change (i.e. amounts previously recorded in Accumulated Other Comprehensive Loss) have been and will continue to be amortized as interest expense over the period of the originally designated hedged transactions which have various dates through October 2013. Future changes in fair value of the swaps have been and will continue to be immediately recognized in the consolidated statements of comprehensive income as interest expense.
As required by ASC 815 Derivatives and Hedging, we record the Swaps at fair value pursuant to ASC 820 Fair Value Measurements and Disclosures, which 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. When determining the fair value of the Swaps, we considered our credit risk in accordance with ASC 820. The fair value of the Swaps, including the impact of credit risk, at December 31, 2012 and 2011 was a liability of $3.0 million and $5.3 million, respectively.
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,laws; the difference between tax and financial reporting bases of assets and liabilities,liabilities; estimates of amounts currently due or owed in various jurisdictions,jurisdictions; and current accounting standards. We review and update our estimates on a quarterly basis as facts and circumstances change and actual results are known.
Our balance sheet includes significant deferred tax assets as a result of goodwill and intangible asset book versus tax differences as well as significant net operating loss carryforwards.differences. In assessing the realizability of these deferred tax assets, 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. As of September 30, 2011, we were in a three year cumulative loss position and had a full valuation allowance recorded against our net deferred tax assets. In the fourth quarter of 2011, we came out of a three-year cumulative loss position and, as part of the normal assessment of the future realization of our net deferred tax assets, determined that a valuation allowance was no longer required. As a result, the valuation allowance previously recorded was reversed in the fourth quarter of 2011 and was recorded as a component of the income tax provision.
Generac Brazil, acquired in the Ottomotores acquisition in December 2012, is in a three-year cumulative net loss position due to the start-up nature of the business, and therefore we have not considered expected future taxable income in analyzing the realizability of theirits deferred tax assets as of December 31, 2012.2014. As a result, a full valuation allowance was recorded in the opening balance sheet foragainst the deferred tax assets of OttomotoresGenerac Brazil.
In performing the assessment of the realization of our deferred tax assets as of December 31, 2012,2014, excluding OttomotoresGenerac Brazil, we have determined that it is more likely than not that our deferred tax assets will be realized, and therefore no valuation allowance is required.
Share based compensation
Under the fair value recognition provisions of ASC 718,Compensation –- Stock Compensation, share based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period. Determining the fair value of share based awards at the grant date requires judgment, including estimating expected dividends and market volatility of our stock. In addition, judgment is also required in estimating the amount of share based awards that are expected to be forfeited. If actual results differ significantly from these estimates, share based compensation expense and our results of operations could be impacted.
New Accounting Standards
For information with respect to new accounting pronouncements and the impact of these pronouncements on our consolidated financial statements, we refer you tosee Note 2, “New“Significant Accounting Policies - New Accounting Pronouncements,” of ourto the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K10-K.
We are exposed to market risk from changes in foreign currency exchange rates, commodity prices and interest rates. To reduce the risk from changes in certain foreign currency exchange rates, and commodity prices and interest rates, we use financial instruments from time to time. We do not hold or issue financial instruments for trading purposes.
We are exposed to foreign currency exchange risk as a result of purchasing from suppliers in currency 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 foreign currency purchases in the normal course of business. Contracts typically have maturities of one year or less. Realized and unrealized gains and losses on transactions denominated in foreign currency are recorded in earnings as a component of cost of goods sold. At December 31, 2012 and December 31, 2011, we had no foreign exchange contracts outstanding.sold on the statements of comprehensive income.
As of December 31, 2010. Total losses recognized in2014, we had the consolidated statement of comprehensive income forfollowing foreign currency contracts were $100,000. The primary objective of this hedging activity is to mitigate the impact of potential price fluctuations of the Euro on our financial results.
Currency Denomination | Trade Date | Effective Date | Notional Amount | Exchange Rate(EUR:GBP) | Expiration Date |
GBP | July 24, 2014 | October 1, 2014 | 1,000 | 0.7983 | March 2, 2015 |
GBP | September 17, 2014 | December 15, 2014 | 500 | 0.8011 | March 31, 2015 |
GBP | September 17, 2014 | December 15, 2014 | 500 | 0.8030 | March 27, 2015 |
GBP | October 31, 2014 | November 4, 2014 | 1,000 | 0.7900 | May 29, 2015 |
GBP | October 31, 2014 | February 26, 2015 | 1,000 | 0.7918 | April 28, 2015 |
GBP | November 3, 2014 | January 15, 2015 | 1,000 | 0.7885 | April 28, 2015 |
With the purchase of the Ottomotores businessesbusiness in December 2012 and the Tower Light business in August 2013, a small portion of revenues and expenses are now denominated in Euros, Mexican Pesos, Brazilian Real and Brazilian Real.
Commodity prices
We are a purchaser of commodities and of components 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. To the extent that commodity prices increase and we do not have firm pricing from our suppliers, or our suppliers are not able to honor such prices, we may experience a decline in our gross margins to the extent we are not able to increase selling prices of our products or obtain manufacturing efficiencies or supply chain savings to offset increases in commodity costs.
Periodically, we engage in certain commodity risk management activities. The primary objectives of these activities are to understand and mitigate the impact of potential price fluctuations on our financial results. Generally, these risk management transactions will involve the use of commodity derivatives to protect against exposure resulting from significant price fluctuations.
We primarily utilize commodity contracts with maturities of one year or less.less than eighteen months. These contracts are intended to offset the effect of price fluctuations on actual inventory purchases. The primary objective of the hedge ispurchases and to mitigate the impact of potential price fluctuations of copper on our financial results. As of December 31, 2012,2014, we had the following commodity forward contracts outstanding (in thousands):
Hedged Item | Number of Contracts Outstanding | Effective Date | Aggregate Notional Amount | Fixed Copper Price | |||||
Copper | 1 | January 1, 2013 to September 30, 2013 | $ | 3,472 | $3.50 per LB |
Hedged Item | Trade Date | Effective Date | Notional Amount | Fixed Price (per LB) | Expiration Date | ||||||
Copper | October 2, 2014 | October 1, 2014 | $ | 4,960 | $ | 3.000 | December 31, 2015 | ||||
Copper | October 15, 2014 | November 1, 2014 | $ | 4,637 | $ | 3.005 | December 31, 2015 | ||||
Copper | December 1, 2014 | December 1, 2014 | $ | 8,232 | $ | 2.872 | December 31, 2015 |
For additional information on the Company’s commodity forward contracts, including amounts charged to the statement of comprehensive income during 2012,2014, see Note 24, “Derivative Instruments and Hedging Activity,” to our auditedthe consolidated financial statements included in Item 8 of this Annual Report on Form 10-K.
Interest rates
As of December 31, 2012, a portion2014, all of the outstanding debt under our term loansloan was subject to floating interest rate risk. As of this date,December 31, 2014, we had the following interest rate swap contracts outstanding (in thousands):
Hedged Item | Contract Date | Effective Date | Notional Amount | Fixed LIBOR Rate | Expiration Date | ||||||
Interest rate | October 23, 2013 | July 1, 2014 | $ | 100,000 | 1.7420 | % | July 1, 2018 | ||||
Interest rate | October 23, 2013 | July 1, 2014 | $ | 100,000 | 1.7370 | % | July 1, 2018 | ||||
Interest rate | May 19, 2014 | July 1, 2014 | $ | 100,000 | 1.6195 | % | July 1, 2018 |
Hedged Item | Effective Date | Notional Amount | Expiration Date | ||
Contract Date | Fixed LIBOR Rate | ||||
Interest rate | April 1, 2011 | October 1, 2012 | $100,000 | 2.22% | October 1, 2013 |
Interest rate | April 1, 2011 | July 1, 2012 | $200,000 | 1.905% | July 1, 2013 |
At December 31, 2012,2014, the fair value of the swaps reduced for our credit risk and excluding related accrued interest was a liability of $3.0$1.0 million. For additional information on the Company’s interest rate swaps, including amounts charged to the statement of comprehensive income during 2012,2014, see Note 24, “Derivative Instruments and Hedging Activities,” and “Note 6, Accumulated Other Comprehensive Loss,” to our audited consolidated financial statements included in Item 8 of this Annual Report on Form 10-K. Even after giving effect to these swaps, we are exposed to risks due to changes in interest rates with respect to the portion of our term loans that are 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 $0.5$4.1 million (or, without the swaps in place, $0.3$5.6 million). in 2014. The existence of a 1.25%0.75% LIBOR floor provision in our newNew Term Loan Credit Agreement, effective May 30, 2012, significantly31, 2013, limits the impact of a hypothetical 100 basis point change in LIBOR at current December 31, 20122014 LIBOR rates.
To the Board of Directors and Stockholders of Generac Holdings Inc.
We have audited Generac Holdings Inc.’s internal control over financial reporting as of December 31, 2012,2014, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) (the COSO criteria). Generac Holdings Inc.’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’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed 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’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’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As indicated in the accompanying Management’s Report on Internal Control Over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Ottomotores UK Ltd.,the Powermate and MAC businesses, which isare included in the December 31, 20122014 consolidated financial statements of Generac Holdings Inc., and constituted 4.6%2.2% and 8.7%0.1% of total and net assets, respectively, as of December 31, 20122014 and 0.6%1.6% and 0.3%0.4% of revenues and net income, respectively, for the year then ended. Our audit of internal control over financial reporting of Generac Holdings Inc. also did not include an evaluation of the internal control over financial reporting of Ottomotores UK Ltd.
In our opinion, Generac Holdings Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012,2014, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets as of December 31, 20122014 and 2011,2013, and related consolidated statements of comprehensive income, redeemable stock and stockholders' equity and cash flows for each of the three years in the period ended December 31, 20122014 of Generac Holdings Inc. and our report dated March 13, 2013February 27, 2015 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Milwaukee, WI, USA
February 27, 2015
To the Board of Directors and Stockholders of Generac Holdings Inc.
We have audited the accompanying consolidated balance sheets of Generac Holdings Inc. (the Company) as of December 31, 20122014 and 2011,2013, and the related consolidated statements of comprehensive income, redeemable stock and stockholders’ equity (deficit) and cash flows for each of the three years in the period ended December 31, 2012.2014. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Generac Holdings Inc. at December 31, 20122014 and 2011,2013, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2012,2014, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Generac Holdings Inc.’s internal control over financial reporting as of December 31, 2012,2014, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) and our report dated March 13, 2013February 27, 2015 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Milwaukee, WI, USA
Consolidated Balance Sheets | ||||||||
(Dollars in Thousands, Except Share and Per Share Data) | ||||||||
December 31, | ||||||||
2012 | 2011 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 108,023 | $ | 93,126 | ||||
Accounts receivable, less allowance for doubtful accounts of $1,166 in 2012 and $789 in 2011 | 134,978 | 109,705 | ||||||
Inventories | 225,817 | 162,124 | ||||||
Deferred income taxes | 48,687 | 14,395 | ||||||
Prepaid expenses and other assets | 5,048 | 3,915 | ||||||
Total current assets | 522,553 | 383,265 | ||||||
Property and equipment, net | 104,718 | 84,384 | ||||||
Customer lists, net | 37,823 | 72,897 | ||||||
Patents, net | 70,302 | 78,167 | ||||||
Other intangible assets, net | 5,783 | 7,306 | ||||||
Deferred financing costs, net | 13,987 | 3,459 | ||||||
Trade names, net | 158,831 | 148,401 | ||||||
Goodwill | 552,943 | 547,473 | ||||||
Deferred income taxes | 136,754 | 227,363 | ||||||
Other assets | 153 | 78 | ||||||
Total assets | $ | 1,603,847 | $ | 1,552,793 | ||||
Liabilities and stockholders’ equity | ||||||||
Current liabilities: | ||||||||
Short-term borrowings | $ | 12,550 | $ | – | ||||
Accounts payable | 94,543 | 81,053 | ||||||
Accrued wages and employee benefits | 19,435 | 14,439 | ||||||
Other accrued liabilities | 86,081 | 47,024 | ||||||
Current portion of long-term borrowings | 82,250 | 22,874 | ||||||
Total current liabilities | 294,859 | 165,390 | ||||||
Long-term borrowings | 799,018 | 575,000 | ||||||
Other long-term liabilities | 46,342 | 43,514 | ||||||
Total liabilities | 1,140,219 | 783,904 | ||||||
Stockholders’ equity: | ||||||||
Common stock (formerly Class A non-voting common stock), par value $0.01, 500,000,000 shares authorized, 68,295,960 and 67,652,812 shares issued and outstanding at December 31, 2012 and 2011, respectively | 683 | 676 | ||||||
Additional paid-in capital | 743,349 | 1,142,701 | ||||||
Excess purchase price over predecessor basis | (202,116 | ) | (202,116 | ) | ||||
Accumulated deficit | (63,792 | ) | (157,015 | ) | ||||
Accumulated other comprehensive loss | (14,496 | ) | (15,357 | ) | ||||
Total stockholders’ equity | 463,628 | 768,889 | ||||||
Total liabilities and stockholders’ equity | $ | 1,603,847 | $ | 1,552,793 | ||||
See notes to consolidated financial statements. |
Consolidated Statements of Comprehensive Income | ||||||||||||
(Dollars in Thousands, Except Share and Per Share Data) | ||||||||||||
Year Ended December 31, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
Net sales | $ | 1,176,306 | $ | 791,976 | $ | 592,880 | ||||||
Costs of goods sold | 735,906 | 497,322 | 355,523 | |||||||||
Gross profit | 440,400 | 294,654 | 237,357 | |||||||||
Operating expenses: | ||||||||||||
Selling and service | 101,448 | 77,776 | 57,954 | |||||||||
Research and development | 23,499 | 16,476 | 14,700 | |||||||||
General and administrative | 46,031 | 30,012 | 22,599 | |||||||||
Amortization of intangibles | 45,867 | 48,020 | 51,808 | |||||||||
Trade name write-down | – | 9,389 | – | |||||||||
Total operating expenses | 216,845 | 181,673 | 147,061 | |||||||||
Income from operations | 223,555 | 112,981 | 90,296 | |||||||||
Other (expense) income: | ||||||||||||
Interest expense | (49,114 | ) | (23,718 | ) | (27,397 | ) | ||||||
Loss on extinguishment of debt | (14,308 | ) | (377 | ) | (4,809 | ) | ||||||
Investment income | 79 | 110 | 235 | |||||||||
Costs related to acquisition | (1,062 | ) | (875 | ) | – | |||||||
Other, net | (2,798 | ) | (1,155 | ) | (1,105 | ) | ||||||
Total other expense, net | (67,203 | ) | (26,015 | ) | (33,076 | ) | ||||||
Income before provision for income taxes | 156,352 | 86,966 | 57,220 | |||||||||
Provision (benefit) for income taxes | 63,129 | (237,677 | ) | 307 | ||||||||
Net income | 93,223 | 324,643 | 56,913 | |||||||||
Preferential distribution to: | ||||||||||||
Series A preferred stockholders | – | – | (2,042 | ) | ||||||||
Class B common stockholders | – | – | (12,133 | ) | ||||||||
Beneficial conversion | – | – | (140,690 | ) | ||||||||
Net income (loss) attributable to common stockholders (formerly Class A common stockholders) | $ | 93,223 | $ | 324,643 | $ | (97,952 | ) | |||||
Net income (loss) per common share - basic: | ||||||||||||
Common stock (formerly Class A common stock) | $ | 1.38 | $ | 4.84 | $ | (1.65 | ) | |||||
Class B common stock | n/a | n/a | $ | 505 | ||||||||
Net income (loss) per common share - diluted: | ||||||||||||
Common stock (formerly Class A common stock) | $ | 1.35 | $ | 4.79 | $ | (1.65 | ) | |||||
Class B common stock | n/a | n/a | $ | 505 | ||||||||
Weighted average common shares outstanding - basic: | ||||||||||||
Common stock (formerly Class A common stock) | 67,360,632 | 67,130,356 | 59,364,958 | |||||||||
Class B common stock | n/a | n/a | 24,018 | |||||||||
Weighted average common shares outstanding - diluted: | ||||||||||||
Common stock (formerly Class A common stock) | 69,193,138 | 67,797,371 | 59,364,958 | |||||||||
Class B common stock | n/a | n/a | 24,018 | |||||||||
Dividends declared per share | $ | 6.00 | $ | – | $ | – | ||||||
Other comprehensive income (loss): | ||||||||||||
Amortization of unrealized loss on interest rate swaps | $ | 2,082 | $ | – | $ | – | ||||||
Foreign currency translation adjustment | (34 | ) | – | – | ||||||||
Net unrealized gain (loss) on derivatives | 365 | (683 | ) | (4,145 | ) | |||||||
Pension liability adjustment | (1,552 | ) | (4,922 | ) | (1,115 | ) | ||||||
Other comprehensive income (loss) | 861 | (5,605 | ) | (5,260 | ) | |||||||
Comprehensive income | $ | 94,084 | $ | 319,038 | $ | 51,653 | ||||||
See notes to consolidated financial statements. |
Generac Holdings Inc. | ||||||||||||||||||||||||||||||||||||||
(Dollars in Thousands, Except Share Data) | ||||||||||||||||||||||||||||||||||||||
Redeemable | ||||||||||||||||||||||||||||||||||||||
Series A Preferred Stock | Class B Common Stock | Common Stock (formerly Class A Common Stock) | Additional Paid-In | Excess Purchase Price Over Predecessor | Retained Earnings(Accumulated | Accumulated Other Comprehensive Income | Stockholder Notes | Total Stockholders' | ||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Capital | Basis | Deficit) | (Loss) | Receivable | Equity | |||||||||||||||||||||||||||
Balance at December 31, 2009 | 11,311 | $ | 113,109 | 24,018 | $ | 765,096 | 1,617 | $ | – | $ | 2,394 | $ | (202,116 | ) | $ | (538,571 | ) | $ | (4,492 | ) | $ | (29 | ) | $ | (742,814 | ) | ||||||||||||
Unrealized loss on interest rate swaps | – | – | – | – | – | – | – | – | – | (4,145 | ) | – | (4,145 | ) | ||||||||||||||||||||||||
Repayment of stockholder notes receivable | – | – | – | – | – | – | – | – | – | – | 29 | 29 | ||||||||||||||||||||||||||
Corporate reorganization | (11,311 | ) | (113,109 | ) | (24,018 | ) | (765,096 | ) | 28,368,581 | 284 | 877,921 | – | – | – | – | 878,205 | ||||||||||||||||||||||
Beneficial conversion related to Class B Common and Series A Preferred stockholders | – | – | – | – | – | – | (140,690 | ) | – | – | – | – | (140,690 | ) | ||||||||||||||||||||||||
Accumulated accretion related to Class B Common and Series A Preferred stockholders | – | – | – | – | – | – | (303,305 | ) | – | – | – | – | (303,305 | ) | ||||||||||||||||||||||||
Issuance of Common stock (formerly Class A Common stock) resulting from the beneficial conversion and accumulated accretion | – | – | – | – | 18,002,337 | 180 | 443,815 | – | – | – | – | 443,995 | ||||||||||||||||||||||||||
Proceeds from public stock offering | – | – | – | – | 20,700,500 | 207 | 247,424 | – | – | – | – | 247,631 | ||||||||||||||||||||||||||
Net income | – | – | – | – | – | – | – | – | 56,913 | – | – | 56,913 | ||||||||||||||||||||||||||
Share-based compensation | – | – | – | – | 451,561 | 5 | 6,358 | – | – | – | – | 6,363 | ||||||||||||||||||||||||||
Pension liability adjustment | – | – | – | – | – | – | – | – | – | (1,115 | ) | – | (1,115 | ) | ||||||||||||||||||||||||
Balance at December 31, 2010 | – | – | – | – | 67,524,596 | $ | 675 | $ | 1,133,918 | $ | (202,116 | ) | $ | (481,658 | ) | $ | (9,752 | ) | $ | – | $ | 441,067 | ||||||||||||||||
Unrealized loss on interest rate swaps, net of tax of $440 | – | – | – | – | – | – | – | – | – | (683 | ) | – | (683 | ) | ||||||||||||||||||||||||
Common stock issued under equity incentive plans, net of shares withheld for employee taxes and strike price | – | – | – | – | 128,216 | 1 | (63 | ) | – | – | – | – | (62 | ) | ||||||||||||||||||||||||
Excess tax benefits from equity awards | – | – | – | – | – | – | 200 | – | – | – | – | 200 | ||||||||||||||||||||||||||
Share-based compensation | – | – | – | – | – | – | 8,646 | – | – | – | – | 8,646 | ||||||||||||||||||||||||||
Pension liability adjustment, net of tax of $3,173 | – | – | – | – | – | – | – | – | – | (4,922 | ) | – | (4,922 | ) | ||||||||||||||||||||||||
Net income | – | – | – | – | – | – | – | – | 324,643 | – | – | 324,643 | ||||||||||||||||||||||||||
Balance at December 31, 2011 | – | – | – | – | 67,652,812 | $ | 676 | $ | 1,142,701 | $ | (202,116 | ) | $ | (157,015 | ) | $ | (15,357 | ) | $ | – | $ | 768,889 | ||||||||||||||||
Unrealized gain on interest rate swaps, net of tax of $236 | – | – | – | – | – | – | – | – | – | 365 | – | 365 | ||||||||||||||||||||||||||
Amortization of unrealized loss on interest rate swaps, net of tax of $95 | – | – | – | – | – | – | – | – | – | 2,082 | – | 2,082 | ||||||||||||||||||||||||||
Foreign currency translation adjustment | – | – | – | – | – | – | – | – | – | (34 | ) | – | (34 | ) | ||||||||||||||||||||||||
Common stock issued under equity incentive plans, net of shares withheld for employee taxes and strike price | – | – | – | – | 643,148 | 7 | (6,431 | ) | – | – | – | – | (6,424 | ) | ||||||||||||||||||||||||
Excess tax benefits from equity awards | – | – | – | – | – | – | 4,588 | – | – | – | – | 4,588 | ||||||||||||||||||||||||||
Share-based compensation | – | – | – | – | – | – | 10,780 | – | – | – | – | 10,780 | ||||||||||||||||||||||||||
Dividends declared | – | – | – | – | – | – | (408,289 | ) | – | – | – | – | (408,289 | ) | ||||||||||||||||||||||||
Pension liability adjustment, net of tax of $1,001 | – | – | – | – | – | – | – | – | – | (1,552 | ) | – | (1,552 | ) | ||||||||||||||||||||||||
Net income | – | – | – | – | – | – | – | – | 93,223 | – | – | 93,223 | ||||||||||||||||||||||||||
Balance at December 31, 2012 | – | – | – | – | 68,295,960 | $ | 683 | $ | 743,349 | $ | (202,116 | ) | $ | (63,792 | ) | $ | (14,496 | ) | $ | – | $ | 463,628 | ||||||||||||||||
See notes to consolidated financial statements |
Consolidated Statements of Cash Flows | ||||||||||||
(Dollars in Thousands) | ||||||||||||
Year Ended December 31, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
Operating activities | ||||||||||||
Net income | $ | 93,223 | $ | 324,643 | $ | 56,913 | ||||||
Adjustment to reconcile net income to net cash provided by operating activities: | ||||||||||||
Depreciation | 8,293 | 8,103 | 7,632 | |||||||||
Amortization of intangible assets | 45,867 | 48,020 | 51,808 | |||||||||
Trade name write-down | – | 9,389 | – | |||||||||
Amortization of original issue discount | 1,598 | – | – | |||||||||
Amortization of deferred finance costs | 2,161 | 1,986 | 2,439 | |||||||||
Amortization of unrealized loss on interest rate swaps | 2,082 | – | – | |||||||||
Loss on extinguishment of debt | 14,308 | 377 | 4,809 | |||||||||
Provision for losses on accounts receivable | 204 | (7 | ) | (124 | ) | |||||||
Deferred income taxes | 62,429 | (238,170 | ) | – | ||||||||
Loss on disposal of property and equipment | 261 | 10 | 56 | |||||||||
Share-based compensation expense | 10,780 | 8,646 | 6,363 | |||||||||
Net changes in operating assets and liabilities, net of effects from acquisitions: | ||||||||||||
Accounts receivable | (137 | ) | (22,235 | ) | (8,621 | ) | ||||||
Inventories | (31,656 | ) | (11,224 | ) | (3,151 | ) | ||||||
Other assets | (8,416 | ) | (6,834 | ) | 1,177 | |||||||
Accounts payable | (3,898 | ) | 18,517 | 7,896 | ||||||||
Accrued wages and employee benefits | 3,168 | 6,516 | (197 | ) | ||||||||
Other accrued liabilities | 35,327 | 21,975 | (12,519 | ) | ||||||||
Net cash provided by operating activities | 235,594 | 169,712 | 114,481 | |||||||||
Investing activities | ||||||||||||
Proceeds from sale of property and equipment | 91 | 14 | 76 | |||||||||
Expenditures for property and equipment | (22,392 | ) | (12,060 | ) | (9,631 | ) | ||||||
Acquisition of business, net of cash acquired | (47,044 | ) | (83,907 | ) | (1,649 | ) | ||||||
Net cash used in investing activities | (69,345 | ) | (95,953 | ) | (11,204 | ) | ||||||
Financing activities | ||||||||||||
Proceeds from short-term borrowings | 23,018 | – | – | |||||||||
Proceeds from long-term borrowings | 1,455,614 | – | – | |||||||||
Repayments of short-term borrowings | (23,000 | ) | – | – | ||||||||
Repayments of long-term borrowings | (1,175,124 | ) | (59,355 | ) | (434,310 | ) | ||||||
Payment of debt issuance costs | (25,691 | ) | – | – | ||||||||
Cash dividends paid | (404,332 | ) | – | – | ||||||||
Taxes paid related to the net share settlement of equity awards | (6,425 | ) | (371 | ) | – | |||||||
Excess tax benefits from equity awards | 4,588 | 200 | – | |||||||||
Proceeds from issuance of common stock | – | – | 248,309 | |||||||||
Proceeds from exercise of stock options | – | 310 | – | |||||||||
Net cash used in financing activities | (151,352 | ) | (59,216 | ) | (186,001 | ) | ||||||
Net increase (decrease) in cash and cash equivalents | 14,897 | 14,543 | (82,724 | ) | ||||||||
Cash and cash equivalents at beginning of period | 93,126 | 78,583 | 161,307 | |||||||||
Cash and cash equivalents at end of period | $ | 108,023 | $ | 93,126 | $ | 78,583 | ||||||
Supplemental disclosure of cash flow information | ||||||||||||
Cash paid during the period | ||||||||||||
Interest | $ | 33,076 | $ | 24,264 | $ | 36,796 | ||||||
Income taxes | 2,811 | 437 | 322 | |||||||||
See notes to consolidated financial statements |
Consolidated Financial Statements
(Dollars in Thousands, Except Share and Per Share Data)
December 31, | ||||||||
2014 | 2013 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 189,761 | $ | 150,147 | ||||
Restricted cash | - | 6,645 | ||||||
Accounts receivable, less allowance for doubtful accounts of $2,275 atDecember 31, 2014 and $2,658 at December 31, 2013 | 189,107 | 164,907 | ||||||
Inventories | 319,385 | 300,253 | ||||||
Deferred income taxes | 22,841 | 26,869 | ||||||
Prepaid expenses and other assets | 9,384 | 5,358 | ||||||
Total current assets | 730,478 | 654,179 | ||||||
Property and equipment, net | 168,821 | 146,390 | ||||||
Customer lists, net | 41,002 | 42,764 | ||||||
Patents, net | 56,894 | 62,418 | ||||||
Other intangible assets, net | 4,298 | 4,447 | ||||||
Trade names, net | 182,684 | 173,196 | ||||||
Goodwill | 635,565 | 608,287 | ||||||
Deferred financing costs, net | 16,243 | 20,051 | ||||||
Deferred income taxes | 46,509 | 85,104 | ||||||
Other assets | 48 | 1,369 | ||||||
Total assets | $ | 1,882,542 | $ | 1,798,205 | ||||
Liabilities and stockholders’ equity | ||||||||
Current liabilities: | ||||||||
Short-term borrowings | $ | 5,359 | $ | 9,575 | ||||
Accounts payable | 132,248 | 109,238 | ||||||
Accrued wages and employee benefits | 17,544 | 26,564 | ||||||
Other accrued liabilities | 84,814 | 92,997 | ||||||
Current portion of long-term borrowings and capital lease obligations | 557 | 12,471 | ||||||
Total current liabilities | 240,522 | 250,845 | ||||||
Long-term borrowings and capital lease obligations | 1,082,101 | 1,175,349 | ||||||
Other long-term liabilities | 70,120 | 54,940 | ||||||
Total liabilities | 1,392,743 | 1,481,134 | ||||||
Stockholders’ equity: | ||||||||
Common stock, par value $0.01, 500,000,000 shares authorized, 69,122,271 and 68,767,367 shares issued at December 31, 2014 and 2013, respectively | 691 | 688 | ||||||
Additional paid-in capital | 434,906 | 421,672 | ||||||
Treasury stock, at cost, 198,312 and 163,458 shares at December 31, 2014 and 2013, respectively | (8,341 | ) | (6,571 | ) | ||||
Excess purchase price over predecessor basis | (202,116 | ) | (202,116 | ) | ||||
Retained earnings | 280,426 | 105,813 | ||||||
Accumulated other comprehensive loss | (15,767 | ) | (2,415 | ) | ||||
Total stockholders’ equity | 489,799 | 317,071 | ||||||
Total liabilities and stockholders’ equity | $ | 1,882,542 | $ | 1,798,205 |
See notes to consolidated financial statements.
Generac Holdings Inc.
Consolidated Statements of Comprehensive Income
(Dollars in Thousands, Except Share and Per Share Data)
Year Ended December 31, | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
Net sales | $ | 1,460,919 | $ | 1,485,765 | $ | 1,176,306 | ||||||
Costs of goods sold | 944,700 | 916,205 | 735,906 | |||||||||
Gross profit | 516,219 | 569,560 | 440,400 | |||||||||
Operating expenses: | ||||||||||||
Selling and service | 120,408 | 107,515 | 101,448 | |||||||||
Research and development | 31,494 | 29,271 | 23,499 | |||||||||
General and administrative | 54,795 | 55,490 | 46,031 | |||||||||
Amortization of intangibles | 21,024 | 25,819 | 45,867 | |||||||||
Gain on remeasurement of contingent consideration | (4,877 | ) | - | - | ||||||||
Total operating expenses | 222,844 | 218,095 | 216,845 | |||||||||
Income from operations | 293,375 | 351,465 | 223,555 | |||||||||
Other (expense) income: | ||||||||||||
Interest expense | (47,215 | ) | (54,435 | ) | (49,114 | ) | ||||||
Investment income | 130 | 91 | 79 | |||||||||
Loss on extinguishment of debt | (2,084 | ) | (15,336 | ) | (14,308 | ) | ||||||
Gain on change in contractual interest rate | 16,014 | - | - | |||||||||
Costs related to acquisitions | (396 | ) | (1,086 | ) | (1,062 | ) | ||||||
Other, net | (1,462 | ) | (1,983 | ) | (2,798 | ) | ||||||
Total other expense, net | (35,013 | ) | (72,749 | ) | (67,203 | ) | ||||||
Income before provision for income taxes | 258,362 | 278,716 | 156,352 | |||||||||
Provision for income taxes | 83,749 | 104,177 | 63,129 | |||||||||
Net income | $ | 174,613 | $ | 174,539 | $ | 93,223 | ||||||
Net income per common share - basic: | $ | 2.55 | $ | 2.56 | $ | 1.38 | ||||||
Weighted average common shares outstanding - basic: | 68,538,248 | 68,081,632 | 67,360,632 | |||||||||
Net income per common share - diluted: | $ | 2.49 | $ | 2.51 | $ | 1.35 | ||||||
Weighted average common shares outstanding - diluted: | 70,171,044 | 69,667,529 | 69,193,138 | |||||||||
Dividends declared per share | $ | - | $ | 5.00 | $ | 6.00 | ||||||
Other comprehensive income (loss): | ||||||||||||
Amortization of unrealized loss on interest rate swaps | $ | - | $ | 2,381 | $ | 2,082 | ||||||
Foreign currency translation adjustment | (3,082 | ) | 1,238 | (34 | ) | |||||||
Net unrealized gain (loss) on derivatives | (1,420 | ) | 774 | 365 | ||||||||
Pension liability adjustment | (8,850 | ) | 7,688 | (1,552 | ) | |||||||
Other comprehensive income (loss) | (13,352 | ) | 12,081 | 861 | ||||||||
Comprehensive income | $ | 161,261 | $ | 186,620 | $ | 94,084 |
See notes to consolidated financial statements.
Generac Holdings Inc.
Consolidated Statements of Stockholders' Equity
(Dollars in Thousands, Except Share Data)
| ||||||||||||||||||||||||||||||||||||
Common Stock | Additional Paid-In | Treasury Stock | Excess Purchase Price OverPredecessor | Retained Earnings (Accumulated | Accumulated Other Comprehensive | Total Stockholders' | ||||||||||||||||||||||||||||||
Shares | Amount | Capital | Shares | Amount | Basis | Deficit) | Income (Loss) | Equity | ||||||||||||||||||||||||||||
Balance at December 31, 2011 | 67,652,812 | $ | 676 | $ | 1,142,701 | - | $ | - | $ | (202,116 | ) | $ | (157,015 | ) | $ | (15,357 | ) | $ | 768,889 | |||||||||||||||||
Unrealized gain on interest rate swaps, net of tax of $236 | - | - | - | - | - | - | - | 365 | 365 | |||||||||||||||||||||||||||
Amortization of unrealized loss on interest rate swaps, net of tax of $95 | - | - | - | - | - | - | - | 2,082 | 2,082 | |||||||||||||||||||||||||||
Foreign currency translation adjustment | - | - | - | - | - | - | - | (34 | ) | (34 | ) | |||||||||||||||||||||||||
Common stock issued under equity incentive plans, net of shares withheldfor employee taxes and strike price | 643,148 | 7 | (6,431 | ) | - | - | - | - | - | (6,424 | ) | |||||||||||||||||||||||||
Excess tax benefits from equity awards | - | - | 4,588 | - | - | - | - | - | 4,588 | |||||||||||||||||||||||||||
Share-based compensation | - | - | 10,780 | - | - | - | - | - | 10,780 | |||||||||||||||||||||||||||
Dividends declared | - | - | (408,289 | ) | - | - | - | - | - | (408,289 | ) | |||||||||||||||||||||||||
Pension liability adjustment, net of tax of $(1,001) | - | - | - | - | - | - | - | (1,552 | ) | (1,552 | ) | |||||||||||||||||||||||||
Net income | - | - | - | - | - | - | 93,223 | - | 93,223 | |||||||||||||||||||||||||||
Balance at December 31, 2012 | 68,295,960 | 683 | 743,349 | - | - | (202,116 | ) | (63,792 | ) | (14,496 | ) | 463,628 | ||||||||||||||||||||||||
Unrealized gain on interest rate swaps, net of tax of $462 | - | - | - | - | - | - | - | 774 | 774 | |||||||||||||||||||||||||||
Amortization of unrealized loss on interest rate swaps, net of tax of $109 | - | - | - | - | - | - | - | 2,381 | 2,381 | |||||||||||||||||||||||||||
Foreign currency translation adjustment | - | - | - | - | - | - | - | 1,238 | 1,238 | |||||||||||||||||||||||||||
Common stock issued under equity incentive plans, net of shares withheldfor employee taxes and strike price | 471,407 | 5 | (8,587 | ) | - | - | - | - | - | (8,582 | ) | |||||||||||||||||||||||||
Treasury stock purchases | - | - | - | (163,458 | ) | (6,571 | ) | - | - | - | (6,571 | ) | ||||||||||||||||||||||||
Excess tax benefits from equity awards | - | - | 11,553 | - | - | - | - | - | 11,553 | |||||||||||||||||||||||||||
Share-based compensation | - | - | 12,368 | - | - | - | - | - | 12,368 | |||||||||||||||||||||||||||
Dividends declared | - | - | (337,011 | ) | - | - | - | (4,934 | ) | - | (341,945 | ) | ||||||||||||||||||||||||
Pension liability adjustment, net of tax of $5,060 | - | - | - | - | - | - | - | 7,688 | 7,688 | |||||||||||||||||||||||||||
Net income | - | - | - | - | - | - | 174,539 | - | 174,539 | |||||||||||||||||||||||||||
Balance at December 31, 2013 | 68,767,367 | $ | 688 | $ | 421,672 | (163,458 | ) | $ | (6,571 | ) | $ | (202,116 | ) | $ | 105,813 | $ | (2,415 | ) | $ | 317,071 | ||||||||||||||||
Unrealized loss on interest rate swaps, net of tax of $(860) | - | - | - | - | - | - | - | (1,420 | ) | (1,420 | ) | |||||||||||||||||||||||||
Foreign currency translation adjustment | - | - | - | - | - | - | - | (3,082 | ) | (3,082 | ) | |||||||||||||||||||||||||
Common stock issued under equity incentive plans, net of shares withheldfor employee taxes and strike price | 354,904 | 3 | (10,378 | ) | - | - | - | - | - | (10,375 | ) | |||||||||||||||||||||||||
Treasury stock purchases | - | - | - | (34,854 | ) | (1,770 | ) | - | - | - | (1,770 | ) | ||||||||||||||||||||||||
Excess tax benefits from equity awards | - | - | 10,972 | - | - | - | - | - | 10,972 | |||||||||||||||||||||||||||
Share-based compensation | - | - | 12,612 | - | - | - | - | - | 12,612 | |||||||||||||||||||||||||||
Dividends declared | - | - | 28 | - | - | - | - | - | 28 | |||||||||||||||||||||||||||
Pension liability adjustment, net of tax of $(5,658) | - | - | - | - | - | - | - | (8,850 | ) | (8,850 | ) | |||||||||||||||||||||||||
Net income | - | - | - | - | - | - | 174,613 | - | 174,613 | |||||||||||||||||||||||||||
Balance at December 31, 2014 | 69,122,271 | $ | 691 | $ | 434,906 | (198,312 | ) | $ | (8,341 | ) | $ | (202,116 | ) | $ | 280,426 | $ | (15,767 | ) | $ | 489,799 |
See notes to condensed consolidated financial statements.
Generac Holdings Inc.
Consolidated Statements of Cash Flows
(Dollars in Thousands)
Year Ended December 31, | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
Operating activities | ||||||||||||
Net income | $ | 174,613 | $ | 174,539 | $ | 93,223 | ||||||
Adjustment to reconcile net income to net cash provided by operating activities: | ||||||||||||
Depreciation | 13,706 | 10,955 | 8,293 | |||||||||
Amortization of intangible assets | 21,024 | 25,819 | 45,867 | |||||||||
Amortization of original issue discount | 3,599 | 2,074 | 1,598 | |||||||||
Amortization of deferred financing costs | 3,016 | 2,698 | 2,161 | |||||||||
Amortization of unrealized loss on interest rate swaps | - | 2,381 | 2,082 | |||||||||
Loss on extinguishment of debt | 2,084 | 15,336 | 14,308 | |||||||||
Gain on change in contractual interest rate | (16,014 | ) | - | - | ||||||||
Gain on remeasurement of contingent consideration | (4,877 | ) | - | - | ||||||||
Provision for losses on accounts receivable | 672 | 1,037 | 204 | |||||||||
Deferred income taxes | 37,878 | 82,675 | 62,429 | |||||||||
Loss on disposal of property and equipment | 576 | 370 | 261 | |||||||||
Share-based compensation expense | 12,612 | 12,368 | 10,780 | |||||||||
Net changes in operating assets and liabilities: | ||||||||||||
Accounts receivable | (2,988 | ) | (5,257 | ) | (137 | ) | ||||||
Inventories | 3,508 | (52,488 | ) | (31,656 | ) | |||||||
Other assets | 2,456 | (10,902 | ) | (8,416 | ) | |||||||
Accounts payable | 15,269 | (5,847 | ) | (3,898 | ) | |||||||
Accrued wages and employee benefits | (9,405 | ) | 6,248 | 3,168 | ||||||||
Other accrued liabilities | 6,229 | 9,491 | 39,915 | |||||||||
Excess tax benefits from equity awards | (10,972 | ) | (11,553 | ) | (4,588 | ) | ||||||
Net cash provided by operating activities | 252,986 | 259,944 | 235,594 | |||||||||
Investing activities | ||||||||||||
Proceeds from sale of property and equipment | 394 | 80 | 91 | |||||||||
Expenditures for property and equipment | (34,689 | ) | (30,770 | ) | (22,392 | ) | ||||||
Proceeds from sale of business, net | - | 2,254 | - | |||||||||
Acquisitions of businesses, net of cash acquired | (61,196 | ) | (116,113 | ) | (47,044 | ) | ||||||
Net cash used in investing activities | (95,491 | ) | (144,549 | ) | (69,345 | ) | ||||||
Financing activities | ||||||||||||
Proceeds from short-term borrowings | 6,550 | 16,007 | 23,018 | |||||||||
Proceeds from long-term borrowings | - | 1,200,000 | 1,455,614 | |||||||||
Repayments of short-term borrowings | (26,444 | ) | (18,982 | ) | (23,000 | ) | ||||||
Repayments of long-term borrowings and capital lease obligations | (94,035 | ) | (901,184 | ) | (1,175,124 | ) | ||||||
Payment of debt issuance costs | (4 | ) | (22,376 | ) | (25,691 | ) | ||||||
Cash dividends paid | (902 | ) | (343,429 | ) | (404,332 | ) | ||||||
Taxes paid related to the net share settlement of equity awards | (12,181 | ) | (15,020 | ) | (6,425 | ) | ||||||
Excess tax benefits from equity awards | 10,972 | 11,553 | 4,588 | |||||||||
Proceeds from exercise of stock options | 21 | 32 | - | |||||||||
Net cash used in financing activities | (116,023 | ) | (73,399 | ) | (151,352 | ) | ||||||
Effect of exchange rate changes on cash and cash equivalents | (1,858 | ) | 128 | - | ||||||||
Net increase in cash and cash equivalents | 39,614 | 42,124 | 14,897 | |||||||||
Cash and cash equivalents at beginning of period | 150,147 | 108,023 | 93,126 | |||||||||
Cash and cash equivalents at end of period | $ | 189,761 | $ | 150,147 | $ | 108,023 | ||||||
Supplemental disclosure of cash flow information | ||||||||||||
Cash paid during the period | ||||||||||||
Interest | $ | 42,592 | $ | 55,828 | $ | 33,076 | ||||||
Income taxes | 34,283 | 25,821 | 2,811 |
See notes to consolidated financial statements
Generac Holdings Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 2014, 2013, and2012
(Dollars in Thousands, Except Share and Per Share Data)
1. | Description of Business |
Generac Holdings Inc. (the Company) owns all of the common stock of Generac Acquisition Corp. (GAC), which in turn, owns all of the common stock of Generac Power Systems, Inc. (the Subsidiary and the Borrower). The Company is a leading designer and manufacturer of a wide range of generatorspower generation equipment and other engine powered products forserving the residential, light-commercial, industrial, oil & gas, and construction markets.
Over the past several years, we have executed a number of Class B Common Stock and Seriesacquisitions that support our strategic plan. A preferred Stock
● | On October 3, 2011, we acquired substantially all the assets of Magnum Products (Magnum), a supplier of generator powered light towers and mobile generators for a variety of industries and specialties. The Magnum business is a strategic fit for us as it provides diversification, with the introduction of new engine powered products, distribution channels and end markets. | |
● | On December 8, 2012, we 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. | |
● | On August 1, 2013, we 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. | |
● | On November 1, 2013, we 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. | |
● | On September 2, 2014, we acquired the equity of Pramac America LLC (Powermate), resulting in the ownership of the Powermate trade name and the right to license the DeWalt brand name for certain residential engine powered tools. The transaction also included working capital associated with these products. This acquisition helps to expand the Generac brand portfolio across its residential product platform and increases its product offering in the portable generator category. | |
● | On October 1, 2014, we acquired MAC, Inc. and its related entities (MAC). MAC is a leading manufacturer of premium-grade commercial and industrial mobile heaters within the United States and Canada. The acquisition expands the Company’s portfolio of mobile power products and provides increased access to the oil & gas market. |
2.Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany amounts and transactions have been eliminated in consolidation.
Cashand CashEquivalents
The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
Restricted Cash
Restricted cash represents cash transferred to an escrow account for the settlement of certain earn-out obligations associated with the Tower Light acquisition. See Note 3, “Acquisitions,” to the consolidated financial statements for additional details.
Concentration of Credit Risk
The Company maintains the majority of its cash in one commercial bank in multiple operating and investment accounts. Balances on deposit are insured by the Federal Deposit Insurance Corporation (FDIC) up to specified limits. Balances in excess of FDIC limits are uninsured.
One customer accounted for approximately 9% and 12%11% of accounts receivable at December 31, 20122014 and December 31, 2011,2013, respectively. No one customer accounted for greater than 8%, 6% and 7%, 10% and 10%, respectively, of net sales during the years ended December 31, 2014, 2013, or 2012, 2011, or 2010.
Accounts Receivable
Receivables are recorded at their face value amount less an allowance for doubtful accounts. The Company estimates and records an allowance for doubtful accounts based on specific identification and historical experience. The Company writes off uncollectible accounts against the allowance for doubtful accounts after all collection efforts have been exhausted. Sales are generally made on an unsecured basis.
Inventories
Inventories are stated at the lower of cost or market, with cost determined generally using the first-in, first-out method.
Property and Equipment
Property and equipment are recorded at cost and are being depreciated using the straight-line method over the estimated useful lives of the assets, which are summarized below (in years). Costs of leasehold improvements are amortized over the lesser of the term of the lease (including renewal option periods) or the estimated useful lives of the improvements.
Land improvements | 10 - 15 | |||
Buildings and improvements | 10 - 40 | |||
Leasehold improvements | 7 - 20 | |||
Machinery and equipment | 5 | - 20 | ||
Dies and tools | 3 | - 10 | ||
Vehicles | 3 | |||
Office equipment | 3 |
Weighted Average | 2012 | 2011 | ||||||||||||||||||||||||||
Amortization Years | Cost | Accumulated Impairment | Amortized Cost | Cost | Accumulated Impairment | Amortized Cost | ||||||||||||||||||||||
Indefinite lived intangible assets | ||||||||||||||||||||||||||||
Trade names | $ | 168,220 | $ | (9,389 | ) | $ | 158,831 | $ | 157,790 | $ | (9,389 | ) | $ | 148,401 | ||||||||||||||
Cost | Accumulated Amortization | Amortized Cost | Cost | Accumulated Amortization | Amortized Cost | |||||||||||||||||||||||
Finite lived intangible assets | ||||||||||||||||||||||||||||
Trade names | 0 | $ | 8,775 | $ | (8,775 | ) | $ | - | $ | 8,715 | $ | (8,715 | ) | $ | - | |||||||||||||
Customer lists | 7 | 273,355 | (235,532 | ) | 37,823 | 272,050 | (199,153 | ) | 72,897 | |||||||||||||||||||
Patents | 15 | 118,921 | (48,619 | ) | 70,302 | 118,881 | (40,714 | ) | 78,167 | |||||||||||||||||||
Unpatented technology | 11 | 13,165 | (7,696 | ) | 5,469 | 13,165 | (6,325 | ) | 6,840 | |||||||||||||||||||
Software | 8 | 1,014 | (779 | ) | 235 | 1,014 | (650 | ) | 364 | |||||||||||||||||||
Non-compete | 5 | 113 | (34 | ) | 79 | 113 | (11 | ) | 102 | |||||||||||||||||||
Total finite lived intangible assets | $ | 415,343 | $ | (301,435 | ) | $ | 113,908 | $ | 413,938 | $ | (255,568 | ) | $ | 158,370 |
Direct and incremental costs incurred in connection with the issuance of long-term debt are capitalized and amortized to interest expense over the terms of the related credit agreements. Debt discounts incurred in connection with the issuance of long-term debt are deferred and recorded as a reduction of outstanding debt and amortized to interest expense using the catch-up approach of the effective interest method over the terms of the related credit agreements. Approximately $3,759, $1,986,$6,615, $4,772, and $2,439$3,759 of deferred financing costs and original issue discountsdiscount were amortized to interest expense during fiscal years 2014, 2013 and 2012, 2011 and 2010, respectively. EstimatedExcluding the impact of any future long-term debt issuances or prepayments, estimated amortization expense each year for the next five years subsequent to December 31, 2012 is as follows: 2013, $5,105; 2014, $5,360; 2015, $5,634;$7,012; 2016, $5,944;$7,302; 2017, $5,960.
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 on October 31 or more frequently when an event occurs or circumstances change that indicates the carrying value may not be recoverable. The Company has the option to assess goodwill for impairment by first performing a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the Company determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then further goodwill impairment testing is not required to be performed. If the Company determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company is required to perform a two-step goodwill impairment test. In the first step, the fair value of the reporting unit is compared to its book value including goodwill. If the fair value of the reporting unit is in excess of its book value, the related goodwill is not impaired and no further analysis is necessary. If the fair value of the reporting unit is less than its book value, there is an indication of potential impairment and a second step is performed. When required, the second step of testing involves calculating the implied fair value of goodwill for the reporting unit. The implied fair value of goodwill is determined in the same manner as goodwill recognized in a business combination, which is the excess of the fair value of the reporting unit determined in step one over the fair value of its net assets and identifiable intangible assets as if the reporting unit had been acquired. If the carrying value of the reporting unit's goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. For reporting units with a negative book value (i.e., excess of liabilities over assets), qualitative factors are evaluated to determine whether it is necessary to perform the second step of the goodwill impairment test.
Other indefinite-lived intangible assets consist of trade names. The Company tests the carrying value of these trade names by comparing the assets’ fair value to its carrying value. Fair value is measured using a relief-from-royalty approach, which assumes the fair value of the trade name is the discounted cash flows of the amount that would be paid had the Company not owned the trade name and instead licensed the trade name from another company. The Company conducts its annual impairment test for indefinite-lived intangible assets on October 31 of each year.
The Company performed the required annual impairment tests for fiscal years 2014, 2013 and 2012 and found no impairment of goodwill or indefinite-lived trade names. There can be no assurance that future impairment tests will not result in a charge to earnings.
Impairment ofLong-Lived Assets
The Company periodically evaluates the carrying value of long-lived assets (excluding goodwill and trade names). Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the sum of the expected future undiscounted cash flows is less than the carrying amount of an asset, a loss is recognized for the difference between the fair value and carrying value of the asset. Such analyses necessarily involve significant judgments.
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 conducts its annual impairment test for goodwill on October 31st of each year. Conditions that would trigger an impairment assessment include, but are not limited to, a significant adverse change in legal factors or business climate that could affect the value of an asset.
Year ended December 31, 2012 | Year ended December 31, 2011 | |||||||||||||||||||||||
Gross | Accumulated Impairment | Net Goodwill | Gross | Accumulated Impairment | Net Goodwill | |||||||||||||||||||
Balance at beginning of year | $ | 1,050,666 | $ | (503,193 | ) | $ | 547,473 | $ | 1,030,341 | $ | (503,193 | ) | $ | 527,148 | ||||||||||
Acquisition of a business, net | 5,470 | — | 5,470 | 20,325 | — | 20,325 | ||||||||||||||||||
Balance at end of year | $ | 1,056,136 | $ | (503,193 | ) | $ | 552,943 | $ | 1,050,666 | $ | (503,193 | ) | $ | 547,473 |
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.
Sales, net of estimated returns and allowances, are recognized upon shipment of product to the customer, which is generally when title passes, the Company has no further obligations, and the customer is required to pay. The Company, at the request of certain customers, will warehouse inventory billed to the customer but not delivered. Unless all revenue recognition criteria have been met, the Company does not recognize revenue on these transactions until the customers take possession of the product. TheIn these cases, the funds collected on product warehoused for these customers are recorded as a customer advance until the customer takes possession of the product and the Company’s obligation to deliver the goods is completed. Customer advances are included in accrued liabilities in the accompanying consolidated balance sheets.
The Company provides for certain estimated sales promotionpromotions, discounts and incentive expenses which are recognized as a reduction of sales.
Shipping and Handling Costs
Shipping and handling costs billed to customers are included in net sales, and the related costs are included in cost of goods sold in the consolidated statements of comprehensive income.
Advertising and Co-Op Advertising Expenditures for advertising, included in selling and service expenses in the Research and Development The Company expenses research and development costs as incurred. Total expenditures incurred for research and development were Foreign Currency Translation and Transactions Balance sheet amounts for non-U.S. Dollar functional currency Fair Value of Financial Instruments The Assets and liabilities measured at fair value are based on the market approach, which are prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The Company believes the carrying amount of its financial instruments (cash and cash equivalents, restricted cash, accounts receivable, accounts payable, accrued liabilities Use of Estimates The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Derivative Instruments and Hedging Activities The Company records accompanying consolidated statements of comprehensive income, are expensed as incurred. Total expenditures for advertising were $13,360, $11,742,$32,352, $19,910, and $11,985$13,360 for the years ended December 31, 2014, 2013, and 2012, 2011, and 2010, respectively.$23,499, $16,476,$31,494, $29,271, and $14,700$23,499 for the years ended December 31, 2014, 2013 and 2012, 2011 and 2010, respectively.Foreignbalance sheet accountsbusinesses are translated into dollars at the rates of exchange in effect at fiscal year-end. Income and expenses incurred in a foreign currency are translated at the average rates of exchange in effect during the year. The related translation adjustments are made directly to a separate component of Stockholders’ Equity.Realized and unrealized gains and losses on transactions denominated in foreign currency are generally recorded in earnings as a component of cost of goods sold.Generac Holdings Inc.Notes to Consolidated Financial StatementsYears Ended December 31, 2012, 2011, and 2010(Dollars in Thousands, Except Share and Per Share Data)2. Significant Accounting Policies (continued)Accumulated Other Comprehensive LossAccumulated other comprehensive loss includes foreign currency translation adjustments, pension liability adjustments and unrealized losses on certain cash flow hedges. The components of accumulated other comprehensive loss, at December 31, 2012a component of stockholders’ equity, in the consolidated balance sheets. Gains and 2011 were: December 31, 2012 2011 Foreign currency translation adjustments $ (34 ) $ - Pension liability, net of tax of $(4,174) and $(3,173) (12,081 ) (10,529 ) Unrealized losses on cash flow hedges, net of tax of $(109) and $(440) (2,381 ) (4,828 ) Accumulated other comprehensive loss $ (14,496 ) $ (15,357 ) Company believes the carrying amount of its financial instruments (cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities and short-term borrowings), excluding long-term borrowings, approximates the fair value of these instruments based upon their short-term nature. The fair value of long-term borrowings, including amounts classified as current, was approximately $913,191 (level 2) at December 31, 2012, as calculated based on independent valuations whose inputs and significant value drivers are observable.MeasurementsASC 820-10 Fair Value Measurements and DisclosuresMeasurement,among other things, defines fair value, establishes a consistent framework for measuring fair value, and expands disclosure for each major asset and liability category measured at fair value on either a recurring basis or nonrecurring basis. ASC 820-10 clarifies that fair value is an exit price, representing the amount that would be received in the sale of an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the pronouncement establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows: (Level 1) observable inputs such as quoted prices in active markets; (Level 2) inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and (Level 3) unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.Assetsmeasured at fair value on a recurring basis are as follows: Fair Value Measurement Using Quoted Prices in Active Markets for Identical Contracts (Level 1) Interest rate swaps $ (2,973 ) $ – $ (2,973 ) Commodity contracts $ 111 $ – $ 111 Fair Value Measurement Using Quoted Prices in Active Markets for Identical Contracts (Level 1) Interest rate swaps $ (5,268 ) $ – $ (5,268 ) Commodity Contracts $ (373 ) $ – $ (373 ) Generac Holdings Inc.Notes to Consolidated Financial StatementsYears Ended December 31, 2012, 2011, and 2010(Dollars in Thousands, Except Share and Per Share Data)2. Significant Accounting Policies (continued)The valuation techniques used to measureshort-term borrowings), excluding long-term borrowings, approximates the fair value of derivative contracts classified as level 2, all of which have counterparties with high credit ratings, were valuedthese instruments based on quoted market prices or model driven valuations using significant inputs derived from or corroborated by observable market data.upon their short-term nature. The fair value of derivative contracts above considers the Company’s credit risk in accordance with ASC 820-10. Excluding the impact of credit risk, the fairlong-term borrowings, including amounts classified as current, which have an aggregate carrying value of derivatives$1,080,599 was approximately $1,048,165 (Level 2) at December 31, 20122014, as calculated based on independent valuations whose inputs and 2011 was $2,936 (liability) and $5,780 (liability), respectively, and this represents the amount the Company would need to pay to exit the agreements on this date. all derivatives in accordance with ASC 815,Derivatives and Hedging, which requires all derivative instruments be reported on the consolidated balance sheets at fair value and establishes criteria for designation and effectiveness of hedging relationships. The Company is exposed to market risk such as changes in commodity prices, foreign currencies, and interest rates. The Company does not hold or issue derivative financial instruments for trading purposes.
Stock-Based Compensation
Stock-based compensation expense, including stock options and restricted stock awards, is generally recognized on a straight-line basis over the vesting period based on the fair value of awards which are expected to vest. The fair value of all share-based awards is estimated on the date of grant.
New Accounting Pronouncements
In May 2014, the FASB issued ASU No 2014-09,Revenue from Contracts with Customers. This guidance is the culmination of the FASB’s joint project with the International Accounting Standards Board to clarify the principles for recognizing revenue. The core principal of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides a five-step process that entities should follow in order to achieve that core principal. The guidance is effective for the Company in 2017. The guidance can be applied either on a full retrospective basis or on a retrospective basis in which the cumulative effect of initially applying the standard is recognized at the date of initial application. The Company is currently assessing the impact the adoption of this guidance will have on the Company’s results of operations.
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’s consolidated financial statements.
3.Acquisitions
Acquisition of MAC
On October 1, 2014, a subsidiary of the Company acquired MAC for a purchase price, net of cash acquired of $55,690. Headquartered in Bismarck, North Dakota, MAC is a leading manufacturer of premium-grade commercial and industrial mobile heaters within the United States and Canada. The acquisition expands the Company’s portfolio of mobile power products and provides increased access to the oil & gas market. This acquisition was funded solely by existing cash.
The Company recorded a preliminary purchase price allocation during the fourth quarter of 2014 based upon its estimates of the fair value of the acquired assets and assumed liabilities. As a result, the Company recorded approximately $49,378 of intangible assets, including approximately $25,898 of goodwill, as of the acquisition date. The accompanying consolidated financial statements include the results of MAC from October 1, 2014 through December 31, 2014. The goodwill ascribed to this acquisition is not deductible for tax purposes.
Acquisition of Tower Light
On August 1, 2013, a subsidiary of the Company acquired all of the shares of Tower Light for a purchase price, net of cash acquired and inclusive of estimated earn-out payments, of $85,812. Headquartered outside Milan, Italy, Tower Light is a leading developer and supplier of mobile light towers throughout Europe, the Middle East and Africa. Tower Light has built a leading market position in the equipment rental markets by leveraging its broad product offering and strong global distribution network in over 50 countries worldwide.
The net cash paid at closing was $80,239 and included a cash deposit of $6,645 into an escrow account to fund future earn-out payments required by the purchase agreement, which was recorded as restricted cash on the Company’s consolidated balance sheet as of December 31, 2013. The earn-out payment of $7,641 was finalized during the second quarter of 2014, resulting in a gain of $4,877, which was recorded in the consolidated statement of comprehensive income for the year ended December 31, 2014. The difference between the total escrow deposit and the Company’s final earn-out payment is reflected as an addition to the purchase price. Additionally, the cash paid at closing included an estimate of acquired working capital. This estimate was finalized during third quarter of 2013, resulting in a $300 decrease to the purchase price. The acquisition was funded solely by existing cash.
The Company recorded a preliminary purchase price allocation during the third quarter of 2013 based upon its estimates of the fair value of the acquired assets and assumed liabilities. As a result, the Company recorded approximately $67,900 of intangible assets, including approximately $38,400 of goodwill. Based on revised purchase accounting estimates, an additional $9,328 of goodwill was recorded during the fourth quarter of 2013. The goodwill ascribed to this acquisition is not deductible for tax purposes. The accompanying consolidated financial statements include the results of Tower Light from August 1, 2013 through December 31, 2014.
Acquisition of Ottomotores
On December 8, 2012, a subsidiary of the Company acquired all of the shares of Ottomotores. Ottomotores was founded in 1950 and is located in Mexico City, Mexico and Curitiba, Brazil. Ottomotores is a leading manufacturer in the Mexican market for industrial diesel gensets ranging in size from 15kW to 3,250kW and is a market participant throughout all of Latin America.
The cash paid at closing of $44,769, net of cash acquired, included an estimate of acquired working capital. This estimate was finalized during the second quarter of 2013 to reflect actual working capital acquired as well as cash acquired and debt assumed, resulting in a $6,278 decrease to the purchase price. This acquisition was funded solely by existing cash.
The Company recorded a preliminary purchase price allocation during the fourth quarter of 2012 based upon its estimates of the fair value of the acquired assets and assumed liabilities. As a result, the Company recorded approximately $16,100 of intangible assets, including approximately $5,050 of goodwill, as of the acquisition date. The purchase price allocation was finalized during the second quarter of 2013, resulting in an additional $2,590 of intangible assets and a $439 decrease to goodwill. The goodwill ascribed to this acquisition is not deductible for tax purposes.
Management considers these acquisitions to be immaterial for full required disclosure.
4. Derivative Instruments and Hedging Activities
Commodities
The primary objectives of the commodity risk management activities are to understand and mitigate the impact of potential price fluctuations on the Company’s financial results and its economic well-being. While the Company’s risk management objectives and strategies will be driven from an economic perspective, the Company attempts, where possible and practical, to ensure that the hedging strategies it engages in can be treated as “hedges” from an accounting perspective or otherwise result in accounting treatment where the earnings effect of the hedging instrument provides substantial offset (in the same period) to the earnings effect of the hedged item. Generally, these risk management transactions will involve the use of commodity derivatives to protect against exposure resulting from significant price fluctuations.
The Company primarily utilizes commodity contracts with maturities of less than 12eighteen months. These are intended to offset the effect of price fluctuations on actual inventory purchases. There were one, two, and one outstandingOutstanding commodity forward contracts in place to hedge itsthe Company’s projected commodity purchases at December 31, 2012, 2011,were as follows:
As of December 31, 2014: | ||||||||
Commodity | Trade Date | Effective Date | Notional Amount | Termination Date | ||||
Copper | October 2, 2014 | October 1, 2014 | $ | 4,960 | December 31, 2015 | |||
Copper | October 15, 2014 | November 1, 2014 | $ | 4,637 | December 31, 2015 | |||
Copper | December 1, 2014 | December 1, 2014 | $ | 8,232 | December 31, 2015 |
As of December 31, 2013: | ||||||||
Commodity | Trade Date | Effective Date | Notional Amount | Termination Date | ||||
Copper | June 21, 2013 | October 1, 2013 | $ | 2,169 | June 30, 2014 |
As of December 31,2012: | ||||||||
Commodity | Trade Date | Effective Date | Notional Amount | Termination Date | ||||
Copper | October 29, 2012 | January 1, 2013 | $ | 3,472 | September 30, 2013 |
Because these contracts do not qualify for hedge accounting, gains and 2010, respectively. In October 2009,losses are recorded in cost of goods sold in the Company entered into commodity swaps to purchase $1,432Company’s consolidated statements of copper. The swaps were effective from October 5, 2009, and terminatedcomprehensive income. Net gains (losses) recognized on March 31, 2010. In November 2010, the Company entered into a commodity swap to purchase $2,296 of copper. The swap was effective from January 1, 2011, and terminated on April 30, 2011. In February 2011, the Company entered into a commodity forward contract to purchase a notional amount of $2,378 of copper. The contract was effective from March 1, 2011, and terminated on December 31, 2011. In March 2011, the Company entered into a commodity forward contract to purchase a notional amount of $2,100 of copper. The contract was effective from April 1, 2011, and terminated on December 31, 2011. In May 2011, the Company entered into a commodity forward contract to purchase a notional amount of $1,808 of copper. The contract was effective from May 5, 2011, and terminated on December 31, 2011. In September 2011, the Company entered into two new commodity forwardsuch contracts to purchase notional amounts of $4,533 and $1,935 of copper. The contracts are effective from October 1, 2011, and terminate on June 30, 2012. In May 2012, the Company entered into a commodity forward contract to purchase a notional amount of $1,898 of copper. The contract was effective from July 1, 2012, and terminated on December 31, 2012. In October 2012, the Company entered into a commodity forward contract to purchase a notional amount of $3,472 of copper. The contract was effective from January 1, 2013, and terminates on September 30, 2013.
Foreign Currencies
The Company is exposed to foreign currency exchange risk as a result of transactions in other currencies. The Company periodically utilizes foreign currency forward purchase and sales contracts to manage the volatility associated with foreign currency purchases in the normal course of business. Contracts typically have maturities of one yeartwelve months or less. There were no foreign currency hedge contracts outstanding asduring the year ended December 31, 2012. As of December 31, 2012, 2011 or 2010. There was one Euro2014 and 2013, the following foreign currency contract outstanding during 2010 that expired on December 31, 2010. A loss of $100 wascontracts were outstanding:
As of December 31, 2014: | ||||
Currency Denomination | Notional Amount | |||
British Pound Sterling (GBP) to Euro | £ | 5,000 |
As ofDecember 31, 2013: | ||||
Currency Denomination | Notional Amount | |||
United States Dollar (USD) to Euro | $ | 650 | ||
British Pound Sterling (GBP) to Euro | £ | 4,000 |
Total net losses recognized in the consolidated statements of operationscomprehensive income for the yearyears ended December 31, 2010 related to this Euro contract.
On October 23, 2013, the Company entered into two interest rate swap agreements, and on May 19, 2014, the Company entered into one interest rate swap agreement. The Company formally documented all relationships between interest rate hedging instruments and hedged items, as well as its risk-management objectives and strategies for undertaking various hedge transactions. These interest rate swap agreements qualify as cash flow hedges. For derivatives that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of accumulated other comprehensive loss. The cash flows of the swaps are recognized as adjustments to interest expense each period. The ineffective portion of the derivatives’ change in fair value, if any, is immediately recognized in earnings. The Company assesses on an ongoing basis whether derivatives used in hedging transactions are highly effective in offsetting changes in cash flows of hedged items. The effective dates of the swaps are July 1, 2014 with a notional amount of $100,000 each, a fixed LIBOR rate of 1.7370%, 1.7420% and 1.6195%, including a LIBOR floor of 0.75%, and all expire on July 1, 2018.
The following table presents the fair value of the Company’s derivatives:
December 31, 2012 | December 31, 2011 | |||||||
Derivatives designated as hedging instruments: | ||||||||
Interest rate swaps | $ | - | $ | (5,268 | ) | |||
- | (5,268 | ) | ||||||
Derivatives not designated as hedging instruments: | ||||||||
Commodity contracts | 111 | (373 | ) | |||||
Interest rate swaps | (2,973 | ) | - | |||||
Total derivatives | $ | (2,862 | ) | $ | (5,641 | ) |
December 31, | December 31, | |||||||
Interest rate swaps | $ | (1,045 | ) | $ | 1,236 | |||
Commodity contracts | (515 | ) | 69 | |||||
Foreign currency contracts | (149 | ) | 56 |
The fair value of all derivatives not designated as hedging instruments isthe interest rate swaps, and the commodity and foreign currency contracts are included in other currentaccrued liabilities and other assets in the consolidated balance sheets as of December 31, 20122014 and 2011, respectively.
The following presents the impact of interest rate swaps, commodity contracts and commodityforeign currency contracts on the consolidated statement of comprehensive income for the yearyears ended December 31, 2012, 20112014, 2013 and 2010:
Amount of gain (loss) recognized in AOCI for the twelve months ended December 31, | Location of gain (loss) recognized in net income (loss) on ineffective portion of hedges | Amount of loss reclassified from AOCI into net income (loss) for the twelve months ended December 31, | Amount of gain (loss) recognized in net income (loss) on hedges (ineffective portion) for twelve months ended December 31, | ||||||||||||||||||||||||||||||||||
2012 | 2011 | 2010 | 2012 | 2011 | 2010 | 2012 | 2011 | 2010 | |||||||||||||||||||||||||||||
Derivatives designated as hedging instruments | |||||||||||||||||||||||||||||||||||||
Interest rate swaps (1) | $ | 365 | $ | (683 | ) | $ | (4,145 | ) | Interest expense | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||
Derivatives not designated as hedging instruments | |||||||||||||||||||||||||||||||||||||
Commodity and foreign currency contracts | - | - | - | Cost of goods sold | - | - | - | 386 | (861 | ) | 956 | ||||||||||||||||||||||||||
Interest rate swaps (2) | $ | - | $ | - | $ | - | Interest expense | $ | (2,082 | ) | $ | - | $ | - | $ | 1,695 | $ | - | $ | - |
Amount of Gain (Loss) Recognized in AOCI for the Year Ended December 31, | Location of Gain (Loss) Recognized in the Net Income (Loss) on Ineffective | Amount of Loss Reclassified from AOCI into Net Income for the Year Ended December 31, | Amount of Gain (Loss) Recognized in Net Income on Hedges (Ineffective Portion) for the Year Ended December 31, | ||||||||||||||||||||||||||||||||||
2014 | 2013 | 2012 | Portion of Hedges | 2014 | 2013 | 2012 | 2014 | 2013 | 2012 | ||||||||||||||||||||||||||||
Derivatives designated as hedging instruments | |||||||||||||||||||||||||||||||||||||
Interest rate swaps (1) | $ | (1,420 | ) | $ | 774 | $ | 365 | Interest Expense | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | |||||||||||||||||
Derivatives not designated as hedging instruments | |||||||||||||||||||||||||||||||||||||
Interest rate swaps (2) | $ | - | $ | - | $ | - | Interest Expense | $ | - | $ | (2,381 | ) | $ | (2,082 | ) | $ | - | $ | 2,973 | $ | 1,695 | ||||||||||||||||
Commodity and foreign currency contracts | $ | - | $ | - | $ | - | Cost of goods sold | $ | - | $ | - | $ | - | $ | (778 | ) | $ | (661 | ) | $ | 386 |
(1) | Amounts recorded for the year ended December 31, 2012 relate to the interest rate swap agreements outstanding prior to May 30, 2012, the date the hedging relationships for these agreements were terminated. |
(2) | Amounts recorded for the years ended December 31, 2013 and 2012 relate to interest rate swap agreements outstanding as of May 30, 2012, |
5. Fair Value Measurements
Assets (liabilities) measured at fair value on a straight-linerecurring basis over the vesting period based onare as follows:
Fair Value Measurement Using | ||||||||||||
Total December 31, 2014 | Quoted Prices in Active | Significant Other Observable Inputs (Level 2) | ||||||||||
Interest rate swaps | $ | (1,045 | ) | $ | - | $ | (1,045 | ) | ||||
Commodity contracts | $ | (515 | ) | $ | - | $ | (515 | ) | ||||
Foreign currency contracts | $ | (149 | ) | $ | - | $ | (149 | ) |
Fair Value Measurement Using | ||||||||||||
Total December 31, 2013 | Quoted Prices in Active Markets for Identical Contracts (Level 1) | Significant Other Observable Inputs (Level 2) | ||||||||||
Interest rate swaps | $ | 1,236 | $ | - | $ | 1,236 | ||||||
Commodity contracts | $ | 69 | $ | - | $ | 69 | ||||||
Foreign currency contracts | $ | 56 | $ | - | $ | 56 |
The valuation techniques used to measure the fair value of awardsderivative contracts classified as Level 2, all of which are expected to vest.have counterparties with high credit ratings, were valued based on quoted market prices or model driven valuations using significant inputs derived from or corroborated by observable market data. The fair value of all share-based awards is estimated onderivative contracts above considers the date of grant.
6. Accumulated Other Comprehensive Loss
The following presents a tabular disclosure of changes in accumulated other comprehensive income (loss) during the years ended December 31, 2014 and 2013, net of tax:
Foreign Currency Translation Adjustments | Defined Benefit Pension Plan | Unrealized Hedges | Total | |||||||||||||
Beginning Balance - January 1, 2014 | $ | 1,204 | $ | (4,393 | ) | $ | 774 | $ | (2,415 | ) | ||||||
Other comprehensive loss beforereclassifications | (3,082 | ) | (8,922 | ) | (1,420 | ) | (13,424 | ) | ||||||||
Amounts reclassified from accumulated othercomprehensive loss | - | 72 | (1) | - | 72 | |||||||||||
Net current-period other comprehensive loss | (3,082 | ) | (8,850 | ) | (1,420 | ) | (13,352 | ) | ||||||||
Ending Balance - December 31, 2014 | $ | (1,878 | ) | $ | (13,243 | ) | $ | (646 | ) | $ | (15,767 | ) |
Foreign Currency Translation Adjustments | Defined Benefit Pension Plan | Unrealized Gain (Loss) Hedges | Total | |||||||||||||
Beginning Balance - January 1, 2013 | $ | (34 | ) | $ | (12,081 | ) | $ | (2,381 | ) | $ | (14,496 | ) | ||||
Other comprehensive income beforereclassifications | 1,238 | 6,994 | 774 | 9,006 | ||||||||||||
Amounts reclassified from accumulated othercomprehensive loss | - | 694 | (2) | 2,381 | (3) | 3,075 | ||||||||||
Net current-period other comprehensive income | 1,238 | 7,688 | 3,155 | 12,081 | ||||||||||||
Ending Balance - December 31, 2013 | $ | 1,204 | $ | (4,393 | ) | $ | 774 | $ | (2,415 | ) |
(1) | Represents the actuarial losses of $(106), net of tax benefit of $34, included in the computation of net periodic pension cost. See Note 14, “Benefit Plans,” to the consolidated financial statements for additional information. |
(2) | Represents the actuarial losses of $(1,108), net of tax benefit of $414, included in the computation of net periodic pension cost. See Note 14, “Benefit Plans,” to the consolidated financial statements for additional information. |
(3) | Represents amortization of unrealized losses on interest rate swaps to interest expense on the consolidated statements of comprehensive income of $(2,490), net of tax benefit of $109. See Note 11, “Credit Agreements,” to the consolidated financial statements for additional information. |
7. Segment Reporting The Company operates in and reports as a single operating segment, which is the design and manufacture of a wide range of power products. Net sales are predominantly generated through the sale of generators and other engine powered products through various distribution channels. The Company manages and evaluates its operations as one segment primarily due to similarities in the nature of the products, production and design processes, and methods of distribution. The Company’s sales in the United States represent approximately 93%84%, 95%88%, and 95%93% of total sales for the years ended December 31, 2012, 20112014, 2013 and 2010,2012, respectively. Approximately 98%91%, 100%90% and 100%94% of the Company’s identifiable long-lived assets are located in the United States as of December 31, 2014, 2013 and 2012, 2011 and 2010, respectively.
The Company's product offerings consist primarily of power products with a range of power output geared for varying end customer uses. Residential power products and commercial & industrial power products are each a similar class of products based on similar power output and end customer usage. The breakout of net sales between residential, commercial & industrial, and other products is as follows:
Year ended December 31, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
Residential power products | $ | 705,444 | $ | 491,016 | $ | 372,782 | ||||||
Commercial & industrial power products | 410,341 | 250,270 | 183,555 | |||||||||
Other | 60,521 | 50,690 | 36,543 | |||||||||
Total | $ | 1,176,306 | $ | 791,976 | $ | 592,880 |
Year Ended December 31, | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
Residential products | $ | 722,206 | $ | 843,727 | $ | 705,444 | ||||||
Commercial & industrial products | 652,216 | 569,890 | 410,341 | |||||||||
Other | 86,497 | 72,148 | 60,521 | |||||||||
Total | $ | 1,460,919 | $ | 1,485,765 | $ | 1,176,306 |
Accounts receivable | $ | 24,309 | ||
Inventory | 23,763 | |||
Prepaid expenses and other current assets | 280 | |||
Property and equipment | 5,164 | |||
Goodwill | 20,337 | |||
Trade name | 17,740 | |||
Customer relationships | 14,740 | |||
Patents | 1,070 | |||
Other intangible assets | 2,220 | |||
Trade accounts payable | (20,727 | ) | ||
Accrued expenses | (2,746 | ) | ||
Other long term liabilities | (2,243 | ) | ||
Total cash paid, net of $30 cash acquired | $ | 83,907 |
Year ended December 31, | ||||||||
2011 | 2010 | |||||||
Net sales | $ | 897,892 | $ | 681,278 | ||||
Net income | 334,076 | 68,369 |
Inventories consist of the following:
December 31, | ||||||||
2012 | 2011 | |||||||
Raw material | $ | 168,459 | $ | 121,098 | ||||
Work-in-process | 8,580 | 578 | ||||||
Finished goods | 55,777 | 45,165 | ||||||
Reserves for excess and obsolescence | (6,999 | ) | (4,717 | ) | ||||
Total | $ | 225,817 | $ | 162,124 |
December 31, | ||||||||
2014 | 2013 | |||||||
Raw material | $ | 184,407 | $ | 183,787 | ||||
Work-in-process | 8,798 | 9,620 | ||||||
Finished goods | 135,567 | 113,404 | ||||||
Reserves for excess and obsolescence | (9,387 | ) | (6,558 | ) | ||||
Total | $ | 319,385 | $ | 300,253 |
As of December 31, 20122014 and 2011,2013, inventories totaling $4,401$12,497 and $1,736,$6,504, respectively, were on consignment at customer locations.
Property and equipment consists of the following:
December 31, | ||||||||
2012 | 2011 | |||||||
Land and improvements | $ | 6,511 | $ | 5,050 | ||||
Buildings and improvements | 68,934 | 52,941 | ||||||
Machinery and equipment | 42,581 | 38,132 | ||||||
Dies and tools | 15,406 | 12,982 | ||||||
Vehicles | 1,872 | 1,026 | ||||||
Office equipment | 12,993 | 8,380 | ||||||
Leasehold improvements | 1,393 | 44 | ||||||
Construction in progress | 3,439 | 3,131 | ||||||
Gross property and equipment | 153,129 | 121,686 | ||||||
Accumulated depreciation | (48,411 | ) | (37,302 | ) | ||||
Total | $ | 104,718 | $ | 84,384 |
December 31, | ||||||||
2014 | 2013 | |||||||
Land and improvements | $ | 7,803 | $ | 7,416 | ||||
Buildings and improvements | 102,254 | 96,161 | ||||||
Machinery and equipment | 65,240 | 54,847 | ||||||
Dies and tools | 16,897 | 17,071 | ||||||
Vehicles | 1,383 | 1,979 | ||||||
Office equipment | 21,990 | 17,304 | ||||||
Leasehold improvements | 2,535 | 2,229 | ||||||
Construction in progress | 20,120 | 9,724 | ||||||
Gross property and equipment | 238,222 | 206,731 | ||||||
Accumulated depreciation | (69,401 | ) | (60,341 | ) | ||||
Total | $ | 168,821 | $ | 146,390 |
9. Goodwill and Intangible Assets
The changes in the carrying amount of goodwill for the following:
December 31, | ||||||||
2012 | 2011 | |||||||
Accrued commissions | $ | 7,467 | $ | 5,731 | ||||
Accrued interest | 15,809 | 3,119 | ||||||
Product warranty obligations – short term | 28,752 | 19,187 | ||||||
Accrued dividends for unvested restricted stock | 3,957 | - | ||||||
Accrued volume rebates | 7,991 | 4,645 | ||||||
Accrued customer prepayments | 6,569 | 3,370 | ||||||
Other accrued selling expenses | 7,753 | 6,024 | ||||||
Other accrued liabilities | 7,783 | 4,948 | ||||||
Total | $ | 86,081 | $ | 47,024 |
Year Ended December 31, 2014 | Year Ended December 31, 2013 | |||||||||||||||||||||||
Gross | Accumulated Impairment | Net | Gross | Accumulated Impairment | Net | |||||||||||||||||||
Balance at beginning of year | $ | 1,111,480 | $ | (503,193 | ) | $ | 608,287 | $ | 1,056,136 | $ | (503,193 | ) | $ | 552,943 | ||||||||||
Acquisitions of businesses, net | 27,278 | - | $ | 27,278 | 56,605 | - | $ | 56,605 | ||||||||||||||||
Sale of business, net | - | - | - | (1,261 | ) | - | (1,261 | ) | ||||||||||||||||
Balance at end of year | $ | 1,138,758 | $ | (503,193 | ) | $ | 635,565 | $ | 1,111,480 | $ | (503,193 | ) | $ | 608,287 |
See Note 3, “Acquisitions,” to consolidated financial statements for further information regarding the Company’s acquisitions.
The following table summarizes intangible assets by major category as of December 31, 2014 and 2013:
Weighted Average | 2014 | 2013 | ||||||||||||||||||||||||||
Amortization Years | Cost | Accumulated Impairment | Net Cost | Cost | Accumulated Impairment | Net Cost | ||||||||||||||||||||||
Indefinite lived intangible assets | ||||||||||||||||||||||||||||
Trade names | $ | 192,073 | $ | (9,389 | ) | $ | 182,684 | $ | 182,585 | $ | (9,389 | ) | $ | 173,196 |
Cost | Accumulated Amortization | Amortized Cost | Cost | Accumulated Amortization | Amortized Cost | |||||||||||||||||||||||
Finite lived intangible assets | ||||||||||||||||||||||||||||
Trade names | 0 | $ | 8,775 | $ | (8,775 | ) | $ | - | $ | 8,775 | $ | (8,775 | ) | $ | - | |||||||||||||
Customer lists | 8 | 304,180 | (263,178 | ) | 41,002 | 294,627 | (251,863 | ) | 42,764 | |||||||||||||||||||
Patents | 15 | 121,341 | (64,447 | ) | 56,894 | 118,921 | (56,503 | ) | 62,418 | |||||||||||||||||||
Unpatented technology | 13 | 13,169 | (10,435 | ) | 2,734 | 13,169 | (9,064 | ) | 4,105 | |||||||||||||||||||
Software | 8 | 1,046 | (1,037 | ) | 9 | 1,046 | (912 | ) | 134 | |||||||||||||||||||
Non-compete/other | 7 | 1,961 | (406 | ) | 1,555 | 345 | (137 | ) | 208 | |||||||||||||||||||
Total finite lived intangible assets | $ | 450,472 | $ | (348,278 | ) | $ | 102,194 | $ | 436,883 | $ | (327,254 | ) | $ | 109,629 |
Amortization of intangible assets was $21,024, $25,819 and $45,867 in 2014, 2013 and 2012, 2011, and 2010
December 31, | ||||||||
2012 | 2011 | |||||||
Accrued pension costs | $ | 23,174 | $ | 22,044 | ||||
Product warranty obligations – long term | 20,833 | 15,193 | ||||||
Other long-term liabilities | 2,335 | 6,277 | ||||||
Total | $ | 46,342 | $ | 43,514 |
10. Product Warranty Obligations
The Company records a liability for product warranty obligations at the time of sale to a customer based upon historical warranty experience. The Company also records a liability for specific warranty matters when they become known and are reasonably estimable. The Company also sells extended warranty coverage for certain product. The sales of extended warranties are recorded as deferred revenue, and we recognize the revenue from sales of extended warranties over the life of the contracts. The Company’s product warranty obligations, including deferred revenue related to extended warranty coverage, are included in other accrued liabilities and other long-term liabilities in the consolidated balance sheets.
The Company recognizes the revenue from sales of extended warranties over the lifefollowing is a tabular reconciliation of the contracts.
Year Ended December 31, | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
Balance at beginning of year | $ | 33,734 | $ | 36,111 | $ | 24,643 | ||||||
Payments | (20,615 | ) | (18,484 | ) | (19,801 | ) | ||||||
Provision for warranties issued | 22,890 | 33,707 | 34,173 | |||||||||
Changes in estimates for pre-existing warranties | (5,100 | ) | (17,600 | ) | (2,904 | ) | ||||||
Balance at end of year | $ | 30,909 | $ | 33,734 | $ | 36,111 |
The following is a tabular reconciliation of the deferred revenue related to extended warranty coverage:
Year Ended December 31, | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
Balance at beginning of year | $ | 23,092 | $ | 13,474 | $ | 9,737 | ||||||
Deferred revenue on extended warranty contracts sold | 7,343 | 11,998 | 5,547 | |||||||||
Amortization of deferred revenue on extended warranty contracts | (3,242 | ) | (2,380 | ) | (1,810 | ) | ||||||
Balance at end of year | $ | 27,193 | $ | 23,092 | $ | 13,474 |
For the year ended December 31, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
Balance at beginning of year | $ | 34,380 | $ | 22,478 | $ | 20,729 | ||||||
Payments, net of extended warranty receipts | (14,257 | ) | (11,195 | ) | (13,178 | ) | ||||||
Charged to operations | 29,462 | 23,097 | 14,927 | |||||||||
Balance at end of year | $ | 49,585 | $ | 34,380 | $ | 22,478 |
Product warranty obligations and warranty related deferred revenues are included in the balance sheets as follows:
December 31, | ||||||||
2012 | 2011 | |||||||
Other accrued liabilities | $ | 28,752 | $ | 19,187 | ||||
Other long-term liabilities | 20,833 | 15,193 | ||||||
Balance at end of year | $ | 49,585 | $ | 34,380 |
December 31, | ||||||||
2014 | 2013 | |||||||
Product warranty liability | ||||||||
Current portion - other accrued liabilities | $ | 24,143 | $ | 26,080 | ||||
Long-term portion - other long-term liabilities | 6,766 | 7,654 | ||||||
Total | $ | 30,909 | $ | 33,734 | ||||
Deferred revenue related to extended warranty | ||||||||
Current portion - other accrued liabilities | $ | 4,519 | $ | 3,325 | ||||
Long-term portion - other long-term liabilities | 22,674 | 19,767 | ||||||
Total | $ | 27,193 | $ | 23,092 |
The revolving credit facilities and credit agreements discussed below were outstanding for allthe periods presented.described below. The Company refinanced this debt on February 9, 2012, and amended and restated its credit agreements on May 30, 2012.
Short-term borrowings are included in the balance sheets as follows:
December 31, | ||||||||
2012 | 2011 | |||||||
ABL facility | $ | - | $ | - | ||||
Other lines of credit, as described below | 12,550 | - | ||||||
$ | 12,550 | $ | - |
December 31, | ||||||||
2014 | 2013 | |||||||
ABL facility | $ | - | $ | - | ||||
Other lines of credit, as described below | 5,359 | 9,575 | ||||||
Total | $ | 5,359 | $ | 9,575 |
Long-term borrowings are included in the balance sheets as follows:
December 31, | ||||||||
2012 | 2011 | |||||||
Term loan | $ | 897,750 | $ | - | ||||
Discount on debt | (16,482 | ) | - | |||||
First lien term loan | - | 604,372 | ||||||
Total | 881,268 | 604,372 | ||||||
Less treasury debt – first lien | - | 6,498 | ||||||
Less current portion | 82,250 | 22,874 | ||||||
$ | 799,018 | $ | 575,000 |
December 31, | ||||||||
2014 | 2013 | |||||||
Term loan | $ | 1,104,000 | $ | 1,197,000 | ||||
Discount on debt | (23,861 | ) | (12,735 | ) | ||||
Capital lease obligation | 2,059 | 2,529 | ||||||
Other | 460 | 1,026 | ||||||
Total | 1,082,658 | 1,187,820 | ||||||
Less current portion of debt | 389 | 12,286 | ||||||
Less current portion of capital lease obligation | 168 | 185 | ||||||
Total | $ | 1,082,101 | $ | 1,175,349 |
Maturities of long-term borrowings outstanding at December 31, 2012,2014, are as follows:
Year | ||||
2012 | $ | - | ||
2013 | - | |||
2014 | - | |||
2015 | - | |||
After 2015 | 799,018 | |||
Total | $ | 799,018 |
Year | |||||
2015 | $ | 557 | |||
2016 | 254 | ||||
2017 | 185 | ||||
2018 | 191 | ||||
After 2018 | 1,105,332 | ||||
Total | $ | 1,106,519 |
On February 9, 2012, a subsidiary of the Company (the “Borrower” or “Generac Power Systems”) entered into a new credit agreement (“Credit Agreement”)(Credit Agreement) with certain commercial banks and other lenders. The Credit Agreement provided for borrowings under a $150,000 revolving credit facility, a $325,000 tranche A term loan facility and a $250,000 tranche B term loan facility. The revolving credit facility and tranche A term loan facility were scheduled to mature in February 2017 and the tranche B term loan facility was scheduled to mature in February 2019. Proceeds received by the Company from loans made under the Credit Agreement were used for general corporate purposes and to repay in full all outstanding borrowings under the former credit agreement, dated as of November 10, 2006, as amended from time to time, and for general corporate purposes. The Company’s former credit agreement outstanding in 2011 and 2010 was comprised of a revolving credit facility and a first-lien term loan which were scheduled to mature in November 2012 and November 2013, respectively.
On May 30, 2012, the Borrower amended and restated its then existing Credit Agreement by entering into a new credit agreement (“Term(Term Loan Credit Agreement”)Agreement) and a new revolving credit agreement (ABL Credit Agreement) with certain commercial banks and other lenders. The Term Loan Credit Agreement providesprovided for a $900,000 term loan B credit facility (“Term Loan”) and a $125,000 uncommitted incremental term loan facility (Term Loan). The ABL Credit Agreement provided for borrowings under a $150,000 senior secured ABL revolving credit facility. The Term Loan Credit Agreement matures onwas scheduled to mature in May 30, 2018.2018 and the ABL Credit Agreement was scheduled to mature in May 2017. Proceeds received by the Company from loans under the Term Loan Credit Agreement, together with cash on hand, were used to repay amounts outstanding under the Company’s previous Credit Agreement. The remaining proceeds from the Term Loan were used, along with cash on hand, toAgreement and pay a special cash dividend of $6.00 per share on the Company’s common stock (see(refer to Note #13 – Special17, “Special Cash Dividend).
On May 31, 2013, the Borrower to maintain a minimum consolidated fixed charge coverage ratio of 1.0x, tested on a quarterly basis, when Availability plus the amount of Qualified Cash (up to $5,000) (as defined in the ABL Credit Agreement) under the ABL Facility is less than the greater of (i) 10.0% of the lesser of the aggregate commitmentsamended and the applicable borrowing base under the ABL Facility or (ii) $10,000. The ABL Credit Agreement also contains covenants and events of default substantially similar to those in therestated its then existing Term Loan Credit Agreement as described below.by entering into a new term loan credit agreement (New Term Loan Credit Agreement) with certain commercial banks and other lenders. The Company is requiredNew Term Loan Credit Agreement provides for a $1,200,000 term loan B credit facility (New Term Loan) and includes a $300,000 uncommitted incremental term loan facility. The New Term Loan Credit Agreement matures on May 31, 2020. Proceeds from the New Term Loan were used to pay an ABL Facility commitment fee of 0.50% on the average available unused commitment. As of December 31, 2012, the Company had $147,036 of availability under the ABL facility, net of outstanding letters of credit. As of December 31, 2012, the Company’s interest rate on the ABL Facility was 1.96%. There were no borrowingsrepay amounts outstanding under the ABL Facility as of December 31, 2012.
Prior to any voluntary prepayments, the New Term Loan amortizesamortized in equal installments of 0.25% of the original principal amount of the New Term Loan payable on the first day of April, July, October and January commencing on October 1, 20122013 until the final maturity date of the Term Loan. The final principal repayment installment of theNew Term Loan is required to be repaid on the maturity date in an amount equal to the aggregate principal amount of the Term Loan outstanding on such date. In February 2013, the Borrower made an $80.0 million debt prepayment that was applied to all required future principal amortizations. The Term LoanMay 31, 2020. It initially bearsbore interest at rates based upon either a base rate plus an applicable margin of 4.00%1.75% or adjusted LIBOR rate plus an applicable margin of 5.00%2.75%, subject to a LIBOR floor of 1.25%0.75%. At December 31, 2012Beginning in the second quarter of 2014, the applicable margin related to base rate loans can be reduced to 1.50% and 2011 the Company’s interestapplicable margin related to LIBOR rate was 6.25% and 2.80%loans can be reduced to 2.50%, respectively.
As the circumstancesBorrower’s net debt leverage ratio was below 3.00 to 1.00 on April 1, 2014, the Company realized a 25 basis point reduction in borrowing costs during the second quarter of 2014. As a result, the Company recorded a cumulative catch-up gain of $16,014 in the second quarter of 2014 which represents the Borrower cantotal cash interest savings over the remaining term of the loan. The gain was recorded as original issue discount on long-term borrowings in the consolidated balance sheets. The Borrower’s net debt leverage ratio as of December 31, 2014 continues to be below 3.00 to 1.00.
The New Term Loan Credit Agreement contains restrictions on the Borrower’s ability to pay distributions and dividends (but which arepermitted the payment of the special cash dividend described in additionNote 17, “Special Cash Dividend” to those to be paid in connection with the Transactions (as defined in the Term Loan Credit Agreement)consolidated financial statements). Payments can be made by the Borrower to the Company or other parent companies for certain expenses such as operating expenses in the ordinary course, fees and expenses related to any debt or equity offering and to pay franchise or similar taxes. Dividends can be used to repurchase equity interests, subject to limitations in certain circumstances. Additionally, the New Term Loan Credit Agreement restricts the aggregate amount of dividends and distributions that can be paid and, in certain circumstances, requires Pro Forma (as defined in the Term Loan Credit Agreement)pro forma compliance with certain fixed charge coverage ratios or gross leverage ratios, as applicable, in order to pay certain dividends orand distributions. The New Term Loan Credit Agreement also contains certain other affirmative and negative covenants that, among other things, provide limitations onlimit 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 the Company’sour organizational documents. The New Term Loan Credit Agreement does not contain any financial maintenance covenants. The Company was in compliance with all requirements of the Credit Agreements as of December 31, 2012, 2011 and 2010.
The New Term Loan Credit Agreement contains customary events of default, including, among others, nonpayment of principal, interest or other amounts, failure to perform covenants, inaccuracy of representations or warranties in any material respect, cross-defaults with other material indebtedness, certain undischarged judgments, the occurrence of certain ERISA or bankruptcy or insolvency events or the occurrence of a change in control (as defined(defined in the New Term Loan Credit Agreement). A bankruptcy or insolvency event of default causes suchwill cause the obligations under the New Term Loan Credit Agreement to automatically become immediately due and payable.
Concurrent with the new credit agreement on February 9, 2012, andclosing of the subsequent amendment and restatementNew Term Loan Credit Agreement on May 30, 201231, 2013, the Company had (i)Borrower amended its existing ABL Credit Agreement (New ABL Credit Agreement). The amendment provides for a first lien credit facility with Goldman Sachs Credit Partners L.P., as administrative agent, composedone year extension of (x) a $950,000 term loan, which was scheduled to maturethe maturity date in November 2013 and (y) arespect of the $150,000 senior secured ABL revolving credit facility provided under the ABL Credit Agreement (ABL Facility). The extended maturity date of the ABL Facility is May 31, 2018. Borrowings under the ABL Facility are guaranteed by all of the Borrower’s wholly-owned domestic restricted subsidiaries and GAC, and are secured by associated collateral agreements which was scheduled to mature in November 2012,pledge a first priority lien on all cash, trade accounts receivable, inventory, and (ii)other current assets and proceeds thereof, and a second priority lien crediton all other assets, including fixed assets and intangibles of the Borrower, certain domestic subsidiaries of the Borrower and the guarantors (other than the Company).
Borrowings under the ABL facility with JP Morgan Chase Bank, N.A.bear 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%, as administrative agent, composed of a $430,000 term loan, which was scheduledin each case, subject to mature in May 2014.
In connection with the February 2010,9, 2012 refinancing and in accordance with ASC 470-50, Debt Modifications and Extinguishments, the Company used $221,622capitalized $10,409 of new debt issuance costs, recorded $1,386 of fees paid to creditors as a debt discount, expensed $1,407 of transaction fees and wrote-off $2,902 of unamortized debt issuance costs relating to the former credit agreement. In connection with the May 30, 2012 refinancing, the Company capitalized $15,309 of new debt issuance costs, recorded $18,000 of fees paid to creditors as a debt discount, expensed $801 of transaction fees and wrote-off $9,198 of unamortized debt issuance costs relating to the Credit Agreement. Amounts expensed were recorded as a loss on extinguishment of debt in net proceeds from the initial public offeringconsolidated statement of comprehensive income for the year ended December 31, 2012.
In connection with the May 31, 2013 refinancing, the Company capitalized $21,824 of new debt issuance costs, recorded $13,797 of fees paid to pay downcreditors as a debt discount, expensed $7,100 of transaction fees and wrote-off $5,473 of unamortized debt issuance costs and original issue discount relating to the second lien term loanprevious Term Loan Credit Agreement and ABL Credit Agreement. Amounts expensed were recorded as a loss on extinguishment of debt in fullthe consolidated statement of comprehensive income for the year ended December 31, 2013. The Company amortizes both the capitalized debt issuance costs and to pay down a portionthe original issue discount on its loans under the catch-up approach of the first lien term loan. In addition, in March 2010, December 2010, April 2011, December 2011 andeffective interest method.
On February 201211, 2013, the Company used $138,495, $74,194, $24,731, $34,624 and $22,874 respectively,made an $80,000 voluntary prepayment of debt with available cash and cash equivalents on hand that was applied to further pay down principal.
On April 30, 2012. Beginning MaySeptember 30 and December 31, 2012,2014, the effective portionCompany made voluntary prepayments of the swaps priorNew 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 change (i.e. amounts previously recorded in Accumulated Other Comprehensive Loss) have been and will continue to be amortized as interest expense over the period of the originally designated hedged transactions which have various dates through October 2013. Future changes in fair value of the swaps have been and will continue to be immediately recognizedExcess Cash Flow payment requirement in the condensed consolidated statements of comprehensive income as interest expense.
Series A Preferred | Class B Common | |||||||
Carrying value | $ | 113,109 | $ | 765,096 | ||||
Cumulative accretion | 17,006 | 286,299 | ||||||
$ | 130,115 | $ | 1,051,395 |
As of December 31, 2014 and December 31, 2013, short-term borrowings consisted primarily of borrowings by our foreign subsidiaries on local lines of credit, which totaled $5,359 and $9,575 respectively.
12. Earnings Per Share
Basic earnings per share is calculated by dividing net income by the weighted average number of common shares outstanding.outstanding during the period, excluding unvested restricted shares. Except where the result would be anti-dilutive, diluteddilutive earnings per share is calculated by assuming the vesting of unvested restricted stock and the exercise of stock options, as well as their related income tax benefits. The following table reconcilessummarizes the numerator and the denominator used to calculate basic and diluted earnings per share:
Year ended December 31 , | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
Net income | $ | 93,223 | $ | 324,643 | $ | 56,913 | ||||||
Less: accretion of Series A Preferred stock | - | - | (2,042 | ) | ||||||||
Less: accretion of Class B Common stock | - | - | (12,133 | ) | ||||||||
Less: beneficial conversion | - | - | (140,690 | ) | ||||||||
Net income (loss) attributable to Common stock (formerly Class A Common stock) | 93,223 | 324,643 | (97,952 | ) | ||||||||
Income attributable to Class B Common stock | - | - | 12,133 | |||||||||
Net income (loss) per common share - basic: | ||||||||||||
Common stock (formerly Class A Common stock) | $ | 1.38 | $ | 4.84 | $ | (1.65 | ) | |||||
Class B Common stock | n/a | n/a | $ | 505 | ||||||||
Net income (loss) per common share - diluted: | ||||||||||||
Common stock (formerly Class A Common stock) | $ | 1.35 | $ | 4.79 | $ | (1.65 | ) | |||||
Class B Common stock | n/a | n/a | $ | 505 | ||||||||
Weighted average number of shares outstanding – Common Stock (formerly Class A Common stock): | ||||||||||||
Basic | 67,360,632 | 67,130,356 | 59,364,958 | |||||||||
Dilutive effect of equity awards (1) | 1,832,506 | 667,015 | - | |||||||||
Diluted | 69,193,138 | 67,797,371 | 59,364,958 | |||||||||
Weighted average number of shares outstanding – Class B Common stock – basic and diluted: | n/a | n/a | 24,018 |
Year Ended December 31, | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
Net income (numerator) | $ | 174,613 | $ | 174,539 | $ | 93,223 | ||||||
Weighted average shares (denominator) | ||||||||||||
Basic | 68,538,248 | 68,081,632 | 67,360,632 | |||||||||
Dilutive effect of stock compensation awards (1) | 1,632,796 | 1,585,897 | 1,832,506 | |||||||||
Diluted | 70,171,044 | 69,667,529 | 69,193,138 | |||||||||
Net income per share | ||||||||||||
Basic | $ | 2.55 | $ | 2.56 | $ | 1.38 | ||||||
Diluted | $ | 2.49 | $ | 2.51 | $ | 1.35 |
(1) Excludes approximately 81,600, 10,300 and 363,000 stock options and restricted stock awards for the twelve month periodyears ended December 31, 2014, 2013 and 2012, respectively, as the impact of such awards was anti-dilutive. There were no anti-dilutive awards for the twelve month period ended December 31, 2011. For the year ended December 31, 2010, diluted earnings per share are identical to basic earnings per share because the impact of common stock equivalents on earnings per share is anti-dilutive. Had the impact not been anti-dilutive, the effect of stock compensation awards on weighted average diluted shares outstanding would have been 257,038.
The Company’s provision for income taxes consists of the following:
Year ended December 31, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
Current: | ||||||||||||
Federal | $ | 34,170 | $ | 14,312 | $ | – | ||||||
State | 3,854 | 1,885 | 307 | |||||||||
Foreign | 81 | – | – | |||||||||
38,105 | 16,197 | 307 | ||||||||||
Deferred: | ||||||||||||
Federal | 21,972 | 15,632 | 19,127 | |||||||||
State | 3,048 | 1,887 | 2,831 | |||||||||
Foreign | 25 | – | – | |||||||||
25,045 | 17,519 | 21,958 | ||||||||||
Change in valuation allowance | (21 | ) | (271,393 | ) | (21,958 | ) | ||||||
Provision for income taxes | $ | 63,129 | $ | (237,677 | ) | $ | 307 |
Year Ended December 31, | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
Current: | ||||||||||||
Federal | $ | 38,161 | $ | 48,287 | $ | 34,170 | ||||||
State | 1,645 | 5,648 | 3,854 | |||||||||
Foreign | 5,701 | 2,214 | 81 | |||||||||
45,507 | 56,149 | 38,105 | ||||||||||
Deferred: | ||||||||||||
Federal | 42,474 | 42,003 | 21,972 | |||||||||
State | (3,134 | ) | 5,523 | 3,048 | ||||||||
Foreign | (1,462 | ) | 167 | 25 | ||||||||
37,878 | 47,693 | 25,045 | ||||||||||
Change in valuation allowance | 364 | 335 | (21 | ) | ||||||||
Provision for income taxes | $ | 83,749 | $ | 104,177 | $ | 63,129 |
The Company ishas been notified by the taxpaying entity and files a consolidated federalInternal Revenue Service of an income tax return. Currently,audit for the 2012 tax year. To date, field work has not commenced. As of December 31, 2014, due to the carryforward of net operating losses and research and development credits, the Company is not under examination by any major taxing jurisdictionopen to whichU.S. Federal and state income tax examinations for the tax years 2006 through 2014. In addition, the Company is subject. The statute of limitationsubject to audit by various foreign taxing jurisdictions for the tax years 2012, 2011, 2010, and 2009 is open, for federal and state income taxes. Additionally, tax years 2007 and 2008 remain open for examination by certain state and foreign taxing authorities.through 2014.
Significant components of deferred tax assets and liabilities are as follows:
December 31, | ||||||||
2012 | 2011 | |||||||
Deferred tax assets: | ||||||||
Goodwill and intangible assets | $ | 125,457 | $ | 160,311 | ||||
Accrued expenses | 26,606 | 16,572 | ||||||
Deferred revenue | 3,503 | 1,370 | ||||||
Inventories | 2,544 | 2,720 | ||||||
Pension obligations | 9,064 | 8,641 | ||||||
Stock-based compensation | 6,408 | 5,302 | ||||||
Operating loss and credit carryforwards | 24,915 | 50,429 | ||||||
Interest rate swap, copper derivative | 1,119 | 2,065 | ||||||
Other | 36 | 719 | ||||||
Valuation allowance | (806 | ) | – | |||||
Total deferred tax assets | 198,846 | 248,129 | ||||||
Deferred tax liabilities: | ||||||||
Depreciation | 12,274 | 5,994 | ||||||
Prepaid expenses | 1,131 | 377 | ||||||
Total deferred tax liabilities | 13,405 | 6,371 | ||||||
Net deferred tax asset | $ | 185,441 | $ | 241,758 |
December 31, | ||||||||
2014 | 2013 | |||||||
Deferred tax assets: | ||||||||
Goodwill and intangible assets | $ | 23,624 | $ | 74,992 | ||||
Accrued expenses | 18,191 | 24,263 | ||||||
Deferred revenue | 7,945 | 4,413 | ||||||
Inventories | 6,306 | 4,483 | ||||||
Pension obligations | 8,738 | 4,043 | ||||||
Stock-based compensation | 8,628 | 6,609 | ||||||
Operating loss and credit carryforwards | 10,047 | 976 | ||||||
Other | 4,299 | 2,089 | ||||||
Valuation allowance | (1,385 | ) | (1,021 | ) | ||||
Total deferred tax assets | 86,393 | 120,847 | ||||||
Deferred tax liabilities: | ||||||||
Depreciation | 18,535 | 15,163 | ||||||
Debt refinancing costs | 10,925 | 7,494 | ||||||
Prepaid expenses | 1,032 | 1,183 | ||||||
Total deferred tax liabilities | 30,492 | 23,840 | ||||||
Net deferred tax assets | $ | 55,901 | $ | 97,007 |
The net current and noncurrent components of deferred taxes included in the consolidated balance sheets are as follows:
December 31, | ||||||||
2012 | 2011 | |||||||
Net current deferred tax assets | $ | 48,687 | $ | 14,395 | ||||
Net long-term deferred tax assets | 137,560 | 227,363 | ||||||
Valuation allowance | (806 | ) | – | |||||
Net deferred tax assets | $ | 185,441 | $ | 241,758 |
December 31, | ||||||||
2014 | 2013 | |||||||
Net current deferred tax assets | $ | 22,841 | $ | 26,869 | ||||
Net long-term deferred tax assets | 47,894 | 86,125 | ||||||
Net long-term deferred tax liabilities | (13,449 | ) | (14,966 | ) | ||||
Valuation allowance | (1,385 | ) | (1,021 | ) | ||||
Net deferred tax assets | $ | 55,901 | $ | 97,007 |
The Company was in a three year cumulative net loss position, due primarily to a 2008 goodwill and tradename impairment write-off, and therefore had not considered expected future taxable income in analyzing the realizability of thelong-term deferred tax assetsliabilities and valuation allowance are included in other long-term liabilities and deferred income taxes (noncurrent), respectively, in the consolidated balance sheets as of December 31, 2010, resulting in a full valuation allowance against these net deferred tax assets. In the fourth quarter of 2011, the Company was no longer in a three-year cumulative loss position2014 and as part of the normal assessment of the future realization of the net deferred tax assets, determined that a valuation allowance was no longer required. As a result, the valuation allowance was reversed in the fourth quarter of 2011 and the Company recorded as a tax benefit of $271,393.
Generac Brazil, acquired as part of the Ottomotores acquisition, Ottomotores Brazilhas generated net operating losses for multiple years.years as part of the start-up of the business. The realizability of the deferred tax assets associated with these net operating losses is uncertain so a valuation allowance has beenwas recorded in the opening balance sheet as of December 8, 2012.
At December 31, 2012,2014, the Company has federal net operating losshad state research and development credit, and state manufacturing credit carryforwards of approximately $54,079, which expire between 2028$15,610 and 2030, and various state net operating loss carryforwards,$2,424, respectively, which expire between 2017 and 2030.
Changes in the expiration of net operating lossCompany’s gross liability for unrecognized tax benefits, excluding interest and tax credit carry forwards before utilization. The Company has no such limitationpenalties, were as of December 31, 2011 and expects no limitation was triggered in 2012. Future ownership changes may result in such a limitation. However, the Company believes any limitation would not be significant.
December 31, | ||||
2014 | ||||
Unrecognized tax benefit, beginning of period | $ | - | ||
Increase in unrecognized tax benefit for positions taken in current period | 6,394 | |||
Unrecognized tax benefit, end of period | $ | 6,394 |
At December 31, 20122013 and 2011,2012, the Company hashad no reserves recorded for uncertain tax positions.
The entire unrecognized tax benefit as of December 31, 2014, if recognized, would impact the effective tax rate.
Interest and penalties are recorded as a component of income tax expense. As of December 31, 2014, total interest of approximately $86 and penalties of approximately $263 associated with net unrecognized tax benefits are included in the Company’s consolidated balance sheet. There were no interest or penalties related to income taxes that had been accrued or recognized as of and for the years ended December 31, 2013 and 2012.
The Company does not expect a significant increase or decrease to the total amounts of unrecognized tax benefits related to continuing operations during the fiscal year ending December 31, 2015.
The Company considers the earnings of certain non-U.S. subsidiaries to be indefinitely invested outside the United States on the basis of estimates that future domestic cash generation will be sufficient to meet future domestic cash needs and the Company’s specific plans for reinvestment of those subsidiary earnings. The Company has not provided for additional U.S. income taxes on approximately $9,139 of undistributed earnings of consolidated non-U.S. subsidiaries. It is not practicable to estimate the amount of unrecognized withholding taxes and deferred tax liability on such earnings.
A reconciliation of the statutory tax rates and the effective tax rates for the years ended December 31, 2012, 20112014, 2013 and 20102012 are as follows:
Year ended December 31, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
U.S. statutory rate | 35.0 | % | 35.0 | % | 35.0 | % | ||||||
State taxes | 4.1 | 4.0 | 4.0 | |||||||||
Valuation allowance | - | (312.3 | ) | (38.0 | ) | |||||||
Other | 1.3 | - | - | |||||||||
Effective tax rate | 40.4 | % | (273.3 | )% | 1.0 | % |
Year Ended December 31, | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
U.S. statutory rate | 35.0 | % | 35.0 | % | 35.0 | % | ||||||
State taxes | 3.1 | 3.7 | 4.1 | |||||||||
Valuation allowance | 0.2 | 0.2 | - | |||||||||
Research and development credits | (5.0 | ) | (0.6 | ) | (0.2 | ) | ||||||
Other | (0.9 | ) | (0.9 | ) | 1.5 | |||||||
Effective tax rate | 32.4 | % | 37.4 | % | 40.4 | % |
Medical and Dental Plan
The Company maintains medical and dental benefit plans covering full-time domestic employees of the Company and their dependents. Certain plans are partially or fully self-funded plans under which participant claims are obligations of the plan. These plans are funded through employer and employee contributions at a level sufficient to pay for the benefits provided by the plan. The Company’s contributions to the planplans were $8,741, $6,700,$11,701, $9,500, and $7,300$8,741 for the years ended December 31, 2014, 2013, and 2012, 2011, and 2010, respectively. The plan covering a majority of full-time employees maintains individual stop loss insurance policies on the medical portion with a limit of stop loss of $235 to mitigate losses. Balances for the incurred but not yet reported claims, including reported but unpaid claims at December 31, 2012, and 2011, were $1,185 and $800, respectively. The Company estimates claims incurred but not yet reported based on its historical experience. During 2012,2014, the Company paid premiums of $2,446$2,700 for other standard medical benefits covering certain full-time employees.
The Company’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.
Savings Plan
The Company maintains a defined-contribution 401(k) savings plan for virtually alleligible domestic employees who meet certain eligibility requirements.employees. Under the plan, employees may defer receipt of a portion of their eligible compensation.
Pension Plans The Company has a frozen noncontributory salaried and hourly pension plans The Company uses a December 31 measurement date for the Pension Plans. 2014 2013 Accumulated benefit obligation at end of period Change in projected benefit obligation Projected benefit obligation at beginning of period Interest cost Net actuarial loss (gain) Benefits paid Projected benefit obligation at end of period Change in plan assets Fair value of plan assets at beginning of period Actual return on plan assets Company contributions Benefits paid Fair value of plan assets at end of period Funded status: accrued pension liability included in other long-term liabilities Amounts recognized in accumulated other comprehensive income Net actuarial loss The actuarial loss for the Pension Plans that was amortized from Year Ended December 31, 2014 2013 2012 Components of net periodic pension (benefit) cost: Interest cost Expected return on plan assets Amortization of net loss Net periodic pension (benefit) cost Weighted-average assumptions used to determine the benefit December 31, 2014 2013 Discount rate - salaried pension plan Discount rate - hourly pension plan Rate of compensation increase (1) (1) No compensation increase was assumed as the plans were frozen effective December 31, 2008. Weighted-average assumptions used to determine net periodic pension Year Ended December 31, 2014 2013 2012 Discount rate Expected long-term rate of return on plan assets Rate of compensation increase (1) (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 plan assets, the Company studies historical markets and preserves the long-term historical relationships between equities and fixed-income securities consistent with the widely accepted capital market principle that assets with higher volatility generate a greater return over the long run. The Company evaluates current market factors such as inflation and interest rates before it determines long-term capital market assumptions and reviews peer data and historical returns to check for reasonableness and appropriateness. The Pension Plan’s weighted-average asset allocation at December 31, December 31, 2014 December 31, 2013 Asset Category Target Dollars % Dollars % Fixed Income Domestic equity International equity Real estate Total The fair values of the Pension Plan's assets at December 31, Total Quoted Prices in Active Markets for Identical Asset (Level 1) Significant Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Mutual fund Other investments Total The fair values of the Pension Plan's assets at December 31, Total Quoted Prices in Active Markets for Identical Asset (Level 1) Significant Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Mutual fund Collective trust Total A reconciliation of beginning and ending balances for Level 3 assets for the year ended December 31, 2014 is as follows: Other Investments Balance as of December 31, 2013 Purchases Realized gains Balance as of December 31, 2014 Mutual Funds Other Investments - This category includes investments in limited partnerships and are valued at estimated fair value, as determined with the assistance of each respective limited partnership, based on the net asset value of the investment as of the balance sheet date, which is subject to judgment. The Net Asset Value (NAV) is classified within Level 3 of the fair value hierarchy. Collective Trusts The Company’s target allocation for equity securities and real estate is generally between 65% The Company expects to make estimated contributions of The following benefit payments are expected to be paid from the Pension Plans: Year 2015 2016 2017 2018 2019 Certain of the Company’s foreign subsidiaries participate in local defined benefit or other post-employment benefit plans. These plans provide benefits that are generally based on years of credited service and a percentage of the employee’s eligible compensation earned throughout the applicable service period. Liabilities recorded under these plans are included in accrued wages and employee benefits in the Company’s consolidated balance sheets and are not material. 15. Share Plans The Company adopted an equity incentive 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-based awards to executives, directors and employees. Awards available for grant under the Beginning in 2011, stock option exercises are 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 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. 2014 2013 2012 Weighted average grant date fair value Assumptions: Expected stock price volatility Risk free interest rate Expected annual dividend per share Expected life of options (years) 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, A summary of the Company’s stock option activity and related information for the Number of Options Weighted- Average Exercise Price Weighted- Average Remaining Contractual Term (in years) Aggregate Intrinsic Value ($ in thousands) Outstanding as of December 31, 2011 Granted Exercised Expired Forfeited Outstanding as of December 31, 2012 Granted Exercised Expired Forfeited Outstanding as of December 31, 2013 Granted Exercised Expired Forfeited Outstanding as of December 31, 2014 Exercisable as of December 31, 2014 As of December 31, Restricted Stock – For awards issued prior to 2012, restricted stock awards vest in full on the third anniversary of the date of grant, subject to the grantee’s continued employment. Restricted stock awards issued in 2012 and after, vest in equal installments over three years, subject to the grantee’s continued employment or service. Restricted stock also includes performance shares, which were awarded for the first time in 2014. The number of performance shares that can be earned are contingent upon Company performance measures over a three-year period. Performance measures are based on a weighting of revenue growth and EBITDA margin, from which grantees may earn from 0% to 200% of their target performance share award. The performance period for the 2014 awards covers the years 2014 through 2016. The fair market value of the Restricted stock vesting is net-share settled such that the Company withholds shares with value equivalent to the employees’ minimum statutory obligation for the applicable income and other employment taxes. In effect, the Company repurchases these shares and classifies as treasury stock, and uses the cash on behalf of the employees to satisfy the tax withholding requirements. Total shares withheld were approximately 34,854, 163,458 and zero in 2014, 2013 and 2012, respectively, and were based on the value of the stock on the vesting dates as determined based upon an average of the Company’s high and low stock sales price on the vesting dates. Total payments for the employees’ tax obligations to the taxing authorities were $1,770, $6,571 and zero in 2014, 2013 and 2012, respectively, and are reflected as a financing activity within the consolidated statements of cash flows. A summary of the Company's restricted share awards activity for the Shares Weighted- Average Grant- Date Fair Value Non-vested as of December 31, 2011 Granted Vested Forfeited Non-vested as of December 31, 2012 Granted Vested Forfeited Non-vested as of December 31, 2013 Granted Vested Forfeited Non-vested as of December 31, 2014 As of December 31, During 2014, 2013 and 2012, 16. Commitments and Contingencies The Company leases certain computer equipment, automobiles, and warehouse space under operating leases with The approximate aggregate minimum rental commitments at December 31, Year Amount 2015 2016 2017 2018 2019 Total Total rent expense for the years ended December 31, The Company has an arrangement with a finance company to provide floor plan financing for In the normal course of business, the Company is named as a defendant in various lawsuits in which claims are asserted against the Company. In the opinion of management, the liabilities, if any, which may result from such lawsuits are not expected to have a material adverse effect on the financial position, results of operations, or cash flows of the Company. On June 29, 2012, the Company used a portion of the proceeds from the May 30, 2012 debt refinancing (see Note On June 21, 2013, the Company used a portion of the proceeds from the May 31, 2013 debt refinancing (see Note 11, “Credit Agreements” to the consolidated financial statements) to pay a special cash dividend of $5.00 per share on its common stock, resulting in payments totaling $340,772 to stockholders. Related dividends declared but unpaid as of December 31, 2014 of $810, which relate to dividends earned on unvested restricted stock awards, are included in other accrued liabilities in the consolidated balance sheet. Payment of these dividends will be made when the underlying restricted stock awards vest. The balance of retained earnings as of the 2013 dividend declaration date was $4,934. As such, the dividends were first charged to retained earnings and dividends in excess of retained earnings were recorded as a reduction to additional paid-in capital. In connection with the special 18. Quarterly Financial Information (Unaudited) Quarters Ended 2014 Q1 Q2 Q3 Q4 Net sales Gross profit Operating income Net income Net income per common share, basic: Net income per common share, diluted: Quarters Ended 2013 Q1 Q2 Q3 Q4 Net sales Gross profit Operating income Net income Net income per common share, basic: Net income per common share, diluted: For the years ended December 31, Balance at Beginning of Year Reserves Assumed in Acquisition Additions Charged to Earnings Charges to Reserve, Net (1) Balance at End of Year Allowance for doubtful accounts Reserves for inventory Valuation of deferred tax assets - Allowance for doubtful accounts Reserves for inventory Valuation of deferred tax assets - Allowance for doubtful accounts Reserves for inventory Valuation of deferred tax assets - (1) Deductions from the allowance for doubtful accounts equal accounts receivable written off, less recoveries, against the allowance. Deductions from the reserves for inventory excess and obsolete items equal inventory written off against the reserve as items were disposed of. There were no changes in, or disagreements with, accountants reportable herein. Evaluation of Disclosure Controls and Procedures Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by us in reports we file or submit under the Securities Exchange Act of 1934 Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, has conducted an evaluation of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act as of the end of the period covered by this report on Form 10-K. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective in providing reasonable assurance that the information required to be disclosed in this report on Form 10-K has been recorded, processed, summarized and reported as of the end of the period covered by this report on Form 10-K. Management’s Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed under the supervision of our Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the consolidated financial statements in accordance with U.S. Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of the financial statements in accordance with U.S. There are inherent limitations to the effectiveness of any internal control over financial reporting, including the possibility of human error or the circumvention or overriding of the controls. Accordingly, even an effective internal control over financial reporting can provide only reasonable assurance of achieving its objective. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate, because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, our management conducted an assessment of the effectiveness of internal control over financial reporting as of December 31, Our independent registered public accounting firm has issued an attestation report on our internal control over financial reporting as of December 31, Changes in Internal Control Over Financial Reporting There have been no changes in our internal control over financial reporting that occurred during the three months ended December 31, The information required by Item 10 not already provided herein under “Item 1 The information required by this item will be included in our Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required by this item, including under the heading “Securities Authorized for Issuance Under Equity Compensation Plans,”will be included in our 2015 Proxy Statement and is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions, and Director Independence The information required by this item will be included in our Item The information required by this item will be included in our PART IV (a)(1) Financial Statements Included in Part II of this report: Page 39 41 42 43 44 45 (a)(2) Financial Statement Schedules All financial statement schedules have been omitted, since the required information is not applicable or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements and notes thereto. (a)(3) Exhibits See the Exhibits Index following the signature pages for a list of the exhibits being filed or furnished with or incorporated by reference into this Annual Report on Form 10-K. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Generac Holdings Inc. By: /s/Aaron Jagdfeld Aaron Jagdfeld President and Chief Executive Officer Dated: Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons and on behalf of the Registrant in the capacities and on the dates indicated. /s/Aaron Jagdfeld Aaron Jagdfeld President, Chief Executive Officer and Director February 27, 2015 /s/York A. Ragen York A. Ragen Chief Financial Officer and February 27, 2015 /s/Todd A. Adams Todd A. Adams Director February 27, 2015 /s/John D. Bowlin John D. Bowlin Director February 27, 2015 / Ralph W. Castner Director February 27, 2015 /s/Robert D. Dixon Robert D. Dixon Director February 27, 2015 /s/Barry J. Goldstein Barry J. Goldstein Director February 27, 2015 /s/ Andrew G. Lampereur Director February 27, 2015 /s/Bennett Morgan Bennett Morgan Director February 27, 2015 /s/David Ramon David Ramon Director February 27, 2015 /s/Timothy Walsh Timothy Walsh Director February 27, 2015 EXHIBIT INDEX Exhibits Description 2.1 Agreement and Plan of Merger by and among Generac Power Systems, Inc., the representative named therein, GPS CCMP Acquisition Corp., and GPS CCMP Merger Corp., dated as of September 13, 2006 (incorporated by reference to Exhibit 2.1 of the Registration Statement on Form S-1 filed with the SEC on January 11, 2010). 2.2 Amendment to Agreement and Plan of Merger by and among Generac Power Systems, Inc., the representative named therein, GPS CCMP Acquisition Corp., and GPS CCMP Merger Corp (incorporated by reference to Exhibit 2.1 of the Registration Statement on Form S-1 filed with the SEC on January 11, 2010). 3.1 Third Amended and Restated Certificate of Incorporation of Generac Holdings Inc. (incorporated by reference to Exhibit 3.1 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010). 3.2 Amended and Restated Bylaws of Generac Holdings Inc. (incorporated by reference to Exhibit 10.6 Credit Agreement, dated as of May 30, 2012, among Generac Power Systems, Inc., its Domestic Subsidiaries listed as Borrowers on the signature pages thereto, Generac Acquisition Corp., the lenders party thereto, Bank of America, N.A. as Administrative Agent, JPMorgan Chase Bank, N.A. and Goldman Sachs Bank USA, as syndication agents, and Wells Fargo Bank, National Association, as Documentation Agent (incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K filed with the SEC on May 31, 2012). Exhibits Description 10.7 Amendment No. 1 dated as of May 31, 2013 to the Credit Agreement, dated as of May 30, 2012, among Generac Power Systems, Inc., its Domestic Subsidiaries listed as Borrowers on the signature pages thereto, Generac Acquisition Corp., the lenders party thereto, Bank of America, N.A. as Administrative Agent, JPMorgan Chase Bank, N.A. and Goldman Sachs Bank USA, as syndication agents, and Wells Fargo Bank, National Association, as Documentation Agent (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the SEC on June 4, 2013) 10.8 10.17+ Form of Nonqualified Stock Option Award Agreement (incorporated by reference to Exhibit 10.45 of the Registration Statement on Form S-1 filed with the SEC on January 25, 2010). Exhibits Description 10.22 Form of Generac Holdings Inc. Director Indemnification Agreement for Barry Goldstein, John D. Bowlin, Robert Dixon, David Ramon, 10.23 Form of Generac Holdings Inc. Officer Indemnification Agreement (incorporated by reference to Exhibit 10.52 of the Registration Statement on Form S-1 filed with the SEC on January 11, 2010). 10.24 Form of Generac Power Systems, Inc. Director Indemnification Agreement for Stephen Murray and Timothy Walsh (incorporated by reference to Exhibit 10.53 of the Registration Statement on Form S-1 filed with the SEC on January 25, 2010). 10.25+ Form of 21.1* List of Subsidiaries of Generac Holdings Inc. 23.1* Consent of Ernst & Young, Independent Registered Public Accounting 31.1* Certification of Chief Executive Officer pursuant to 31.2* Certification of Chief Financial Officer pursuant to 32.1** Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002. Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002. 101* The following financial information from the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, * Filed herewith. ** Furnished herewith. + Indicates management contract or compensatory plan or arrangement. 75(collectively, “Pension Plans”)(Pension Plans) covering certain domestic employees. The benefits under the salaried plan are based upon years of service and the participants’ defined final average monthly compensation. The benefits under the hourly plan are based on a unit amount at the date of termination multiplied by the participant’s years of credited service. The Company’s funding policy for the Pension Plans is to contribute amounts at least equal to the minimum annual amount required by applicable regulations. The Company elected to freeze the Pension Plans effective December 31, 2008. This resulted in a cessation of all future benefit accruals for both hourly and salary pension plans.Information related toThe table that includes the accumulated benefit obligation; and reconciliation of the changes in projected benefit obligation, changes in plan assets and the funded status of the Pension Plans is as follows: Year Ended December 31, 2012 2011 Accumulated benefit obligation at end of period $ 59,744 $ 53,467 Change in projected benefit obligation Projected benefit obligation at beginning of period $ 53,467 $ 46,049 Interest cost 2,453 2,369 Net actuarial loss 5,332 6,649 Benefits paid -1,508 -1,600 Projected benefit obligation at end of period $ 59,744 $ 53,467 Change in plan assets Fair value of plan assets at beginning of period $ 31,423 $ 30,615 Actual return on plan assets 4,268 623 Company contributions 2,387 1,785 Benefits paid -1,508 -1,600 Fair value of plan assets at end of period $ 36,570 $ 31,423 Funded status: accrued pension liability included in other long-term liabilities $ (23,174 ) $ (22,044 ) Amounts recognized in accumulated other comprehensive income Net actuarial loss $ (12,081 ) $ (10,529 ) Year Ended December 31, $ 68,376 $ 52,825 $ 52,825 $ 59,744 2,591 2,423 14,791 (7,695 ) (1,831 (1,647 ) $ 68,376 $ 52,825 $ 42,440 $ 36,570 3,110 6,465 1,733 1,052 (1,831 (1,647 ) $ 45,452 $ 42,440 $ (22,924 $ (10,385 ) $ (13,243 $ (4,393 ) OCIAOCI into net periodic benefit(benefit) cost during 20122014 is $909.$106. The amount in OCIAOCI as of December 31, 20122014 that is expected to be recognized as a component of net periodic pension expense during the next fiscal year is $1,108.Generac Holdings Inc.Notes to Consolidated Financial StatementsYears Ended December 31, 2012, 2011, and 2010(Dollars in Thousands, Except Share and Per Share Data)10. Benefit Plans (continued)Additional information related to the Pension Plansnet periodic pension (benefit) cost is as follows: $ 2,591 $ 2,423 $ 2,453 (2,933 ) (2,520 ) (2,398 ) 106 1,108 909 $ (236 ) $ 1,011 $ 964
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Table Of Contents Year ended December 31, 2012 2011 2010 Components of net periodic pension expense: Interest cost $ 2,453 $ 2,369 $ 2,359 Expected return on plan assets (2,398 ) (2,342 ) (2,004 ) Amortization of net loss 909 273 247 Net periodic pension expense $ 964 $ 300 $ 602 obligationobligations are as follows: December 31, 2012 2011 Discount rate – salaried pension plan 4.10 % 4.65 % Discount rate – hourly pension plan 4.14 % 4.65 % Rate of compensation increase (1) n/a n/a 3.97 % 4.98 % 3.99 % 5.01 % n/a n/a (1) expense(benefit) cost are as follows: Year ended December 31, 2012 2011 2010 Discount rate 4.65 % 5.23 % 5.76 % Expected long-term rate of return on plan assets 7.57 7.62 7.30 Rate of compensation increase (1) n/a n/a n/a 5.01 % 4.14 % 4.65 % 6.88 6.95 7.57 n/a n/a n/a (1) Generac Holdings Inc.Notes to Consolidated Financial StatementsYears Ended December 31, 2012, 2011, and 2010(Dollars in Thousands, Except Share and Per Share Data)10. Benefit Plans (continued)20122014 and 2011,2013, by asset category, is as follows: December 31, 2012 December 31, 2011 Asset Category Target Dollars % Dollars % Fixed Income 24 % 8,736 24 % 7,349 23 % Domestic equity 49 % 17,926 49 % 15,879 51 % International equity 17 % 6,257 17 % 4,766 15 % Real estate 10 % 3,651 10 % 3,429 11 % Total 100 % $ 36,570 100 % $ 31,423 100 % 24 % $ 7,400 16 % $ 7,307 17 % 49 % 24,373 54 % 23,903 56 % 17 % 8,869 19 % 7,424 18 % 10 % 4,810 11 % 3,806 9 % 100 % $ 45,452 100 % $ 42,440 100 % 20122014 are as follows: Mutual fund $ 33,683 $ 33,683 $ – $ – Collective trust 2,887 – 2,887 – Total $ 36,570 $ 33,683 $ 2,887 $ – $ 42,267 $ 42,267 $ - $ - 3,185 - - 3,185 $ 45,452 $ 42,267 $ - $ 3,185 20112013 are as follows: $ 39,759 $ 39,759 $ - $ - 2,681 - 2,681 - $ 42,440 $ 39,759 $ 2,681 $ -
63
Table Of Contents Mutual fund $ 28,530 $ 28,530 $ – $ – Collective trust 2,893 – 2,893 – Total $ 31,423 $ 28,530 $ 2,893 $ – $ - 3,100 85 $ 3,185 – - This category includes investments in mutual funds that encompass both equity and fixed income securities that are designed to provide a diverse portfolio. The plan’s mutual funds are designed to track exchange indices, and invest in diverse industries. Some mutual funds are classified as regulated investment companies. Investment managers have the ability to shift investments from value to growth strategies, from small to large capitalization funds, and from U.S. to international investments. These investments are valued at the closing price reported on the active market on which the individual securities are traded. These investments are classified within Level 1 of the fair value hierarchy. – - This category includes public investment vehicles valued using the Net Asset Value (NAV)NAV provided by the administrator of the trust. The NAV is based on the value of the underlying assets owned by the trust, minus its liabilities, and then divided by the number of shares outstanding. The NAV of the trust is classified within Level 2 of the fair value hierarchy.Generac Holdings Inc.Notes to Consolidated Financial StatementsYears Ended December 31, 2012, 2011, and 2010(Dollars in Thousands, Except Share and Per Share Data)10. Benefit Plans (continued)–- 85%, with the remainder allocated primarily to bonds. The Company regularly reviews its actual asset allocation and periodically rebalances its investments to the targeted allocation when considered appropriate.$1,052$1,187 to the Pension Plans in 2013.Year 2013 $ 1,656 2014 1,768 2015 1,863 2016 1,994 2017 2,191 Years 2018 – 2022 $ 12,715 11. $ 1,888 1,998 2,185 2,319 2,430 2020 - 2024 14,500 On November 10, 2006, the Company adopted the 2006 Management Equity Incentive Plan (2006 Equity Incentive Plan). The 2006 Equity Incentive Plan provided for awards with respect to a maximum of 9,350.0098 shares of Common stock (formerly Class A Common stock) and 5,000 Class B Common shares, subject to certain adjustments. On November 10, 2006, and from time to time thereafter, certain members of management purchased restricted shares of Class A Common stock under the 2006 Equity Incentive Plan for $341 per share and pursuant to restricted stock agreements. One half of the restricted shares vested over time (Time Vesting Shares), with 25% vesting on November 10, 2007 and on the next three anniversaries thereafter, so long as the participant was still employed by the Company or one of its subsidiaries on the applicable vesting date. Upon the occurrence of a change of control of the Company, any unvested Time Vesting Shares immediately vested in full, so long as the participant was still employed by the Company or one of its subsidiaries. The remaining restricted shares immediately vested (performance-based vesting) in full, provided the participant was still then employed by the Company or one of its subsidiaries, upon the occurrence of either: (i) a change of control of the Company that provides CCMP with a certain rate of return with respect to net proceeds received by CCMP from their investment in the Company; or (ii) from and after the date of an IPO, the achievement with respect to shares of the Common stock (formerly Class A Common stock) of an average closing trading price exceeding, in any 60 consecutive trading day period starting prior to the later of (a) the fifth year anniversary of the date of grant of the restricted shares, and (b) one year after the IPO, a certain threshold with respect to net proceeds received by CCMP from their investment in the Company. As a condition to the purchase of restricted shares, members of management executed confidentiality, non-competition and intellectual property agreements.The fair value of the Class A common stock on the date of issuance was estimated to be $390 per share. The Company recorded $6 of stock-based compensation expense related to the Time Vesting Shares in 2010 related to amortization of the excess of fair value over purchase price of these restricted shares. This excess was being amortized over the vesting provisions of the restricted shares. As a result of the IPO, the remaining unvested performance-based Restricted Shares became fully vested. As a result, the Company recorded $159 of stock-based compensation expense related to the accelerated vesting in 2010.IPO. At the time of the IPO, 4,341,504Plan include stock options, and 456,249 shares ofstock appreciation rights, restricted stock, other stock-based awards, and other stock awards were granted to employees and Board members of the Company pursuant to the equity incentive plan. The Company has subsequently granted an additional 470,372 stock options and 287,618 shares of restricted stock and other stock awards to employees and Board members of the Company.performance-based compensation awards. Total share-based compensation costexpense related to the equity incentive plan recognized inwas $12,612, $12,368 and $10,780 the consolidated statements of comprehensive income was $10,780, $8,646years ended December 31, 2014, 2013 and $6,198 in 2012, 2011 and 2010, respectively, net of actualestimated forfeitures, which is recorded in operating expenses in the consolidated statements of comprehensive income.69Generac Holdings Inc.Notes to Consolidated Financial StatementsYears Ended December 31, 2012, 2011,between $42.20 per share and 2010(Dollars$59.01 per share, stock options granted in Thousands, Except Share2013 have an exercise price of between $29.81 per share and Per Share Data)11. Share Plans (continued)Stock Options - Stock$48.36 per share, and the stock options granted in 2012 have an exercise price of between $18.82$15.94 per share and $37.05$32.05 per share. On June 21, 2013, the Company paid a special cash dividend of $5.00 per share on its common stock, options granted in 2011 have an exercise price of between $11.15 per share and $18.73 per share, and the stock options granted in 2010 have an exercise price of between $7.00 per share and $10.18 per share. Onon June 29, 2012, the Company used a portion of the proceeds from the May 30, 2012 debt refinancing (see footnote #6 – Credit Agreement) together with cash on its balance sheet to paypaid a special cash dividend of $6.00 per share on its common stock. In connection with thethese special dividend,dividends, and pursuant to the terms of the Company’s stock option plan, certain adjustments are required to bewere made to stock options outstanding under the plan in order to avoid dilution of the intended benefits which would otherwise result as a consequence of the special dividend. As such, the strike price for all outstanding stock options as of the special dividend date wasdates, were adjusted by the $5.00 and $6.00 special dividend amount.amounts. There was no change to compensation expense as a result of this adjustment. On July 2, 2012, the strike price of all stock option awards outstanding prior to the special dividend date was restated to reflect these adjustments. The exercise prices noted above reflect this adjustment. Stock options issued in 2014, 2013 and 2012 vest in equal installments over four years, subject to the grantee’s continued employment or service and expire 10 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 10 years after the date of grant.approximately235,644, 323,427 and 667,041 in 2014, 2013 and 55,202 in 2012, and 2011, respectively, and were based on the value of the stock on the exercise datedates as determined based upon an average of the Company’s high and low stock sales price.price on the exercise dates. Total payments for the employees’ tax obligations to the taxing authorities were $10,411, $8,449 and $6,425 $371in 2014, 2013 and $0 in 2012, 2011 and 2010, respectively, and are reflected as a financing activity within the Consolidated Statementconsolidated statements of Cash Flows.cash flows. The net-share settlements had the effect of share repurchases by the Company as they reduced the number of shares that would have otherwise been issued as a result of the vesting and did not represent an expense to the Company.The Company has agreed to pay these taxes on behalf of the employees in return for the employee exchanging an equivalent value of options to the Company. This transaction resulted in a decrease of approximately $6,425 and $371 in 2012 and 2011, respectively, to equity on the consolidated balance sheet as the cash payment of the taxes effectively acted as a repurchase of the stock options previously granted.Since thereSincethere is limited history for the Company’s stock, expected volatility is calculated based on an analysis of historic and implied volatility measures for a set of peer companies. The average expected life is based on the contractual term of the option using the simplified method. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with a remaining term equal to the expected life assumed at the date of grant. The compensation expense recognized is net of estimated forfeitures. Forfeitures are estimated based on termination history, as there is not sufficient history of actual share option forfeitures at this time.forfeiture history. The weighted-average assumptions used in the Black-Scholes-Merton option pricing model for 20122014, 2013 and 20112012 are as follows: 2012 2011 Weighted average grant date fair value $ 12.13 $ 11.10 Assumptions: Expected stock price volatility 45 % 50 % Risk free interest rate 1.22 % 2.69 % Expected annual dividend per share $ 0.00 $ 0.00 Expected life of options (years) 6.25 6.5 Generac Holdings Inc.Notes to Consolidated Financial StatementsYears Ended December 31, 2012, 2011, and 2010(Dollars in Thousands, Except Share and Per Share Data)11. Share Plans (continued) $ 26.35 $ 16.30 $ 12.13 45 % 47 % 45 % 1.90 % 1.21 % 1.22 % $ - $ - $ - 6.25 6.25 6.25 2012, 20112014, 2013 and 2010. 2012.three years ended December 31, 2014, 2013 and 2012 is as follows: Number of Options Outstanding as of December 31, 2009 - $ - Granted 4,366,504 13.02 Exercised - - Expired - - Forfeited (130,245) (13.00) Outstanding as of December 31, 2010 4,236,259 13.02 9.1 $ 13,349 Granted 179,877 21.26 Exercised (107,591) 13.00 Expired - - Forfeited - - Outstanding as of December 31, 2011 4,308,545 13.36 8.2 $ 63,193 Granted 256,112 21.28 Exercised (1,113,827) 13.21 Expired - - Forfeited (10,788) 20.52 Outstanding as of December 31, 2012 3,440,042 14.38 $ 68,549 Exercisable as of December 31, 2012 509,054 $ 13.19 7.3 $ 10,750 Of the 1,113,827 stock options exercised during the fiscal year 2012, 667,041 shares underlying such exercised options were retained by the Company in a net-share settlement to cover the aggregate exercise price and the required amount of employee withholding taxes. 4,308,545 $ 13.36 8.2 $ 63,193 256,112 21.28 (1,113,827 ) 13.21 - - (10,788 ) 20.52 3,440,042 8.44 9.5 $ 87,001 253,857 35.04 (703,326 ) 6.05 (1,625 ) 20.94 (51,647 ) 17.02 2,937,301 5.74 9.5 $ 148,369 187,189 57.21 (549,282 ) 3.44 (259 ) 15.94 (32,810 ) 12.68 2,542,139 9.94 8.5 $ 96,518 1,210,861 4.22 8.4 $ 52,014 2012,2014, there was $16,356$7,794 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 2.4 years. Total share-based compensation cost related to the stock options for 2014, 2013 and 2012 2011was $8,509, $9,034 and 2010 was $6,835, $6,475 and $4,470, respectively, which is recorded in operating expenses in the consolidated statements of comprehensive income.awardrestricted awards at the time of the grant is amortized to expense over the period of vesting. The fair value of restricted share awards is determined based on the market value of the Company's shares on the grant date. The compensation expense recognized for restricted share awards is net of estimated forfeitures.Generac Holdings Inc.Notes to Consolidated Financial StatementsYears Ended December 31, 2012, 2011, and 2010(Dollars in Thousands, Except Share and Per Share Data)11. Share Plans (continued)three years ended December 31, 2014, 2013 and 2012 is as follows:Shares Non-vested as of December 31, 2009 - $ - Granted 439,999 13.02 Vested - - Forfeited (9,844) (13.00) Non-vested as of December 31, 2010 430,155 $ 13.02 Granted 59,147 20.59 Vested - - Forfeited - - Non-vested as of December 31, 2011 489,302 $ 13.93 Granted 195,771 26.94 Vested - - Forfeited (20,002) - Non-vested as of December 31, 2012 665,071 $ 17.75 Generac Holdings Inc.Notes to Consolidated Financial StatementsYears Ended December 31, 2012, 2011, and 2010(Dollars in Thousands, Except Share and Per Share Data)11. Share Plans (continued) 489,302 $ 13.93 195,771 26.94 - - (20,002 ) 11.96 665,071 17.75 112,494 37.82 (450,537 ) 14.21 (22,622 ) 25.36 304,406 29.68 115,473 54.35 (105,123 ) 28.31 (47,472 ) 42.31 267,284 38.72 2012,2014, there was $4,431$5,394 of total unrecognized compensation cost, net of expected forfeitures, related to non-vested restricted stock awards. That cost is expected to be recognized over the remaining service period, having a weighted-average period of 2.0 years. Total2.1 years.Total share-based compensation cost related to the restricted stock for 2014, 2013 and 2012 2011was $4,103, $3,074 and 2010 was $3,645, $1,871 and 1,447, respectively, which is recorded in operating expenses in the consolidated statements of comprehensive income.20118,869, 7,291 and 2010, 10,864 16,680 and 21,406 shares, respectively, of fully vested stock were granted to certain members of the Company’s board of directors as a component of their compensation for their service on the board. Total compensation cost for these share grants in 2014, 2013 and 2012 2011was $509, $260 and 2010 was $300, $300 and $281, respectively, which is recorded in operating expenses in the consolidated statements of comprehensive income.12.lease terms generally ranging between 3-5 years.2012,2014, are as follows: Amount Year 2013 $ 825 2014 540 2015 269 2016 108 2017 18 Total $ 1,760 $ 2,585 2,567 1,571 264 - $ 6,987 2012, 20112014, 2013 and 2010,2012, which includes short-term data processing equipment rentals, was approximately $4,102, $2,457, and $2,870, $1,309, and $554, respectively.selectedcertain dealers. The Company receives payment from the finance company after shipment of product to the dealer. The Company participates in the cost of dealer financing up to certain limits. The Company has agreed to repurchase products repossessed by the finance company, but does not indemnify the finance company for any credit losses they incur. The amount financed by dealers which remained outstanding under this arrangement at December 31, 20122014 and 20112013 was approximately $16,600$26,100 and 10,035,$24,300, respectively.Generac Holdings Inc.Notes to Consolidated Financial StatementsYears Ended December 31, 2012, 2011, and 2010(Dollars in Thousands, Except Share and Per Share Data)13.17. Special Cash Dividend#6 – Credit Agreements)11, “Credit Agreements” to the consolidated financial statements) together with cash on its balance sheet to pay a special cash dividend of $6.00 per share on its common stock, resulting in payments totaling $404,332 to stockholders. DividendsRelated dividends declared but unpaid as of December 31, 20122014 of $3,957,$731, which relate to dividends earned on unvested restricted stock awards, are included in other accrued liabilities in the consolidated balance sheet. Payment of these dividends will be made when the underlying restricted stock awards vest. The 2012 dividend was recorded as a reduction to additional paid-in capital as the Company had an accumulated deficit balance as of the dividend declaration date.dividend,dividends, and pursuant to the terms of the Company’s stock option plan, certain adjustments were required to be made to stock options outstanding under the plan in order to avoid dilution of the intended benefits which would otherwise result as a consequence of the special dividend. As such, on July 2, 2012, the strike price for all outstanding stock options at that time of the dividend was modified by the $6.00 and $5.00 special dividend amount.amount, respectively, for the 2012 and 2013 special dividends. There was no change to compensation expense as a result of this adjustment.Dividends have been recorded as a reduction to additional paid-in capital as the Company has an accumulated deficit balance.14. Related-Party TransactionsPrior to the IPO, the Company had an agreement to pay CCMP and certain other investors and related entities an annual advisory fee of $500. The Company expensed $55 in advisory fees for 2010. This agreement was terminated effective with the IPO on February 10, 2010.15. $ 342,008 $ 362,609 $ 352,305 $ 403,997 119,514 128,012 130,283 138,410 65,306 78,160 70,794 79,115 34,701 54,025 36,497 49,390 $ 0.51 $ 0.79 $ 0.53 $ 0.72 $ 0.50 $ 0.77 $ 0.52 $ 0.70 $ 399,572 $ 346,688 $ 363,269 $ 376,236 153,462 130,953 139,463 145,682 96,525 76,433 87,289 91,218 50,674 28,254 47,093 48,518 $ 0.75 $ 0.41 $ 0.69 $ 0.71 $ 0.73 $ 0.40 $ 0.67 $ 0.69 68 Quarters Ended 2012 Q1 Q2 Q3 Q4 Net sales $ 294,561 $ 239,137 $ 300,586 $ 342,022 Gross profit 111,005 87,429 115,813 126,153 Operating income 59,493 37,158 59,124 67,780 Net income 30,060 9,335 25,541 28,287 Net income per common share, basic: $ 0.45 $ 0.14 $ 0.38 $ 0.42 Net income per common share, diluted: $ 0.44 $ 0.14 $ 0.37 $ 0.41 Quarters Ended 2011 Q1 Q2 Q3 Q4 Net sales $ 123,981 $ 161,363 $ 239,324 $ 267,308 Gross profit 47,177 60,353 88,659 98,465 Operating income 11,143 21,800 44,178 35,860 Net income 4,844 15,289 37,379 267,131 Net income per common share, basic: $ 0.07 $ 0.23 $ 0.56 $ 3.98 Net income per common share, diluted: $ 0.07 $ 0.23 $ 0.55 $ 3.91 Generac Holdings Inc.Notes to Consolidated Financial StatementsYears Ended December 31, 2012, 2011, and 2010(Dollars in Thousands, Except Share and Per Share Data)16.19. Valuation and Qualifying Accounts2012, 20112014, 2013 and 2010: Balance at Beginning of Period Additions Charged to Earnings Charges to Reserve, Net (1) Year ended December 31, 2012 Allowance for doubtful accounts $ 789 $ 383 $ 204 $ (210 ) $ 1,166 Reserves for inventory 4,717 1,694 1,785 (1,197 ) 6,999 Valuation of deferred tax assets – 827 (21 ) – 806 Year ended December 31, 2011 Allowance for doubtful accounts $ 723 $ 171 $ (7 ) $ (98 ) $ 789 Reserves for inventory 4,059 657 1,092 (1,091 ) 4,717 Valuation of deferred tax assets 271,393 – (271,393 ) – – Year ended December 31, 2010 Allowance for doubtful accounts $ 1,016 $ – $ (124 ) $ (169 ) $ 723 Allowance for doubtful notes 965 – – (965 ) - Reserves for inventory 3,937 – 1,056 (934 ) 4,059 Valuation of deferred tax assets 289,529 – (18,136 ) – 271,393 Year ended December 31, 2014 $ 2,658 $ 209 $ 672 $ (1,264 ) $ 2,275 6,558 2,282 2,797 (2,250 ) 9,387 1,021 - 364 1,385 Year ended December 31, 2013 $ 1,166 $ 496 $ 1,037 $ (41 ) $ 2,658 6,999 1,131 72 (1,644 ) 6,558 806 (120 ) 335 1,021 Year ended December 31, 2012 $ 789 $ 383 $ 204 $ (210 ) $ 1,166 4,717 1,694 1,785 (1,197 ) 6,999 - 827 (21 ) 806 17. Subsequent EventsOn February 11, 2013, the Company prepaid $80,000 of principal on its existing Term Loan with available cash on hand, which was applied against both required excess cash flow payments and all required future principal amortizations on the Term Loan.or the Exchange Act,(Exchange Act), is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure.generally accepted accounting principles.GAAP.generally accepted accounting principles,GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the Company’s financial statements.20122014 based on the criteria established in the 2013Internal Control –- Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, our management has concluded that our internal control over financial reporting was effective as of December 31, 2012.2014. In conducting this assessment, our management excluded Ottomotores UK Ltd.the Powermate and MAC businesses because it wasthey were not acquired only inuntil the third and fourth quarter 2012 and constituted 4.6% and 8.7%quarters of total and net assets, respectively, as of December 31, 2012 and 0.6% and 0.3% of revenues and net income, respectively, for the year then ended. 2014, respectively.2012.2014. Its report appears in the consolidated financial statements included in this Annual Report on Form 10-K on page 39.On December 8, 2012, a subsidiary of the Company acquired all of the equity of the Ottomotores businesses. As a result of the acquisition, we are in the process of reviewing the internal control structure of Ottomotores and, if necessary, will make appropriate changes as we incorporate our controls and procedures into the acquired business. Except for this acquisition, there20122014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.None–- Business –- Executive Officers”, will be included in our 20132015 Proxy Statement, and is incorporated by reference herein.20132015 Proxy Statement and is incorporated herein by reference.20132015 Proxy Statement and is incorporated herein by reference.13. Certain Relationships14. Principal Accountant Fees and Related Transactions, and Director IndependenceServices20132015 Proxy Statement and is incorporated herein by reference.The information required by this item will be included in our 2013 Proxy Statement and is incorporated herein by reference. 2013 2012 2012 2012 SIGNATURES March 13, 2013Signature Title Title March 13, 2013
Chief Accounting OfficerMarch 13, 2013March 13, 2013ss/Ralph W. CastnerMarch 13, 2013March 13, 2013/s/ Stephen MurrayStephen MurrayDirectorMarch 13, 2013david ramonAndrew G. LampereurDavid RamonDirectorMarch 13, 2013/s/ Timothy W. SullivanMarch 13, 2013Timothy W. SullivanMarch 13, 201378
Number 2.1 2.2 3.1 3.23.23.1 of the Company’s AnnualCurrent Report on Form 10-K for8-K filed with the fiscal year ended December 31, 2010)SEC on April 10, 2013). 4.1 Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 of the Registration Statement on Form S-1 filed with the SEC on January 25, 2010). 4.2Stockholders10.1 Restatement Agreement, dated as of November 10, 2006, by and among Generac Holdings Inc.,May 31, 2013, to that certain stockholders of Generac Holdings Inc., including CCMP Capital Investors II, L.P., various of it affiliated funds, various funds affiliated with Unitas Capital Ltd. and the Management Stockholders (as defined in Stockholders Agreement) (incorporated by reference to Exhibit 4.2 of the Registration Statement on Form S-1 filed with the SEC on October 20, 2009).10.1Credit Agreement, dated as of February 9, 2012, as amended and restated as of May 30,31, 2012, among Generac Power Systems, Inc., Generac Acquisition Corp., the lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, and Bank of America, N.A. and Goldman Sachs Bank USA, as syndication agents (incorporated by reference to Exhibit 10.1 ofto the Company’s Current Report on Form 8-K filed with the SEC on May 31, 2012)June 4, 2013).10.2 Guarantee and Collateral Agreement, dated as of February 9, 2012, as amended and restated as of May 30, 2012, among Generac Holdings Inc., Generac Acquisition Corp., Generac Power Systems, Inc., certain subsidiaries of Generac Power Systems, Inc. and JPMorgan Chase Bank, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed with the SEC on May 31, 2012). 10.3 Credit Agreement, dated as of February 9, 2012, as amended and restated as of May 30, 2012, as further amended and restated as of May 31, 2013, among Generac Power Systems, Inc., Generac Acquisition Corp., the lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent and Bank of America, N.A. and Goldman Sachs Bank USA, as syndication agent (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on June 4, 2013). 10.4 Guarantee and Collateral Agreement, dated as of May 30, 2012, among Generac Holdings Inc., Generac Acquisition Corp., Generac Power Systems, Inc., certain subsidiaries of Generac Power Systems, Inc. and Bank of America, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.4 of the Company’s Current Report on Form 8-K filed with the SEC on May 31, 2012). 10.5 First Amendment to Guarantee and Collateral Agreement, dated as of May 31, 2013, to that certain Guarantee and Collateral Agreement, dated as of February 9, 2012, as amended and restated as of May 30, 2012, among Generac Holdings Inc., Generac Acquisition Corp., Generac Power Systems, Inc., certain subsidiaries of Generac Power Systems, Inc. and JPMorgan Chase Bank, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the SEC on June 4, 2013).
Number10.4First Amendment to the Guarantee and Collateral Agreement, dated as of May 31, 2013, to that certain Guarantee and Collateral Agreement, dated as of May 30, 2012, among Generac Holdings Inc., Generac Acquisition Corp., Generac Power Systems, Inc., certain subsidiaries of Generac Power Systems, Inc. and Bank of America, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.4 of10.5 to the Company’s Current Report on Form 8-K filed with the SEC on May 31, 2012)June 4, 2013).10.5Advisory Services and Monitoring Agreement, dated November 10, 2006 (incorporated by reference to Exhibit 10.7 of the Registration Statement on Form S-1 filed with the SEC on November 24, 2009).10.6+10.9+2009 Executive Management Incentive Compensation Program (incorporated by reference to Exhibit 10.46 of the Registration Statement on Form S-1 filed with the SEC on December 17, 2009). 10.7+10.10+ Generac Holdings Inc. Amended and Restated 2010 Equity Incentive Plan (incorporated by reference to Appendix A to the Definitive Proxy Statement on Schedule 14A of the Company filed with the SEC on April 27, 2012) .10.8+10.11+ Generac Holdings Inc. Annual Performance Bonus Plan (incorporated by reference to Exhibit 10.63 of the Registration Statement on Form S-1 filed with the SEC on January 25, 2010). 10.9+10.12+ Amended and Restated Employment Agreement, dated January 14, 2010, between Generac and Aaron Jagdfeld (incorporated by reference to Exhibit 10.65 of the Registration Statement on Form S-1 filed with the SEC on January 25, 2010). 10.10+Employment Agreement, dated as of November 10, 2006, between Generac and Dawn Tabat (incorporated by reference to Exhibit 10.3 of the Registration Statement on Form S-1 filed with the SEC on January 25, 2010).Exhibits NumberDescription10.11+10.13+Amendment to Employment Agreement, dated January 14, 2010, between Generac and Dawn Tabat (incorporated by reference to Exhibit 10.66 of the Registration Statement on Form S-1 filed with the SEC on October 20, 2009).10.12+Employment Letter with Terrence Dolan (incorporated by reference to Exhibit 10.62 of the Registration Statement on Form S-1 filed with the SEC on January 25, 2010). 10.13+10.14+ Form of Change in Control Severance Agreement (incorporated by reference to Exhibit 10.64 of the Registration Statement on Form S-1 filed with the SEC on January 25, 2010). 10.1410.15 Form of Confidentiality, Non-Competition and Intellectual Property Agreement (incorporated by reference to Exhibit 10.40 of the Registration Statement on Form S-1 filed with the SEC on November 24, 2009). 10.15+10.16+ Form of Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.44 of the Registration Statement on Form S-1 filed with the SEC on January 25, 2010). 10.16+10.17+10.18+ Amended Form of Restricted Stock Award Agreement pursuant to the 2010 Equity Incentive Plan (incorporated by reference to Exhibit 10.3 of the Quarterly Report on Form 10-Q filed with the SEC on May 8, 2012). 10.18+10.19+ Amended Form of Nonqualified Stock Option Award Agreement pursuant to the 2010 Equity Incentive Plan (incorporated by reference to Exhibit 10.4 of the Quarterly Report on Form 10-Q filed with the SEC on May 8, 2012). 10.19+10.20+ Amended Form of Restricted Stock Award Agreement with accelerated vesting pursuant to the 2010 Equity Incentive Plan (incorporated by reference to Exhibit 10.5 of the Quarterly Report on Form 10-Q filed with the SEC on May 8, 2012). 10.2010.21 Form of Generac Holdings Inc. Director Indemnification Agreement for Stephen Murray and Timothy Walsh (incorporated by reference to Exhibit 10.50 of the Registration Statement on Form S-1 filed with the SEC on January 11, 2010). 10.21
Numberand Timothy W. Sullivan, Bennett Morgan, Todd A. Adams, Andrew G. Lampereur and Ralph W. Castner (incorporated by reference to Exhibit 10.51 of the Registration Statement on Form S-1 filed with the SEC on January 11, 2010).10.2210.2310.24Generac Power Systems, Inc. IndemnificationPerformance Share Award Agreement for Barry Goldstein, John D. Bowlin, Aaron Jagdfeld, David Ramon, York A. Ragen, Dawn Tabat, Allen Gillette, Roger Schaus, Jr., Roger Pascavis and Russell S. Minick (incorporated by reference to Exhibit 10.54 of the Registration Statement on Form S-1 filed with the SEC on January 25, 2010).10.25+Amendment to Employment Agreement with Dawn Tabat (incorporated by reference to Exhibit 10.1 of the Quarterly Report on Form 10-Q filed with the SEC on November 14, 2011)May 5, 2014).10.26+Amendment to Employment Agreement with Dawn Tabat (incorporated by reference to Exhibit 10.1 of the Quarterly Report on Form 10-Q filed with the SEC on November 6, 2012).10.27+Offer letter to Russ Minick (incorporated by reference to Exhibit 10.2 of the quarterly report filed with the SEC on November 14, 2011).21.1*23.1*Firm, relating to Generac Holdings Inc.Firm.31.1* Rule 13a-14 Securities Exchange Act Rules 13a-14(a) and 15d-14(a), pursuant to sectionSection 302 of the Sarbanes-Oxley Act of 2002.31.2* Rule 13a-14 Securities Exchange Act Rules 13a-14(a) and 15d-14(a), pursuant to sectionSection 302 of the Sarbanes-Oxley Act of 2002.32.2** 101*2012,2014, filed with the SEC on March 13, 2013,February 27, 2015, formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets at December 31, 20122014 and December 31, 2011;2013; (ii) Consolidated Statements of OperationsComprehensive Income for the Fiscal Years Ended December 31, 2012,2014, December 31, 20112013 and December 31, 2010;2012; (iii) Consolidated Statements of Redeemable Stock and Stockholders' Equity (Deficit) for the Fiscal Years Ended December 31, 2012,2014, December 31, 20112013 and December 31, 2010;2012; (iv) Consolidated Statements of Cash Flows for the Fiscal Years Ended December 31, 2012,2014, December 31, 20112013 and December 31, 2010;2012; (v) Notes to Consolidated Financial Statements.* +80