Table Of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

 
x

☒

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2012

or
2015

Or

o

☐

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.Hwy 59, Waukesha, WI


(Address of principal executive offices)

53189


(Zip Code)

(262) 544-4811


(Registrant’s telephone number, including area code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

Common Stock, $0.01 par value


(Title of class)

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

☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o

☒

Accelerated filer x

☐

Non-accelerated filer o

☐
(Do not check if a smaller

reporting company)

Smaller reporting company o

☐

     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, 2012,2015, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $621,912,000$2,707,473,704 based upon the closing price reported for such date on the New York Stock Exchange.

     As of March 1, 2013, 68,278,598February 19, 2016, 66,366,949 shares of registrant's common stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s Annual Report to Stockholders for the year ended December 31, 2015 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 20132016 Annual Meeting of Stockholders (the “2013“2016 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, 2012,2015, are incorporated by reference into Part III of this Form 10-K.

 

TABLE OF CONTENTS

  

Page

PART I

Item 1.
Business
2
Item 1A.
Risk Factors
7
Item 1B.
Unresolved Staff Comments
15
Item 2.
Properties
15
Item 3.
Legal Proceedings
16
Item 4.
Mine Safety Disclosures
16

 
PART II

Item 1.

Business

1

Item 1A.

Risk Factors

9

Item 1B.

Unresolved Staff Comments

16

Item 2.

Properties

16

Item 3.

Legal Proceedings

17

Item 4.

Mine Safety Disclosures

17

PART II

Item 5.

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

16

17

Item 6.

Selected Financial Data

19

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

24

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

37

36

Item 8.

Financial Statements and Supplementary Data

39

38

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

76

66

Item 9A.

Controls and Procedures

76

66

Item 9B.

Other Information

76

67

 

PART III

Item 10.

Directors, Executive Officers and Corporate Governance

77

67

Item 11.

Executive Compensation

77

67

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

77

67

Item 13.

Certain Relationships and Related Transactions, and Director Independence

77

67

Item 14.

Principal Accountant Fees and Services

77

67

 

PART IV

Item 15.

Exhibits and Financial Statement Schedules

77

68



PART I
 
 
Table Of Contents
 

Forward-Looking Statements

This annual report contains forward-looking statements that are subject to risks and uncertainties. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “anticipate,” “estimate,” “expect,” “forecast,”“project, “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 major power outages;outages impacting demand for our products;

· 

●

availability, cost and quality of raw materials and key components used in producing our products;

· 

●

the impact on our results of the substantial increasespossible fluctuations in our outstanding indebtednessinterest rates and related interest expense due to the dividend recapitalization discussed below under “Liquidity and financial position”;foreign currency exchange rates;

· 

●

the possibility that the expected synergies, efficiencies and cost savings of the acquisition of the Ottomotores businesses or otherour acquisitions will not be realized, or will not be realized within the expected time period;

· 

●

the risk that the Ottomotores businesses or otherour acquisitions that we make will not be integrated successfully;

· 

●

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;claims or recalls; 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.

Stockholders, potential investors and other readers should consider these factors carefully in evaluating the forward-looking statements.

Any forward-looking statement made by us in this report speaks only as of the date on which 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.

1

Item 1.Business

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 are a market leader in the power generation market in North America and have an expanding presence internationally. We believe we have one of the leading market positionswidest 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 outdoor power equipment market in North America. 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 United States 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.


companies under a variety of brand names. We have what we believe is an industry leading, multi-layered distribution network,also sell direct to certain national and regional account customers, as well as to individual consumers, that are the end users of our products are available in thousands of outlets across North America. We sell and distribute our products to and through independent residential and industrial dealers, electrical wholesalers, national accounts, private label arrangements, retailers, catalogs, e-commerce merchants, equipment rental companies, equipment dealers and construction companies. products.

We have a significant market share in the residential and light commercial generator markets for automatic standby generators, which we believe are currently under penetrated.remain under-penetrated. We also have a leading market position for portable generators used in residential, light construction and recreational applications. We believe that our leading market position is largely attributable to our strategy of providing a broad product line of high-quality, innovative and affordable products through our extensive and multi-layered distribution network.  Innetwork to whom we offer comprehensive support and programs from the factory.In addition, through recent acquisitions, we are also a leading provider of light towers, mobile generators, flameless heaters, outdoor power equipment and industrial diesel gensets for international marketsgenerators ranging in sizes up to 2,500kW.


We operate several manufacturing plants located principally in Wisconsin and Mexico totaling over two million square feet. We also maintain inventory warehouses in the United States that accommodate material storage and rapid response requirements of our customers.

3,250kW.

History


Generac Holdings Inc. (Generac)(the Company or Generac) is a Delaware corporation that was founded in 2006. Generac Power Systems, Inc., or 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.

●

During the 1990’s, we expanded our industrial product development and global distribution system, 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 power 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 purpose-built line of residential automatic standby generators and implemented our multi-layered distribution philosophy.

●

In 2005, we introduced our quiet-running QT Series generators, 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 businessAnnual Report on Form 10-K.

Products

We design and manufacture stationary, portable and mobile generators with single-engine outputs ranging between800W and 3,250kW. We have the ability to Briggs & Stratton.  Our growth accelerated in 2000 as we expanded our automatic residential standbyexpand the power range for certain stationary 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 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 products for a wide variety of applications and markets. Our success is built on engineering expertise, manufacturing excellence and our innovative approachessolutions to the market.


CCMP transactions

In November 2006, affiliates of CCMP Capital Advisors, LLC, or CCMP, together with certain other investors and members of our management, purchasedmuch larger multi-megawatt systems through an aggregate of $689 million of our equity capital. In addition, on November 10, 2006, Generacintegrated paralleling configuration called Modular 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 $3.0 million for general corporate purposes.

We refer to the foregoing transactions collectively as the “CCMP Transactions.”

Initial public offering and corporate reorganization

On February 17, 2010, we completed our initial public offering (IPO) of 18,750,000 shares of our common stock at a price of $13.00 per share. In addition, on March 18, 2010, the underwriters exercised their option and purchased an additional 1,950,500 shares of our common stock from us. We received approximately $224.1 million in net proceeds at the initial closing, and approximately $23.8 million in net proceeds from the underwriters’ option exercise, after deducting the underwriting discount and total expenses related to the offering. The proceeds from the initial closing of the IPO were used entirely to pay down our second lien credit facility in full and to repay a portion of our first lien credit facility.  Proceeds from the option exercise were used for general corporate purposes, including additional pre-payment of the first lien credit facility.

Our capitalization prior to the IPO consisted of Series A Preferred Stock, Class B Common Stock and Class A Common Stock.  In connection with the IPO, we effected a corporate reorganization in which, after giving effect to a 3.294 for one reverse Class A Common Stock split, our Class B Common Stock and Series A Preferred Stock was converted into Class A Common Stock and our Class A Common Stock was then reclassified as common stock. Following the IPO, we have only one class of common stock outstanding. We refer to these transactions, as the “Corporate Reorganization.” For more information regarding our Corporate Reorganization, see “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations – Corporate reorganization.”

2
Our products

We design, engineer and manufacture generators with an output of between 800W and 9mW, as well as other(MPS). Other engine powered products such asthat we design and manufacture include light towers, mobile heaters, power washers and water pumps, along with a broad line of outdoor power equipment including trimmer & brush mowers, log splitters, lawn & leaf vacuums, and power washers. With the acquisition of Ottomotores, we also become a leader in the manufacture and distribution in Latin America of industrial diesel gensets ranging in output between 15kW and 2,500kW and an important player in the Uninterrupted Power Supply (UPS) market in Mexico. In the manufacturing process, we design, manufacture, source and modify engines, alternators, transfer switches and other components necessary to production.chipper shredders. We classify our products into three classescategories based on similar range of power output geared for varying end customer uses: residential power products; commercialResidential products, Commercial & Industrial (C&I) products and industrial power products; and otherOther products. The following summary outlines our portfolio of products, including their key attributes and customer applications.


2
Table Of Contents

Residential power products


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, which have a quiet, low-speed enginecapability to receive maintenance and a standard aluminum enclosure.


service alerts.

We provide a broad product line of portable generators that are fueled predominantly by gasoline, thatwith certain models running on propane and diesel fuel, 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;segment; and the iX series,inverter generators targeted at 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.


Our portable generators are offered under the Generac®, Powermate®, Dewalt® and Honeywell® brand names. In 2015, we introduced a new invertergenerator called the iQ2000, which includes state-of-the-art sound mitigation technology coupled with advanced electronics that greatly reduces noise while also improving fuel consumption and ease of operation.

We also provide a broad product line of engine driven power washers produce line, which was first introduced in the first quarter of 2011, includes models for residential and commercial use.


use, fueled by gasoline, which range in pressure from 2,500 to 4,200 PSI. Additionally, we offer a product line of water pumps built to meet the water removal needs of homeowners, farmers, construction crews and other end-user applications.

The acquisition of Country Home Products (CHP) in August 2015 provides a broad product line of chore-related specialty outdoor power equipment that includes trimmer & brush mowers, log splitters, lawn & leaf vacuums, and chipper shredders for the property maintenance needs of larger-acreage residences, light commercial properties, municipalities and farms. These products are largely sold in North America through catalogs and outdoor power equipment dealers primarily under the DR® brand name.

Residential power products comprised 60.0%51.2%, 62.0%49.5% and 62.9%56.8%, respectively, of total net sales in 2012, 20112015, 2014 and 2010.


2013.

Commercial & Industrial Products

We offer a full line of C&I generators fueled by diesel, natural gas, liquid propane and commercialBi-Fuel™. We believe we have one of the broadest product offerings in the industry with power products


outputs ranging from 10kW up to 3,250kW.

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 standbystationary generators and related transfer switches for various industrial standby, continuous-duty and prime rated applications. Our single-engine industrial generators range in output from 10kW up to 2,500kW3,250kW, which includes stationary and containerized packages, 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.


3
Table Of Contents

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.


We provide the telecommunications market our full rangea broad line of generator systems.


Our light towers, mobile generators and mobile generatorsheaters, which 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.

Industrial

We introduced several new C&I products during 2015, including a number of stationary and commercialmobile natural gas generators that further expand our broad natural gas product range. We began shipping our new 400 kilowatt power node earlier in the year at an industry leading price point, and toward the end of the year we announced a new 500 kilowatt natural gas generator, the largest gas unit in our industrial generator line. Both of these units are ideal for large standby power applications such as office buildings, mission-critical data centers and healthcare facilities. Recently, we also introduced the new MGG450 mobile generator that operates on natural gas, wellhead gas or liquid propane, and offers superior power density making it ideal for powering large equipment under continuous operation in remote field locations.

C&I products comprised 34.9%41.6%, 31.6%44.6% and 31.0%,38.4% respectively, of total net sales in 2012, 20112015, 2014 and 2010.


3
2013.

Table of ContentsOtherProducts

Other power products

We sell

Our “Other Products” category includes aftermarket service parts to our dealers and proprietary engines to third-party original equipment manufacturers or OEMs.


(OEMs).

Other power products comprise 5.1%comprised 7.2%, 6.4%5.9% and 6.1%4.8%, respectively, of total net sales in 2012, 20112015, 2014 and 2010.


2013.

Distribution channelsChannels and customers


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, as well as to individual consumers, that are the end users of our products.

We believe our distribution network is a competitive advantage that has strengthened over the last decade byas a result of adding, expanding and developing 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% of our sales in 2012.


2015.

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.


network with Generac.

Our industrial dealer network providesconsists of a combination of primary distributors as well as a support network of dealers serving the United States 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.


4
Table Of Contents

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 other engine powered tools. The placement of our products at retail locations drives significant awareness for our brands and the automatic home standby product category.

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


Our retail distribution network includes thousands of locations and includes regional and national home improvement chains, retailers, clubs, buying groups and farm supply stores. These physical retail locations are supplemented by a number of catalogue and e-commerce retailers. This network primarily sells our residential standby, portable and light-commercial generators. In some cases, we have worked with our retail partners to create installation programs using our residential dealers to support the sale and installation of standby generator products sold at retail. We also use a combination of display units and advertising through our retail accounts to promote awareness for our products.

The distribution for our mobile products includes international, national, regional and regionalspecialty equipment rental companies, equipment dealersdistributors and construction companies.


companies, which primarily serve non-residential building construction, road construction, energy markets and special events. In addition, our Tower Light business provides access to numerous independent distributors in over 50 countries. 

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

BusinessStrategy


We have been executing on our “Powering Ahead” strategic plan, which serves as the framework for the significant investments we sell certain engines directlyhave made to OEM manufacturers and after-market dealers for usecapitalize on the long-term growth prospects of Generac. As we continue to move the Powering Ahead plan into the future, we are focused on a number of initiatives that are driven by the same four key objectives:

Growing the residential standby generator market.As the leader in the lawn, gardenhome standby generator market, 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 focusing on a variety of strategic initiatives targeted toward generating more sales leads, improving close rates and reducing the total overall cost of a home standby system. In addition, we intend to continue to focus on innovation in this emerging product category and introduce new products into the marketplace. With only approximately 3.5% penetration of the addressable market of homes in the United States (which we define as single-family detached, owner-occupied households with a home value of over $100,000, 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 efforts to leverage our expanding platform of diesel and natural gas offerings by better optimizing our industrial distribution partners’ capabilities to market, sell and support these products. Specifically, we continue to pursue certain initiatives to expand our distributors interactions with engineering firms and electrical contractors responsible for specifying and selecting our products within C&I power generation applications. We are also committed to a number of initiatives to improve the overall specification rates for our products which should increase quoting activity and close rates for our industrial distributors. 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.

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, which gave access to several new products, markets and customers. As a result of these acquisitions, we now have access to a broad lineup of mobile power products, higher-output generators and other engine powered tools, including products that serve the oil & gas and other infrastructure power markets.


Manufacturing

Our excellence in manufacturing reflects our philosophy of high standards, continuous improvement and commitment to quality. Our facilities showcase our advanced manufacturing techniques and demonstrate the effectiveness of lean manufacturing.

We continually seek to reduce manufacturing costs while improving product quality. We deliver an affordable productare now a more balanced company relative to our customersresidential product sales as compared to only five years ago, as revenues for our C&I products have expanded from 31.0% of total net sales in 2010 to 41.6% in 2015. As we continue to build upon our recent diversification efforts, we intend to evaluate other products and services which we believe could further diversify our end markets, either through organic initiatives or additional acquisitions.

5
Table Of Contents

Expanding into new geographies. During 2015, approximately 10% of our value engineering philosophy,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 the acquisitions of Ottomotores in 2012, located in Latin America, and Tower Light in 2013, located in Europe, 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 Ottomotores and Tower Light acquisitions provide us with an enhanced platform and increased scale for our strategic foreign sourcing,international growth initiatives, and also accelerate our scale,efforts to become a more global player in the markets for backup power and mobile power equipment. As we look forward, 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 initiatives 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 investmentPowering Ahead strategy, have helped to capitalize on the macro, secular growth drivers for our business and are an important part of our efforts to diversify and globalize our business. See “Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations – Business Drivers and Trends” for additional drivers that influence demand for our products and other trends affecting the markets that we serve.

Manufacturing

We operate several manufacturing plants, distribution facilities and inventory warehouses located principallyin the United States, Mexico, Italy and Brazil totaling over three 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 product quality is essential to maintaining a leading market position. Incoming shipments from our suppliers are tested to ensure engineering specifications are met. Purchased components are tested for quality at the supplier’s factory and prior to entering production lines and are continuously tested throughout the manufacturing process. Internal product and production audits are performed to ensure a reliable product and process. We test finished products under a variety of simulated conditions at each of our manufacturing facilities.

4
Research and development and intellectual property

Development

Our primary focus on generatorspower generation equipment and other engine powered equipmentproducts 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$32.9 million, $16.5$31.5 million and $14.7$29.3 million for the years ended December 2012, 201131, 2015, 2014 and 2010,2013, 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 are committed to research and development, and we rely on a combination of patents and trademarks to establish and protect our proprietary rights. Our commitment to research and development has resulted in a portfolio of approximately 90 U.S. and internationalrights.Our patents and patent applications. Our patents expire between 2016 and 2031 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. New U.S. patents that are issued generally have a life of 20 years from the date the patent application is initially filed. 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


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.internationally. 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 2015, we sourced approximately half52% of our materials and components from outside the United States.

6
Table Of Contents

Competition


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.along with mobile equipment and engine powered tools 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.


In

A summary of the market for standby commercial and industrial generators, our primary competitors across our main product classes are as follows:

Residential products – Kohler, Briggs & Stratton, Cummins, Honda, Champion, Techtronics International, FNA Group, Mi-T-M, Karcher, Swisher, MTD, Husqvarna, Ariens and Ardisam, along with a number of smaller domestic and foreign competitors; certain of which also have broad operations in other manufacturing businesses.  

C&I products– Caterpillar, Cummins, Kohler, MTU, Stemac, FG Wilson, Wacker, MultiQuip, Terex, Doosan, Briggs & Stratton (Allmand), Atlas Copco, Himonisa, Flagro, Frost Fighter, Therm Dynamics and MTU, mostTioga; 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 standby generators, our primary competitors include Briggs & Stratton, Cummins (Onan division) and Kohler, which also have broad operations in other manufacturing businesses. In the portable generator market, our primary competitors include Briggs & Stratton, Honda 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.


There are a number of other standby generator manufacturers located outside North America, but most supply their products mainly to their respective regional markets. world.

In a continuously evolving sector,market, we believe our sizescale and broad capabilities make us well positioned to remain competitive.


We compete primarily on the basis of brand reputation, quality, reliability, pricing, innovative features, breadth of product offering, product availability and product availability.

factory support.

Employees


As of December 31, 2012,2015, we had 3,0483,156 employees (2,700(2,920 full time and 348236 part-time and temporary employees). Of those, 1,9351,922 employees were directly involved in manufacturing at our manufacturing facilities.


We

Domestically, we have had an “open shop” bargaining agreement for the past 4750 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.


5
Regulation, including environmental matters

Environmental Matters

As a manufacturing company, our operations are subject to a variety of foreign, federal, state, local and localforeign laws and regulations covering environmental, health and safety matters. Applicable laws and regulations 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 variousvarying degrees of regulation depending upon product application and fuel types.  New regulations could require us to redesign our products and could affect market growth for our products.

Segment information


Information

We refer you to Note 2,6, “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.


further information.

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


Officers

The following table sets forth information regarding our executive officers:

Name AgePosition

Aaron P. Jagdfeld

41

44

President, Chief Executive Officer and Director

York A. Ragen

41

44

Chief Financial Officer

Dawn A. Tabat

Russell S. Minick

60Chief Operating Officer
Terrence J. Dolan

55

47

Executive Vice President, Commercial & Industrial GroupNorth America

Russell S. Minick

Roger F. Pascavis

52

55

Executive Vice President, Residential GroupStrategic Global Sourcing

Patrick Forsythe

48

Executive Vice President, Global Engineering

Allen A.D. Gillette

56

59

Executive Vice President, Global Engineering

Clement Feng

52

Senior Vice President, Engineering

Roger F. Pascavis52Senior Vice President, OperationsMarketing


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.


Terrence J. DolanRussell S. Minickbegan serving as our Executive Vice President, Commercial & Industrial GroupNorth America in October 2011.September 2014. Prior to becoming Executive Vice President of Industrial Products,this appointment he served as our Senior Vice President of Sales from January 2010 to October 2011. Prior to joining Generac, Mr. Dolan was Senior Vice President of Business Development and Marketing at Boart Longyear from 2007 to 2008, Vice President of Sales and Marketing at Ingersoll Rand from 2002 to 2007, and Director of Strategic Accounts at Case Corporation from 1991 to 2001. Mr. Dolan holds a B.A. in Management and Communications from Concordia University.

6
Russell S. Minick joined Generac in August 2011, and was named Executive Vice President, Residential GroupProducts in October 2011.2011, with this responsibility being expanded in January 2014 to Executive Vice President, Global Residential Products. Prior to joining Generac, Mr. Minick was President & CEO of Home Care Products for Electrolux from 2006 to 2011, President of The Gunlocke Company at HNI Corporation from 2003 to 2006, Senior Vice President of Sales, Marketing and Product Development at True Temper Sports from 2002 to 2003, and General Manager of Extended Warranty Operations for Ford Motor Company from 1998 to 2002. Mr. Minick is a graduate of the University of Northern Iowa, and holds a degree in marketing.

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.


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

Patrick Forsythehas served as our Executive Vice President of Global Engineering since July 2015. Prior to re-joining Generac, Mr. Forsythe was Vice President, Global Engineering & Technology of Hayward Industries from 2008 to 2015, Vice President, Global Engineering at Ingersoll Rand Company (and the acquired Doosan Infracore International) from 2004 to 2008, and Director of Engineering at Ingersoll Rand Company from 2002 to 2004. Prior to 2002, Mr. Forsythe worked in various engineering management capacities with Generac from 1995 to 2002. Mr. Forsythe holds a Higher National Diploma (HND) in Mechanical Engineering from the University of Ulster (United Kingdom), a B.S. in Mechanical Engineering, and an M.S. in Manufacturing Management & Technology from The Open University (United Kingdom).


Item 1A.  Risk Factors
 
8
Table Of Contents

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.

Item 1A.RiskFactors

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.us. These risks are not exclusive, and additional risks to which we are subject include, but are not limited to, the factors mentioned under “Forward-Looking Statements” and the risks of our businesses described elsewhere in this Annual Report.

Risk factors related to our business and industry

Demand for the majority of our products is significantly affected by unpredictable 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 the majority of our products is affected by power outage events caused by thunderstorms, hurricanes, ice storms, blackouts and other power grid reliability issues. The impact of these outage events on our sales can vary depending on the location, frequency and severity of the outages. Sustained periods without major power disruptions can lead to reduced consumer awareness of the benefits of standby and portable generator products and can result in reduced sales growth rates and excess inventory. 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.products at the same level, if at all. If general economic conditions or consumer confidence were to worsen, or if the non-residential construction sector or rate of capital investments were to decline, our net sales and profits would likely be adversely affected. Additionally, timing of capital spending by our national account customers can vary from quarter-to-quarter based on capital availability and internal capital spending budgets.

 
9
Table Of Contents

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.

7

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

We operate in markets that are highly competitive. Some of our competitors have established brands and are larger in size or are divisions of large diversified companies andwhich have substantially greater financial resources.resources than we do. Some of our competitors may be willing to reduce prices and accept lower margins in order to compete with us. In addition, we could face new competition from large international or domestic companies with established industrial brands that enter our end markets. Demand for our products may also be affected by our ability to respond to changes in design and functionality, to respond to downward pricing pressure, and to provide shorter lead times for our products than our competitors. If we are unable to respond successfully to these competitive pressures, we could lose market share, which could have an adverse impact on our results. For 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 haveintroductions, higher than expected production costs than originally expected or they may not be well accepted by our customers. If we are not able to anticipate, identify, develop and market high quality products in line with technological advancements that respond to changes in customer preferences, demand for our products could decline and our operating results could be adversely affected.

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

In addition to our direct sales force and manufacturer sales representatives, we depend on the services of independent distributors and dealers to sell our products and provide service and aftermarket support to our end customers. We also rely upon our distribution channels to drive awareness for our product categories and our brands. In addition, we sell our products to end users through private label arrangements with leading home equipment, electrical equipment and 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 competitors’ products and services of our competitors.services. Impairment of our relationships with our distributors, dealers or large customers, loss of a substantial number of these distributors or dealers or of one or more large customers, or an increase in our distributors' or dealers' sales of our competitors' products to our customers or of our large customers' purchases of our competitors' products could materially reduce our sales and profits. Also, our ability to successfully realize our growth strategy is dependent in part on our ability to identify, attract and retain new distributors at all layers of our distribution platform, and we cannot be certain that we will be successful in these efforts.

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

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

 
10
Table Of Contents

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 the Beacon Group in 1998, we granted the Beacon Group 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) when the Beacon Group sold that business to Briggs. Currently, this trademark is not being used in commerce and, as such, there is a rebuttable presumption that Briggs has abandoned the trademark. However, in the event that the Beacon Group or Briggs use this trademark in the future, we could suffer competitive confusion and our business could be negatively impacted.

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

Our operations are subject to a variety of foreign, federal, state and local environmental, health and safety laws and regulations including those governing, among other things, emissions to air,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. We could also be subject to a recall action by regulatory authorities. Violations of or liabilities under such laws and regulations could result in substantial costs, fines and civil or criminal proceedings or personal injury and workers' compensation claims.

8

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 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 the Magnum acquisition. Typically, additional costs associated with significant compliance modifications are passed on to the market. While we have been able to meet previous deadlines and requirements, failure to comply with other existing and future regulatory standards could adversely affect our position in the markets we serve.

We

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.

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.

 
11
Table Of Contents

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

We may from time to time experience union organizing activities in our non-union facilities. Disputes with the current labor union or new union organizing activities could lead to work slowdowns or stoppages and make it difficult or impossible for us to meet scheduled delivery times for product shipments to our customers, which could result in loss of business. In addition, union activity could result in higher labor costs, which could harm our financial condition, results of operations and competitive position.

A work stoppage or limitations on production at our facilities for any reason could have an adverse effect on our business, results of operations and financial condition. In addition, many of our suppliers have unionized work forces. Strikes or work stoppages experienced by our customers or suppliers could have an adverse effect on our business, results of operations and financial condition.

We may experience material disruptions to our manufacturing operations.

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

· 

●

equipment or information technology infrastructure failure; 

· 

●

disruptions in the transportation infrastructure including roads, bridges, railroad tracks; tracks and container ports;

· 

●

fires, floods, tornados, earthquakes, or other catastrophes; and 

· 

●

other operational problems.

In addition, the majoritya significant portion of our manufacturing and production facilities are located in Wisconsin within a 100-mile 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.

9
A significant portion of our purchased components are sourced in foreign countries, exposing us to additional risks that may not exist in the United States.

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

· 

●

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 and challenges, including extended container port congestion;

●

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 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.

 
12
Table Of Contents

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 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.

As a U.S. corporation that conducts business in a variety of foreign countries including, but not limited to, Mexico and Brazil, we are subject to the regulations imposed by a variety of anti-corruption laws worldwide.

The U.S. Foreign Corrupt Practices Act 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.
10

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, 2012,2015, goodwill and other indefinite-lived intangibles totaled $711.8 million, most of which arose from the CCMP Transactions.$798.0 million. We review goodwill and other intangibles at least annually for impairment and any excess in carrying value over the estimated fair value is charged to the statement of operations. A reduction in net income resulting from the write-down or impairment of goodwill or indefinite-lived intangibles 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.

Goodwill and identifiable intangible assets are recorded at fair value on the date of acquisition. In accordance with 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-livedfinite-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”Operations,” Note 2, “Significant Accounting Policies,” and Note 8, “Goodwill and Intangible Assets,” to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K for details.

We may need additional capital to finance our growthfurther information on the Company’s impairment tests and the impairment of certain tradenames as a result of a new brand strategy or to refinance our existing credit facilities, and we may not be able to obtain it on acceptable terms, or at all, which may limit our ability to grow.
We may require additional financing to expand our business. Financing may not be available to us or may be available to us only on terms that are not favorable. The termsthe impairment of our senior secured credit facilities limit our ability to incur additional debt. In addition, economic conditions, including a downturnthe goodwill of the Ottomotores reporting unit both recorded 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 allfourth quarter 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.
2015.

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

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

We may not realize all of the anticipated benefits of our 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.

Our ability to realize the anticipated benefits of 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, wouldcould preclude realization of the full benefits expected by us. Our failure to meet the challenges involved in integrating an acquired business into our existing operations or otherwise to realize the anticipated benefits of the transaction could cause an interruption of, or a loss of momentum in, our activities and could adversely affect our results of operations.

In addition, the overall integration of 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.

11
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;

 
13
Table Of Contents


· 

●

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 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.

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

In January 2016, we implemented a new ERP system for a majority of our business as part of our ongoing efforts to improve and strengthen our operational and financial processes and our reporting systems. The ERP system may not provide the benefits anticipated, could add costs and complications to ongoing operations, and may impact our ability to process transactions accurately and efficiently, all of which may have a material adverse effect on the Company’s business and results of operations.

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

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

Our IT systems and our confidential information may be vulnerable to damage or intrusion from a variety of attacks including computer viruses, worms or other malicious software programs. These attacks pose a risk to the security of the products, systems and networks of our customers, suppliers and third-party service providers, as well to the confidentiality of our information and the integrity and availability of our data. While we attempt to mitigate these risks through controls, due diligence, training, surveillance and other measures, we remain vulnerable to information security threats.

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

 
14
Table Of Contents
 
12
Risks related to our common stock

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

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

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

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

· 

●

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 of directors 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 anticipate paying have plans to paydividends on our common stock in the foreseeable future.

While we declared a special dividend in June 2012, we

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

13
Risks related to our capital structure

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

We have a significant amount of indebtedness. As of December 31, 2012,2015, we had total indebtedness of $881.3$1,059.3 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:

· 

●

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.

 
15
Table Of Contents

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 borrowings. Ourborrowings.Our existing credit facilities do not contain any financial maintenance covenants

14
Our principal stockholder continues

We may need additional capital to have 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.

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 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 withgrowth strategies. In the future, if we are unable to refinance our interests or the interests ofcredit facilities on acceptable terms, 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 andliquidity 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 our amended and restated certificate of incorporation, are not required to offer us any transaction opportunity of which they become aware and 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.
adversely affected. 

Item 1B.UnresolvedStaff Comments

None.

Item 2.Properties

None.
Item 2.  Properties

We own, operate or lease manufacturing and distribution facilities located principally in Wisconsinthe United States, Mexico, Italy, Brazil and the United Kingdom totaling over 2three 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.

 
16
Table Of Contents

The following table shows the location and activities of our principal operations:

Location

Owned / Leased

 
Square Footage

Owned/Leased

 
Activities
Waukesha, WIOwned

Square Footage

 307,250

Activities

 

Waukesha, WI

Owned

307,000

Corporate headquarters, manufacturing, storage, research and development, service parts distribution

Eagle, WI

Owned

 242,000

Owned

 

242,000

Manufacturing, office, training

Whitewater, WI

Owned

 295,000

Owned

 Manufacturing , office
Whitewater, WIOwned

491,000

 196,000

Manufacturing, office, distribution

Oshkosh, WI

 Distribution

Owned

240,000

Manufacturing, storage, research and development 

Berlin,Berlin, WIOwned 129,000 Manufacturing, office
Berlin, WILeased 122,500192,500 Manufacturing, storage, research and development
Fort Atkinson,

Edgerton, WI

Leased

235,000

Storage

Jefferson, WI

Owned

253,000

Manufacturing, distribution

Jefferson, WILeased 203,000589,000 Storage
Edgerton, WI

Maquoketa, IA

Owned

137,000

Storage, rental property

Bismarck, ND

Owned

50,000

Manufacturing and office

Vergennes, VT

Leased

66,000

Office

Winooski, VT

Leased

104,000

Manufacturing

Mexico City, Mexico

Owned

180,000

Manufacturing, sales, distribution, storage, office

Mexico City, Mexico

Leased

71,000

Office, storage and warehouse

Curitiba, Brazil

Leased

24,000

Manufacturing, sales, distribution, storage, office

Milan, Italy

Leased

91,000

Manufacturing, sales, distribution, storage, office

Milton Keynes, EnglandLeased 328,000Storage
Maquoketa, IAOwned137,000Storage, rental property
Nor Cross, GALeased12,5509,000 Sales, distribution, training
Alpharetta, GALeased13,000Manufacturing, sales, distribution
Jefferson, WIOwned252,500Manufacturing, distribution
Mexico City, MexicoOwned53,740Manufacturing, sales, distribution, storage, office
Mexico City, MexicoOwned107,640Manufacturing, sales, distribution, storage, office
Curitiba, BrazilLeased21,500Manufacturing, sales, distribution, storage, office

As of December 31, 2012,2015, substantially all of our owned properties are subject to collateral provisions under our senior secured credit facilities.

15
Item 3.LegalProceedings

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, 2012,2015, we believe that there is no litigation pending that would have a material effect on our results of operations or financial condition.

Item 4.Item 4.  MineSafety Disclosures.Disclosures

Not Applicable.

PART II

Item 5.Marketfor Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

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 20122015 and 2011,2014, respectively.

2015

High

Low

Fourth Quarter

$32.53

$26.88

Third Quarter

$39.78

$27.16

Second Quarter

$49.35

$39.62

First Quarter

$50.41

$43.74

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 
17

  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 
16

TablePurchases of ContentsEquity Securities By the Issuer and Affiliated Purchasers

The following table summarizes the stock repurchase activity for the three months ended December 31, 2015, which consisted of the withholding of shares upon the vesting of restricted stock awards to pay withholding taxes on behalf of the recipient and shares repurchased under the Company’s $200.0 million stock repurchase program:

  

Total Number of

Shares Purchased

  

Average Price

Paid per Share

  

Total Number OfShares PurchasedAsPart OfPubliclyAnnouncedPlans OrPrograms

  

ApproximateDollar ValueOf Shares ThatMay YetBe PurchasedUnder ThePlans OrPrograms

 
                 

10/01/15 - 10/31/15

  112  $31.57   -   135,621,708 

11/01/15 - 11/30/15

  681,148   30.65   680,000   114,781,696 

12/01/15 - 12/31/15

  473,500   31.10   473,500   100,057,756 

Total

  1,154,760  $30.83         

For equity compensation plan information, please refer to Note 15, “Share Plans,” to the consolidated financial statements 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 yearfive-year period ended December 31, 2012.2015. The graph and table assume that $100 was invested on February 11,December 31, 2010 (first day of trading) in each of our common stock, the S&P 500 Index, the S&P 500 Industrials Index and the Russell 2000 Index, and that all dividends were reinvested. Cumulative total stockholder returns for our common stock, the S&P 500 Index, and the S&P 500 Industrials Index and the Russell 2000 Index are based on our fiscal year.

Company / Market / Peer Group

 

12/31/2010

  

12/31/2011

  

12/31/2012

  

12/31/2013

  

12/31/2014

  

12/31/2015

 
                         

Generac Holdings Inc.

 $100.00  $173.35  $273.48  $513.40  $423.84  $269.84 

S&P 500 Index - Total Returns

  100.00   102.11   118.45   156.82   178.28   180.75 

S&P 500 Industrials Index

  100.00   99.41   114.67   161.31   177.16   172.67 

Russell 2000 Index

  100.00   95.82   111.49   154.78   162.35   155.18 

 
18
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 

Holders

As of February 1, 2013,19, 2016, there were approximately 124222 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 29, 2012,21, 2013, the Company used a portion of the proceeds from the May 30, 201231, 2013 debt refinancing (see footnote #6 – Credit AgreementNote 10, “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$5.00 per share on its common stock, resulting in payments totaling $404.3$340.8 million to stockholders. stockholders on that date.

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 other such other factors that our board of directors may deem relevant, we may change this policy and choose to pay dividends. Our ability to pay dividends on our common stock is currently restricted by the terms of our senior secured credit facilities and may be further restricted by any future indebtedness we incur. Our business is conducted through our subsidiaries, including our principal operating subsidiary, Generac Power Systems. Dividends from, and cash generated by our subsidiaries will be our principal sources of cash to repay indebtedness, fund operations, repurchase shares of common stock and pay dividends. Accordingly, our ability to pay dividends to our stockholders is dependent on the earnings and distributions of funds from our subsidiaries, including Generac Power Systems.

Securities Authorized for Issuance Under Equity Compensation Plans

The

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.

Item 6.SelectedFinancial Data

The following table sets forth our selected historical consolidated financial data for the periods and at the dates indicated. The selected historical consolidated financial data for the years ended December 31, 2012, 20112015, 2014 and 20102013 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, 20092012 and December 31, 2008 are2011 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 includedthereto 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 
19
(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 

  

Year Ended December 31,

 

(U.S. Dollars in thousands, except per share data)

 

2015

  

2014

  

2013

  

2012

  

2011

 

Statement of Operations Data:

                    

Net sales

 $1,317,299  $1,460,919  $1,485,765  $1,176,306  $791,976 

Costs of goods sold

  857,349   944,700   916,205   735,906   497,322 

Gross profit

  459,950   516,219   569,560   440,400   294,654 

Operating expenses:

                    

Selling and service

  130,242   120,408   107,515   101,448   77,776 

Research and development

  32,922   31,494   29,271   23,499   16,476 

General and administrative

  52,947   54,795   55,490   46,031   30,012 

Amortization of intangibles (1)

  23,591   21,024   25,819   45,867   48,020 

Tradename and goodwill impairment (2)

  40,687   -   -   -   9,389 

Gain on remeasurement of contingent consideration (3)

  -   (4,877)  -   -   - 

Total operating expenses

  280,389   222,844   218,095   216,845   181,673 

Income from operations

  179,561   293,375   351,465   223,555   112,981 

Other income (expense):

                    

Interest expense

  (42,843)  (47,215)  (54,435)  (49,114)  (23,718)

Investment income

  123   130   91   79   110 

Loss on extinguishment of debt (4)

  (4,795)  (2,084)  (15,336)  (14,308)  (377)

Gain (loss) on change in contractual interest rate (5)

  (2,381)  16,014   -   -   - 

Costs related to acquisitions

  (1,195)  (396)  (1,086)  (1,062)  (875)

Other, net

  (5,487)  (1,462)  (1,983)  (2,798)  (1,155)

Total other expense, net

  (56,578)  (35,013)  (72,749)  (67,203)  (26,015)

Income before provision for income taxes

  122,983   258,362   278,716   156,352   86,966 

Provision (benefit) for income taxes (6)

  45,236   83,749   104,177   63,129   (237,677)

Net income

 $77,747  $174,613  $174,539  $93,223  $324,643 

Income per share - diluted:

                    

Common Stock

 $1.12  $2.49  $2.51  $1.35  $4.79 
                     

Statement of Cash Flows data:

                    

Depreciation

 $16,742  $13,706  $10,955  $8,293  $8,103 

Amortization of intangible assets

  23,591   21,024   25,819   45,867   48,020 

Expenditures for property and equipment

  (30,651)  (34,689)  (30,770)  (22,392)  (12,060)
                     

Other Financial Data:

                    

Adjusted EBITDA (7)

 $270,816  $337,283  $402,613  $289,809  $188,476 

Adjusted Net Income (8)

  198,436   234,165   301,664   220,792   147,176 

(U.S. Dollars in thousands)

 

As of December 31, 2015

  

As of December 31, 2014

  

As of December 31, 2013

  

As of December 31, 2012

  

As of December 31, 2011

 

Balance Sheet Data:

                    

Current assets

 $661,372  $730,478  $654,179  $522,553  $383,265 

Property, plant and equipment, net

  184,213   168,821   146,390   104,718   84,384 

Goodwill

  669,719   635,565   608,287   552,943   547,473 

Other intangibles and other assets

  277,512   347,678   389,349   423,633   537,671 

Total assets

 $1,792,816  $1,882,542  $1,798,205  $1,603,847  $1,552,793 
                     

Total current liabilities

 $213,224  $240,522  $250,845  $294,859  $165,390 

Long-term borrowings, less current portion

  1,050,097   1,082,101   1,175,349   799,018   575,000 

Other long-term liabilities

  63,624   70,120   54,940   46,342   43,514 

Stockholders' equity

  465,871   489,799   317,071   463,628   768,889 

Total liabilities and stockholders' equity

 $1,792,816  $1,882,542  $1,798,205  $1,603,847  $1,552,793 

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


(2) During the fourth quarter of 2015, our Board of Directors approved a plan to strategically transition and consolidate certain of our brands acquired through acquisitions over the past several years to the Generac® tradename. This brand strategy change resulted in a reclassification to a two year remaining useful life for the impacted tradenames and a $36.1 million non-cash charge to write-down to net realizable value. Additionally, during the fourth quarter of 2015, a $4.6 million goodwill impairment charge was recorded related to the write-down of the Ottomotores reporting unit goodwill. 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 Company recordedGenerac® tradename, which resulted in a $9.4 million non-cash charge which primarily related to the write downwrite-down of the impacted trade nametradename to net realizable value. AsRefer to Note 2, “Significant Accounting Policies – Goodwill and Other Indefinite-Lived Intangible Assets,” and Note 8, “Goodwill and Intangible Assets,” to the consolidated financial statements in Item 8 of October 31, 2008, as a result of our annual goodwill and trade namethis Annual Report on Form 10-K for further information on the 2015 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.charges.  

(3) During 2012, the Company recorded a loss on extinguishmentsecond quarter of debt related to the refinancing transactions that occurred on February 9, 2012 and May 30, 2012.  During 2011 and 2010, the Company wrote-off a portion of deferred financing costs related to accelerated repayments of debt.

During 2009, affiliates of CCMP acquired $9.9 million principal amount of first lien term loans and $20.0 million principal amount of second lien term loans for approximately $14.8 million. CCMP's affiliates exchanged this debt for 1,475.4596 shares of Series A Preferred Stock. The fair value of the shares exchanged was $14.8 million. We recorded this transaction as additional Series A Preferred Stock of $14.8 million based on the fair value of the debt contributed by CCMP's affiliates, which approximated the fair value of shares exchanged. The debt was held in treasury at face value. Consequently,2014, we recorded a gain on extinguishment of debt of $14.7$4.9 million which includesrelated to an adjustment to a certain earn-out obligation in connection with a recent acquisition.

(4)  For the years ended December 31, 2015, 2014 and 2013, represents the non-cash write-off of deferred financing feesoriginal issue discount and other closingcapitalized debt issuances costs in the consolidated statement of operationsdue to voluntary debt prepayments. Additionally, for the year ended December 31, 2009.


During 2008, affiliates of CCMP acquired $148.9 million principal amount of second lien term loans for approximately $81.1 million. CCMP's affiliates exchanged this debt for additional shares of our Class B Common Stock and Series A Preferred Stock. The fair value of2013, represents the shares exchanged was $81.1 million. We recorded this transaction as Series A Preferred Stock of $62.9 million and Class B Common Stock of $18.2 million based on the fair value of the debt contributed by CCMP's affiliates, which approximated the fair value of shares exchanged. The debt was held in treasury at face value. Consequently, we recorded a gainloss on extinguishment of debt as a result of $65.4 million, which includes a write-off of deferred financing fees and other closing coststhe refinancing transaction in the consolidated statement of operations forMay 2013. For the year ended December 31, 2008.

(4)2012, represents the loss on extinguishment of debt as a result of the refinancing transactions in February and May 2012. For the year ended December 31, 2011, represents the non-cash write-off of capitalized debt issuance costs due to voluntary debt prepayments. Refer to Note 10, “Credit Agreements,” to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K for further information on the losses on extinguishment of debt.

(5) For the year ended December 31, 2015, represents a non-cash loss relating to a 25 basis point increase in borrowing costs as a result of the credit agreement leverage ratio rising above 3.0 times at June 30, 2015. For the year ended December 31, 2014, represents a non-cash gain relating to a 25 basis point reduction in borrowing costs as a result of the credit agreement leverage ratio falling below 3.0 times at March 31, 2014. Refer to Note 10, “Credit Agreements,” to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K for further information on the gains and losses on changes in the contractual interest rate.

(6) 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 Statementsof this Annual Report on Form 10-K for further information on the tax provision for the years ended December 31, 2015, 2014 and Supplementary Data – Note 9 for additional information.


(5)   Diluted earnings per share reflects the impact of the reverse stock split which occurred immediately prior to the initial public offering as discussed in “Item 8 – Financial Statements and Supplementary Data – Note 1”. 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.

(6)2013.

(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 ourthe Term Loan Credit Agreement and Amended ABL Credit Agreement.Facility (terms defined in Note that10, “Credit Agreements,” to the definitionsconsolidated financial statements in Item 8 of EBITDA in the new Term Loan Credit Agreement and ABL Credit Agreement arethis Annual Report on Form 10-K), 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.

●

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.the 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;


• 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.

●

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 Term Loan Credit Agreement and Amended ABL Credit AgreementFacility and also are presented to illustrate the operating performance of our business in a manner consistent with the presentation used by our management and board of directors. These adjustments eliminate the impact of a number of items that:

●

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

●

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

●

are non-cash in nature, such as share-based compensation expense.


21
Table Of Contents
• 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;

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


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


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

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

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

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

• several of the adjustments that we use in calculating Adjusted EBITDA, such as non-cash impairment 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;

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

●

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 Term Loan Credit Agreement and Amended ABL Credit Agreement,Facility, this discretion may be viewed as an additional limitation on the use of Adjusted EBITDA as an analytical tool.


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


The following table presents a reconciliation of net income (loss) to Adjusted EBITDA:
(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 

  

Year Ended December 31,

 

(U.S. Dollars in thousands)

 

2015

  

2014

  

2013

  

2012

  

2011

 

Net income

 $77,747  $174,613  $174,539  $93,223  $324,643 

Interest expense

  42,843   47,215   54,435   49,114   23,718 

Depreciation and amortization

  40,333   34,730   36,774   54,160   56,123 

Income taxes provision (benefit)

  45,236   83,749   104,177   63,129   (237,677)

Non-cash write-down and other adjustments (a)

  3,892   (3,853)  78   247   1,011 

Non-cash share-based compensation expense (b)

  8,241   12,612   12,368   10,780   8,646 

Tradename and goodwill impairment (c)

  40,687   -   -   -   9,389 

Loss on extinguishment of debt (d)

  4,795   2,084   15,336   14,308   377 

(Gain) loss on change in contractual interest rate (e)

  2,381   (16,014)  -   -   - 

Transaction costs and credit facility fees (f)

  2,249   1,851   3,863   4,117   1,719 

Business optimization expenses (g)

  1,947   -   -   -   - 

Other

  465   296   1,043   731   527 

Adjusted EBITDA

 $270,816  $337,283  $402,613  $289,809  $188,476 

(a)   Represents the following non-cash charges:


• for the year ended December 31, 2012, includes losslosses on disposalsdisposal of assets, unrealized mark-to-market adjustments on copper forwardcommodity contracts, and ancertain foreign currency and purchase accounting related adjustments. Additionally, the year ended December 31, 2014 includes a $4.9 million gain adjustment to ana certain 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 described in "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations—Critical accounting policies—Goodwill and other intangible assets." Also includes unrealized mark-to-market adjustments on copper forward contracts and loss on disposal of assets;

• for the years ended December 31, 2010 and 2009, primarily unrealized mark-to-market adjustments on copper and Euro forward contracts and loss on disposal of assets;

• for the year ended December 31, 2008, primarily $503.2 million in goodwill impairment charges and $80.3 million in trade name impairment charges. $1.6 million of the amount is comprised of unsettled mark to market losses on copper forward contracts, a write-off of pre-CCMP Transactions bad debts and excess inventory and loss on disposals of assets. Separately, the amount also includes a write-off of certain inventory;

an acquisition.

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


• The losses on disposals of assets in several periods 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 write-offs of certain pre-CCMP Transaction bad debts in the year ended December 31, 2008 are non-cash charges that we believe do not reflect cash outflows after our acquisition by CCMP;

• The adjustments for unrealized mark-to-market gains and losses on copper forward and Euro contracts represent non-cash items to reflect changes in the fair value of forward contracts that have not been settled or terminated. We believe that 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 income and cash flows to capture the full effect of these contracts on our operating performance;

• The goodwill and trade name impairment charges recorded in the year ended December 31, 2008 and the trade name write-down recorded in the year ended December 31, 2011 are one-time items that we believe do not reflect our ongoing operations;

• The write-off of certain pre-CCMP Transaction excess inventory recorded in the year ended December 31, 2008 was a non-cash charge that we believe does not reflect cash outflows after our acquisition by CCMP.

●

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

●

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

●

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

 
22
 

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


(c) RepresentsDuring the fourth quarter of 2015, our Board of Directors approved a plan to strategically transition and consolidate certain of our brands acquired through acquisitions over the past several years to the Generac® tradename. This brand strategy change resulted in a reclassification to a two year remaining useful life for the impacted tradenames and a $36.1 million non-cash charge to write-down to net realizable value. Additionally, for the year ended December 31, 2015, represents a $4.6 million goodwill impairment charge related to the write-down of the Ottomotores reporting unit goodwill. For the year ended December 31, 2011, represents the decision to strategically transition certain products to the Generac® tradename, which resulted in a $9.4 million non-cash charge which primarily related to the write-down of the impacted tradename to net realizable value. Refer to Note 2, “Significant Accounting Policies – Goodwill and Other Indefinite-Lived Intangible Assets,” and Note 8, “Goodwill and Intangible Assets,” to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K for further information on the 2015 impairment charges.

(d) For the years ended December 31, 2015, 2014 and 2013, represents the non-cash write-off of original issue discount and capitalized debt issuance costs due to voluntary debt prepayments. Additionally, for the year ended December 31, 2013, represents the loss (gain) on extinguishment of debt from:


• foras a result of the refinancing transaction in May 2013. For the year ended December 31, 2012, represents the loss on extinguishment of debt related toas a result of the refinancing transactions that occurred onin February 9, 2012 and May 30, 2012;

• for2012. For the yearsyear ended December 31, 2011, and 2010, represents the non-cash write-off of a portioncapitalized debt issuance costs due to voluntary debt prepayments. Refer to Note 10, “Credit Agreements,” to the consolidated financial statements in Item 8 of deferred financing costs related to accelerated repaymentsthis Annual Report on Form 10-K for further information on the losses on extinguishment of debt;

• fordebt.

(e)   For the yearsyear ended December 31, 2009 and 2008,2015, represents a non-cash gainsloss relating to a 25 basis point increase in borrowing costs as a result of the credit agreement leverage ratio rising above 3.0 times at June 30, 2015. For the year ended December 31, 2014, represents a non-cash gain relating to a 25 basis point reduction in borrowing costs as a result of the credit agreement leverage ratio falling below 3.0 times at March 31, 2014. Refer to Note 10, “Credit Agreements,” to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K for further information on the extinguishment of debt repurchased by affiliates of CCMP, as describedgains and losses on changes in note (3) above, which we do not expect to recur;


(d)contractual interest rate.

(f)   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;


• in the year ended December 31, 2012, transaction costs relating to the acquisition of the Ottomotores business and revolving credit facility commitment fees under our Term Loan and Amended ABL Facility, which we believe to be akin to, or associated with, interest expense and whose inclusion in Adjusted EBITDA is therefore similar to the inclusion of interest expense in that calculation;

●

transaction costs relating to the acquisition of a business; and

●

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

(g)   Represents severance and non-recurring restructuring charges related to the dividend recapitalization transactionintegration of acquired facilities, which represent expenses that are not from our core operations and security registration statement;


• in the year ended December 31, 2011, transaction costs relating to the acquisition of the Magnum Products business;

• before 2011, transaction costs relating to repurchases of debt under our first and second lien credit facilities by affiliates of CCMP, which CCMP's affiliates contributed to our company in exchange for the issuances of securities, which repurchases we do not expect to recur;

(7)reflect our ongoing operations.

(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 otherlosses on extinguishment of debt, business optimization expenses, purchase accounting adjustments, and certain other non-cash gains and losses as reflected in the reconciliation table set forth below (as applicable).


below.

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


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


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


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

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

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

●

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

●

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

●

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

 
23
 

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 
(8) Includes

  

Year Ended December 31,

 

(U.S. Dollars in thousands)

 

2015

  

2014

  

2013

  

2012

  

2011

 

Net income

 $77,747  $174,613  $174,539  $93,223  $324,643 

Provision (benefit) for income taxes

  45,236   83,749   104,177   63,129   (237,677)

Income before provision (benefit) for income taxes

  122,983   258,362   278,716   156,352   86,966 

Amortization of intangible assets

  23,591   21,024   25,819   45,867   48,020 

Amortization of deferred finance costs and original issue discount

  5,429   6,615   4,772   3,759   1,986 

Tradename and goodwill impairment

  40,687   -   -   -   9,389 

Loss on extinguishment of debt

  4,795   2,084   15,336   14,308   377 

(Gain) loss on change in contractual interest rate

  2,381   (16,014)  -   -   - 

Transaction costs and other purchase accounting adjustments (a)

  2,710   (3,623)  2,842   3,317   875 

Business optimization expenses

  1,947   -   -   -   - 

Adjusted net income before provision for income taxes

  204,523   268,448   327,485   223,603   147,613 

Cash income tax expense (b)

  (6,087)  (34,283)  (25,821)  (2,811)  (437)

Adjusted net income

 $198,436  $234,165  $301,664  $220,792  $147,176 

(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, and Class B Common Stock.

certain purchase accounting adjustments. The year ended December 31, 2014 also includes a gain adjustment to a certain earn-out obligation in connection with an acquisition ($4.9 million).

(b)   Amounts are based on actual cash income taxes paid during each year.

Item 7.Management’sDiscussion 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 includedthereto 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 power equipment market. As the only significant market participant focused predominantly on these products, we have one of the leadingare a market positionsleader in the power equipment market in North America and have 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, wholesalersoutdoor power equipment for residential and equipment rental companies.


commercial use.  

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

Business driversDrivers and measures


Operational Factors

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.


24
Table Of Contents
Industry trends

Business Drivers and Trends

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


Increasing penetration opportunity.    Many potential customers are 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 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 increase 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 marketand mobile generators for residential, generators is affected by the residential investment cyclecommercial and overall consumer sentiment.  When homeowners are confident of their household income or net worth, they are more likely to invest in their home.  These trends can have a material impact on demand for residential generators. Trends in the new housing market can also impact demand for our residential products.industrial purposes.
Effect of large scaleand baselinepower disruptions.Power disruptions are an important driver of consumercustomer awareness and have historically influenced demand for generators. Increased frequency and duration of major power outage events, caused by the aging U.S. power gridthat have a broader impact beyond a localized level, increases product awareness and may drive consumers to accelerate their purchase of a standby or portable generator during the immediate and subsequent period, which we believe may last for six to twelve months following a major power outage event for standby generators. For example, the multiple major outage events that occurred overduring the last six quarterssecond half of both 2011 and 2012 drove strong demand for portable and home standby generators, and the increased awareness of these products contributed to substantial organic revenue growth for us in 2012.  As a result of recent major2012 with strong growth continuing during 2013. Major power outage activity in late October/early November 2012 affecting the east coast, we have seen increased demand for our home standby and portable generators.  While the full impact is uncertain, we expect near term results of operations to be positively impacted by this outage activity.  While theredisruptions are power outages every day across all regions of the country, major outage activity is unpredictable by nature and, as a result, our sales levels and profitability may fluctuate from period to period. In addition, there are smaller, more localized power outages that occur frequently across the United States that drive the baseline level of demand for back-up power solutions. The level of baseline power outage activity occurring across the United States can also fluctuate, and may cause our financial results to fluctuate from year to year.

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 generators. Demand for outdoor power equipment is also impacted by several of these factors, as well as weather precipitation patterns.

Impact of business capital investment cycle. 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.


Operational factors

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.


Effect of commodity, currency and component price fluctuations.    Industry-wide price fluctuations of key commodities, such as steel, copper and aluminum and other components we use in our products, together with foreign currency fluctuations, can have a material impact on our results of operations. We have historically attempted to mitigate the impact of rising commodity, currency and component prices through improved product design and sourcing, manufacturing efficiencies, price increases and select hedging transactions. Our results are also influenced by changes in fuel prices in the form of freight rates, which in some cases are borneaccepted by our customers and in other cases are paid by us.


25
Table Of Contents
Other factors

Other factors

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, 22% to 25% in the second quarter, 24% to 27% in the third quarter and 25% to 28% 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 affect our resultsoccurred during the second half of operations includeboth 2011 and 2012, which were significant in terms of severity. As a result, the following:


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, credit agreement pricing grids, and repayments or borrowings of indebtedness. InterestCash interest expense increased in 2012decreased during 2015 compared to 2011,2014, primarily due to a slight increase in the weighted-average costvoluntary prepayments of debt associated with the Credit Agreement (see footnote #6 – Credit Agreement), for the period between February 9, 2012 and May 29, 2012, as well as an increase in outstanding debtTerm Loan principal and the weighted-average costlower interest rate on our Amended ABL Facility borrowings.Refer to Note 10, “Credit Agreements,” to the consolidated financial statements in Item 8 of debt associated with the Term Loan Credit Agreement (defined below),this Annual Report on Form 10-K for the period between May 30, 2012 and December 31, 2012.further information.


Factors influencing provision for income taxes.taxes and cash income taxes paid.    Because we made a Section 338(h)(10) election in connection with the CCMP Transactions, we have $1.1 billion We had approximately $715 million of tax-deductible goodwill and intangible asset amortization remaining as of December 31, 20122015 related to our acquisition by CCMP in 2006 that we expect to generate aggregate cash tax savings of $422approximately $279 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 addition, asAs a result of the asset acquisition of the Magnum business in the fourth quarter of 2011, we havehad approximately $52.0$42.0 million of incremental tax deductible goodwill and intangible assets remaining as of December 31, 2012.2015. We expect these assets to generate aggregate cash tax savings of $20.3$16.4 million through 2026 assuming continued profitability and a 39% tax rate. The amortization of these assets for tax purposes is expected to be $3.8 million annually through 2025 and $2.8 million in 2026, which generates an additional annual cash tax savings of $1.5 million through 2025 and $1.1 million in 2026, assuming profitability and a 39% tax rate.

Seasonality.    Although there is demand for Based on current business plans, we believe that our products throughout the year,cash tax obligations through 2026 will be significantly reduced by these tax attributes. Other domestic acquisitions have resulted in each of the past three years approximately 16% to 25% of our net sales occurred in the first quarter, 20% to 24% in the second quarter, 26% to 30% in the third quarteradditional tax deductible goodwill 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. Dueintangible assets that will generate tax savings, but are not material 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.

We maintain a flexible production and supply chain schedule in order to respond to outage-driven peak demand, but typically increase production levels in the second and third quarters of each year.
Transactions with CCMP

In November 2006, affiliates of CCMP, together with certain other investors and members of our management, purchased an aggregate of $689 million of our equity capital. In addition, on November 10, 2006, Generac Power Systems borrowed an aggregate of $1.38 billion, consisting of an initial drawdown of $950 million under a $1.1 billion first lien secured credit facility and $430 million under a $430 million second lien secured credit facility. With the proceeds from these equity and debt financings, together with cash on hand at Generac Power Systems, we (1) acquired all of the capital stock of Generac Power Systems and repaid certain pre-transaction indebtedness of Generac Power Systems for $2.0 billion, (2) paid $66 million in transaction costs related to the transaction and (3) retained $3 million for general corporate purposes.
During 2007, 2008 and 2009, affiliates of CCMP acquired approximately $249.2 million of second lien term loans and $9.9 million of first lien term loans for approximately $155.9 million. CCMP’s affiliates exchanged this debt for additional shares of Class B Common Stock and Series A Preferred Stock. We recorded these transactions as additional Class B Common Stock and Series A Preferred Stock based on the fair value of the debt contributed by CCMP’s affiliates, which approximated the fair value of the shares exchanged.  In connection with such issuances of our Class B Common Stock and the satisfaction of preemptive rights under the stockholders’ agreement that arose from such issuances, affiliates of CCMP sold some of the shares of our Class B Common Stock to an entity affiliated with CCMP, certain other investors and certain members of our management and board of directors. In addition, in connection with such issuances of our Series A Preferred Stock and the satisfaction of preemptive rights under the stockholders' agreement that arose from such issuances, during 2009, we issued 2,000 shares of Series A Preferred Stock for an aggregate purchase price of $20.0 million in cash to an entity affiliated with CCMP and certain members of management and our board of directors, and affiliates of CCMP sold some of the shares of Series A Preferred Stock they were issued to an entity affiliated with CCMP and a member of the board of directors at the same price.

Corporate reorganization

Our capitalization prior to the initial public offering consisted of Series A Preferred Stock, Class B Common Stock and Class A Common Stock. Our Series A Preferred Stock was entitled to a priority return preference equal to a 14% annual return on the amount originally paid for such shares and equity participation equal to 24.3% of the remaining equity value of the Company. Our Class B Common Stock was entitled to a priority return preference equal to a 10% annual return on the amount originally paid for such shares. In connection with the initial public offering, we undertook a corporate reorganization which gave effect to the conversion of our Series A Preferred Stock and Class B Common Stock into the same class of our common stock that was sold in our initial public offering while taking into account the rights and preference of those shares, including the priority returns of our Series A Preferred Stock and our Class B Common Stock and the equity participation rights of the Series A Preferred Stock. A reverse stock split was needed to reduce the number of shares to be issued to holders of our Class A and Class B Common Stock to the number that correctly reflected the proportionate interest of such stockholders in our company, taking into account the number of shares of common stock to be issued upon the conversion of our Series A Preferred Stock and the number and value of shares of common stock to be issued and sold to new investors in the initial public offering. We refer to these transactions as the “Corporate Reorganization.” The specific steps in the Corporate Reorganization were as follows:

Treatment of Class B Common Stock

Our certificate of incorporation prior to the offering provided for the mandatory conversion of our Class B Voting Common Stock to Class A Common Stock in the event of an initial public offering, so that our Class B Common Stock is converted into the same class of our common stock that is to be offered in an initial public offering taking into account 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.

Reverse stock split

Immediately following the Class B Conversion, we effected a 3.294 for one reverse stock split of our then outstanding shares of Class A Common Stock, including those shares of our Class A Common Stock issued as part of the Class B Conversion, which decreased the number of shares of our Class A Common Stock immediately after the Class B Conversion from 88,490,028 shares to 26,861,523 shares. We refer to this as the “Reverse Stock Split.”

Treatment of Series A Preferred Stock

The certificate of designations for our Series A Preferred Stock prior to our initial public offering provided for the mandatory conversion of the Series A Preferred Stock to Class A Common Stock in the event of an initial public offering, so that our Series A Preferred Stock is converted into the same class of our common stock that is to be offered in an initial public offering taking into account of the value, rights and preferences of our Series A Preferred Stock. In accordance with the terms of the certificate of designations to our Series A Preferred Stock and our certificate of incorporation prior to the offering, promptly following the time we entered into an underwriting agreement with respect to the initial public offering, each share of our Series A Preferred Stock automatically converted into a number of shares of our Class A Common Stock equal to the sum of (A) the quotient obtained by dividing (i)(w) the amount paid for such share of Series A Preferred Stock plus (x) an increase to such amount equal to 14% 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 (the “Series A Preferred Return”), by (ii) the public offering price (net of underwriting discounts and commissions), plus (B) the product of (y) a fraction, the numerator of which is one and the denominator of which is the number of shares of our Series A Preferred Stock outstanding at such time, and (z) an additional number of shares of our Class A Common Stock that, when added to the number of shares of our Class A Common Stock outstanding at such time, including after giving effect to the Class B Conversion and the Reverse Stock Split, equaled 24.3% of the number of shares of our Class A Common Stock outstanding at such time (excluding the shares issued pursuant to clause (A) above). We refer to this as the “Series A Preferred Conversion.” Each share of our Series A Preferred Stock converted into 1,724.976 shares of our Class A Common Stock (i.e., the “Series A Preferred Conversion Ratio”). As a result of the Series A Preferred Conversion, we issued an aggregate of 19,511,018 shares of our Class A Common Stock.

Reclassification of Class A Common Stock

After giving effect to the Class B Conversion, the Reverse Stock Split and the Series A Preferred Conversion, there were 46,372,541 shares of Class A Common Stock which were reclassified as common stock.
Initial public offering

On February 17, 2010, the Company completed its initial public offering 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.  Immediately following the Corporate Reorganization, the IPO and underwriters’ option exercise, we had 67,529,290 total shares of common stock outstanding.

consolidated financial statements.  

Components of net salesNet Sales and expenses


Expenses

Net sales


Sales

Substantially all of our net sales are generated through the sale of our generatorspower generator equipment and other engine powered products forto the residential, light commercial, industrial, oil & gas, and 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 2012,2015, our net sales were affected primarily by the U.S. economymarket as sales outside of the United States represented only approximately 7%15% 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% of our net sales, for the year ended December 31, 2012 and our top ten customers representing less than 29%25% of our nettotal sales for the same period.

27
year ended December 31, 2015.

Table of Contents

Costs of goods sold

Goods Sold

The principal elements of costs of goods sold in our manufacturing operations are component parts, raw materials, factory overhead and labor. Component parts and raw materials comprised over 85%approximately 84% of costs of goods sold for the year ended December 31, 2012.2015. The principal component parts are engines and alternators. We design and manufacture air-cooled engines for certain of our products smaller than 20kW.generators up to 22kW. We source engines for certain of our smaller products and all of our products larger than 20kW.diesel products. For certain natural gas engines, we source the base engine block, and then add a significant amount of value engineering, sub-systems and other content to the point that we are recognized as the OEM of those engines. We design allmany of the alternators for our units and either manufacture or source alternators for certain of our units. We also manufacture other generator components where we believe we have a design and cost advantage. We source component parts from an extensive global network of reliable, high quality and value oriented suppliers.


In some cases, these relationships are proprietary.

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


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 categoriesfunctions, among others. These 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.


expense related to our finite-lived intangible assets is included within operating expenses.

Selling and service.    Our selling and service expenses consist primarily of personnel expense, marketing expense, warranty expense and other sales expenses. Our personnel expense recorded in selling and services expenses includes the expense of our sales force responsible for our 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. Our commitmentcontainment. We are committed to research and development, has resulted inand rely on a significant portfoliocombination of approximately 90 U.S. and international patents and patent applications.trademarks to establish and protect our proprietary rights. Our research and development costs are expensed as incurred.


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


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


Goodwilldebt financing costs and trade name.original issue discount, and expenses related to interest rate swap agreements. Other income (expense) also includes other financial items such as losses on extinguishment of debt, gains (losses) on change in contractual interest rate, interest income earned on our cash and cash equivalents, and costs related to acquisitions.

Costs related to acquisitions.    Goodwill primarily represents   In 2015, the excess of amount paid over the fair market value of net tangible and intangible assets acquired in business combinations.


Other indefinite-lived intangible assets consist of trade names. The fair value of trade names 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 we not owned the trade name and instead licensed the trade name from another company.

During the fourth quarter of 2011, we recorded a non-cash charge which primarilyother expenses include transaction-related expenses related to the write downacquisitions of a certain trade name. We refer youCHP and Pramac. In 2014, the other expenses include transaction-related expenses related to the acquisitions of Powermate and MAC. In 2013, other expenses include transaction-related expenses related to the acquisitions of Tower Light and Baldor. See Note 2, “Critical accounting policies—Goodwill3, “Acquisitions” and other intangible assets,” of ourNote 20, “Subsequent Events” to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for additional information about this charge.

Other income (expense)

Our other income (expense) includeson the interest expense on our outstanding borrowings and amortization of debt financing costs. In November 2006, we entered into a $950.0 million first lien term loan, $430.0 million second lien term loan and $150.0 million revolving credit facility. In February 2010, we used the net proceeds from the initial closing of the initial public offering to pay down our second lien term loan in full and to pay down a portion of our first lien term loan. In addition, in March 2010, December 2010, April 2011 and December 2011, we used cash and cash equivalents on hand to further pay down our first lien term loan principal.  In February 2012, we paid our debt down further and entered into a new 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. In May 2012, we amended and restated our existing Credit Agreement by entering into the Term Loan Credit AgreementCompany’s recent acquisitions and the ABL Credit Agreement.  The Term Loan Credit Agreement provides for a $900.0 million Term Loan and a $125.0 million uncommitted incremental term loan facility and the ABL Credit Agreement provides for borrowings under a $150.0 million ABL Facility and an uncommitted $50.0 million incremental credit facility.  No amounts were outstanding under the revolving credit facility at December 31, 2012 and December 31, 2011. The amounts borrowed under our term loans bear interest at rates based upon either a base rate or LIBOR, plus an applicable margin. We also earn interest income on our cash and cash equivalents, which is included in other income (expense). We also recorded expenses related to interest rate swap agreements, which had a notional amount of $300.0 million outstanding at December 31, 2011 at an average rate of 1.5%, and a notional amount of $300.0 million outstanding at December 31, 2012 at an average rate of 2.0%. Other income (expense) may also include other financial items such as gain/loss on extinguishment of debt.

Costs related to acquisition.    In 2012, our other expenses include one-time transaction-related expenses related to theannounced acquisition of the Ottomotores businesses. In 2011, our other expenses include one-time transaction-related expenses related to the acquisition of the Magnum business.Pramac.

Results of operations


Operations

Year ended December 31, 20122015 compared to year ended December 31, 2011


2014

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 

29

  

Year Ended December 31,

 

(U.S. Dollars in thousands)

 

2015

  

2014

 

Net sales

 $1,317,299  $1,460,919 

Costs of goods sold

  857,349   944,700 

Gross profit

  459,950   516,219 

Operating expenses:

        

Selling and service

  130,242   120,408 

Research and development

  32,922   31,494 

General and administrative

  52,947   54,795 

Amortization of intangibles

  23,591   21,024 

Tradename and goodwill impairment

  40,687   - 

Gain on remeasurement of contingent consideration

  -   (4,877)

Total operating expenses

  280,389   222,844 
         

Income from operations

  179,561   293,375 

Total other expense, net

  56,578   35,013 

Income before provision for income taxes

  122,983   258,362 

Provision for income taxes

  45,236   83,749 

Net income

 $77,747  $174,613 

  

Year Ended December 31,

 

(U.S. Dollars in thousands)

 

2015

  

2014

 

Residential products

 $673,764  $722,206 

Commercial & Industrial products

  548,440   652,216 

Other

  95,095   86,497 

Net sales

 $1,317,299  $1,460,919 

Table of Contents

Net sales.Net sales increased $384.3decreased $143.6 million, or 48.5%9.8%, to $1,176.3$1,317.3 million for the year ended December 31, 20122015 from $792.0$1,460.9 million for the year ended December 31, 2011. This increase2014. The contribution from non-annualized recent acquisitions to the year ended December 31, 2015 was driven by a $214.4 million, or a 43.7% increase in residential$62.8 million. Residential product sales largely drivendecreased 6.7% to $673.8 million in 2015 from $722.2 million for the comparable period in 2014, primarily due to lower demand of home standby generators as a result of the significant decline in the power outage severity environment during 2015, partially offset by increased demand created by major power outages inthe contribution from recent quarters along with expanded distribution and new product offerings.  Commercial & industrialacquisitions. C&I product sales increased $160.1million, or 64.0%, drivendecreased 15.9% to $548.4 million in 2015 from $652.2 million for the comparable period in 2014, primarily by the additional Magnum Products revenue,due to a significant reduction in shipments into oil & gas and general rental markets and, to a lesser extent, increasedreduced shipments to telecom national account customers and the negative impact of natural gas backup generators.foreign currency, partially offset by the contribution from recent acquisitions.


Gross profit.Gross profit increased $145.7decreased $56.2 million, or 49.5%10.9%, to $440.4$460.0 million for the year ended December 31, 20122015 from $294.7$516.2 million for the year ended December 31, 2011.2014. Gross profit margin for the year ended December 31, 2012 increased2015 decreased to 37.4%34.9% from 37.2%35.3% for the year ended December 31, 2011.  Gross2014. The decline in gross margin increased over the prior yearwas primarily due to the positive impact from price increases, improvedunfavorable absorption of manufacturing overhead absorption and moderation in commodityoverhead-related costs, relative to the prior year.  These margin improvements were partially offset by the mixfavorable impact of lower commodity costs and overseas sourcing benefits from the addition of Magnum Products sales.a stronger U.S. dollar.


Operating expenses.Operating expenses increased $35.2$57.6 million to $216.8$280.4 million for the year ended December 31, 20122015 from $181.7$222.8 million for the year ended December 31, 2011.  These additional2014. The current year operating expenses were driveninclude a non-cash $36.1 million impairment charge relating to tradenames as a result of a new brand strategy to transition and consolidate various brands to the Generac® tradename, and a non-cash $4.6 million impairment charge relating to the write-down of the goodwill of the Ottomotores reporting unit. Additionally, the prior year operating expenses include a $4.9 million gain relating to a remeasurement of a contingent earn-out obligation from an acquisition. Excluding the impact of these items, operating expenses increased $12.0 million primarily bydue to the addition of recurring operating expenses associated with Magnum,recent acquisitions, increased sales, engineeringmarketing and administrative infrastructure to support the strategic growth initiativesadvertising expenses, and higher baseline sales levels of the Company, increased incentive compensation expenses as a result of the Company’s financial performance during the year, and increased variable expenses resulting from the$2.6 million increase in organic sales.the amortization of intangible assets. This was partially offset by reductions in variable operating expenses on lower sales volumes 

Other expense.Other expense increased $41.2$21.6 million, or 158.3%61.6%, to $67.2$56.6 million for the year ended December 31, 20122015 from $26.0$35.0 million for the year ended December 31, 2011.  Interest expense increased by $25.42014. The increase was primarily due to a prior year $16.0 million or 107.1%non-cash gain relating to a 25 basis point reduction in borrowing costs as a result of our net debt leverage ratio falling below 3.0 times at March 31, 2014, and a current year $2.4 million non-cash loss relating to a 25 basis point increase in borrowing costs as a result of our net debt leverage ratio moving back above 3.0 times at June 30, 2015. Additionally, $150.0 million of voluntary prepayments of Term Loan debt were made in the higher debt levels from the May 2012 refinancing transaction. In addition, lossescurrent year, resulting in a non-cash $4.8 million loss on extinguishment of debt increased $13.9compared to voluntary prepayments of Term Loan debt of $87.0 million in 2012 asthe prior year, which resulted in a resultnon-cash $2.1 million loss on extinguishment of the February 2012 and May 2012debt. The debt refinancing transactions.repayments resulted in a year-over-year decrease in interest expense of $4.4 million.  


Income tax expense.Income tax expense increased $300.8decreased $38.5 million to a provision of $63.1$45.2 million for the year ended December 31, 20122015 from a benefit of $237.7$83.7 million for the year ended December 31, 2011.2014. The largeeffective tax rate for 2015 was 36.8% as compared to 32.4% for 2014. The increase in income tax benefitrate was primarily attributable to a decrease in the prior year consisted primarily of the reversal of the full valuation allowance on the Company’s net deferred tax assets. We refer youfederal domestic production activity deduction due to Note 9, “Income Taxes,” of our consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for additional information.lower pre-tax income.


Net income.As a result of the factors identified above, we generated net income of $93.2$77.7 million for the year ended December 31, 20122015 compared to net income of $324.6$174.6 million for the year ended December 31, 2011. The decrease in net income is due to the items previously described.2014.


Adjusted EBITDA.Adjusted EBITDA, as defined and reconciled in“Item 6, - Selected“Selected Financial Data,” increased decreased to $289.8$270.8 million in 2015 as compared to $188.5$337.3 million in 2011,2014, due to the factors discussed above.


Adjusted net income.Adjusted Net Income,, as defined and reconciled in“Item 6, - Selected“Selected Financial Data,” increaseddecreased to $220.8$198.4 million in 20122015 compared to $147.2$234.2 million in 2011,2014, due to the factors discussed above.above partially offset by a decrease in cash income tax expense.


Year ended December 31, 20112014 compared to year ended December 31, 2010


  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 

operations data for the periods indicated:

  

Year Ended December 31,

 

(U.S. Dollars in thousands)

 

2014

  

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 

  

Year Ended December 31,

 

(U.S. Dollars in thousands)

 

2014

  

2013

 

Residential products

 $722,206  $843,727 

Commercial & Industrial products

  652,216   569,890 

Other

  86,497   72,148 

Net sales

 $1,460,919  $1,485,765 

Net sales.Net sales increased $199.1decreased $24.9 million, or 33.6%1.7%, to $792.0$1,460.9 million for the year ended December 31, 20112014 from $592.9$1,485.8 million for the year ended December 31, 2010.  This increase2013. The contribution from non-annualized recent acquisitions to the year ended December 31, 2014 was driven by a $118.2 million, or a 31.7%, increase in residential$108.0 million. Residential product sales largely driven by demand created bydecreased 14.4% to $722.2 million from $843.7 million for the major power outagescomparable period in the third and fourth quarters of 2011.  The frequency and duration of these major outages in certain regions of the country led to a surge in demand for portable generators as well as increased awareness and accelerated adoption of home standby generators.  Commercial and industrial2013. Residential product sales increased $66.7declined on a year-over-year basis as 2013 benefited from approximately $140 million or 36.3%.  Magnum Products contributed $36.5 million during the fourth quarter of 2011.  In addition, overall capital spending from our national account customers and strong demand for our large industrial systems also contributed to increased commercial and industrial sales.  Other product sales increased $14.1 million mainly due to stronger service parts salesin incremental shipments as a result of satisfying the major power outage events duringextended lead times that resulted from Superstorm Sandy in October 2012, which did not repeat in 2014. Excluding this benefit in 2013, residential products increased approximately 3%. C&I product sales increased 14.4% to $652.2 million from $569.9 million for the second half of 2011.  Magnum Products also contributed $2.3 millioncomparable period in 2013, primarily due to service parts sales during the fourth quarter of 2011.contributions from recent acquisitions along with strength in the oil & gas markets, partially offset by reduced capital spending from certain telecom customers and overall softness within Latin America.

Gross profit.Gross profit increased $57.3decreased $53.4 million, or 24.1%9.4%, to $294.7$516.2 million for the year ended December 31, 20112014 from $237.4$569.6 million for the year ended December 31, 2010, primarily due to the factors affecting net sales described above. As a percent of net sales, gross2013. Gross profit margin for the year ended December 31, 20112014 decreased to 37.2%35.3% from 40.0%38.3% for the year ended December 31, 2010. This2013. The decline is primarily attributable toin gross margin was driven by the combination of a higher sales mix of lower margin portable generators during 2011C&I product shipments, including the impact of recent acquisitions, an increase in promotional activities, and an overall increase in product costs, including a temporary increase in certain costs associated with the mix impact from the additionslowdown of the Magnum Products business during the fourth quarter of 2011. To a lesser extent, higher commodity costs versus the prior year also contributed to the year-over-year gross margin decline.activity in west coast ports as well as short-term increases in other overhead-related costs.


Operating expenses.Operating expenses increased $34.6$4.7 million to $181.7$222.8 million for the year ended December 31, 20112014 from $147.1$218.1 million for the year ended December 31, 2010.  Selling and service2013. Operating expenses increased $19.8 millionprimarily due to higher variable operating expensesthe impact of recent acquisitions, a more favorable adjustment to warranty reserves in 2013 as compared to 2014, and incentive compensation asincreased marketing and advertising expenses. These increases were partially offset by a result of higher sales experienced during 2011.  General and administration costs increased $7.4$4.9 million mainly due to increased incentive compensation and incremental stock-based compensation expense.  Operating expenses also increased in 2011 as a result of investments made in infrastructure to support the strategic growth initiatives of the Company. In addition,gain recorded in the fourthsecond quarter of 2011 the Company recorded2014 relating to a $9.4 million non-cash charge which primarily related to the write downremeasurement of a certain trade name as we strategically transition to the Generac brand. The fourth quartercontingent earn-out obligation from a recent acquisition and a $4.8 million year-over-year decline in amortization of 2011 also includes operating expenses of the Magnum Products business.intangible assets.


Other expense.Other expense decreased $7.1$37.7 million, or 21.3%51.9%, to $26.0$35.0 million for the year ended December 31, 20112014 from $33.1$72.7 million for the year ended December 31, 2010.  This decrease2013. Beginning in the second quarter of 2014, there was driven by a decline25 basis point reduction in interest expense of $3.7 millionborrowing costs as a result of approximately $134the Company’s net debt leverage ratio falling below 3.0 times, resulting in a $16.0 million non-cash gain. In conjunction with the May 2013 refinancing and other debt prepayments made in 2013, a $15.3 million loss on extinguishment of debt was recorded. During 2014, $87.0 million of voluntary prepayments of Term Loan debt pre-paymentswere made, over the last thirteen months. In addition,resulting in a non-cash $2.1 million loss on extinguishment of debt. Additionally, there was a $4.4$7.2 million year-over-year decrease in the write-off of deferred financing costs related to debt extinguishment.  Partially offsetting the aforementioned decreases are transaction costs relatedinterest expense due to the Magnum Products acquisition totaling $0.9 million.refinancing of our debt in May 2013.


Income tax expense.Income tax expense decreased $238.0$20.5 million to a benefit of $237.7$83.7 million for the year ended December 31, 20112014 from $0.3$104.2 million for the year ended December 31, 20102013. The effective tax rate for 2014 was 32.4% as compared to 37.4% for 2013. The decrease in income 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 a reversal of the full valuation allowance on net deferred tax assets.  See discussion in Item 8 – Financial Statements and Supplementary Data – Note 9 for additional information.sufficient taxable income.


Net income.As a result of the factors identified above, we generated net income of $324.6$174.6 million for the year ended December 31, 20112014 compared to a net income of $56.9$174.5 million for the year ended December 31, 2010. The increase in net income is due to the items previously described.2013.


Adjusted EBITDA.Adjusted EBITDA, as defined and reconciled in“Item 6, - Selected“Selected Financial Data,” increased decreased to $188.5$337.3 million in 2014 as compared to $156.2$402.6 million in 2010,2013, due to the factors discussed above.


Adjusted net income.Adjusted Net Income,, as defined and reconciled in“Item 6, - Selected“Selected Financial Data,” increaseddecreased to $147.2$234.2 million in 20112014 compared to $116.0$301.7 million in 2010,2013, due to the factors discussed above.above in addition to an $8.5 million increase in cash income tax expense.


Liquidity and financial position


Financial Position

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 revolvingAmended ABL Facility.

The Company’s 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 our debt down further and entered into a new 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 existing Credit Agreement by entering into the Term Loan Credit Agreement and the ABL Credit Agreement.  The Term Loan Credit Agreement providesagreements provide for a $900.0 million$1.2 billion Term Loan and include a $125.0$300.0 million uncommitted incremental term loan facilityfacility. The Term Loan matures on May 31, 2020. The Term Loan initially bore interest at rates based upon either a base rate plus an applicable margin of 1.75% or adjusted LIBOR rate plus an applicable margin of 2.75%, subject to a LIBOR floor of 0.75%. Beginning in the second quarter of 2014, and measured each subsequent quarter thereafter, the applicable margin related to base rate loans is reduced to 1.50% and the applicable margin related to LIBOR rate loans is reduced to 2.50%, to the extent that the Company’s net debt leverage ratio, as defined in the Term Loan, is below 3.00 to 1.00 for that measurement period. The Company’s net debt leverage ratio as of December 31, 2015 was above 3.00 to 1.00. As of December 31, 2015, the Company is in compliance with all covenants of the Term Loan. There are no financial maintenance covenants on the Term Loan.

The Company’s credit agreements also provide for the $250.0 million Amended ABL Credit Agreement provides for borrowingsFacility. The maturity date of the Amended ABL Facility is May 29, 2020. In May 2015, the Company borrowed $100.0 million under the Amended ABL Facility, the proceeds of which were used as a $150.0voluntary prepayment of Term Loan borrowings. As of December 31, 2015, there was $100.0 million outstanding under the Amended ABL Facility, and an uncommitted $50.0 million incremental credit facility.  Proceeds from the Term Loan were used to repay the Company’s previous Credit Agreement. The remaining proceeds from the Term Loan were used, alongCompany is in compliance with cash on hand, to pay a special cash dividendall of $6.00 per share on the Company’s common stock (”dividend recapitalization”).its covenants.  


30
Table Of Contents
As a result of these refinancing transactions, the outstanding balance on the Term Loan Credit Agreement at December 31, 2012 is $881.3 million.  

At December 31, 2012,2015, we had cash and cash equivalents of $108.0$115.9 million and $147.0$148.5 million of availability under our revolving ABL credit facility. Our total indebtedness was $893.8facility, net of outstanding letters of credit.

On August 5, 2015, the Company’s Board of Directors approved a $200.0 million stock repurchase program. Under the program, the Company may repurchase up to $200.0 million of its common stock over 24 months from time to time, in amounts and at prices the Company deems appropriate, subject to market conditions and other considerations. The repurchase may be executed using open market purchases, privately negotiated agreements or other transactions. The actual timing, number and value of shares repurchased under the program will be determined by management at its direction and will depend on a number of factors, including the market price of the Company’s shares of common stock and general market and economic conditions, applicable legal requirements, and compliance with the terms of the Company’s outstanding indebtedness. The repurchases will be funded from cash on hand or available borrowings. The stock repurchase program may be suspended or discontinued at any time without prior notice. For the year ended December 31, 2012, which includes a local bank facility at Ottomotores Mexico.

its common stock for $99.9 million, funded with cash on hand.  

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

Long-term liquidity


Liquidity

We believe that our cash flow from operations ourand availability under our revolving credit facility,Amended ABL 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 as well as repurchase shares of our common stock, impacting the amount available for working capital, capital expenditures and other general corporate purposes. As we continue to expand our business, we may in the future require additional capital to fund working capital, capital expenditures or acquisitions.


Cash flow


Flow

Year ended December 31, 20122015 compared to year ended December 31, 2011


2014

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

  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)%

  

Year Ended December 31,

   

(U.S. Dollars in thousands)

 

2015

  

2014

  

Change

  

% Change

 

Net cash provided by operating activities

 $188,619  $252,986  $(64,367)  -25.4%

Net cash used in investing activities

  (104,328)  (95,491)  (8,837)  -9.3%

Net cash used in financing activities

  (154,483)  (116,023)  (38,460)  -33.1%

Net cash provided by operating activities was $235.6$188.6 million for 20122015 compared to $169.7$253.0 million in 2011.2014. This increasedecrease of $65.9$64.4 million, or 38.8%25.4%, is primarily attributable to stronglower operating earnings during the current year along with higher working capital investment primarily due to an increase in accounts payable, partially offset by increased working capital investments, such as increases in inventory levels to support higher production rates.


lower cash tax payments versus the prior year.

Net cash used for investing activities for the year ended December 31, 20122015 was $69.3 million.  This included $22.4$104.3 million, usedwhich was primarily related to cash payments of $73.8 million for the acquisition of businesses and $30.7 million for the purchase of property and equipment and $47.0 million for the acquisition of the Ottomotores businesses.equipment. Net cash used for investing activities for the year ended December 31, 20112014 was $96.0$95.5 million, which was primarily related to cash payments of $61.2 million related to the acquisition of businesses and included $12.1$34.7 million used for the purchase of property and equipment and $83.9 million for the acquisition of the Magnum Products business. The increase in purchases of property and equipment was primarily driven by the purchase of a manufacturing facility and expansion of our corporate headquarters and engineering lab facilities.


equipment.

Net cash used infor financing activities was $151.4$154.5 million for the year ended December 31, 2012, an increase2015, primarily consisting of $92.1$174.0 million in netof debt repayments ($150.8 million repayment of long-term borrowings and $23.2 million repayment of short-term borrowings), partially offset by $126.4 million cash outflowsproceeds from 2011 primarily representing the net cash impact of our refinancing activities and dividend recapitalization transaction during the first half of 2012, including gross proceedsborrowings ($100.0 million from long-term borrowings under the Amended ABL facility and $26.4 million from short-term borrowings). In addition, the Company paid $99.9 million for the repurchase of $1,455.6its common stock and $13.0 million for the net share settlement of equity awards, which was partially offset by $1,175.1 million of long-term borrowing repayments. The Company made $25.7$9.6 million of cash paymentstax benefits of equity awards.

Net cash used for transaction fees incurred in connection with these refinancing transactions. Followingfinancing activities was $116.0 million for the refinancing,year ended December 31, 2014, including $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 a special$12.2 million of taxes for the net share settlement of equity awards, which was partially offset by $11.0 million of cash dividendtax benefits 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.equity awards.

Year ended December 31, 20112014 compared to year ended December 31, 2010


2013

The following table summarizes our cash flows by category for 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%

  

Year Ended December 31,

         

(U.S. 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%

Net cash provided by operating activities was $169.7$253.0 million for 20112014 compared to $114.5$259.9 million in 2010.2013. This increasedecrease of $55.2$6.9 million, or 48.2%2.7%, is primarily attributable to increased sales volume during 2011 andlower operating income mostly offset by a reduction in working capital investment, which was primarily due to a lesser extent favorable netsignificant use of cash inflowsin 2013 to replenish finished good inventory levels that had been depleted by demand driven from working capitalmajor power outages in 2011 compared to net cash flow outflows from working capital in 2010.


2012.

Net cash used for investing activities for the year ended December 31, 20112014 was $96.0$95.5 million. This included $12.1cash payments of $61.2 million usedfor the acquisition of businesses and $34.7 million for the purchase of property and equipment and $83.9 million for the acquisition of the Magnum Products business.equipment. Net cash used for investing activities for the year ended December 31, 20102013 was $11.2$144.6 million. This included cash payments of $116.1 million for the acquisition of businesses and included $9.6$30.8 million used for the purchase of property and equipment, and $1.6partially offset by cash proceeds of $2.3 million forfrom the sale of a business acquisition, net of cash acquired.


business.  

Net cash used infor financing activities was $59.2$116.0 million for the year ended December 31, 2011,2014, including $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 for the net share settlement of equity awards, which was partially offset by $11.0 million of cash 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 in 2013, including cash proceeds from long-term borrowings of $1.2 billion 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 decreasespecial cash dividend of $126.8$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 cash outflows from 2010 due to higher levelsshare settlement of debt payments made in 2010 totaling $434.3equity 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 $248.3$16.0 million of cash proceeds from the issuance of common stock.  In 2011, $59.4 million of payments on debt were made.


32
short-term borrowings.

Table of Contents

Senior secured credit facilities

In November 2006, as part of the CCMP Transactions, Generac Power Systems (the "Borrower") entered into (i) a first lien credit facility with Goldman SachsSecured Credit Partners L.P., as administrative agent, composed of (x) a $950.0 million term loan, which was scheduled to mature in November 2013 and (y) a $150.0 million revolving credit facility, which was scheduled to mature in November 2012, and (ii) a second lien credit facility with JP Morgan Chase Bank, N.A., as administrative agent, composed of a $430.0 million term loan, which was scheduled to mature in May 2014.

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 loans.  As a result of these pay downs, the outstanding balance on the first lien credit facility was reduced to $597.9 million as of December 31, 2011, and our second lien credit facility was repaid in full and terminated. We refer youFacilities

Refer to Note 6,10, “Credit Agreements,” of ourto consolidated financial statements in Item 8 and the “Liquidity and Financial Position” section included in Item 7 of this Annual Report on Form 10-K for information on the senior secured credit facilities.

Covenant Compliance

The Term Loan contains restrictions on the Company’s ability to pay distributions and dividends (but which permitted the payment of the 2013 special cash dividend described in Note 17, “Special Cash Dividend,” to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K for additional information about this credit facility.


On February 9, 2012, Generac Power Systems repaid an additional $22.9 million against its first lien term loan and entered into new senior secured credit facilities.  The new credit facilities included a new five-year $150.0 million revolving credit facility, a five-year $325.0 million tranche A term loan facility and a seven-year $250.0 million tranche B term loan facility.  Proceeds from loans made under the new credit facilities were used to repay in full all first lien term loans outstanding under our former first lien credit facility, and for general corporate purposes.  As a result of the repayments of debt and refinancing, our total indebtedness was $575.0 million and there were no borrowings on the revolving credit facility at February 9, 2012.

From February 9, 2012 through May 30, 2012, the new revolving credit facility and tranche A term loan facility initially incurred interest at rates based upon either a base rate plus an applicable margin of 1.25% or adjusted LIBOR rate plus an applicable margin of 2.25%.  The tranche B term loan facility incurred interest at rates based upon either a base rate (which, with respect to such tranche B term loan facility, will not be less than 2.00%) plus an applicable margin of 1.75% or adjusted LIBOR rate (which, with respect to such tranche B term loan facility, will not be less than 1.00%) plus an applicable margin of 2.75%.  In subsequent periods through May 30, 2012, the new revolving credit facility and the tranche A term loan facility incurred interest at rates based upon either a base rate plus an applicable margin ranging from 0.75% to 1.50% or adjusted LIBOR rate plus an applicable margin ranging from 1.75% to 2.50%, each determined based on a leverage ratio.

On May 30, 2012, the Borrower amended and restated its then existing Credit Agreement by entering into a new credit agreement (“Term Loan Credit Agreement”) with certain commercial banks and other lenders.  The Term Loan Credit Agreement provides for a $900.0 million term loan B credit facility (“Term Loan”) and a $125.0 million uncommitted incremental term loan facility.  The Term Loan Credit Agreement matures on May 30, 2018.  Proceeds from the Term Loan were used to repay the Company’s previous Credit Agreement. The remaining proceeds from the Term Loan were used, along with cash on hand, to pay a special cash dividend of $6.00 per share on the Company’s common stock. We refer you to Note 13, “Special Cash Dividend,” of our consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for additional information.

The Term Loan is guaranteed by all of the Borrower’s wholly-owned domestic restricted subsidiaries and the Parent, and is secured by associated collateral agreements which pledge a first priority lien on virtually all of the Borrower’s assets, including fixed assets and intangibles, and the assets of the guarantors (other than the Company), other than all cash, trade accounts receivable, inventory, and other current assets and proceeds thereof, which are secured by a second priority lien.

The Term Loan amortizes in equal installments of 0.25% of the original principal amount of the Term Loan payable on the first day of April, July, October and January commencing on October 1, 2012 until the maturity date of the Term Loan. The final principal repayment installment of the 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 Loan initially bears interest at rates based upon either a base rate plus an applicable margin of 4.00% or adjusted LIBOR rate plus an applicable margin of 5.00%, subject to a LIBOR floor of 1.25%.

The Term Loan Credit Agreement restricts the circumstances in which the Borrower can pay distributions and dividends, which are in addition to those to be paid in connection with the Transactions (as defined in the Term Loan Credit Agreement)10-K). 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 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 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 Term Loan Credit Agreement does not contain any financial maintenance covenants.

The 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 Term Loan Credit Agreement)Loan). A bankruptcy or insolvency event of default causes suchwill cause the obligations under the Term Loan 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%.


Concurrent with the closing of the Term Loan Credit Agreement, on May 30, 2012, the Borrower also entered into a new revolving credit agreement (the “ABL Credit Agreement”) with certain commercial banks and other lenders. The ABL Credit Agreement provides for borrowings under a $150.0 million senior secured ABL revolving credit facility (the “ABL Facility”). The size of theAmended ABL Facility could increase by $50.0 million pursuant to an uncommitted incremental credit facility. The ABL Credit Agreement matures May 30, 2017.

Borrowings under the ABL Facility are guaranteed by all of the Borrower’s wholly-owned domestic restricted subsidiaries and the Parent, and are secured by associated collateral agreements which pledge a first priority lien on all cash, trade accounts receivable, inventory, and other current assets and proceeds thereof, and a second priority lien on all other assets, including fixed assets and intangibles of the Borrower, certain domestic subsidiaries of the Borrower and the guarantors (other than the Company).
Borrowings under the ABL Facility 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%, in each case, subject to adjustments based upon average availability under the ABL Facility. The ABL Credit Agreement requires the Borrower to maintain a minimum consolidated fixed charge coverage ratio of 1.0x, tested on a quarterly basis, when Availability plus the amount of Qualified Cash (up to $5 million) (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 commitments and the applicable borrowing base under the ABL Facility or (ii) $10.0 million. The ABL Credit Agreement also contains covenants and events of default substantially similar to those in the Term Loan, Credit Agreement, as described above. The Company is required to pay an ABL Facility commitment fee of 0.50% on the average available unused commitment.  As of December 31, 2012, the Company had $147.0 million 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 borrowings outstanding under the ABL Facility as of December 31, 2012.

The ABL Credit Agreement provides the Company the ability to issue letters of credit. Outstanding undrawn letters of credit reduced availability under the Company’s ABL Facility. The letters of credit accrued interest at a rate of 1.88%, paid quarterly on the undrawn daily aggregate exposure of the preceding quarter. This rate is subject to meeting certain financial ratios.  At December 31, 2012 and 2011, letters of credit outstanding were $3.0 million and $5.8 million, and interest rates were 1.88% and 2.13% respectively.
Covenant compliance

The first lien credit facility in place at December 31, 2011 required Generac Power Systems to maintain a leverage ratio of consolidated total debt, net of unrestricted cash and marketable securities, to EBITDA (as defined in such first lien credit facility).  We refer to the calculation of EBITDA under and as defined in such first lien credit facility in this annual report as “Covenant EBITDA.”  Covenant EBITDA and the leverage ratio were calculated based on the four most recently completed fiscal quarters of Generac Power Systems.  Based on the formulations set forth in the first lien credit facility, Generac Power Systems was required to maintain a maximum leverage ratio of 4.75 to 1.00 as of December 31, 2011 and for the remainder of the term of such first lien credit agreement.  As of December 31, 2011, Generac Power Systems’ leverage ratio was 2.83 to 1.00.  Failure to comply with this covenant would have resulted in an event of default under the first lien credit facility unless waived by the lender thereunder.  Generac Power Systems was in compliance with the financial covenants under the first lien credit facility as of December 31, 2010 and December 31, 2011.  We refer you to Note 6, “Credit Agreements,” of our consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for additional information about the first lien credit facility.

Effective February 9, 2012 through May 30, 2012, the new credit facilities required Generac Power Systems to maintain a leverage ratio of consolidated total debt, net of unrestricted cash and marketable securities, to EBITDA (as defined in the new credit agreement) and an interest coverage ratio of EBITDA to cash interest expense (as defined in the new credit agreement).  The calculation of EBITDA under and as defined in the new credit agreement is referred to in this annual report as “Covenant EBITDA.”  Covenant EBITDA, the leverage ratio and interest coverage ratio were calculated based on the four most recently completed fiscal quarters of Generac Power Systems.  Based on the formulations set forth in the new credit agreement, Generac Power Systems was required to maintain a maximum leverage ratio of 4.00 to 1.00 from the periods June 30, 2012 to September 30, 2012, and 3.75 to 1.00 thereafter.  Additionally, Generac Power Systems was required to maintain a minimum interest coverage ratio of 2.50 to 1.00 from June 30, 2012 to September 30, 2012, 2.75 to 1.00 from December 31, 2012 to June 30, 2013, 3.00 to 1.00 from September 30, 2013 to June 30, 2014 and 3.25 to 1.00 thereafter.

On May 30, 2012, the Borrower amended and restated its then existing Credit Agreement by entering into a new credit agreement (“Term Loan Credit Agreement”) with certain commercial banks and other lenders.  The Term Loan Credit Agreement provides for a $900.0 million term loan B credit facility (“Term Loan”).

The 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) compliance with certain fixed charge coverage ratios in order to pay certain dividends or distributions. The Term Loan Credit Agreement also contains certain other affirmative and negative covenants that, among other things, provide limitations on 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’s organizational documents.

The Term Loan Credit Agreement does not contain any financial maintenance covenants.

The 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 Term Loan Credit Agreement). A bankruptcy or insolvency event of default causes such obligations to automatically become immediately due and payable.

Concurrent with the closing of the Term Loan Credit Agreement, on May 30, 2012, the Borrower also entered into a new revolving credit agreement (the “ABL Credit Agreement”) with certain commercial banks and other lenders. The ABL Credit Agreement provides for borrowings under a $150.0 million senior secured ABL revolving credit facility (the “ABL Facility”). The size of the ABL Facility could increase by $50.0 million pursuant to an uncommitted incremental credit facility. The ABL Credit Agreement also contains covenants and events of default substantially similar to those in the Term Loan Credit Agreement, as described above. 

As of December 31, 2012, $881.3 million of borrowings were outstanding under the Term Loan.  As of December 31, 2011, $597.9 million of borrowings were outstanding under the first lien credit facility.  On February 11, 2013, Generac Power Systems repaid an additional $80.0 million against its Term Loan, which was applied against all required future principal amortizations.  As of February 11, 2013, a total of $801.3 million were outstanding under the Term Loan. There were no borrowings outstanding under the ABL Facility as of December 31, 2012.

Contractual obligations
Obligations

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 

2015:

(U.S. Dollars in thousands)

 

Total

  

Less than 1 Year

  

2 - 3 Years

  

4 - 5 Years

  

After 5 Years

 

Long-term debt, including curent portion (1)

 $1,066,000  $500  $11,500  $1,054,000  $- 

Capital lease obligations, including current portion

  1,694   157   342   366   829 

Interest on long-term debt

  151,210   36,253   67,318   47,639   - 

Operating leases

  19,117   3,561   6,105   3,962   5,489 

Total contractual cash obligations (2)

 $1,238,021  $40,471  $85,265  $1,105,967  $6,318 

(1) On May 30, 2012, the Borrower amended and restated its then existing Credit Agreement by entering into a new credit agreement (“Term Loan Credit Agreement”) with certain commercial banks and other lenders. The Term Loan Credit Agreement provides for a $900.0 million$1.2 billion term loan B credit facility (“Term Loan”) and includes a $125.0$300.0 million uncommitted incremental term loan facility. The 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) Assumes $80.0 million voluntary prepayment on February 11, 2013, and remaining debt will remain outstanding until maturity and using the interest rates in effect for our senior secured credit facilities as of December 31, 2012.

(3)2020.

(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$0.7 million to our pension plans in 2013.


2016.

Capital expenditures


Expenditures

Our operations require capital expenditures for technology, tooling, equipment, capacity expansion, systems and upgrades. Capital expenditures were $22.4$30.7 million and $12.1$34.7 million for the years ended December 31, 20122015 and 2011,2014, respectively, and were funded through cash from operations.


Off-balance sheet arrangements

Off-Balance Sheet Arrangements

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


We do not indemnify the finance company for any credit losses they may incur.

Total inventory financed under this arrangement accounted for approximately 6%9% and 8% of net sales for the yearyears ended December 31, 20112015 and approximately 7% of net sales for the year ended December 31, 2012.2014, respectively. The amount financed by dealers which remained outstanding was $10.0$32.4 million and $16.6$26.1 million as of December 31, 20112015 and 2012,2014, respectively.


Critical accounting policies


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, derivative accounting,contingencies; 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 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


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.
The Company uses a two-step process to test for goodwill impairment. First, the reporting unit's fair value is compared to its carrying value. Fair value is estimated using a combination of qualitative analyses, a discounted cash flow approach and a market approach.  If a reporting unit's carrying amount exceeds its fair value, an indication exists that the reporting unit's goodwill may be impaired, and the second step of the impairment test would be performed. The second step of the goodwill impairment test is used to measure the amount of the potential impairment loss. In the second step, the implied fair value of the reporting unit's goodwill is determined by allocating the reporting unit's fair value to all of its assets and liabilities other than goodwill in a manner similar to a purchase price allocation. The implied fair value of the goodwill that results from the application of this second step is then compared to the carrying amount of the goodwill and an impairment charge would be recorded for the difference if the carrying value exceeds the implied fair value of the goodwill.
assets.

The Company performed the required annual impairment tests for fiscal years 2012, 2011goodwill as of October 31, 2015, and 2010 and found no impairment of goodwill.


Other indefinite-lived intangible assets consist of trade names. The Company tests the carrying value these trade names by comparing the assets fair value to its carrying value.  Fair value was measured using a relief-from-royalty approach, which assumesdetermined that the fair value of the trade name isOttomotores reporting unit was less than its carrying value, resulting in a non-cash goodwill impairment charge of $4.6 million in the fourth quarter of 2015. The fair value was determined using a discounted cash flowsflow analysis, which utilizes key estimates and assumptions as discussed below. There were no other reporting units with a carrying value at-risk of exceeding fair value as of the amount that wouldOctober 31, 2015 impairment test date.

Additionally, in the fourth quarter of 2015, the Company’s Board of Directors approved a plan to strategically transition and consolidate certain of the Company’s brands acquired through acquisitions over the past several years to the Generac® tradename. This brand strategy change resulted in a reclassification to a two year remaining useful life for the impacted tradenames, causing the fair value to be paid hadless than the carrying value using the relief-from-royalty approach in a discounted cash flow analysis. As such, a $36.1 million non-cash impairment charge was recorded in the fourth quarter of 2015 to write-down the impacted tradenames to net realizable value.

Other than the impairment charges discussed above, the Company not owned the trade name and instead licensed the trade name from another company. The Company conducts its annualfound no other impairment test for indefinite-lived intangible assets on October 31st of each year.

The Company performedwhen performing the required annual impairment tests for goodwill and other indefinite-lived intangible assets for fiscal years 20122015, 2014 and 20102013. See Note 2, “Significant Accounting Policies – Goodwill and found noOther Indefinite-Lived Intangible Assets,” to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K for further information on the impairment of indefinite-lived trade names. Duringcharges recorded in the fourth quarter of 2011, the Company decided to strategically transition certain products to their more widely known Generac brand. Based on this decision, the Company recorded a $9.4 million non-cash trade name impairment charge as of October 31, 2011 which primarily related to the write down of the impacted trade name to net realizable value.
We can make no assurances that remaining goodwill or indefinite-lived trade names will not be impaired in the future. 2015.

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

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.


Inperforming the long term, our remaining goodwill and indefinite-lived trade name balancesintangible asset impairment tests. While we believe our judgments and assumptions are reasonable, different assumptions could be further impaired in future periods.change the estimated fair values. A number of factors, many of which we have no ability to control, could affect our financial condition, operating results and business prospects and could cause actual results to differ from the estimates and assumptions we employed. These factors include:

· 

●

a prolonged global or regional economic crisis;downturn;

· 

●

a significant decrease in the demand for our products;

· 

●

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

· 

●

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

· 

●

an adverse action or assessment by a regulator; and

· 

●

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


Our cash flow assumptions are based on historical and forecasted revenue, operating costs and other relevant factors.

●

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.


Defined benefit pension obligations

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 funded statusexcess of our pension plansthe purchase price over the estimated fair value of assets and liabilities is more fully describedrecorded as goodwill. Assigning fair market values to the assets acquired and liabilities assumed at the date of an acquisition requires knowledge of current market values, and the values of assets in use, and often requires the application of judgment regarding estimates and assumptions. While the ultimate responsibility resides with management, for material acquisitions we retain the services of certified valuation specialists to assist with assigning estimated values to certain acquired assets and assumed liabilities, including intangible assets and tangible long-lived assets. Acquired intangible assets, excluding goodwill, are valued using certain discounted cash flow methodologies based on future cash flows specific to the type of intangible asset purchased. This methodology incorporates various estimates and assumptions, the most significant being projected revenue growth rates, earnings margins, and forecasted cash flows based on the discount rate and terminal growth rate.See Note 91, “Description of Business,” to our auditedthe consolidated financial statements included in Item 8 of this Annual Report on Form 10-K. As discussed in Note 9,10-K for further information on the Company’s business acquisitions.

Defined Benefit PensionObligations

The Company’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.


Rates Such rates are evaluated on an annual basis considering such factors asincluding market interest rates and historical asset performance. Actuarial valuations for fiscal year 20122015 used a discount rate of 4.10%4.36% for the salaried pension plan and 4.14%4.39% for the hourly pension plan. Our discount rate was selected using a methodology that matches plan cash flows with a selection of Moody's Aa“Aa” or higher rated bonds, resulting in a discount rate that better matches a bond yield curve with comparable cash flows. In estimating the expected return on plan assets, we study historical markets and preserve the long-term historical relationships between equities and fixed-income securities. We evaluate current market factors such as inflation and interest rates before we determine long-term capital market assumptions and review peer data and historical returns to check for reasonableness and appropriateness. Changes in the discount rate and return on assets can have a significant effect on the funded status of our pension plans, stockholders' equity and related expense. We cannot predict these changes in discount rates or investment returns and, therefore, cannot reasonably estimate whether the impact in subsequent years will be significant.

significant..

The funded status of our pension plans is the difference between the projected benefit obligation and the fair value of its plan assets. The projected benefit obligation is the actuarial present value of all benefits expected to be earned by the employees' service adjusted for future potential wage increases.


service. No compensation increase is assumed in the calculation of the projected benefit obligation, as the plans were frozen effective December 31, 2008. Further information regarding the funded status of our pension plans can be found in Note 14, “Benefit Plans,” to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K.

Our funding policy for our pension plans is to contribute amounts at least equal to the minimum annual amount required by applicable regulations. Given this policy, we expect to make $1.0$0.7 million in contributions to our pension plans in 2013.


2016.

Allowance for doubtful accounts, excessDoubtful Accounts, Excess & Obsolete InventoryReserves, Product Warranty Reserves and obsolete inventory reserves, product warranty reserves and other contingencies


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, 57, 9, 16 and 1619 to our auditedthe consolidated financial statements included in Item 8 of this Annual Report on Form 10-K.


Derivative accounting

We have interest rate swap contracts, or the Swaps, in place to fix a portion of our variable rate indebtedness. Due to the incorporation of a new interest rate floor provision in 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 required 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.

Income taxes

Taxes

We account for income taxes in accordance with ASC 740,Income Taxes. Our estimate of income taxes payable, deferred income taxes and the effective tax rate is based on an analysis of many factors including interpretations of federal, state and international income tax laws,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.


We have generated

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.


Ottomotores

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, 2012.2015. 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, 2012,2015, 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.

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

Share based compensation


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.


See Note 15, “Share Plans” to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K for further information on the Company’s share based compensation.

New Accounting Standards

For information with respect to new accounting pronouncements and the impact of these pronouncements on our consolidated financial statements, 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.

.


Item 7A.Quantitativeand Qualitative Disclosures About Market Risk

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

Foreign currency

Currency

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 yeartwelve months 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.


On February 18, 2010, we entered into a ten-month foreign currency average rate option transaction for Euros with a total notional amountsold on the statements of $2.5 million and a termination datecomprehensive income.

As of December 31, 2010. Total losses recognized in2015, 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.


outstanding (in thousands):

Currency Denomination

Trade Date

Effective Date

Notional Amount

Exchange Rate(EUR:GBP)

Expiration Date

      

GBP

October 23, 2015

December 15, 2015

1,000

0.7259

March 29, 2016

GBP

October 23, 2015

October 23, 2015

1,000

0.7267

April 22, 2016

GBP

October 23, 2015

February 1, 2016

1,000

0.7232

May 26, 2016

GBP

November 4, 2015

January 18, 2016

1,000

0.7107

May 26, 2016

GBP

November 11, 2015

January 4, 2016

1,000

0.7126

June 28, 2016

GBP

November 17, 2015

June 30, 2016

500

0.7097

July 5, 2016

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.


British Pounds.

Commodity prices


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.lags and calculations. To the extent that commodity prices increase and we do not have firm pricing from our suppliers, or our suppliers are not able to honor such prices, we may experience a decline in our gross margins to the extent we are not able to increase selling prices of our products or obtain manufacturing efficiencies or supply chain savings to offset increases in commodity costs.

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


We primarily utilize commodity contracts with maturities of one year or less. These are intended to offset the effect of price fluctuations on actual inventory purchases. The primary objective of the hedge is to mitigate the impact of potential price fluctuations of copperthese commodities on our financial results. AsThese derivatives typically have maturities of less than eighteen months.As of December 31, 2012,2015, we had the following commodity forward contractscontract 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

Expiration Date

Copper

November 12, 2015

December 1, 2015

$968

$2.196 per LB

March 31, 2016

For additional information on the Company’s commodity forward contracts, including amounts charged to the statement of comprehensive income during 2012,2015, 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


Rates

As of December 31, 2012, a portion2015, all of the outstanding debt under our term loansTerm Loan was subject to floating interest rate risk. As of this date,December 31, 2015, we had the following interest rate swap contracts outstanding (in thousands):

   Hedged Item Effective DateNotional Amount Expiration Date
Contract DateFixed LIBOR Rate
      Interest rateApril 1, 2011October 1, 2012$100,0002.22%October 1, 2013
      Interest rateApril 1, 2011July 1, 2012$200,0001.905%July 1, 2013

Hedged Item

Contract Date

Effective Date

Notional Amount

Fixed LIBOR Rate

Expiration Date

      

Interest rate

October 23, 2013

July 1, 2014

$100,000

1.7420%

July 1, 2018

Interest rate

October 23, 2013

July 1, 2014

$100,000

1.7370%

July 1, 2018

Interest rate

May 19, 2014

July 1, 2014

$100,000

1.6195%

July 1, 2018

At December 31, 2012,2015, the fair value of thethese interest rate swaps reduced for our credit risk and excluding related accrued interest was a liability of $3.0$2.6 million. For additional information on the Company’s interest rate swaps, including amounts charged to the statement of comprehensive income during 2012,2015, 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 loansTerm Loan that areis not covered by the swaps. A hypothetical change in the LIBOR interest rate of 100 basis points would have changed annual cash interest expense by approximately $0.5$5.6 million (or, without the swaps in place, $0.3$8.2 million). in 2015. The existence of a 1.25%0.75% LIBOR floor provision in our new 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, 20122015 LIBOR rates.


Due to the incorporation of a new interest rate floor provision in 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 required 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.
 
38

Item 8. FinancialStatementsand Supplementary Data

Report of Independent Registered Public Accounting Firm


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, 2012,2015, 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 Country Home Products (CHP) business, which is included in the December 31, 20122015 consolidated financial statements of Generac Holdings Inc., and constituted 4.6%6.0% and 8.7%15.9% of total and net assets, respectively, as of December 31, 20122015 and 0.6%2.0% and 0.3%-0.7% 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.


CHP.

In our opinion, Generac Holdings Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012,2015, based on the COSO criteria.


As indicated in the Report of Management on Generac Holdings Inc.’s Internal Control Over Financial Reporting, the Company implemented a new accounting software system on January 4, 2016, which was subsequent to the date of management’s assessment of the effectiveness of internal control over financial reporting.

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, 20122015 and 2011,2014, 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, 20122015 of Generac Holdings Inc. and our report dated March 13, 2013February 26, 2016 expressed an unqualified opinion thereon.


/s/ Ernst & Young LLP


Milwaukee, WI, USA

February 26, 2016

March 13, 2013
 
39
Report of Independent Registered Public Accounting Firm

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, 20122015 and 2011,2014, 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, 2012.2015. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Generac Holdings Inc. at December 31, 20122015 and 2011,2014, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2012,2015, 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, 2012,2015, 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 26, 2016 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Milwaukee, WI, USA

March 13, 2013

February 26, 2016

Generac Holdings Inc.
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.        

Generac Holdings Inc.
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.
Consolidated Statements of Redeemable Stock and Stockholders' Equity (Deficit)
(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                                      

Generac Holdings Inc.
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            

Generac Holdings Inc.

Notes to

Consolidated Financial Statements

Years Ended December 31, 2012, 2011, and 2010
Balance Sheets

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

  

December 31,

 
  

2015

  

2014

 

Assets

        

Current assets:

        

Cash and cash equivalents

 $115,857  $189,761 

Accounts receivable, less allowance for doubtful accounts of $2,494 atDecember 31, 2015 and $2,275 at December 31, 2014

  182,185   189,107 

Inventories

  325,375   319,385 

Deferred income taxes

  29,355   22,841 

Prepaid expenses and other assets

  8,600   9,384 

Total current assets

  661,372   730,478 
         

Property and equipment, net

  184,213   168,821 
         

Customer lists, net

  39,313   41,002 

Patents, net

  53,772   56,894 

Other intangible assets, net

  2,768   4,298 

Tradenames, net

  161,057   182,684 

Goodwill

  669,719   635,565 

Deferred financing costs, net

  12,965   16,243 

Deferred income taxes

  6,673   46,509 

Other assets

  964   48 

Total assets

 $1,792,816  $1,882,542 
         

Liabilities and stockholders’ equity

        

Current liabilities:

        

Short-term borrowings

 $8,594  $5,359 

Accounts payable

  108,332   132,248 

Accrued wages and employee benefits

  13,101   17,544 

Other accrued liabilities

  82,540   84,814 

Current portion of long-term borrowings and capital lease obligations

  657   557 

Total current liabilities

  213,224   240,522 
         

Long-term borrowings and capital lease obligations

  1,050,097   1,082,101 

Deferred income taxes

  6,166   13,449 

Other long-term liabilities

  57,458   56,671 

Total liabilities

  1,326,945   1,392,743 
         

Stockholders’ equity:

        

Common stock, par value $0.01, 500,000,000 shares authorized, 69,582,669 and 69,122,271 shares issued at December 31, 2015 and 2014, respectively

  696   691 

Additional paid-in capital

  443,109   434,906 

Treasury stock, at cost, 3,567,575 and 198,312 shares at December 31, 2015 and 2014, respectively

  (111,516)  (8,341)

Excess purchase price over predecessor basis

  (202,116)  (202,116)

Retained earnings

  358,173   280,426 

Accumulated other comprehensive loss

  (22,475)  (15,767)

Total stockholders’ equity

  465,871   489,799 

Total liabilities and stockholders’ equity

 $1,792,816  $1,882,542 

See notes to consolidated financial statements.


1. Description of Business
 
40
Table Of Contents

Generac Holdings Inc.

Consolidated Statements of Comprehensive Income

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

  

Year Ended December 31,

 
  

2015

  

2014

  

2013

 
             

Net sales

 $1,317,299  $1,460,919  $1,485,765 

Costs of goods sold

  857,349   944,700   916,205 

Gross profit

  459,950   516,219   569,560 
             

Operating expenses:

            

Selling and service

  130,242   120,408   107,515 

Research and development

  32,922   31,494   29,271 

General and administrative

  52,947   54,795   55,490 

Amortization of intangibles

  23,591   21,024   25,819 

Tradename and goodwill impairment

  40,687   –   – 

Gain on remeasurement of contingent consideration

  –   (4,877)  – 

Total operating expenses

  280,389   222,844   218,095 

Income from operations

  179,561   293,375   351,465 
             

Other (expense) income:

            

Interest expense

  (42,843)  (47,215)  (54,435)

Investment income

  123   130   91 

Loss on extinguishment of debt

  (4,795)  (2,084)  (15,336)

Gain (loss) on change in contractual interest rate

  (2,381)  16,014   – 

Costs related to acquisitions

  (1,195)  (396)  (1,086)

Other, net

  (5,487)  (1,462)  (1,983)

Total other expense, net

  (56,578)  (35,013)  (72,749)
             

Income before provision for income taxes

  122,983   258,362   278,716 

Provision for income taxes

  45,236   83,749   104,177 

Net income

 $77,747  $174,613  $174,539 
             

Net income per common share - basic:

 $1.14  $2.55  $2.56 

Weighted average common shares outstanding - basic:

  68,096,051   68,538,248   68,081,632 
             

Net income per common share - diluted:

 $1.12  $2.49  $2.51 

Weighted average common shares outstanding - diluted:

  69,200,297   70,171,044   69,667,529 
             

Dividends declared per share

 $–  $-  $5.00 
             

Other comprehensive income (loss):

            

Amortization of unrealized loss on interest rate swaps

 $–  $–  $2,381 

Foreign currency translation adjustment

  (7,624)  (3,082)  1,238 

Net unrealized gain (loss) on derivatives

  (965)  (1,420)  774 

Pension liability adjustment

  1,881   (8,850)  7,688 

Other comprehensive income (loss)

  (6,708)  (13,352)  12,081 

Comprehensive income

 $71,039  $161,261  $186,620 

See notes to consolidated financial statements.

Generac Holdings Inc.

Consolidated Statements of Stockholders' Equity

(Dollars in Thousands, Except Share Data)

                      

Excess

           
                   Purchase          
                   

Price

  Retained  Accumulated    
     Additional     

Over

  Earnings  

Other

  Total 
  Common Stock  Paid-In  Treasury Stock  Predecessor  (Accumulated  Comprehensive  Stockholders' 
  

Shares

  

Amount

  

Capital

  

Shares

  

Amount

  

Basis

  

Deficit)

  

Income (Loss)

  

Equity

 

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)

Net share settlement of restricted stock awards

  –   –   –   (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)

Net share settlement of restricted stock awards

  –   –   –   (34,854)  (1,770)  –   –   –   (1,770)

Excess tax benefits from equity awards

  –   –   10,972   –   –   –   –   –   10,972 

Share-based compensation

  –   –   12,612   –   –   –   –   –   12,612 

Dividends paid

  –   –   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 

Unrealized loss on interest rate swaps, net of tax of $(609)

  –   –   –   –   –   –   –   (965)  (965)

Foreign currency translation adjustment

  –   –   –   –   –   –   –   (7,624)  (7,624)

Common stock issued under equity incentive plans, net of shares withheldfor employee taxes and strike price

  460,398   5   (9,626)  –   –   –   –   –   (9,621)

Net share settlement of restricted stock awards

  –   –   –   (65,763)  (3,233)  –   –   –   (3,233)

Stock repurchases

  –   –   –   (3,303,500)  (99,942)  –   –   –   (99,942)

Excess tax benefits from equity awards

  –   –   9,559   –   –   –   –   –   9,559 

Share-based compensation

  –   –   8,241   –   –   –   –   –   8,241 

Dividends paid

  –   –   29   –   –   –   –   –   29 

Pension liability adjustment, net of tax of $1,176

  –   –   –   –   –   –   –   1,881   1,881 

Net income

  –   –   –   –   –   –   77,747   –   77,747 
                                     

Balance at December 31, 2015

  69,582,669  $696   443,109  $(3,567,575) $(111,516) $(202,116) $358,173  $(22,475) $465,871 

See notes to condensed consolidated financial statements.

Generac Holdings Inc.

Consolidated Statements of Cash Flows

(Dollars in Thousands)

  

Year Ended December 31,

 
  

2015

  

2014

  

2013

 

Operating activities

            

Net income

 $77,747  $174,613  $174,539 

Adjustment to reconcile net income to net cash provided by operating activities:

            

Depreciation

  16,742   13,706   10,955 

Amortization of intangible assets

  23,591   21,024   25,819 

Amortization of original issue discount

  3,050   3,599   2,074 

Amortization of deferred financing costs

  2,379   3,016   2,698 

Amortization of unrealized loss on interest rate swaps

  –   –   2,381 

Tradename and goodwill impairment

  40,687   –   – 

Loss on extinguishment of debt

  4,795   2,084   15,336 

(Gain) loss on change in contractual interest rate

  2,381   (16,014)  – 

Gain on remeasurement of contingent consideration

  –   (4,877)  – 

Provision for losses on accounts receivable

  481   672   1,037 

Deferred income taxes

  26,955   37,878   82,675 

Loss on disposal of property and equipment

  59   576   370 

Share-based compensation expense

  8,241   12,612   12,368 

Net changes in operating assets and liabilities:

            

Accounts receivable

  9,610   (2,988)  (5,257)

Inventories

  9,084   3,508   (52,488)

Other assets

  5,063   2,456   (10,902)

Accounts payable

  (27,771)  15,269   (5,847)

Accrued wages and employee benefits

  (5,361)  (9,405)  6,248 

Other accrued liabilities

  445   6,229   9,491 

Excess tax benefits from equity awards

  (9,559)  (10,972)  (11,553)

Net cash provided by operating activities

  188,619   252,986   259,944 
             

Investing activities

            

Proceeds from sale of property and equipment

  105   394   80 

Expenditures for property and equipment

  (30,651)  (34,689)  (30,770)

Proceeds from sale of business, net

  –   –   2,254 

Acquisitions of businesses, net of cash acquired

  (73,782)  (61,196)  (116,113)

Net cash used in investing activities

  (104,328)  (95,491)  (144,549)
             

Financing activities

            

Proceeds from short-term borrowings

  26,384   6,550   16,007 

Proceeds from long-term borrowings

  100,000   –   1,200,000 

Repayments of short-term borrowings

  (23,149)  (26,444)  (18,982)

Repayments of long-term borrowings and capital lease obligations

  (150,826)  (94,035)  (901,184)

Stock repurchases

  (99,942)  –   – 

Payment of debt issuance costs

  (2,117)  (4)  (22,376)

Cash dividends paid

  (1,436)  (902)  (343,429)

Taxes paid related to the net share settlement of equity awards

  (12,956)  (12,160)  (14,988)

Excess tax benefits from equity awards

  9,559   10,972   11,553 

Net cash used in financing activities

  (154,483)  (116,023)  (73,399)
             

Effect of exchange rate changes on cash and cash equivalents

  (3,712)  (1,858)  128 
             

Net increase (decrease) in cash and cash equivalents

  (73,904)  39,614   42,124 

Cash and cash equivalents at beginning of period

  189,761   150,147   108,023 

Cash and cash equivalents at end of period

 $115,857  $189,761  $150,147 
             

Supplemental disclosure of cash flow information

            

Cash paid during the period

            

Interest

 $39,524  $42,592  $55,828 

Income taxes

  6,087   34,283   25,821 

See notes to consolidated financial statements

Generac Holdings Inc.
Notes to Consolidated Financial Statements

Years Ended December 31, 2015, 2014, and2013

(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., 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.

Initial Public Offering Generac’s power products are available globally through a broad network of independent dealers, distributors, retailers, wholesalers and Conversionequipment rental companies, as well as sold direct to certain end user customers.

The Company has executed a number of Class B Common Stock and Series A preferred Stock

On February 17, 2010, the Company completed its initial public offering (IPO) of 18,750,000 sharesacquisitions that support our strategic plan (refer to Item 1 in this Annual Report on Form 10-K for discussion of our common stock at a pricePowering Ahead strategic plan). A summary of $13.00 per share. Prior to completion ofthese acquisitions include the IPO, the Company had various classes of equity securities that contained conversion features, distribution rights, and liquidation preferences. Upon completion of our IPO, all shares of the Company’s Series A Preferred Stock and Class B Common Stock were converted into shares of common stock.  Please refer to Note 7, “Redeemable Stock and Stockholders’ Equity (Deficit),” for additional information.following:

●

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

●

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

●

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

●

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

●

On September 2, 2014, the Company acquired the equity of Pramac America LLC (Powermate), resulting in the ownership of the Powermate trade name and the right to license the DeWalt brand name for certain residential engine powered tools. This acquisition expands Generac’s residential product portfolio in the portable generator category.

●

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

●

On August 1, 2015, the Company acquired Country Home Products and its subsidiaries (CHP). CHP is a leading manufacturer of high-quality, innovative, professional-grade engine powered equipment used in a wide variety of property maintenance applications, which are primarily sold in North America under the DR® Power Equipment brand. The acquisition provides an expanded product lineup and additional scale to the Company’s residential engine powered products.

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.

Concentration of Credit Risk

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

One customer accounted for approximately 9%11% and 12%9% of accounts receivable at December 31, 20122015 and December 31, 2011,2014, respectively. No one customer accounted for greater than 7%, 10%8% and 10%6%, respectively, of net sales during the years ended December 31, 2012, 2011,2015, 2014, or 2010.

2013, respectively.

Accounts Receivable

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

Inventories

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

Property and Equipment

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

Land improvements

10–15 

Buildings and improvements

10–40 

Machinery and equipment

5–20 

Dies and tools

3–10 

Vehicles

3–5 

Office equipment and systems

3–15 

Leasehold improvements

7–20 
Land improvements15
Buildings and improvements20 – 40
Leasehold improvements10 – 20
Machinery and equipment5 – 10
Dies and tools3 – 5
Vehicles3 – 5
Office equipment3 – 10

Generac Holdings Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 2012, 2011, and 2010
(Dollars in Thousands, Except Share and Per Share Data)
2. Significant Accounting Policies (continued)
Customer Lists, Patents, and Other Intangible Assets
The following table summarizes intangible assets by major category as of December 31, 2012 and 2011:

  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 

Amortization of intangible assets was $45,867, $48,020 and $51,808 in 2012, 2011 and 2010, respectively. During the fourth quarter of 2011, the Company wrote down its trade name indefinite-lived intangible asset. See the Goodwill and Other Indefinite-Lived Intangible Assets section for further discussion. Estimated amortization expense each year for the five years subsequent to December 31, 2012 is as follows: 2013, $24,084; 2014, $16,686; 2015, $15,480; 2016, $13,668; 2017, $10,328.
Debt Issuance Costs

Direct and incremental costs incurred in connection with the issuance of long-term debt are capitalized as deferred financing costs 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 effective interest method over the terms of the related credit agreements. Approximately $3,759, $1,986,$5,429, $6,615, and $2,439$4,772 of deferred financing costs and original issue discountsdiscount were amortized to interest expense during fiscal years 2012, 20112015, 2014 and 2010,2013, 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; 2016 $5,944;- $5,355; 2017 $5,960.

- $6,783; 2018 - $7,048; 2019 - $7,323; 2020 - $3,134.

Goodwill and Other Indefinite-Lived Intangible Assets

Goodwill represents the excess of the purchase price over fair value of identifiable net assets acquired from business acquisitions. Goodwill is not amortized, but is reviewed for impairment on an annual basis and between annual tests if indicators of impairment are present. The Company evaluates goodwill for impairment annually as of October 31 or more frequently when an event occurs or circumstances change that indicates the carrying value may not be recoverable. The Company has the option to assess goodwill for impairment by first performing 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.

The Company performed the required annual impairment tests for goodwill as of October 31, 2015, and determined that the fair value of the Ottomotores reporting unit was less than its carrying value, resulting in a non-cash goodwill impairment charge in the fourth quarter of 2015 of $4,611 to write-down the balance of the Ottomotores goodwill. The decrease in fair value of the Ottomotores reporting unit was due to several factors in the second half of 2015: the continued challenges of the Latin American economies, devaluation of the Peso against the US Dollar, the slow development of Mexican energy reform as a result of decreasing oil prices; combining to cause 2015 results to fall short of prior expectations and future forecasts to decrease. The fair value was determined using a discounted cash flow analysis, which utilized key financial assumptions including the sales growth factors discussed above, a 3% terminal growth rate and a 15.7% discount rate. There were no other reporting units with a carrying value at-risk of exceeding fair value as of the October 31, 2015 impairment test date.  

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

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

Other than the impairment charges discussed above, the Company found no other impairment when performing the required annual impairment tests for goodwill and other indefinite-lived intangible assets for fiscal years 2015, 2014 and 2013. 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)indefinite-lived tradenames). Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the sum of the expected future undiscounted cash flows is less than the carrying amount of an asset, a loss is recognized for the difference between the fair value and carrying value of the asset. Such analyses necessarily involve significant judgments.

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 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.

Generac Holdings Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 2012, 2011, and 2010
(Dollars in Thousands, Except Share and Per Share Data)
2. Significant Accounting Policies (continued)
The Company uses a two-step process to test for goodwill impairment. First, the reporting unit's fair value is compared to its carrying value. Fair value is estimated using a combination of qualitative analyses, a discounted cash flow approach and a market approach.  If a reporting unit's carrying amount exceeds its fair value, an indication exists that the reporting unit's goodwill may be impaired, and the second step of the impairment test would be performed. The second step of the goodwill impairment test is used to measure the amount of the potential impairment loss. In the second step, the implied fair value of the reporting unit's goodwill is determined by allocating the reporting unit's fair value to all of its assets and liabilities other than goodwill in a manner similar to a purchase price allocation. The implied fair value of the goodwill that results from the application of this second step is then compared to the carrying amount of the goodwill and an impairment charge would be recorded for the difference if the carrying value exceeds the implied fair value of the goodwill.
The Company performed the required annual impairment tests for fiscal years 2012, 2011 and 2010 and found no impairment of goodwill. There can be no assurance that future goodwill impairment tests will not result in a charge to earnings.
The changes in the carrying amount of goodwill for the years ended December 31, 2012 and 2011 are as follows:
 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 acquired two businesses during fiscal 2012 for a combined purchase price of $47,044, net of cash acquired, which resulted in additional goodwill of $5,545.  Separately, the Magnum purchase price allocation was finalized during the third quarter of 2012, which resulted in an adjustment to goodwill of $(75). The Company acquired one business during fiscal 2011 for $85,490, net of cash acquired and inclusive of estimated earn-out payments. This resulted in additional goodwill of $20,337. Offsetting this increase in goodwill was a $(12) adjustment to goodwill recorded during the second quarter of 2011 due to finalization of the purchase price allocation from a 2010 acquisition. A majority of goodwill amounts are deductible for tax purposes.
Other indefinite-lived intangible assets consist of trade names. The Company tests the carrying value these trade names by comparing the assets fair value to its carrying value.  Fair value was 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 31st of each year.
The Company performed the required annual impairment tests for fiscal years 2012 and 2010 and found no impairment of indefinite-lived trade names. During the fourth quarter of 2011, the Company decided to strategically transition certain products to their more widely known Generac brand. Based on this decision, the Company recorded a $9,389 non-cash trade name impairment charge as of October 31, 2011 which primarily related to the write down of the impacted trade name to net realizable value.  There can be no assurance that future impairment tests will not result in a charge to earnings.
Income Taxes

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

Generac Holdings Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 2012, 2011, and 2010
(Dollars in Thousands, Except Share and Per Share Data)
2. Significant Accounting Policies (continued)
Revenue Recognition


Sales, net of estimated returns and allowances, are recognized upon shipment of product to the customer, which is generally when title passes, the Company has no further obligations, and the customer is required to pay.pay subject to agreed upon payment terms. The Company, at the request of certain customers, will warehouse inventory billed to the customer but not delivered. Unless all revenue recognition criteria have been met, the Company does not recognize revenue on these transactions until the customers take possession of the product. 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 promotionprograms, discounts and incentive expenses which are recognized as a reduction of sales.

 
Historically, product returns, whether in the normal course of business or resulting from repurchases made under a floor plan financing program, have not been material.46
Table Of Contents
 

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 accompanying consolidated statements of comprehensive income, are expensed as incurred. Total expenditures for advertising were $13,360, $11,742,$39,258, $32,352, and $11,985$19,910 for the years ended December 31, 2012, 2011,2015, 2014, and 2010,2013, respectively.

Research and Development

The Company expenses research and development costs as incurred. Total expenditures incurred for research and development were $23,499, $16,476,$32,922, $31,494, and $14,700$29,271 for the years ended December 31, 2012, 20112015, 2014 and 2010,2013, respectively.

Foreign Currency Translation and Transactions

Foreign

Balance sheet amounts for non-U.S. Dollar functional currency balance 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 Statements
Years Ended December 31, 2012, 2011, and 2010
(Dollars in Thousands, Except Share and Per Share Data)
2. Significant Accounting Policies (continued)
Accumulated Other Comprehensive Loss
Accumulated 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)

losses from foreign currency transactions are recognized as incurred in the consolidated statements of comprehensive income.

Fair Value of Financial Instruments

The 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.

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

The Company believes the carrying amount of its financial instruments (cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, short-term borrowings and ABL facility borrowings), excluding Term Loan borrowings, approximates the fair value of these instruments based upon their short-term nature. The fair value of Term Loan borrowings, which have an aggregate carrying value of $937,060 was approximately $918,319 (Level 2) at December 31, 2015, as calculated based on independent valuations whose inputs and significant value drivers are observable.

For the fair value of 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.

Assets and liabilities measured at fair value on a recurring basis, aresee the fair value table in Note 4, “Derivative Instruments and Hedging Activities,” to the consolidated financial statements. The fair value of all derivative contracts is classified as follows:
   Fair Value Measurement Using 
  
Total
December 31, 2012
  Quoted Prices in Active Markets for Identical Contracts (Level 1)  
Significant
Other Observable Inputs
(Level 2)
 
Interest rate swaps $(2,973) $–  $(2,973)
Commodity contracts $111  $–  $111 
   Fair Value Measurement Using 
  
Total
December 31, 2011
  Quoted Prices in Active Markets for Identical Contracts (Level 1)  
Significant
Other Observable Inputs
(Level 2)
 
Interest rate swaps $(5,268) $–  $(5,268)
Commodity Contracts $(373) $–  $(373)
Generac Holdings Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 2012, 2011, and 2010
(Dollars in Thousands, Except Share and Per Share Data)
Level 2. Significant Accounting Policies (continued)
The valuation techniques used to measure the fair value of derivative contracts, classified as level 2, all of which have counterparties with high credit ratings, were valued based on quoted market prices or model driven valuations using significant inputs derived from or corroborated by observable market data. The fair value of derivative contracts above considers the Company’s credit risk in accordance with ASC 820-10. Excluding the impact of credit risk, the fair value of derivatives at December 31, 2012 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.

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 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.

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 12 months. These are intended to offset the effect of price fluctuations on actual inventory purchases. There were one, two, and one outstanding commodity contracts in place to hedge its projected commodity purchases at December 31, 2012, 2011, and 2010, respectively. In October 2009, the Company entered into commodity swaps to purchase $1,432 of copper.  The swaps were effective from October 5, 2009, and terminated 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 forward 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.
Total losses or gains recognized in the consolidated statements of operations on commodity contracts were a gain of $386, a loss of $861, and a gain of $1,056 for the years ended December 31, 2012, 2011, and 2010, respectively.
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 year or less. There were no foreign currency hedge contracts outstanding as of December 31, 2012, 2011 or 2010. There was one Euro currency contract outstanding during 2010 that expired on December 31, 2010. A loss of $100 was recognized in the consolidated statements of operations for the year ended December 31, 2010 related to this Euro contract.
Generac Holdings Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 2012, 2011, and 2010
(Dollars in Thousands, Except Share and Per Share Data)
2. Significant Accounting Policies (continued)
Interest Rates
The Company has two interest rate swap agreements outstanding as of December 31, 2012 with a notional amount of $300,000.  The Company had four interest rate swap agreements outstanding as of December 31, 2011 with a notional amount of $300,000. In 2010, the Company entered into two interest rate swap agreements and had 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. The first was entered into on January 21, 2010. The effective date of this swap was July 1, 2010 with a notional amount of $200,000, a fixed LIBOR rate of 1.73% and an expiration date of July 1, 2012. The second was entered into on June 29, 2010. The effective date of that swap was October 1, 2010 with a notional amount of $100,000, a fixed LIBOR rate of 1.025% and an expiration date of October 1, 2012. The Company entered into two interest rate swap agreements on April 1, 2011. The effective date of the first swap is July 1, 2012 with a notional amount of $200,000, a fixed LIBOR rate of 1.905% and an expiration date of July 1, 2013. The effective date of the second swap is October 1, 2012 with a notional amount of $100,000, a fixed LIBOR rate of 2.22% and an expiration date of October 1, 2013.  Due to the incorporation of a new interest rate floor provision in 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 required 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 these swaps have been and will continue to be immediately recognized in the consolidated statements of comprehensive income as interest expense.
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)
The fair value of all derivatives not designated as hedging instruments is included in other current liabilities and other assets in the consolidated balance sheets as of December 31, 2012 and 2011, respectively.
The fair value of derivatives designated as hedging instruments included in other current liabilities and other long-term liabilities is $1,546 and $3,722, respectively, as of December 31, 2011.
The fair value of the derivative contracts considers the Company’s credit risk as of December 31, 2012 and 2011. The impact of credit risk on the fair value of derivative contracts at December 31, 2012 and 2011 was $74 and $139, respectively. Excluding the impact of credit risk, the fair value of the derivatives at December 31, 2012 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 those dates.
Generac Holdings Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 2012, 2011, and 2010
(Dollars in Thousands, Except Share and Per Share Data)
2. Significant Accounting Policies (continued)
The following presents the impact of interest rate swaps and commodity contracts on the consolidated statement of comprehensive income for the year ended December 31, 2012, 2011 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   $-   $- 
(1)  Periods prior to May 30, 2012
(2)  Period between May 30, 2012 and December 31, 2012
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.

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 processes and methods of distribution. The Company’s sales in the United States represent approximately 93%, 95%, and 95% of total sales for the years ended December 31, 2012, 2011 and 2010, respectively. Approximately 98%, 100% and 100% of the Company’s identifiable long-lived assets are located in the United States as of December 31, 2012, 2011 and 2010, respectively.
Generac Holdings Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 2012, 2011, and 2010
(Dollars in Thousands, Except Share and Per Share Data)
2. Significant Accounting Policies (continued)
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 
New Accounting Pronouncements

In December 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-12, “Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05”. In June 2011,May 2014, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income”2014-09,Revenue from Contracts with Customers. Both ASU’s are effective for annual reporting periods beginning after December 15, 2011, and both were adopted by the Company as of January 1, 2012. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. In addition, items of other comprehensive income that are reclassified to profit or loss are required to be presented separately on the face of the financial statements. This guidance is intendedthe culmination of the FASB’s joint project with the International Accounting Standards Board to increaseclarify the prominenceprinciples for recognizing revenue. The core principal of other comprehensive incomethe guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in financial statements by requiringan amount that such amountsreflects the consideration to which the entity expects to be presented eitherentitled in exchange for those goods or services. The guidance provides a single continuous statement of income and comprehensive income or separatelyfive-step process that entities should follow in consecutive statements of income and comprehensive income. ASU 2011-12 defers the changes in ASU 2011-05order to achieve that pertain to how, when and where reclassification adjustments are presented. The Company’s adoption of these standards did not have a material impact on the consolidated financial statements.

core principal. In July 2012,August 2015, the FASB issued ASU 2012-02, “Intangibles- Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets2015-14, which deferred the effective date of ASU 2014-09 for Impairment”an additional year, making the guidance effective for the Company in 2018. 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.

In April 2015, the FASB issued ASU 2015-03,Interest – Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs. This standardguidance is a part of the FASB’s initiative to reduce complexity in accounting standards, and requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the debt liability, consistent with debt discounts. The guidance should be applied on a retrospective basis, and is effective for annualthe Company in 2016. The Company expects that this guidance will only affect the classification of debt issuance costs on its balance sheets and interim indefinite-lived intangible asset impairment tests performedwill have no impact on its results of operations.

In September 2015, the FASB issued ASU 2015-16,Business Combinations: Simplifying the Accounting for fiscal years beginning after September 15, 2012,MeasurementPeriod Adjustments. This guidance eliminates the requirement for an acquirer to recognize measurement period adjustments retrospectively; rather an acquirer will recognize a measurement period adjustment during the period in which it determines the amount of the adjustment. The guidance should be applied on a prospective basis, and is effective for the Company in 2016, with early adoption permitted. This standard provides for an optional qualitative assessment forThe Company has early adopted this guidance in the testing of indefinite-lived intangible asset impairment to determine whether itcurrent year; however, there is more likely than not that such asset is impaired. If it is concluded that this is the case, it is necessary to perform the currently prescribed quantitative impairment test by comparing the fair value of the indefinite-lived intangible asset with its carrying value. Otherwise, the quantitative impairment test is not required. The Company’s adoption of this standard is not expected to have a materialno impact on the Company’s results of operations for year ended December 31, 2015 as there were no material measurement period adjustments.

In November 2015, the FASB issued ASU 2015-17,Income Taxes: Balance Sheet Classification of Deferred Taxes. This guidance is a part of the FASB’s initiative to reduce complexity in accounting standards, and requires that deferred tax liabilities and assets be classified as noncurrent in the consolidated financial statements.

balance sheets. The guidance may be applied on either a prospective or a retrospective basis, and is effective for the Company in 2017. The Company expects that this guidance will only affect classification and presentation of deferred tax liabilities and assets on its balance sheets and will have no impact on its 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.


53

Table of Contents3.    Acquisitions

Generac Holdings Inc.

Notes to Consolidated Financial Statements
Years Ended December 31, 2012, 2011, and 2010
(Dollars in Thousands, Except Share and Per Share Data)
3. Acquisitions
Acquisition of Ottomotores
CHP

On December 8, 2012,August 1, 2015, a subsidiary of the Company acquired allCHP for a purchase price, net of the sharescash acquired, of Ottomotores UK Limited and its affiliates, including the operations of Ottomotores Mexico and Ottomotores Brazil (collectively, “Ottomotores”).  Ottomotores was founded$74,570. Headquartered in 1950 and is located in Mexico City, Mexico and Curitiba, Brazil.  OttomotoresVergennes, Vermont, CHP is a leading manufacturer of high-quality, innovative, professional-grade engine powered equipment used in a wide variety of property maintenance applications, with sales primarily in North America. The acquisition purchase price was funded solely through cash on hand.

The Company recorded a preliminary purchase price allocation during the third quarter of 2015 based upon its estimates of the fair value of the acquired assets and assumed liabilities. As a result, the Company recorded approximately $81,726 of intangible assets, including approximately $30,076 of goodwill, as of the acquisition date. The purchase price allocation was updated in the Mexican marketfourth quarter of 2015, resulting in a $6,552 decrease to total intangible assets, including an increase of $6,208 in goodwill. The goodwill ascribed to this acquisition is not deductible for industrial diesel gensets ranging in sizetax purposes. In addition, the Company assumed $12,000 of debt along with this acquisition. The accompanying consolidated financial statements include the results of CHP from 15kW to 2,500kW and isAugust 1, 2015 through December 31, 2015.  

Acquisition of MAC

On October 1, 2014, a significant market participant throughout allsubsidiary of Latin America.


The cash paid at closing of $44,769,the Company acquired MAC for a purchase price, net of cash acquired, includedof $55,035. Headquartered in Bismarck, North Dakota, MAC is a preliminary estimateleading manufacturer of acquired working capital. This estimate will be finalized in 2013 to reflect actual working capital acquired, which will result in a change inpremium-grade commercial and industrial mobile heaters within the total purchase price. ThisUnited States and Canada. The acquisition was funded solely by existing cash.

through cash on hand.

The Company recorded a preliminary purchase price allocation during the fourth quarter of 20122014 based upon aits estimates of the fair value appraisal by a third party valuation firm.of the acquired assets and assumed liabilities. As a result, the Company recorded approximately $16,100$49,378 of intangible assets, including approximately $5,050$25,898 of goodwill, as of the acquisition date.

The 2012 consolidated financial statements include the results of Ottomotores from December 8, 2012 through December 31, 2012. In addition, transaction costs of approximately $1,062 are included in other expense in the consolidated statement of comprehensive income for the year ended December 31, 2012.

Acquisition of GenTran
On February 1, 2012, a subsidiary of the Company acquired substantially all of the assets and assumed certain liabilities of a leading transfer switch and portable generator accessory manufacturer (“GenTran”) for a purchase price, net of cash acquired of $2,275. The purchase price allocation was finalized during the secondthird quarter of 2012, and the Company recorded $1,200 of2015, resulting in a $4,229 decrease to total intangible assets, including approximately $495an increase of goodwill, as of the acquisition date.$2,481 to goodwill. The goodwill ascribed to this acquisition is not deductible for tax purposes. The acquisition is not material to the Company’saccompanying consolidated financial statements.

statements include the results of MAC from October 1, 2014 through December 31, 2015.

Acquisition of Magnum

Tower Light

On October 3, 2011,August 1, 2013, a subsidiary of the Company acquired substantially all of the assets and assumed certain liabilitiesshares of Magnum Products, LLC and certain of its affiliates (collectively, Magnum)Tower Light for a purchase price, net of cash acquired and inclusive of estimated earn-out payments, of approximately $85,490. The acquisition was funded solely by existing cash.


Magnum$85,812. Headquartered outside Milan, Italy, Tower Light is a leading developer and supplier of generator poweredmobile light towers mobile generatorsthroughout Europe, the Middle East, Africa and combination power units forAsia Pacific. Tower Light has built a variety of industries and specialties including construction, energy, mining, government, military, and special events.  Its products are distributed through international, national and regionalleading market position in the equipment rental companies, equipment dealersmarkets by leveraging its broad product offering and construction companies. strong global distribution network in over 50 countries worldwide.

The Magnum business is a strategic fit for the Company as it provides diversification within the existing business, with the introduction of new engine powered products and distribution channels, while also providing opportunities for future revenue and cost synergies.


Generac Holdings Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 2012, 2011, and 2010
(Dollars in Thousands, Except Share and Per Share Data)
3. Acquisitions (continued)
The purchase price of $85,490 consisted of $83,907 paid in cash at closing and $1,583 recorded as an estimated liability to the sellers for contingent consideration based upon future performance of a particular product line currently in development, as described below. Thenet cash paid at closing was $80,239 and included a cash deposit of $6,645 into an estimateescrow account to fund future earn-out payments required by the purchase agreement. The earn-out payment of acquired working capital. This estimate$7,641 was finalized in 2012 to reflect actual working capital acquired, resulting in a $75 negative adjustment to the $20,337 of goodwill recorded for this transaction during the fourth quarter of 2011. The goodwill ascribed to this acquisition is deductible for tax purposes.

The Company recorded a purchase price allocation during the fourth quarter of 2011 based on a fair value appraisal by a third party valuation firm. A summary of the fair values assigned to the acquired assets is as follows:

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 

Under the acquisition agreement, the purchase price may be increased based upon the performance of a particular product line for the years 2012 through the second quarter of 2017.  Based on performance projections available at the date2014, resulting in a gain of the acquisition, the Company$4,877, which was recorded estimated contingent consideration of $1,583 which is the net present value of the estimated earn-out. The contingent consideration is payable periodically during 2012 through 2017, based upon actual future performance. As of December 31, 2011, there had been no changes to our original estimates.  Due primarily to the accretion from the passage of time, the contingent consideration liability balance increased to $1,656 as of December 31, 2012.

The 2011 consolidated financial statements include the results of Magnum from October 3, 2011 through December 31, 2011. The acquisition contributed $38,817 and $3,353 of net sales and net income, respectively, for the period from October 3, 2011 to December 31, 2011. The 2012 consolidated financial statements include the results of Magnum for the full year. Transaction costs of approximately $876 are included in other expense in the consolidated statement of comprehensive income for the year ended December 31, 2011.2014. 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. The purchase price allocation was finalized during the fourth quarter of 2013, resulting in an increase of $9,328 to goodwill. 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, 2015.

4.     Derivative Instruments and Hedging Activities

Commodities

The Company is exposed to significant price fluctuations in commodities it uses as raw materials, and periodically utilizes commodity derivatives to mitigate the impact of these potential price fluctuations on its financial results and its economic well-being. These derivatives typically have maturities of less than eighteen months. At December 31, 2015 and 2014, the Company had one and three commodity contracts outstanding, respectively, covering the purchases of copper.

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

Foreign Currencies

The Company is exposed to foreign currency exchange risk as a result of transactions denominated in other currencies. The Company periodically utilizes foreign currency forward purchase and sales contracts to manage the volatility associated with certain foreign currency purchases in the normal course of business. Contracts typically have maturities of twelve months or less. As of December 31, 2015 and 2014, the Company had six foreign currency contracts outstanding.

Because these contracts do not qualify for hedge accounting, the related gains and losses are recorded in cost of goods sold in the Company’s consolidated statements of comprehensive income. Net losses recognized for the years ended December 31, 2015, 2014 and 2013 were $624, $149 and $56, respectively.

Interest Rate Swaps

As of May 30, 2012, the Company had four interest rate swap agreements outstanding. Due to the incorporation of a new interest rate floor provision in the then new credit agreement, which constituted a change in critical terms, the Company concluded that as of May 30, 2012, the then outstanding swaps would no longer be highly effective in achieving offsetting changes in cash flows during the periods the hedges were designated. As a result, the Company was required to de-designate the four outstanding hedges as of May 30, 2012. Beginning May 31, 2012, the effective portion of the swaps prior to the change (i.e. amounts previously recorded in Accumulated Other Comprehensive Loss (AOCL)) were amortized into interest expense over the period of the originally designated hedged transactions which had various termination dates through October 2013. The amount reclassified from AOCL to interest expense on the consolidated statement of comprehensive income for the year ended December 31, 2013 was a loss of $2,381. Future changes in fair value of these swaps were immediately recognized in the consolidated statements of comprehensive income as interest expense, which was a gain of $2,973 for the year ended December 31, 2013.

On October 23, 2013, the Company entered into two interest rate swap agreements, and on May 19, 2014, the Company entered into an additional interest rate swap agreement. The Company formally documented all relationships between interest rate hedging instruments and the related hedged items, as well as its risk-management objectives and strategies for undertaking various hedge transactions. These interest rate swap agreements qualify as cash flow hedges, and accordingly, the effective portions of the gains or losses are reported as a component of AOCL. The cash flows of the swaps are recognized as adjustments to interest expense each period. The ineffective portions of the derivatives’ changes in fair value, if any, are immediately recognized in earnings.

Fair Value

The following unaudited pro forma information has been prepared as iftable presents the Magnum acquisition had been consummated at January 1, 2010. This information is presented for informational purposes only, and is not necessarily indicativefair value of the operating results that would have occurred ifCompany’s derivatives:

  

December 31,
2015

  

December 31,
2014

 

Commodity contracts

 $(400) $(515)

Foreign currency contracts

  (171)  (149)

Interest rate swaps

  (2,618)  (1,045)

The fair value of the acquisitions had been consummatedcommodity and foreign currency contracts are included in other accrued liabilities, and the fair value of the interest rate swaps is included in other long-term liabilities in the consolidated balance sheets as of that date. This information shouldDecember 31, 2015 and 2014. Excluding the impact of credit risk, the fair value of the derivative contracts as of December 31, 2015 and 2014 is a liability of $3,248 and $1,727, respectively, which represents the amount the Company would need to pay to exit the agreements on those dates.

The amount of gains (losses) recognized in AOCL in the consolidated balance sheets on the effective portion of interest rate swaps designated as hedging instruments for the years ended December 31, 2015, 2014 and 2013 were $(965), $(1,420) and $774, respectively. The amount of losses recognized in cost of goods sold in the consolidated statements of comprehensive income for commodity and foreign currency contracts not be useddesignated as a predictive measure of our future financial position, results of operations, or liquidity.hedging instruments for the years ended December 31, 2015, 2014 and 2013 were $2,533, $778 and $661, respectively.



  Year ended December 31, 
  2011  2010 
Net sales $897,892  $681,278 
Net income  334,076   68,369 
 
55

Table5.     Accumulated Other Comprehensive Loss

The following presents a tabular disclosure of Contentschanges in AOCL during the years ended December 31, 2015 and 2014, net of tax:

  

Foreign

Currency

Translation

Adjustments

  

Defined

Benefit

Pension Plan

  

Unrealized

Loss on Cash

Flow Hedges

  

Total

 
                 

Beginning Balance – January 1, 2015

 $(1,878) $(13,243) $(646) $(15,767)

Other comprehensive income (loss) before reclassifications

  (7,624)  1,105(1)  (965)(2)  (7,484)

Amounts reclassified from AOCL

  -   776(3)  -   776 

Net current-period other comprehensive income (loss)

  (7,624)  1,881   (965)  (6,708)

Ending Balance – December 31, 2015

 $(9,502) $(11,362) $(1,611) $(22,475)

  

Foreign

Currency

Translation

Adjustments

  

Defined

Benefit

Pension Plan

  

Unrealized

Gain (Loss) on

Cash Flow

Hedges

  

Total

 
                 

Beginning Balance – January 1, 2014

 $1,204  $(4,393) $774  $(2,415)

Other comprehensive loss before reclassifications

  (3,082)  (8,922)(4)  (1,420)(5)  (13,424)

Amounts reclassified from AOCL

  -   72(6)  -   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)

(1)

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

(2)

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

(3)

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

(4)

Represents unrecognized actuarial losses of $(14,614), net of tax benefit of $5,692, included in the computation of net periodic pension cost for the year ended December 31, 2014. See Note 14, “Benefit Plans,” to the consolidated financial statements for additional information.

(5)

Represents unrealized losses of $(2,279), net of tax benefit of $859 for the year ended December 31, 2014.

(6)

Represents actuarial losses of $106, net of tax effect of $(34), amortized to net periodic pension cost for the year ended December 31, 2014. See Note 14, “Benefit Plans,” to the consolidated financial statements for additional information.

6.     Segment Reporting

The Company has multiple operating segments, which it aggregates into a single reportable segment, based on materially similar economic characteristics, products, production processes, classes of customers and distribution methods. The single reportable segment is the design and manufacture of a wide range of engine power products. The Company’s sales in the United States represent approximately 85%, 84%, and 88% of total sales for the years ended December 31, 2015, 2014 and 2013, respectively. Approximately 93% and 91% of the Company’s identifiable long-lived assets are located in the United States as of December 31, 2015 and 2014, respectively.

 
Generac Holdings Inc.51
Table Of Contents
Notes to Consolidated Financial Statements
Years Ended December 31, 2012, 2011,

The Company's product offerings consist primarily of power products with a range of power output geared for varying end customer uses. Residential products and 2010

(Dollars in Thousands, Except Sharecommercial & industrial products are each a similar class of products based on similar power output and Per Share Data)end customer. The breakout of net sales between residential, commercial & industrial, and other products is as follows:

  

Year Ended December 31,

 
  

2015

  

2014

  

2013

 
             

Residential products

 $673,764  $722,206  $843,727 

Commercial & industrial products

  548,440   652,216   569,890 

Other

  95,095   86,497   72,148 

Total

 $1,317,299  $1,460,919  $1,485,765 

4.

7.     Balance Sheet Details

Inventories consist of the following:

  

December 31,

 
  

2015

  

2014

 
         

Raw material

 $188,354  $184,407 

Work-in-process

  2,856   8,798 

Finished goods

  144,747   135,567 

Reserves for excess and obsolete

  (10,582)  (9,387)

Total

 $325,375  $319,385 
  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 

As of December 31, 20122015 and 2011,2014, inventories totaling $4,401$11,253 and $1,736,$12,497, respectively, were on consignment at customer locations.

Property and equipment consists of the following:

  

December 31,

 
  

2015

  

2014

 
         

Land and improvements

 $8,553  $7,803 

Buildings and improvements

  104,774   102,254 

Machinery and equipment

  72,280   65,240 

Dies and tools

  20,066   16,897 

Vehicles

  1,244   1,383 

Office equipment and systems

  29,395   21,990 

Leasehold improvements

  3,338   2,535 

Construction in progress

  30,482   20,120 

Gross property and equipment

  270,132   238,222 

Accumulated depreciation

  (85,919)  (69,401)

Total

 $184,213  $168,821 

  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 
Other accrued liabilities consist

8.     Goodwill and Intangible Assets

The changes in the carrying amount of goodwill for the following:years ended December 31, 2015 and 2014 are as follows:

  

Year Ended December 31, 2015

  

Year Ended December 31, 2014

 
  

Gross

  

Accumulated Impairment

  

Net

  

Gross

  

Accumulated Impairment

  

Net

 

Balance at beginning of year

 $1,138,758  $(503,193) $635,565  $1,111,480  $(503,193) $608,287 

Acquisitions of businesses, net

  38,765   -  $38,765   27,278   -  $27,278 

Impairment

  -   (4,611)  (4,611)  -   -   - 

Balance at end of year

 $1,177,523  $(507,804) $669,719  $1,138,758  $(503,193) $635,565 
  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 

 
Generac Holdings Inc.52
Table Of Contents
Notes

See Note 3, “Acquisitions,” to Consolidated Financial Statements

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

The following table summarizes intangible assets by major category as of December 31, 2012, 2011,2015 and 20102014:

  

Weighted

Average

  

December 31, 2015

  

December 31, 2014

 
  

Amortization

Years

  

Cost

  

Accumulated Amortization

  

Amortized Cost

  

Cost

  

Accumulated Amortization

  

Amortized Cost

 

Finite-lived intangible assets:

                            

Tradenames

  7  $43,252  $(10,516) $32,736  $8,775  $(8,775) $- 

Customer lists

  9   314,600   (275,287)  39,313   304,180   (263,178)  41,002 

Patents

  14   126,491   (72,719)  53,772   121,341   (64,447)  56,894 

Unpatented technology

  15   13,169   (11,628)  1,541   13,169   (10,435)  2,734 

Software

  9   1,046   (1,042)  4   1,046   (1,037)  9 

Non-compete/other

  9   1,731   (508)  1,223   1,961   (406)  1,555 

Total finite-lived intangible assets

     $500,289  $(371,700) $128,589  $450,472  $(348,278) $102,194 

Indefinite-lived tradenames

      128,321   -   128,321   182,684   -   182,684 

Total intangible assets

     $628,610  $(371,700) $256,910  $633,156  $(348,278) $284,878 
(Dollars

See Note 2, “Significant Accounting Policies – Goodwill and Other Indefinite-Lived Intangible Assets,” to the consolidated financial statements for further information regarding the Company’s 2015 brand strategy change and resulting tradename impairment charge.

Amortization of intangible assets was $23,591, $21,024 and $25,819 in Thousands, Except Share2015, 2014 and Per Share Data)

4. Balance Sheet Details (continued)
Other long-term liabilities consist2013, respectively. Excluding the impact of any future acquisitions, the following:Company estimates amortization expense for the next five years will be as follows: 2016 - $29,184; 2017 - $25,832; 2018 - $15,535; 2019 - $13,835; 2020 - $13,762.

  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 

5.9.     Product Warranty Obligations

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

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

  

Year Ended December 31,

 
  

2015

  

2014

  

2013

 
             

Balance at beginning of year

 $30,909  $33,734  $36,111 

Product warranty reserve assumed in acquisition

  351   360   600 

Payments

  (21,686)  (20,975)  (19,084)

Provision for warranties issued

  20,823   22,890   33,707 

Changes in estimates for pre-existing warranties

  (200)  (5,100)  (17,600)

Balance at end of year

 $30,197  $30,909  $33,734 

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

  

Year Ended December 31,

 
  

2015

  

2014

  

2013

 
             

Balance at beginning of year

 $27,193  $23,092  $13,474 

Deferred revenue contracts assumed in acquisition

  291   -   - 

Deferred revenue contracts sold

  5,978   7,343   11,998 

Amortization of deferred revenue contracts

  (4,501)  (3,242)  (2,380)

Balance at end of year

 $28,961  $27,193  $23,092 

 
Changes in product warranty obligations are as follows:53
Table Of Contents
 
  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,

 
  

2015

  

2014

 

Product warranty liability

        

Current portion - other accrued liabilities

 $21,726  $24,143 

Long-term portion - other long-term liabilities

  8,471   6,766 

Total

 $30,197  $30,909 
         

Deferred revenue related to extended warranty

        

Current portion - other accrued liabilities

 $6,026  $4,519 

Long-term portion - other long-term liabilities

  22,935   22,674 

Total

 $28,961  $27,193 

  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 

Generac Holdings Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 2012, 2011, and 2010
(Dollars in Thousands, Except Share and Per Share Data)
6.10.   Credit Agreements
The revolving credit facilities and credit agreements discussed below were outstanding for all periods presented. 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 consolidated balance sheets as follows:

  

December 31,

 
  

2015

  

2014

 
         

ABL facility

 $-  $- 

Other lines of credit

  8,594   5,359 

Total

 $8,594  $5,359 
  December 31, 
  2012  2011 
ABL facility $-  $- 
Other lines of credit, as described below  12,550   - 
  $12,550  $- 

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

  

December 31,

 
  

2015

  

2014

 
         

Term loan

 $954,000  $1,104,000 

Original issue discount

  (16,940)  (23,861)

ABL facility

  100,000   - 

Capital lease obligation

  1,694   2,059 

Other

  12,000   460 

Total

  1,050,754   1,082,658 

Less: current portion of debt

  500   389 

Less: current portion of capital lease obligation

  157   168 

Total

 $1,050,097  $1,082,101 
  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 

Maturities of long-term borrowings outstanding at December 31, 2012,2015, are as follows:

Year

    

2016

 $657 

2017

  11,666 

2018

  172 

2019

  177 

After 2019

  1,055,022 

Total

 $1,067,694 
Year   
2012 $- 
2013  - 
2014  - 
2015  - 
After 2015  799,018 
Total $799,018 

On February 11,May 31, 2013, the Company made an $80,000 voluntary prepayment of debt with available cash on hand that was applied to both the required excess cash flow payment and all required future principal amortizations.  The Company classified this portion of debt as a current liability in the consolidated balance sheet at December 31, 2012.


For all years presented, the Company had credit agreements which provided for borrowings under a revolving credit facility (the Revolving Credit Facility), and term loans (collectively, the Credit Agreements), which are described further below. The Credit Agreements of the Company were secured by the associated collateral agreements which pledged virtually all assets of the Subsidiary.
On February 9, 2012, a subsidiary of the Company (the “Borrower” or “Generac Power Systems”) entered into a new 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 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. 

Generac Holdings Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 2012, 2011, and 2010
(Dollars in Thousands, Except Share and Per Share Data)
6. Credit Agreements (continued)
On May 30, 2012, the Borrower amended and restated its then existing Credit Agreementterm loan credit agreement (Previous Term Loan) by entering into a new term loan credit agreement (“Term Loan Credit Agreement”)(Term Loan) with certain commercial banks and other lenders. The Term Loan Credit Agreement provides for a $900,000$1,200,000 term loan B credit facility (“Term Loan”) and includes a $125,000$300,000 uncommitted incremental term loan facility. The Term Loan Credit Agreement matures on May 30, 2018.31, 2020. Proceeds from the Term Loan were used to repay amounts outstanding under the Company’s previous Credit Agreement. The remaining proceeds from thePrevious Term Loan were used, along with cash on hand,and to payfund a special cash dividend of $6.00$5.00 per share on the Company’s common stock (see(See Note #13 – Special17, “Special Cash Dividend)Dividend” to the consolidated financial statements for additional details). Remaining funds from the Term Loan were used for general corporate purposes and to pay related financing fees and expenses. The Term Loan is guaranteed by all of the Company’s wholly-owned domestic restricted subsidiaries, and is secured by associated collateral agreements which pledge a first priority lien on virtually all of the Company’s assets, including fixed assets and intangibles, other than all cash, trade accounts receivable, inventory, and other current assets and proceeds thereof, which are secured by a second priority lien. The Term Loan initially bore interest at rates based upon either a base rate plus an applicable margin of 1.75% or adjusted LIBOR rate plus an applicable margin of 2.75%, subject to a LIBOR floor of 0.75%. Beginning in the second quarter of 2014, and measured each quarterly period thereafter, the applicable margin related to base rate loans is reduced to 1.50% and the applicable margin related to LIBOR rate loans is reduced to 2.50% to the extent that the Company’s net debt leverage ratio, as defined in the Term Loan, falls below 3.00 to 1.00 for that measurement period.

Because the Company’s net debt leverage ratio was below 3.00 to 1.00 on April 1, 2014, it realized a 25 basis point reduction in borrowing costs in the second quarter of 2014. As a result, the Company recorded a catch-up gain of $16,014 in the second quarter of 2014 which represents the total cash interest savings over the remaining term of the loan, as the Company projected the net debt leverage ratio to remain below 3.00 to 1.00. The gain was recorded as original issue discount on long-term borrowings in the consolidated balance sheets.

Because the Company’s net debt leverage ratio was above 3.00 to 1.00 on July 1, 2015, it realized a 25 basis point increase in borrowing costs in the third quarter of 2015. As a result, the Company recorded a catch-up loss of $2,381 in the third quarter of 2015, which represents the additional cash interest expected to be paid while the net debt leverage ratio is forecasted to be above 3.00 to 1.00. The loss was recorded against original issue discount on long-term borrowings in the consolidated balance sheets. The Company’s net debt leverage ratio as of December 31, 2015 was above 3.00 to 1.00.

On May 18, 2015, the Company amended certain provisions and covenants of the Term Loan. In connection with this amendment and in accordance with ASC 470-50,Debt Modifications and Extinguishments, the Company capitalized $1,528 of fees paid to creditors as original issue discount on long-term borrowings and expensed $49 of transaction fees in the second quarter of 2015. As of December 31, 2015, the Company is in compliance with all covenants of the Term Loan. There are no financial maintenance covenants on the Term Loan.

Concurrent with the closing of the Term Loan Credit Agreement, on May 30, 2012,31, 2013, the Borrower also entered into a new revolvingCompany amended its then existing ABL credit agreement (the “ABL Credit Agreement”) with certain commercial banks and other lenders.agreement. The ABL Credit Agreementamendment provides for borrowings under a one year extension of the maturity date on the $150,000 senior secured ABL revolving credit facility (the “ABL Facility”)(ABL Facility). The sizeextended maturity date of the ABL Facility could increase by $50,000 pursuant to an uncommitted incremental credit facility. The ABL Credit Agreement matureswas May 30, 2017.


31, 2018. Borrowings under the ABL Facility are guaranteed by all of the Borrower’sCompany’s wholly-owned domestic restricted subsidiaries, and the Parent, and are secured by associated collateral agreements which pledge a first priority lien on all cash, trade accounts receivable, inventory, and other current assets and proceeds thereof, and a second priority lien on all other assets, including fixed assets and intangibles of the Borrower,Company and certain domestic subsidiaries of the Borrower and the guarantors (other than the Company).
Borrowings under thesubsidiaries. ABL Facility bearborrowings initially bore interest at rates based upon either a base rate plus an applicable margin of 1.00% or adjusted LIBOR rate plus an applicable margin of 2.00%, in each case, subject to adjustments based upon average availability under the ABL Facility.

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

On May 29, 2015, the lesser of the aggregate commitments and the applicable borrowing baseCompany borrowed $100,000 under the Amended ABL Facility, or (ii) $10,000. The ABL Credit Agreement also contains covenants and eventsthe proceeds of default substantially similar to those inwhich were used as a voluntary prepayment towards the Term Loan Credit Agreement, as described below.  The Company is required to pay an ABL Facility commitment fee of 0.50% on the average available unused commitment.Loan. As of December 31, 2012, the Company had $147,036 of availability2015, there was $100,000 outstanding under the Amended ABL facility,Facility, leaving $148,500 of availability, net of outstanding letters of credit.

On February 11 and May 2, 2013, the Company made voluntary prepayments of the Previous Term Loan of $80,000 and $30,000, respectively, with available cash on hand that was applied to future principal amortizations on the Previous Term Loan. As a result of the prepayments, the Company wrote off $2,763 of original issue discount and capitalized debt issuance costs during the year ended December 31, 2013 as a loss on extinguishment of debt in the consolidated statement of comprehensive income.

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

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

On March 30 and May 29, 2015, the Company made voluntary prepayments of the Term Loan of $50,000 and $100,000, respectively, which will be applied to the Excess Cash Flow payment requirement in the Term Loan. As a result of the prepayments, the Company wrote off $4,795 of original issue discount and capitalized debt issuance costs during the year ended December 31, 2015 as a loss on extinguishment of debt in the condensed consolidated statement of comprehensive income.

As of December 31, 2012, the Company’s interest rate on the ABL Facility was 1.96%.  There were no borrowings outstanding under the ABL Facility as of2015 and December 31, 2012.


The ABL Credit Agreement provides the Company the ability to issue letters of credit. Outstanding undrawn letters of credit reduced availability under the Company’s ABL Facility. The letters of credit accrued interest at a rate of 1.88%, paid quarterly on the undrawn daily aggregate exposure of the preceding quarter. This rate is subject to meeting certain financial ratios. At December 31, 2012 and 2011, letters of credit outstanding were $2,964 and $5,809, and interest rates were 1.88% and 2.13% respectively.
As of December 31, 2012,2014, short-term borrowings consisted primarily consisted of borrowings by our foreign subsidiaries on local lines of credit, which totaled $12.5 million at a weighted average interest rate of approximately 2.20%.
The Term Loan is guaranteed by all of the Borrower’s wholly-owned domestic restricted subsidiaries$8,594 and the Parent, and is secured by associated collateral agreements which pledge a first priority lien on virtually all of the Borrower’s assets, including fixed assets and intangibles, and the assets of the guarantors (other than the Company), other than all cash, trade accounts receivable, inventory, and other current assets and proceeds thereof, which are secured by a second priority lien.$5,359, respectively.


The Term Loan amortizes in equal installments of 0.25% of the original principal amount of the Term Loan payable on the first day of April, July, October and January commencing on October 1, 2012 until the maturity date of the Term Loan. The final principal repayment installment of the 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 Loan initially bears interest at rates based upon either a base rate plus an applicable margin of 4.00% or adjusted LIBOR rate plus an applicable margin of 5.00%, subject to a LIBOR floor of 1.25%11.  At December 31, 2012 and 2011Stock Repurchase Program

On August 5, 2015, the Company’s interest rate was 6.25% and 2.80%, respectively.


The Term Loan Credit Agreement restrictsBoard of Directors approved a $200,000 stock repurchase program. Under the circumstances in which the Borrower can pay distributions and dividends, which are in addition to those to be paid in connection with the Transactions (as defined in the Term Loan Credit Agreement). Payments can be made by the Borrower toprogram, the Company or other parent companies for certain expenses such as operating expenses in the ordinary course, fees and expenses relatedmay repurchase up to any debt or equity offering and to pay franchise or similar taxes. Dividends can be used to repurchase equity interests, subject to limitations in certain circumstances. Additionally, the Term Loan 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) compliance with certain fixed charge coverage ratios in order to pay certain dividends or distributions. The Term Loan Credit Agreement also contains certain other affirmative and negative covenants that, among other things, provide limitations on 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’s organizational documents. The 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.
Generac Holdings Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 2012, 2011, and 2010
(Dollars in Thousands, Except Share and Per Share Data)

6. Credit Agreements (continued)
The 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 Term Loan Credit Agreement). A bankruptcy or insolvency event of default causes such obligations to automatically become immediately due and payable.

Prior to entering into the new credit agreement on February 9, 2012, and the subsequent amendment and restatement on May 30, 2012 the Company had (i) a first lien credit facility with Goldman Sachs Credit Partners L.P., as administrative agent, composed of (x) a $950,000 term loan, which was scheduled to mature in November 2013 and (y) a $150,000 revolving credit facility, which was scheduled to mature in November 2012, and (ii) a second lien credit facility with JP Morgan Chase Bank, N.A., as administrative agent, composed of a $430,000 term loan, which was scheduled to mature in May 2014.

The principal amount of and the outstanding balance under the Term Loan was $881,268 and $597,874, net of loans held in treasury by the Company, at December 31, 2012 and 2011, respectively. In addition to scheduled principal payments, the Term Loan requires an excess cash flow payment each year. The required excess cash flow payment is the amount by which 50% of the excess cash flow (as defined in the credit agreement) generated by the Company in any given year exceeds the principal payments made during that year, subject to certain leverage ratio requirements. The excess cash flow payment is scheduled to be due 125 days after year-end.  For the year ending December 31, 2012, based on the calculation, including voluntary prepayments made prior to the excess cash flow payment date, the Company was not required to make an excess cash flow payment. For the year ending December 31, 2011, as a result of refinancing the Credit Agreement on February 9, 2012, the Company was not required to make an excess cash flow payment. For the year ending December 31, 2010, based on the calculation, the Company was not required to make an excess cash flow payment.
In 2010, the Company used net proceeds from its initial public offering and a substantial portion$200,000 of its cash and cash equivalents to pay down debt.  In February 2010, the Company used $221,622 in net proceeds from the initial public offering to pay down the second lien term loan in full and to pay down a portion of the first lien term loan. In addition, in March 2010, December 2010, April 2011, December 2011 and February 2012 the Company used $138,495, $74,194, $24,731, $34,624 and $22,874 respectively, of cash and cash equivalents on hand to further pay down principal.
Due to the incorporation of a new interest rate floor provision in the Term Loan Credit Agreement, which constitutes a change in critical terms, the Company concluded that as of May 30, 2012, the outstanding interest rate 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 required 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 condensed consolidated statements of comprehensive income as interest expense.
7. Redeemable Stock and Stockholders’ Equity (Deficit)
Between November 2006 and February 2010, certain of the current equity investors (affiliates of CCMP Capital Advisors, LLC and related entities, certain other investors, certain members of management of the Subsidiary and board of directors of the Company) had previously acquired a combination of Class A and Class B Common stock and Series A Preferred stock of the Company. General terms of these securities are:

Preferred stock

Series A Convertible Preferred stock:    Each Series A Preferred share was entitled to a priority return preference equal to the sum of $10,000 per share base amount plus an amount sufficient to generate a 14% annual return on that base amount compounded quarterly from the date of issuance until the accreted priority return preference was paid in full. Each Series A Preferred share also participated in any equity appreciation beyond the Series A Preferred priority return (the Series A Equity Participation).

Voting:    Series A Preferred shares did not have voting rights, subject to certain limited approval rights.

Distributions:    Dividends and other distributions to stockholders in respect of shares, whether as part of an ordinary distribution of earnings, as a leveraged recapitalization or in the event of an ultimate liquidation and distribution of available corporate assets were to be paid to Series A Preferred stockholders as follows: Series A Preferred shares were entitled to receive an amount equal to the Series A Preferred base amount of $10,000 per share plus an amount sufficient to generate a 14% annual return on that base amount, compounded quarterly from the date in which the Series A Preferred shares were originally issued. Series A Preferred shares were then entitled to receive an equity participation on all remaining proceeds after payment of this priority return to all Series A Preferred stockholders equal to 24.3% of remaining proceeds (Series A Equity Participation). No distribution would be made to any holder of common stock until the Series A Preferred stockholders had received all distributions to which they were entitled as previously described. After such distributions were made to the Series A Preferred stockholders, the holders of common stock were entitled to receive any remaining payments or distributions in accordance with their respective priorities.
Generac Holdings Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 2012, 2011, and 2010
(Dollars in Thousands, Except Share and Per Share Data)

7. Redeemable Stock and Stockholders’ Equity (Deficit)(continued)
Liquidations:    Distributions in connection with any liquidation or change of control transaction would be made in accordance with the distributions described above. No distribution would be made to any holder of common stock until the Series A Preferred stockholders had received all distributions to which they were entitled as described above. After such distributions were made to the Series A Preferred stockholders, the holders of common stock would be entitled to receive any remaining payments or distributions in accordance with their respective priorities.

Conversion:    Series A Preferred shares automatically converted into Class A common shares at the time of the initial public offering (IPO). Any unpaid Series A preferred return (base $10,000 per share plus 14% accretion) was converted into additional Class A common shares valued at the IPO price net of underwriter's discount. That is, each Series A Preferred share was converted into a number of Class A common shares equal to (i) a fraction, the numerator of which is the unpaid priority return on such Series A Preferred share and the denominator of which is the value of a Class A common share at the time of conversion plus (ii) the number of Class A common shares required to be issued to satisfy the Series A Equity Participation. The number of shares of Class A common stock which were issued upon conversion of the Series A Preferred was dependent upon the initial public offering price of the Class A common stock on the date of conversion as well as the unpaid priority return of the Series A Preferred stock.

The Series A Preferred were redeemable in a deemed liquidation in the event of a change of control. The redemption features were considered to be outside the control of the Company and therefore, all shares of Series A Preferred stock were recorded outside of permanent equity in accordance with guidance originally issued under EITF Topic D-98, Classification and Measurement of Redeemable Securities (codified under Accounting Standards Codification 480, Distinguishing Liabilities from Equity). Until the time of the IPO, no adjustment to the carrying value of the Series A Preferred stock securities had been recorded, and the priority returns had not been accreted as a change of control was not probable.

Common stock

Class B Convertible common stock:    Class B shares participated in the equity appreciation after the Series A Preferred priority return was satisfied. Each Class B share was entitled to a priority return preference equal to the sum of $10,000 per share base amount plus an amount sufficient to generate a 10% annual return on that base amount compounded quarterly from the date of issue until the Class B priority return preference is paid in full. Each Class B share also participated in any equity appreciation beyond the Class B priority return.

Voting:    Each Class B share was entitled to one vote per share on all matters on which stockholders voted.

Class A common stock:    Class A shares participated in the equity appreciation after the Class B priority return was satisfied.

Class A shares did not have voting rights, priority preference or any accretion rights.
Generac Holdings Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 2012, 2011, and 2010
(Dollars in Thousands, Except Share and Per Share Data)

7. Redeemable Stock and Stockholders’ Equity (Deficit)(continued)
Distributions:    After payment of the priority return to Series A Preferred stockholders previously described above under Preferred Stock, dividends and other distributions that remain available to stockholders in respect of shares, whether as part of an ordinary distribution of earnings, as a leveraged recapitalization or in the event of an ultimate liquidation and distribution of available corporate assets, were to be paid to the common stockholders as follows: Class B shares were entitled to receive an amount equal to the Class B base amount of $10,000 per share plus an amount sufficient to generate a 10% annual return on that base amount, compounded quarterly from the date in which the Class B shares were originally issued. After payment of this priority return to Class B holders, the holders of Class A shares and Class B shares participated together equally and ratably in any and all distributions by the Company.

Liquidations:    Distributions made in connection with any liquidation or change of control transaction would be made in accordance with the distributions previously described above in the preceding paragraph. In addition, any remaining assets after the Class B preferential distribution would be allocated to the Class A and Class B shares as follows: the Class B shares would receive a percentage of the remaining assets equal to the sum of (i) 88% plus (ii) the product of (A) 12% multiplied by (B) one minus a fraction, the numerator of which is the number of issued and outstanding vested shares of Class A shares and the denominator is 9,350.0098. The remainder would be allocated to the Class A shares.

Conversion:    Class B shares automatically converted into Class A shares immediately prior to the IPO. Any unpaid Class B Common priority return (base $10,000 per share plus 10% accretion) was "paid" in additional Class A common shares valued at the IPO price net of underwriter's discount. That is, each Class B share converted into a number of Class A shares required to be issued to satisfy the Class B Common priority return. Each Class B share converted into a number of Class A shares equal to (i) one plus (ii) a fraction, the numerator of which was the unpaid priority return on such Class B share and the denominator of which was the value of a Class A share at the time of conversion, in all cases subject to the priority rights and preferences of the Series A Preferred Shares. The number of shares of Class A common stock which were issued upon conversion of the Class B common stock was dependent upon the initial public offering price of the Class A common stock on the date of conversion as well as the unpaid priority return of the Class B common stock.

The Class B common were redeemable in a deemed liquidation in the event of a change of control. The redemption features were considered to be outside the control of the Company and therefore, all shares of Class B common stock were recorded outside of permanent equity in accordance with guidance originally issued under EITF Topic D-98, Classification and Measurement of Redeemable Securities (codified under Accounting Standards Codification 480, Distinguishing Liabilities from Equity).  Until the time of the IPO, no adjustment to the carrying value of Class B Common stock securities had been recorded, and the priority returns had not been accreted as a change of control was not probable.
Accretion: Cumulative accretion on Series A preferred stock and Class B common stock at the time of the IPO on February 17, 2010, was as follows:
  
Series A
Preferred
  
Class B
Common
 
Carrying value $113,109  $765,096 
Cumulative accretion  17,006   286,299 
  $130,115  $1,051,395 

The amounts above do not include the additional base amount of $25,790 on Class B common stock or the impact of Series A Equity Participation of $114,900 on Series A Preferred stock, both of which were recognized as a beneficial conversion at the time of the initial public offering.
The Company determined that the conversion feature in the Class B Common stock was in-the-money at the date of issuance and therefore represented a beneficial conversion feature. Since the Class B Common stock was convertible upon an initial public offering, the beneficial conversion was contingent upon a future event and had not been recorded in the consolidated financial statements prior to the IPO. The beneficial conversion feature, which was valued at $25,790 at its commitment date, was recorded at the completion of the IPO on February 10, 2010 as a return to Class B Common stockholders analogous to a dividend. Since no retained earnings were available to pay this dividend at resolution of the contingency, the dividend was charged against additional paid in capital resulting in no net impact.

Management Equity Incentive Plan:    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 Class A Common shares and 5,000 Class B Common shares, subject to certain adjustments. On November 10, 2006, andover 24 months from time to time, thereafter, certain membersin amounts and at prices the Company deems appropriate, subject to market conditions and other considerations. The repurchase may be executed using open market purchases, privately negotiated agreements or other transactions. The actual timing, number and value of shares repurchased under the program will be determined by management purchased restrictedat its discretion and will depend on a number of factors, including the market price of the Company’s shares of Class A Commoncommon stock underand general market and economic conditions, applicable legal requirements, and compliance with the 2006 Equity Incentive Plan for $341 per share and pursuant to restricted stock agreements. One halfterms of the restricted shares vested overCompany’s outstanding indebtedness. The stock repurchase program may be suspended or discontinued at any time (Time Vesting Shares), with 25% vesting on November 10, 2007 and onwithout prior notice. For the next three anniversaries thereafter, so long as the participant was still employed byyear ended December 31, 2015, the Company or onerepurchased 3,303,500 shares 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 other half of the 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 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.
Generac Holdings Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 2012, 2011, and 2010
(Dollars in Thousands, Except Share and Per Share Data)
7. Redeemable Stock and Stockholders’ Equity (Deficit)(continued)
The fair value of the Class A common stock for $99,942, funded with cash on the date of issuance was estimated to be $390 per share. The Company recorded $6, and $38, and $40 of stock-based compensation expense related to the Time Vesting Shares in 2010, 2009, and 2008, respectively, 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 has recorded $159 of stock-based compensation expense related to the accelerated vesting in 2010.hand. 

Issuance and repurchases of securities

Series A Preferred Stock:   In September 2009, the Company issued 2,000 shares of the Series A Preferred stock to CCMP and certain members of management and the board of directors, for an aggregate purchase price of $20,000. In December 2009, the Company issued an aggregate of 1,476 shares of Series A Preferred stock to CCMP in exchange for certain term loans under the first and second lien credit facilities that CCMP had purchased. The exchange ratio in connection with the exchange was one share of Series A Preferred stock per $10 of the amount paid by CCMP for the loans that were so exchanged. Such purchased term loans had a cumulative outstanding principal amount equal to $154,815. As the equity consideration was less than the outstanding principal amount, a gain on debt extinguishment was recorded.

The Company determined that the conversion feature in the Series A Preferred stock had a contingent beneficial conversion feature at the date of issuance. The Series A Preferred stock was convertible upon an initial public offering and the number of additional Class A Common shares which may be issued was unknown prior to the IPO. Since the beneficial conversion was contingent upon a future event, it had not been recorded in the consolidated financial statements prior to the IPO. The $114,900 beneficial conversion feature, which is the result of the additional Class A shares issued to satisfy the Series A Equity Participation, was recorded at the completion of the initial public offering on February 10, 2010, as a return to Series A Preferred stockholders analogous to a dividend. Since no retained earnings were available to pay this dividend at resolution of the contingency, the dividend was charged against additional paid in capital resulting in no net impact.
8.12.   Earnings Per Share
In fiscal years 2012, 2011 and 2010, basic

Basic earnings per share is calculated by dividing net income by the weighted average number of common shares outstanding.outstanding during the period, exclusive of 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 reconciles the numerator and the denominator used to calculate basic and diluted earnings per share:

  

Year Ended December 31,

 
  

2015

  

2014

  

2013

 
             

Net income (numerator)

 $77,747  $174,613  $174,539 

Weighted average shares (denominator)

            

Basic

  68,096,051   68,538,248   68,081,632 

Dilutive effect of stock compensation awards (1)

  1,104,246   1,632,796   1,585,897 

Diluted

  69,200,297   70,171,044   69,667,529 

Net income per share

            

Basic

 $1.14  $2.55  $2.56 

Diluted

 $1.12  $2.49  $2.51 
  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 

(1) Excludes approximately 363,000161,400, 81,600 and 10,300 stock options and restricted stock awards for the twelve month periodyears ended December 31, 2012,2015, 2014 and 2013, respectively, as the impact of such awards was anti-dilutive. There were no anti-dilutive awardsExcludes approximately 1,000 shares of restricted stock 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 because2015, as the impact of common stock equivalents on earnings per share issuch awards was 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.


 
Generac Holdings Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 2012, 2011, and 2010
(Dollars in Thousands, Except Share and Per Share Data)
8. Earnings Per Share (continued)

In fiscal year 2010, the Company’s Class B Common stock was considered a participating stock security requiring use of the “two-class” method for the computation of basic net income (loss) per share in accordance with provisions of ASC 260-10 Earnings per share. Losses were not allocated to the Class B Common stock in the computation of basic earnings per share as the Class B Common stock was not obligated to share in losses. Basic earnings per share excludes the effect of common stock equivalents and was computed using the “two-class” computation method, which subtracts earnings attributable to the Class B preference from total earnings. In addition, earnings attributable to the Series A Preferred preference and the Class B and Series A Preferred beneficial conversion were subtracted from total earnings.  Any remaining loss was attributed to the Class A Common shares.
9.13.   Income Taxes

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

  

Year Ended December 31,

 
  

2015

  

2014

  

2013

 

Current:

            

Federal

 $13,614  $38,161  $48,287 

State

  1,966   1,645   5,648 

Foreign

  3,588   5,701   2,214 
   19,168   45,507   56,149 

Deferred:

            

Federal

 $31,869  $42,474  $42,003 

State

  1,387   (3,134)  5,523 

Foreign

  (7,326)  (1,462)  167 
   25,930   37,878   47,693 

Change in valuation allowance

  138   364   335 

Provision for income taxes

 $45,236  $83,749  $104,177 
  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 

The Company is

During 2015, the taxpaying entity and files a consolidated federalInternal Revenue Service completed field work on income tax return. Currently,audits for the 2012 and 2013 tax years. A final audit report was issued and resulted in no change to the Company’s provision for income taxes. As of December 31, 2015, 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 which the Company is subject. The statute of limitation for tax years 2012, 2011, 2010, and 2009 is open, forU.S. federal and state income taxes. Additionally,tax examinations for the tax years 2007 and 2008 remain open for examination2006 through 2014. In addition, the Company is subject to audit by certain state andvarious foreign taxing authorities.


jurisdictions for the tax years 2010 through 2015.

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

  

December 31,

 
  

2015

  

2014

 

Deferred tax assets:

        

Goodwill and intangible assets

 $-  $23,624 

Accrued expenses

  18,982   18,191 

Deferred revenue

  9,389   7,945 

Inventories

  9,772   9,177 

Pension obligations

  7,684   8,738 

Stock-based compensation

  7,974   8,628 

Operating loss and credit carryforwards

  15,677   10,047 

Other

  2,842   1,428 

Valuation allowance

  (1,523)  (1,385)

Total deferred tax assets

  70,797   86,393 
         

Deferred tax liabilitites:

        

Goodwill and intangible assets

  12,455   - 

Depreciation

  19,507   18,535 

Debt refinancing costs

  7,732   10,925 

Prepaid expenses

  1,241   1,032 

Total deferred tax liabilities

  40,935   30,492 

Net deferred tax assets

 $29,862  $55,901 

  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 

 
Generac Holdings Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 2012, 2011, and 2010
(Dollars in Thousands, Except Share and Per Share Data)
9. Income Taxes (continued)

The net current and noncurrent components of deferred taxes included in the consolidated balance sheets are as follows:

  

December 31,

 
  

2015

  

2014

 
         

Net current deferred tax assets

 $29,355  $22,841 

Net long-term deferred tax assets

  8,196   47,894 

Net long-term deferred tax liabilitites

  (6,166)  (13,449)

Valuation allowance

  (1,523)  (1,385)

Net deferred tax assets

 $29,862  $55,901 
  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 

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 the deferred tax assets 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 position 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.
Acquired

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.

2012 and continued through December 31, 2015.

At December 31, 2012,2015, 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$16,275 and 2030, and various state net operating loss carryforwards,$3,132, respectively, which expire between 2017 and 2030.

As a result of ownership changes, Section 382 of the Internal Revenue Code of 1986 as amended and similar state provisions can limit the annual deductions of net operating loss and tax credit carry forwards. Such annual limitations could result

Changes in the expiration of net operating lossCompany’s gross liability for unrecognized tax benefits, excluding interest and penalties, were as follows:

  

December 31,

 
  

2015

  

2014

 
         

Unrecognized tax benefit, beginning of period

 $6,394  $- 

Increase in unrecognized tax benefit for positions taken in current period

  845   6,394 

Unrecognized tax benefit, end of period

 $7,239  $6,394 

The entire unrecognized tax credit carry forwards before utilization. The Company has no such limitationbenefit as of December 31, 20112015 and expects no limitation was triggered in 2012. Future ownership changes may result in such2014, if recognized, would impact the effective tax rate.

Interest and penalties are recorded as a limitation. However, the Company believes any limitation would not be significant.

Atcomponent of income tax expense. As of December 31, 20122015 and 2011,2014, total interest of approximately $174 and $86, respectively, and penalties of approximately $363 and $263, respectively, associated with net unrecognized tax benefits are included in the Company’s consolidated balance sheets. There were no interest or penalties related to income taxes that had been accrued or recognized as of and for the year ended December 31, 2013.

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, 2016.

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 no reserves recordednot provided for uncertainadditional U.S. income taxes on approximately $11,430 of undistributed earnings of consolidated non-U.S. subsidiaries. It is not practicable to estimate the amount of unrecognized withholding taxes and deferred tax positions.

liability on such earnings.

A reconciliation of the statutory tax rates and the effective tax rates for the years ended December 31, 2012, 20112015, 2014 and 20102013 are as follows:

  

Year Ended December 31,

 
  

2015

  

2014

  

2013

 
             

U.S. stautory rate

  35.0%  35.0%  35.0%

State taxes

  4.1   3.1   3.7 

Valuation allowance

  0.6   0.2   0.2 

Research and development credits

  (2.3)  (5.0)  (0.6)

Other

  (0.6)  (0.9)  (0.9)

Effective tax rate

  36.8%  32.4%  37.4%

 
  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%
58

The American Taxpayer Relief Act of 2012 (the “Act”) was signed into law on January 2, 2013. The Act retroactively restored several expired business tax provisions, including the research and experimentation credit.  Because a change in tax law is accounted for in the period of enactment, the retroactive benefit of the Act on the Company’s U.S. federal taxes for 2012 will be recognized in 2013.  The Company expects the Act’s extension of this provision through the end of 2013 will reduce our estimated annual effective tax rate for 2013, however we do not believe the effect will be material.
Generac Holdings Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 2012, 2011, and 2010
(Dollars in Thousands, Except Share and Per Share Data)
10.14.   Benefit Plans

Medical and Dental Plan

The Company maintains medical and dental benefit plans covering its full-time domestic employees of the Company and their dependents. Certain plans are partially or fully self-funded plans under which participant claims are obligations of the plan. These plans are funded through employer and employee contributions at a level sufficient to pay for the benefits provided by the plan. The Company’s contributions to the planplans were $8,741, $6,700,$14,352, $11,701, and $7,300$9,500 for the years ended December 31, 2012, 2011,2015, 2014, and 2010,2013, 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 2012,2015, the Company paid premiums of $2,446$3,400 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 planplans for virtually alleligible domestic employees who meet certain eligibility requirements.employees. Under the plan,plans, employees may defer receipt of a portion of their eligible compensation.

The Company amended the 401(k) savings plans effective January 1, 2009, to add Company matching and non-elective contributions. The Company may contribute a matching contribution of 50% of the first 6% of eligible compensation of employees. No matching contribution shall be made with respect to employee catch-up contributions. The Company may also contribute a non-elective contribution for each plan year after 2008. The contribution will apply to eligible employees employed on December 31, 2008. The rate of the non-elective contribution is determined based upon years of service as of December 31, 2008, and is fixed. Both Company matching contributions and non-elective contributions are subject to vesting. Forfeitures may be applied against plan expenses.
expenses and company contributions. The Company recognized $3,000, $2,400$3,400 and $2,300$3,300 of expense related to this plan in 2012, 20112015, 2014 and 2010,2013, respectively.

Pension Plans

The Company has frozen noncontributory salaried and hourly pension plans (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.

The Company uses a December 31 measurement date for the 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,

 
  

2015

  

2014

 
         

Accumulated benefit obligation at end of period

 $63,894  $68,376 
         

Change in projected benefit obligation

        

Projected benefit obligation at beginning of period

 $68,376  $52,825 

Interest cost

  2,681   2,591 

Net actuarial loss (gain)

  (5,254)  14,791 

Benefits paid

  (1,909)  (1,831)

Projected benefit obligation at end of period

 $63,894  $68,376 
         

Change in plan assets

        

Fair value of plan assets at beginning of period

 $45,452  $42,440 

Actual return (loss) on plan assets

  (384)  3,110 

Company contributions

  826   1,733 

Benefits paid

  (1,909)  (1,831)

Fair value of plan assets at end of period

 $43,985  $45,452 
         

Funded status: accrued pension liability included in other long-term liabilities

 $(19,909) $(22,924)
         

Amounts recognized in accumulated other comprehensiveloss

        

Net actuarial loss

 $(11,362) $(13,243)


  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)
59
Table Of Contents
 

The actuarial loss for the Pension Plans that was amortized from OCIAOCL into net periodic benefit(benefit) cost during 20122015 is $909.$1,228. The amount in OCIAOCL as of December 31, 20122015 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 Statements
Years 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 Plans isnet periodic pension (benefit) cost are as follows:

  

Year Ended December 31,

 
  

2015

  

2014

  

2013

 

Components of net periodic pension (benefit) cost:

            

Interest cost

 $2,681  $2,591  $2,423 

Expected return on plan assets

  (3,041)  (2,933)  (2,520)

Amortization of net loss

  1,228   106   1,108 

Net periodic pension (benefit) cost

 $868  $(236) $1,011 

  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 

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

  

December 31,

 
  

2015

  

2014

 

Discount rate – salaried pension plan

  4.36%  3.97%

Discount rate – hourly pension plan

  4.39%  3.99%

Rate of compensation increase (1)

  n/a   n/a 
  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 

(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 expense(benefit) cost are as follows:

  

Year Ended December 31,

 
  

2015

  

2014

  

2013

 

Discount rate

  3.99%  5.01%  4.14%

Expected long-term rate of return on plan assets

  6.75%  6.88%  6.95%

Rate of compensation increase (1)

  n/a   n/a   n/a 
  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 

(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.

Generac Holdings Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 2012, 2011, and 2010
(Dollars in Thousands, Except Share and Per Share Data)
10. Benefit Plans (continued)

The Pension Plan’s weighted-average asset allocation at December 31, 20122015 and 2011,2014, by asset category, is as follows:

      

December 31, 2015

  

December 31, 2014

 

Asset Category

 

Target

  

Dollars

  

%

  

Dollars

  

%

 

Fixed Income

  20%  $8,571   19% $7,400   16%

Domestic equity

  49%   20,479   47%  24,373   54%

International equity

  21%   9,687   22%  8,869   19%

Real estate

  10%   5,248   12%  4,810   11%

Total

  100%  $43,985   100% $45,452   100%

 
     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%
60
Table Of Contents
 

The fair values of the Pension Plans’ assets at December 31, 2015 are as follows:

  

Total

  

Quoted Prices in Active Markets for Identical Asset

(Level 1)

  

Significant Observable Inputs

(Level 2)

  

Significant Unobservable Inputs

(Level 3)

 

Mutual funds

 $40,310  $40,310  $–  $– 

Other investments

  3,675   –   –   3,675 

Total

 $43,985  $40,310  $–  $3,675 

The fair values of the Pension Plan's assets at December 31, 20122014 are as follows:

  

Total

  

Quoted Prices in Active Markets for Identical Asset

(Level 1)

  

Significant Observable Inputs

(Level 2)

  

Significant Unobservable Inputs

(Level 3)

 

Mutual funds

 $42,267  $42,267  $–  $– 

Other investments

  3,185   –   –   3,185 

Total

 $45,452  $42,267  $–  $3,185 

  
 
 
 
Total
  
Quoted prices in active markets for identical asset
(level 1)
  
Significant observable inputs
(level 2)
  
Significant unobservable inputs
(level 3)
 
Mutual fund $33,683  $33,683  $–  $– 
Collective trust  2,887   –   2,887   – 
Total $36,570  $33,683  $2,887  $– 

The fair values

A reconciliation of beginning and ending balances for Level 3 assets for the Pension Plan's assets atyears ended December 31, 2011 are2015 and 2014 is as follows:

  

2015

  

2014

 

Balance at beginning of period

 $3,185  $– 

Purchases

  408   3,100 

Realized gains

  82   85 

Balance at end of period

 $3,675  $3,185 

  
 
 
 
Total
  
Quoted prices in active markets for identical asset
(level 1)
  
Significant observable inputs
(level 2)
  
Significant unobservable inputs
(level 3)
 
Mutual fund $28,530  $28,530  $–  $– 
Collective trust  2,893   –   2,893   – 
Total $31,423  $28,530  $2,893  $– 

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


Collective Trusts

Other Investments – This category includes public investment vehiclesinvestments in limited partnerships and are valued usingat estimated fair value, as determined with the Net Asset Value (NAV) provided by the administratorassistance of the trust. The NAV iseach respective limited partnership, based on the net asset value of the underlying assets owned by the trust, minus its liabilities, and then divided by the number of shares outstanding. The NAVinvestment as of the trustbalance sheet date, which is subject to judgment, and therefore is classified within Level 23 of the fair value hierarchy.

Generac Holdings Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 2012, 2011, and 2010
(Dollars in Thousands, Except Share and Per Share Data)
10. Benefit Plans (continued)

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

The Company expects to make estimated contributions of $1,052$741 to the Pension Plans in 2013.

2016.

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

Year

     
2016 

 

  $2,052 
2017 

 

   2,231 
2018 

 

   2,340 
2019 

 

   2,424 
2020 

 

   2,552 
2021–2025   15,238 

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.

 
Year   
2013 $1,656 
2014  1,768 
2015  1,863 
2016  1,994 
2017  2,191 
Years 2018 – 2022  $12,715 
61
Table Of Contents

11.

15.   Share Plans


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.

The Company adopted an equity incentive plan (Plan) on February 10, 2010 in connection with its initial public offering. The Plan, as amended, allows for granting of up to 9.1 million stock-based awards to executives, directors and employees. Awards available for grant under the 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 inPlan was $8,241, $12,612 and $12,368 for the consolidated statements of comprehensive income was $10,780, $8,646years ended December 31, 2015, 2014 and $6,198 in 2012, 2011 and 2010,2013, respectively, net of actualestimated forfeitures, which is recorded in operating expenses in the consolidated statements of comprehensive income.

Generac Holdings Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 2012, 2011, and 2010
(Dollars in Thousands, Except Share and Per Share Data)
11. Share Plans (continued)
Stock Options - Stock options granted in 20122015 have an exercise price of between $18.82$28.36 per share and $37.05$49.70 per share,share; stock options granted in 20112014 have an exercise price of between $11.15$42.20 per share and $18.73$59.01 per share, and the stock options granted in 20102013 have an exercise price of between $7.00$29.81 per share and $10.18$48.36 per share.

On June 29, 2012,21, 2013, 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$5.00 per share on its common stock. In connection with thethis special dividend, and pursuant to the terms of the Company’s stock option plan,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, waswere adjusted by the $6.00$5.00 special dividend amount. 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 2012 - 2015 vest in equal installments over four years, subject to the grantee’s continued employment or service and expire 10ten years after the date of grant. Stock options issued in 2011 and 2010 vest in equal installments over five years, subject to the grantee’s continued employment or service and expire 10ten years after the date of grant.


Beginning in 2011, stock

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 approximately 667,041272,296, 235,644 and 55,202323,427 in 20122015, 2014 and 2011,2013, 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 $6,425, $371$9,768, $10,411 and $0$8,449 in 2012, 20112015, 2014 and 2010,2013, respectively, and are reflected as a financing activity within the Consolidated Statementconsolidated statements of Cash Flows.cash flows. The net-share settlements hadsettlement has the effect of share repurchases by the Company as they reducedreduce 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.

issued.

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. Since there is limited history for the Company’s stock, expectedinputs.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 20122015, 2014 and 20112013 are as follows:

  

2015

  

2014

  

2013

 

Weighted average grant date fair value

 $19.07  $26.35  $16.30 
             

Assumptions:

            

Expected stock price volatility

  41%  45%  47%

Risk free interest rate

  1.72%  1.90%  1.21%

Expected annual dividend per share

 $-  $-  $- 

Expected life of options (years)

  6.25   6.25   6.25 
  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 Statements
Years Ended December 31, 2012, 2011, and 2010
(Dollars in Thousands, Except Share and Per Share Data)
11. Share Plans (continued)

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, 2012, 20112015, 2014 and 2010. 2013.

A summary of the Company’s stock option activity and related information for the three years ended December 31, 20122015, 2014 and 2013 is as follows:

  

Number of

Options

  

Weighted-Average

Exercise Price

  

Weighted-Average

Remaining

Contractual

Term (in years)

  

Aggregate

Intrinsic Value

($ in thousands)

 
                 

Outstanding as of December 31, 2012

  3,440,042  $8.44   9.5  $87,001 

Granted

  253,857   35.04         

Exercised

  (703,326)  6.05         

Expired

  (1,625)  20.94         

Forfeited

  (51,647)  17.02         

Outstanding as of December 31, 2013

  2,937,301   5.74   9.5  $148,369 
                 

Granted

  187,189   57.21         

Exercised

  (549,282)  3.44         

Expired

  (259)  15.94         

Forfeited

  (32,810)  12.68         

Outstanding as of December 31, 2014

  2,542,139   9.94   8.5  $96,518 
                 

Granted

  287,165   45.18         

Exercised

  (604,088)  3.79         

Expired

  (6,409)  50.11         

Forfeited

  (90,793)  37.27         

Outstanding as of December 31, 2015

  2,128,014   15.15   7.7  $40,271 
                 

Exercisable as of December 31, 2015

  1,574,790   6.08   7.5  $39,072 
 Number of Options 
Weighted-
 Average
 Exercise Price
 
Weighted-
 Average
 Remaining
 Contractual Term
 (in years)
 
Aggregate
 Intrinsic
 Value
 ($ in thousands)
Outstanding as of December 31, 2009­- $-    
Granted4,366,504  13.02    
Exercised-  -    
Expired-  -    
Forfeited(130,245)  (13.00)    
Outstanding as of December 31, 20104,236,259  13.02 9.1$                                                                       13,349
Granted179,877  21.26    
Exercised(107,591)  13.00    
Expired-  -    
Forfeited-  -    
Outstanding as of December 31, 20114,308,545  13.36 8.2$ 63,193
Granted256,112  21.28    
Exercised(1,113,827)  13.21    
Expired-  -    
Forfeited(10,788)  20.52    
Outstanding as of December 31, 20123,440,042  14.38    $68,549
Exercisable as of December 31, 2012509,054   $13.19 7.3$ 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.

As of December 31, 2012,2015, there was $16,356$7,342 of total unrecognized compensation cost, net of expected forfeitures, related to unvested options. The cost is expected to be recognized over the remaining service period, having a weighted-average period of 2.42.5 years. Total share-based compensation cost related to the stock options for 2012, 20112015, 2014 and 20102013 was $6,835, $6,475$4,198, $8,509 and $4,470,$9,034, respectively, which is recorded in operating expenses in the consolidated statements of comprehensive income.


Restricted Stock – For awards issued prior to 2012, restricted stock awards vest in full on the third anniversary of the date of grant, subject to the grantee’s continued employment. Restricted stock awards issued in 2012 and after, vest in equal installments over three years, subject to the grantee’s continued employment or service. Certain restricted stock awards also include performance shares, which were awarded in 2014 and 2015. 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, and the performance period for the 2015 awards covers the years 2015 through 2017. The Company estimates the number of performance shares that will vest based on projected financial performance. The fair market value of the 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.

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

Generac Holdings Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 2012, 2011, and 2010
(Dollars in Thousands, Except Share and Per Share Data)
11. Share Plans (continued)

A summary of the Company's restricted share awardsstock activity for the three years ended December 31, 20122015, 2014 and 2013 is as follows:

  

Shares

  

Weighted-Average

Grant-Date

Fair Value

 
         

Non-vested as of December 31, 2012

  665,071  $17.75 

Granted

  112,494   37.82 

Vested

  (450,537)  14.21 

Forfeited

  (22,622)  25.36 

Non-vested as of December 31, 2013

  304,406   29.68 
         

Granted

  115,473   54.35 

Vested

  (105,123)  28.31 

Forfeited

  (47,472)  42.31 

Non-vested as of December 31, 2014

  267,284   38.72 
         

Granted

  193,117   41.31 

Vested

  (183,362)  32.56 

Forfeited

  (33,999)  47.77 

Non-vested as of December 31, 2015

  243,040   44.16 

Non-vested Stock Awards
Shares 
Weighted-Average
 Grant-Date
 Fair Value
 
Non-vested as of December 31, 2009- $- 
Granted439,999  13.02 
Vested-  - 
Forfeited(9,844)  (13.00) 
Non-vested as of December 31, 2010430,155 $13.02 
Granted59,147  20.59 
Vested-  - 
Forfeited-  - 
Non-vested as of December 31, 2011489,302 $13.93 
Granted195,771  26.94 
Vested-  - 
Forfeited(20,002)  - 
Non-vested as of December 31, 2012665,071 $17.75 
Generac Holdings Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 2012, 2011, and 2010
(Dollars in Thousands, Except Share and Per Share Data)
11. Share Plans (continued)

As of December 31, 2012,2015, there was $4,431$6,723 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. Totalyears.Total share-based compensation cost related to the restricted stock for 2012, 20112015, 2014 and 20102013 was $3,645, $1,871$4,043, $4,103 and 1,447,$3,074, respectively, which is recorded in operating expenses in the consolidated statements of comprehensive income.


During 2012, 20112015, 2014 and 2010, 10,864, 16,6802013, 16,260, 8,869 and 21,4067,291 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 2012, 20112015, 2014 and 20102013 was $300, $300$615, $509 and $281,$260, respectively, which is recorded in operating expenses in the consolidated statements of comprehensive income.

12.

16.   Commitments and Contingencies

The Company leases certain manufacturing facilities, computer equipment, automobiles and warehouse space under operating leases with lease terms generally ranging between 3-5 years.

leases. The approximate aggregate minimum rental commitments at December 31, 2012,2015, are as follows:

Year

 

Amount

 

2016

 $3,561 

2017

  3,072 

2018

  3,033 

2019

  2,153 

2020

  1,809 

After 2020

  5,489 

Total

 $19,117 
  Amount 
Year   
2013 $825 
2014  540 
2015  269 
2016  108 
2017  18 
Total $1,760 

Total rent expense for the years ended December 31, 2012, 20112015, 2014 and 2010, which includes short-term data processing equipment rentals,2013, was approximately $2,870, $1,309,$4,796, $4,102, and $554,$2,457, respectively.

The Company has an arrangement with a finance company to provide floor plan financing for 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 Companylimits and has agreed to repurchase products repossessed by the finance company, but does not indemnify the finance company for any credit losses they incur. The amount financed by dealers which remained outstanding under this arrangement at December 31, 20122015 and 20112014 was approximately $16,600$32,400 and 10,035,$26,100, respectively.

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

 
Generac Holdings Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 2012, 2011, and 2010
(Dollars in Thousands, Except Share and Per Share Data)
13.17.   Special Cash Dividend

On June 29, 2012,21, 2013, the Company used a portion of the proceeds from the May 30, 201231, 2013 debt refinancing (see Note #6 – Credit Agreements) together with cash on its balance sheet10, “Credit Agreements” to the consolidated financial statements) to pay a special cash dividend of $6.00$5.00 per share on its common stock, resulting in payments totaling $404,332$340,772 to stockholders. Dividendsstockholders on that date. Related dividends declared but unpaid as of December 31, 2012 of $3,957,2015 are $76, which relate to dividends earned on unvested restricted stock awards, and 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 dividend, 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$5.00 special dividend amount. 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 Transactions
Prior 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.

18.   Quarterly Financial Information (Unaudited)

  Quarters Ended 2015 
  

Q1

  

Q2

  

Q3

  

Q4

 

Net sales

 $311,818  $288,360  $359,291  $357,830 

Gross profit

  102,603   95,897   130,326   131,124 

Operating income

  44,911   39,467   67,867   27,316 

Net income

  19,685   14,844   34,036   9,182 

Net income per common share, basic:

 $0.29  $0.22  $0.50  $0.14 

Net income per common share, diluted:

 $0.28  $0.21  $0.49  $0.14 

  

Quarters Ended 2014

 
  

Q1

  

Q2

  

Q3

  

Q4

 

Net sales

 $342,008  $362,609  $352,305  $403,997 

Gross profit

  119,514   128,012   130,283   138,410 

Operating income

  65,306   78,160   70,794   79,115 

Net income

  34,701   54,025   36,497   49,390 

Net income per common share, basic:

 $0.51  $0.79  $0.53  $0.72 

Net income per common share, diluted:

 $0.50  $0.77  $0.52  $0.70 

  Quarters Ended 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 Statements
Years Ended December 31, 2012, 2011, and 2010
(Dollars in Thousands, Except Share and Per Share Data)

16.19.   Valuation and Qualifying Accounts

For the years ended December 31, 2012, 20112015, 2014 and 2010:2013:

  

Balance at Beginning of Year

  

Reserves

Assumed in

Acquisition

  

Additions Charged to Earnings

  

Charges to Reserve, Net (1)

  

Balance at End

of Year

 

Year ended December 31, 2015

                    

Allowance for doubtful accounts

 $2,275  $63  $481  $(325) $2,494 

Reserves for inventory

  9,387   614   3,739   (3,158)  10,582 

Valuation of deferred tax assets

  1,385   -   138   –   1,523 
                     

Year ended December 31, 2014

                    

Allowance for doubtful accounts

 $2,658  $209  $672  $(1,264) $2,275 

Reserves for inventory

  6,558   2,282   2,797   (2,250)  9,387 

Valuation of deferred tax assets

  1,021   -   364   –   1,385 
                     

Year ended December 31, 2013

                    

Allowance for doubtful accounts

 $1,166  $496  $1,037  $(41) $2,658 

Reserves for inventory

  6,999   1,131   72   (1,644)  6,558 

Valuation of deferred tax assets

  806   (120)  335   –   1,021 

(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.

 
  Balance at Beginning of Period  
Reserves Assumed in
Acquisition
  Additions Charged to Earnings  Charges to Reserve, Net (1)  
Balance at End
of Year
 
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 
65
Table Of Contents

(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.

17.

20.   Subsequent Events

On February 11, 2013,13, 2016, the Company prepaid $80,000entered into an agreement to acquire a majority ownership interest of principal onPR Industrial S.r.l and its existing Term Loan with available cash on hand, which was applied against both required excess cash flow paymentssubsidiaries (collectively Pramac), headquartered in Siena, Italy. With over 600 employees, four manufacturing plants and all required future principal amortizations onfourteen commercial branches located around the Term Loan.

75
Tableworld, Pramac is a leading global manufacturer of Contentsstationary, mobile and portable generators sold in over 150 countries through a broad distribution network. The acquisition is anticipated to close prior to the end of the first quarter of 2016.


Item 9.Changesin and Disagreements with Accountants on Accounting and Financial Disclosure

There were no changes in, or disagreements with, accountants reportable herein.

Item 9A. Controls andProcedures

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 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.


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. generally accepted accounting principles.


GAAP.

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. 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.


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, 20122015 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, 2012.2015. In conducting this assessment, our management excluded Ottomotores UK Ltd.the CHP business because it was not acquired only inuntil the fourththird quarter 2012of 2015.

In January 2016, we implemented a new global enterprise resource planning (ERP) system for a majority of our business. In connection with this ERP system implementation, we are updating our internal controls over financial reporting, as necessary, to accommodate modifications to our business processes and constituted 4.6% and 8.7% 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. 


accounting procedures. Additional implementations will occur at our remaining locations over a multi-year period.

Our independent registered public accounting firm has issued an attestation report on our internal control over financial reporting as of December 31, 2012.2015. Its report appears in the consolidated financial statements included in this Annual Report on Form 10-K on page 39.


38.

Changes in Internal Control Over Financial Reporting


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, there

There have been no changes in our internal control over financial reporting that occurred during the three monthsyear ended December 31, 20122015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


Item 9B. OtherInformation

None
PART III

Item 10.Directors, Executive Officers and Corporate Governance

The information required by Item 10 not already provided herein under “Item 1 – Business – Executive Officers”, will be included in our 20132016 Proxy Statement, and is incorporated herein by reference herein.


reference.

Item 11.ExecutiveCompensation

The information required by this item will be included in our 20132016 Proxy Statement and is incorporated herein by reference.

Item 12.SecurityOwnership 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 2016 Proxy Statement and is incorporated herein by reference.

Item 13.CertainRelationships and Related Transactions, and Director Independence

The information required by this item will be included in our 20132016 Proxy Statement and is incorporated herein by reference.

Item 13.  Certain Relationships14.PrincipalAccountant Fees and Related Transactions, and Director IndependenceServices

The information required by this item will be included in our 20132016 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.

PART IV

Item 15.Exhibitsand Financial Statement Schedules

(a)(1) Financial Statements

Included in Part II of this report:

(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
 

SIGNATURES

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

 

Generac Holdings Inc.

  
 

By:

/s/Aaron Jagdfeld

  

Aaron Jagdfeld

  

Chairman,President and Chief Executive Officer

Dated: March 13, 2013

February 26, 2016

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

Signature
Title
  
Title
Date 
   

/s/Aaron Jagdfeld

 Aaron Jagdfeld

Chairman, President and Chief Executive Officer and Director

March 13, 2013

February 26, 2016

Aaron Jagdfeld

/s/York A. Ragen

York A. Ragen

Chief Financial Officer and

February 26, 2016

York A. RagenChief Accounting OfficerMarch 13, 2013

/s/Todd A. Adams

Lead Director

February 26, 2016

Todd A. Adams

/s/John D. Bowlin

Director

February 26, 2016

John D. Bowlin
DirectorMarch 13, 2013

/ss/Ralph W. Castner

Director

February 26, 2016

Ralph W. Castner

/s/Robert D. Dixon

Director

February 26, 2016

Robert D. Dixon
DirectorMarch 13, 2013
/s/ Barry J. Goldstein
Barry J. Goldstein
DirectorMarch 13, 2013

/s/Stephen MurrayAndrew G. Lampereur

Stephen Murray

DirectorMarch 13, 2013

Director

February 26, 2016

/s/ david ramon
David Ramon
Andrew G. Lampereur		DirectorMarch 13, 2013
/s/ Timothy W. Sullivan
DirectorMarch 13, 2013
Timothy W. Sullivan

/s/Bennett Morgan

Director

February 26, 2016

Bennett Morgan

/s/David A. Ramon

Director

February 26, 2016

David A. Ramon

/s/Timothy Walsh

Director

February 26, 2016

Timothy WalshDirectorMarch 13, 2013

 
69
78

EXHIBIT INDEX

Exhibits
Number

Description

 2.1

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

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

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

3.2

Amended and Restated Bylaws of Generac Holdings Inc. (incorporated by reference to Exhibit 3.23.1 of the Company’s AnnualCurrent Report on Form 10-K for8-K filed with the fiscal year ended December 31, 2010)SEC on February 16, 2016).

 4.1

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).

 4.2Stockholders

10.1

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

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).

10.6Credit 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).

10.4Exhibits
Number		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

First Amendment to the Guarantee and Collateral Agreement, dated as of May 31, 2013, to that certain Guarantee and Collateral Agreement, dated as of May 30, 2012, among Generac Holdings Inc., Generac Acquisition Corp., Generac Power Systems, Inc., certain subsidiaries of Generac Power Systems, Inc. and Bank of America, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.410.5 to the Company’s Current Report on Form 8-K filed with the SEC on June 4, 2013).

10.9

Amendment No. 2 dated as of May 29, 2015 to the Credit Agreement, dated as of May 30, 2012, as amended by Amendment No. 1, dated as of May 31, 2013, among Generac Holdings, Inc., Generac Acquisition Corp., Generac Power Systems, Inc., certain subsidiaries of Generac Power Systems, Inc. and Bank of America, N.A., as Administrative Agent and the other agents named therein (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the SEC on May 31, 2012)June 1, 2015).

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,November 5, 2015, between Generac and Aaron Jagdfeld (incorporated by reference to Exhibit 10.6510.1 of the Registration StatementCompany’s Quarterly Report on Form S-110-Q filed with the SEC on January 25, 2010)November 6, 2015).

10.10+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 NumberDescription
10.11+

10.14+

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+

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).

10.14

10.15

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+

Form of Nonqualified Stock Option Award Agreement (incorporated by reference to Exhibit 10.45 of the Registration Statement on Form S-1 filed with the SEC on January 25, 2010).

10.17+

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).

Exhibits
Number		Description
10.20

10.21

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

10.21

10.22

Form of Generac Holdings Inc. Director Indemnification Agreement for Barry Goldstein, John D. Bowlin, Robert Dixon, David Ramon, and 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).

10.22

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).

10.23

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).

10.24

10.25+

Form of Generac 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+

21.1*

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*

List of Subsidiaries of Generac Holdings Inc.

23.1*

23.1*

Consent of Ernst & Young, Independent Registered Public Accounting Firm, relating to Generac Holdings Inc.Firm.

31.1*

31.1*

Certification of Chief Executive Officer pursuant to 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*

31.2*

Certification of Chief Financial Officer pursuant to 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.

32.1**Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002.

32.2**

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002.

101*

101*

The following financial information from the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012,2015, filed with the SEC on March 13, 2013,February 26, 2016, formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets at December 31, 20122015 and December 31, 2011;2014; (ii) Consolidated Statements of OperationsComprehensive Income for the Fiscal Years Ended December 31, 2012,2015, December 31, 20112014 and December 31, 2010;2013; (iii) Consolidated Statements of Redeemable Stock and Stockholders' Equity (Deficit) for the Fiscal Years Ended December 31, 2012,2015, December 31, 20112014 and December 31, 2010;2013; (iv) Consolidated Statements of Cash Flows for the Fiscal Years Ended December 31, 2012,2015, December 31, 20112014 and December 31, 2010;2013; (v) Notes to Consolidated Financial Statements.


*

Filed herewith.

**

Furnished herewith.

 +Indicates management contract or compensatory plan or arrangement.
80




72