We design and manufacture stationary, portable and mobile generators with single-engine outputs ranging between 800W and up to 3,250kW, with3,250kW. We have the ability to expand the power range for certain stationary generator solutions to much larger multi-megawatt systems through ouran integrated paralleling configuration called Modular Power Systems an integrated paralleling configuration.(MPS). Other engine powered products that we design and manufacture include light towers, mobile heaters, power washers and pumps.water pumps, along with a broad line of outdoor power equipment. We classify our products into three classescategories based on similar range of power output geared for varying end customer uses: Residential power products, Commercial & Industrial power products;(C&I) products and Other products. The following summary outlines our portfolio of products, including their key attributes and customer applications.
Residential power products
Our residential automatic standby generators range in output from 6kW to 60kW, with manufacturer's suggested retail prices or MSRPs,(MSRPs) from approximately $1,900$1,899 to $16,700.$16,199. These products operate on natural gas, liquid propane or diesel and are permanently installed with an automatic transfer switch, which we also manufacture. Air-cooled engine residential standby generators range in outputs from 6kW to 20kW,22kW, are available in steel and aluminum enclosures and serve as an emergency backup for small to medium-sized homes. Liquid-cooled engine generators serve as emergency backup for larger homes and small businesses and range in output from 22kW to 60kW. Liquid-cooled brands include the Guardian® Series and the premium Quietsource® Series, which have We also provide a quiet, low-speed engine and a standard aluminum enclosure.
We providea 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. These products serve as an emergency home backup source of electricity and are also used for construction and recreational purposes. We currently have fiveOur portable product lines: the GP series,generators are targeted at homeowners, with price points ranging from 1,800W to 17,500W;between the LP series, that runs on propane and is also targeted at homeowners, ranging from 3,250W to 5,500W;consumer value end of the XG series, targeted atmarket 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.market. In addition, we offer manual transfer switches to supplement our portable generator product offering.
We provide a broad product line of engine driven power washers which are also fueled by gasoline, that range in PSI from 2,000 to 4,000 that are used for residential and commercial use.
Further, we provide a broad product line of outdoor power equipment that includes trimmer & brush mowers, log splitters, lawn & leaf vacuums, and chipper shredders for the property maintenance needs of larger-acreage residences, light commercial properties, municipalities and farms. These products are largely sold in North America through catalogs and outdoor power equipment dealers primarily under the DR® brand name.
Residential power products comprised 56.8%53.5%, 60.0%51.2% and 62.0%49.5%, respectively, of total net sales in 2013, 20122016, 2015 and 2011.
Commercial & Industrial power products
We offer a full line of commercial & industrialC&I generators fueled by diesel, natural gas, liquid propane and Bi-Fuel™. Ranging from 22kW up to 3,250kW, weWe believe we have one of the broadest product offerings in the industry.
Our light-commercial standby generators include a full range of affordable systems from 22kW to 150kW and related transfer switches, providing three-phase power sufficient for most small and mid-sized businesses including grocery stores, convenience stores, restaurants, gas stations, pharmacies, retail banks, and small health care facilities.facilities and other small-footprint retail applications. Our light-commercial generators run on natural gas, and liquid propane and in late 2013 we introduced a product line of compact, diesel-fueled generators called Protector® Series.
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 3,250kW, which includes stationary and containerized packages, with our Modular Power System (MPS)MPS technology extending our product range up to much larger multi-megawatt systems through an integrated paralleling configuration. We offer four fuel options for our industrial generators, including diesel, natural gas, liquid propane or Bi-Fuel™. Bi-Fuel™ generators operate on a combination of both diesel and natural gas to allow our customers the advantage of multiple fuel sources and extended run times. Our industrial standby generators are primarily used as emergency backup for large healthcare, telecom, datacom, commercial office, municipal and manufacturing customers.
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. 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 a broad line of 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.
The acquisition of Tower LightPramac in August 2013 provides us an expandedMarch 2016 added a broad product offeringline of light towers to support additional geographic markets, allowing us to participateC&I stationary and mobile generators that are sold in the growing rental market outside the U.S.
C&I products comprised 38.4%38.6%, 34.9%41.6% and 31.6%44.6% respectively, of total net sales in 2013, 20122016, 2015 and 2011.
Other power products
Our “Other Products” category includes aftermarket service parts to our dealers, product accessories and proprietary engines to third-party original equipment manufacturers or OEMs.
Other power products comprised 4.8%7.9%, 5.1%7.2% and 6.4%5.9%, respectively, of total net sales in 2013, 20122016, 2015 and 2011.
Distribution channelsChannels and customers
We distribute our products through severaldistribution channels to increase awareness of our product categories and the Generac®, Magnum®, OttomotoresTM and Tower LightTM brands, and to ensure our products reach a broad customer base. This distribution network includes independent residential dealers, industrial distributors and industrial dealers, national and regional retailers, e-commerce merchants, electrical and HVAC wholesalers (including certain private label arrangements), catalogs, equipment rental companies and equipment dealers.distributors. We also sell direct to certain national and regional account customers, as well as to individual consumers, that are the end users of our products.
We believe our distribution network is a competitive advantage that has strengthened over the last decadeyears as a result of adding, expanding and expandingdeveloping the various distribution channels through which we sell our products. Our network is well balanced with no customer providing more than 6%7% of our sales in 2013.
Our overall dealer network which is located principally in the United States, Canada and Latin America, is the industry's largest network of factory direct independent generator contractors. In addition,contractors in North America. We further expanded our dealer network on a global basis with the acquisition of Tower LightPramac in August 2013 provides access to numerous independent distributorsMarch 2016, particularly in over 50 countries.
Our residential/light commercial dealer network sells, installs and services our residential and light-commerciallight commercial products to end users. We have increased our level of investment in recent years by focusing on a variety of initiatives to more effectively market and sell our home standby products and better align our dealer network with Generac.
Our industrial dealernetwork consists of a combination of primary distributors as well as a support network providesof dealers serving the United States and Canada. The industrial distributors and dealers provide industrial and commercial end users with ongoing sales and product support. Our industrial distributors and dealers maintain the local relationships with commercial electrical contractors, specifying engineers and national account regional buying offices. In recent years, we have been particularly focused on expanding our dealer network globally through the Ottomotores acquisition in Latin AmericaDecember 2012 and other regions of the worldPramac acquisition in March 2016, along with organic means, in order to expand our international sales opportunities.
Our retail distribution network includes thousands of locations across the globe and includes a variety of regional and national home improvement chains, retailers, clubs, buying groups and farm supply stores. These physical retail locations are supplemented by a number of cataloguecatalog and e-commerce retailers. This network primarily sells our residential standby, portable and light-commercial generators, as well as our power washers.
Our wholesaler network distributes our residential and light-commercial generators, and consists of selling branches of both national and local distribution houses for electrical and HVAC products.
On a selective basis, we have established private label and licensing arrangements with third party partners to provide residential, light-commerciallight-commercial and industrial generators. These partners include leading home equipment, electrical equipment and construction machinery companies, each of which provides access to incremental channels of distribution for our products.
The distribution for our mobile products includesincludes international, national, regional and regionalspecialty equipment rental companies, equipment dealersdistributors and construction companies, which primarily serve non-residential building construction, road construction, energy markets and energy markets.
We sell direct to certain nationaland 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.
Business Strategy
We have been executing on our “Powering Ahead” strategy. Since shortly after our initial public offering in 2010, this strategic plan, has servedwhich serves as the framework for the significant investments we have made to drivecapitalize on the long-term growth prospects of Generac. As we continue to move the Powering Ahead plan into the future, we are focused on a number of initiatives that are driven by the same four key objectives:
Growing the residential standby generator market.
As the leader in the home standby generatorGaining 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 areLead with gas power generation products. We will attempt to garnergain incremental market share within commercial and industrial markets through our leading position in the growing market for cleaner burning, more cost effective natural gas fueled back-upstandby power solutions. While still a much smaller portion of the overall C&I market, we believe demand for these products continues to increase at a faster rate than traditional diesel fueled generators as a result of their lower capital investment and operating costs. We also believe there is an opportunity to provide smaller, more cost effective generators marketed aggressively towards the underpenetrated “optional” standby market which includes smaller footprint commercial buildings. With our scale in these smaller commercial products, our distribution capabilities, and our national account customer focus, we believe we have an opportunity to penetrate these markets by using a targeted marketing approach and funneling opportunities to our distribution partners.
Expanding global presence.Expanding into new geographies. During 2013, approximately 8% ofWe have increased our revenues were shipped to regions outside the U.S. and Canada. GivenCanada in recent years, with sales outside this region accounting for approximately 20% of our revenues during 2016, as compared to approximately 10% and 9% in 2015 and 2014, respectively. This increase is largely the result of acquisitions made that thecomprise our International segment – Ottomotores, Tower Light and Pramac. These businesses have significantly increased our global market for power generation equipment is estimated to exceed $15 billion annually, we believe there are growth opportunities for Generacpresence by expanding into new geographies. Prior to 2013, these efforts had been mostly organic with the creation of a dedicated sales teamadding product, manufacturing and the addition of over 100 new distribution pointscapabilities that serve local markets around the globe, with many of thoseworld, and have resulted in Latin America. The acquisitions of the Ottomotores and Tower Light businesses provide us with an enhanced platform and immediate scale for our international growth initiatives and accelerates our efforts to becomebecoming a moreleading global player in the markets for backup power and mobile power equipment. As we look forward, we intend to leverage our increased international footprint attained from these recent acquisitions whileto serve the over $13 billion annual market for power generation equipment outside the U.S. and Canada. We also evaluatingintend to improve the profit margins of our International segment by executing on several revenue and cost synergies, and driving organic growth in existing markets with additional investment and focus, including the expanding opportunity for global gaseous-fueled products. We will continue to evaluate other opportunities to expand into otheradditional regions of the world.world through both organic initiatives and potential acquisitions.
We believe thethe investments we have made to date, due in part to our Powering Ahead strategy, have helped to capitalize on the macro, secular growth drivers for our business and are an important part of our efforts to diversify and globalize our business. See “Item 7.7, Management’s Discussion and Analysis of Financial Condition and Results of Operations – Business driversDrivers and trends”Trends” for additional drivers that influence demand for our products and other trends affecting the markets that we serve.
We operate severalnumerous manufacturing plants, distribution facilities and inventory warehouses located principally in Wisconsin (USA), Mexico, Italy and Brazil totaling over three million square feet.throughout the world. We also maintain inventory warehouses in the United States that accommodate material storage and rapid response requirements of our customers.
In recent years, we have added manufacturing capacity through investments in automation, improved utilization and the expansion of our manufacturing footprint through organic means as well as through acquisitions. We believe we have sufficient capacity to achieve our business goals for the near-to-intermediate term.
Our primary focus on generatorspower generation equipment and other engine powered equipmentproducts drives technological innovation, specialized engineering and manufacturing competencies. Research and development (R&D) is a core competency and includes a staff of over 250300 engineers working on numerous active projects. Our sponsored research and development expense was $29.3$37.2 million, $23.5$32.9 million and $16.5$31.5 million for the years ended December 2013, 201231, 2016, 2015 and 2011,2014, respectively. Research and development is conducted at eachseveral 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 regulatory standards. We have over 30 years of experience using natural gas engines and have developed specific expertise with fuel systems and emissions technology. In the residential and light commercial markets, we have developed proprietary engines, cooling packages, controls, fuel systems and emissions systems. We believe that our expertise in engine powered equipment gives us the capability to develop new products that will allow continued diversification in our end markets.
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 over 100 U.S. and international patents and patent applications. Our patents expire between 2016 and 2030 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. New U.S. patents that are issued generally have a life of 20 years from the date the patent application is initially filed. U.S. and international trademark registrations generally have a perpetual duration if they are properly maintained and renewed. We believe the existence of these patents and trademarks, along with our ongoing processes to register additional patents and trademarks, protect our intellectual property rights and enhance our competitive position. We also use proprietary manufacturing processes that require customized equipment.
Suppliers of raw materials
Our primary raw material inputs are steel, copper and aluminum, all of which are purchased from third parties and, in many cases, as part of machined or manufactured components. We have developed an extensive network of reliable low-cost suppliers in the United States and abroad.internationally. Our strategic global sourcing function continuously evaluates the quality and cost structure of our products and assesses the capabilities of our supply chain. Components are sourced accordingly based on this evaluation. Our supplier quality engineers conduct on-site audits of major supply chain partners and help to maintain the reliability of critical sourced components. In 2013, we sourced approximately 60% of our materials and components from outside the United States.
Competition
The market for power generation equipment and other engine powered products is competitive. We face competition from a variety of large diversified industrial companies as well as smaller generator manufacturers, 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 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 mobile generators with broad capabilities across the residential, light commercial,light-commercial and industrial and construction generator markets. We believe that our engineering capabilities and core focus on generators provide us with manufacturing flexibility and enableenables us to maintain a first-mover advantage over our competition for product innovation. We also believe our broad product offering, and diverse distribution model and strong factory support provide for additional advantages as well.
A summary of the primary competitors across our main product classes are as follows:
Residential standby generatorsproducts – Kohler, Briggs & Stratton, Cummins, Honda, Champion, Techtronics International, Husqvarna and Cummins (Onan division), eachAriens, along with a number of smaller domestic and foreign competitors; certain of which also have broad operations in other manufacturing businesses.
C&I pPortable generators – Honda, Briggs & Stratton, Pramac and Techtronics International (TTI), along with a number of smaller domestic and foreign competitors.
In a continuously evolving sector,market, we believe our scale and broad capabilities make us well positioned to remain competitive.
Employees
As of December 31 2013,, 2016, we had 3,3804,202 employees (3,032(3,608 full time and 348594 part-time and temporary employees). Of those, 2,0942,266 employees were directly involved in manufacturing at our manufacturing facilities.
Domestically, wewe have had an “open shop” bargaining agreement for the past 4850 years. The current agreement, which expires October 17, 2016,2021, covers our Waukesha and Eagle, Wisconsin facilities. Additionally, our plants in Mexico, Italy and Brazil are operated under various local or national union groups. Our other facilities are not unionized.
Regulation, including 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 include those governing, among other things, emissions to air, discharges to water, noise and employee safety, as well as the generation, handling, storage, transportation, treatment, and disposal of waste and other materials. In addition, our products are subject to various laws and regulations relating to, among other things, emissions and fuel requirements, as well as labeling and marketing.
Our products sold in the United States are regulated by the U.S. EnvironmentalEnvironmental Protection Agency (“EPA”)(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.
Available Information
The Company’sCompany’s principal executive offices are located at S45 W29290 Highway 59, Waukesha, Wisconsin, 53189 and the Company’s telephone number is (262) 544-4811. The Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports are available free of charge through the “Investors” portion of the Company’s web site, www.generac.com, as soon as reasonably practical after they are filed with the Securities and Exchange Commission or the “SEC”(SEC). The SEC maintains a web site, www.sec.gov, which contains reports, proxy and information statements, and other information filed electronically with the SEC by the Company. The information provided on these websites is not part of this report and is therefore not incorporated herein by reference.
Executive officers
The following table sets forth information regarding our executive officers:
| Name | Age | Position | ||
Aaron P. Jagdfeld | 45 | President, Chief Executive Officer and | ||
York A. Ragen | 45 | Chief Financial Officer | ||
Russell S. Minick | 56 | Chief | ||
Erik Wilde | 42 | Executive Vice President, | ||
Roger F. Pascavis | 56 | Executive Vice President, Strategic Global | ||
Patrick Forsythe | 49 | |||
Executive Vice President, Global Engineering | ||||
Aaron P. Jagdfeld
has served as our Chief Executive Officer since September 2008,York A. Ragen
has served as our Chief Financial Officer since September 2008. Prior to becoming Chief Financial Officer, Mr. Ragen held Director of Finance and Vice President of Finance positions at Generac. Prior to joining Generac in 2005, Mr. Ragen was Vice President, Corporate Controller at APW Ltd., a spin-off from Applied Power Inc., now known as Actuant Corporation. Mr. Ragen began his career in the Audit division of Arthur Andersen's Milwaukee, Wisconsin office. Mr. Ragen holds a Bachelor of Business Administration in Accounting from the University of Wisconsin-Whitewater.Russell S. Minick Terrence J. Dolanbegan serving as our Executive Vice President, Industrial ProductsChief Marketing Officer in October 2011, with this title being expanded in January 2014 to Executive Vice President, Global Commercial & Industrial Products.August 2016. 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.
Erik WildeTable began serving as our Executive Vice President, North America Industrial in July 2016. Mr. Wilde was Vice President and General Manager of Contentsthe Mining Division for Komatsu America Corp. from 2013 until he joined Generac. Prior to that role, he held leadership positions as Vice President of the ICT Business Division and Product Marketing back to 2005. Mr. Wilde holds a Bachelor of Business Administration in Management from Boise State University and an M.B.A. from Keller Graduate School of Management.
Roger Pascavis
has served as our Executive Vice President, Strategic GlobalPatrick Forsythe Allen D. Gillette ishas served as our Executive Vice President of Global Engineering. Mr. Gillette joinedEngineering since re-joining Generac in 1998July 2015. Mr. Forsythe was Vice President, Global Engineering & Technology of Hayward Industries from 2008 to 2015, Vice President, Global Engineering at Ingersoll Rand Company (and the acquired Doosan Infracore International) from 2004 to 2008, and has served in numerous engineering positions involving increasing levels of responsibilities and corresponding titles. Prior to joining Generac, Mr. Gillette was ManagerDirector of Engineering at Transamerica Delaval Enterprise Division, Chief Engineer—High-Speed Engines at Ajax-Superior Division and Manager of Design & Development, Cooper-Bessemer Reciprocating Products Division.Ingersoll Rand Company from 2002 to 2004. Prior to 2002, Mr. GilletteForsythe worked in various engineering management capacities with Generac from 1995 to 2002. Mr. Forsythe holds an M.S.a Higher National Diploma (HND) in Mechanical Engineering from Purduethe University andof Ulster (United Kingdom), a B.S. in Mechanical Engineering, from Gonzaga University.
You should carefully consider the following risks. These risks could materially affect our business, results of operationsoperations or financial condition, cause the trading price of our common stock to decline materially or cause our actual results to differ materially from those expected or those expressed in any forward-looking statements made by us or on our behalf.us. These risks are not exclusive, and additional risks to which we are subject include, but are not limited to, the factors mentioned under “Forward-Looking Statements” and the risks of our businesses described elsewhere in this Annual Report.
Risk factors relatedrelated to our business and industry
Demand for the majority of our products is significantlysignificantly affected by unpredictable major power-outage events activity that can lead to substantial variations in, and uncertainties regarding, our financial results from period to period.
Sales of our products are subject to consumer buying patterns, and demand forthe majority of our products is affected by power outage events caused by thunderstorms, hurricanes, ice storms, blackouts and other power grid reliability issues. The impact of these outage events on our sales can vary depending on the location, frequency and severity of the outages. Sustained periods without major power disruptions can lead to reduced consumer awareness of the benefits of standby and portable generator products and can result in reduced sales growth rates and excess inventory. 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.
Decreases in the availability and quality, or increases in the cost, of raw materials and key components we use could materially reduce our earnings.
The principal raw materials that we use to produce our products are steel, copper and aluminum. We also source a significant number of component parts from third parties that we utilize to manufacture our products. The prices of those raw materials and components are susceptible to significant fluctuations due to trends in supply and demand, transportation costs, government regulations and tariffs, price controls, economic conditions and other unforeseen circumstances beyond our control. We do not have long-term supply contracts in place to ensure the raw materials and components we use are available in necessary amounts or at fixed prices. If we are unable to mitigate raw material or component price increases through product design improvements, price increases to our customers, manufacturing productivity improvements, or hedging transactions, our profitability could be adversely affected. Also, our ability to continue to obtain quality materials and components is subject to the continued reliability and viability of our suppliers, including in some cases, suppliers who are the sole source of certain important components. If we are unable to obtain adequate, cost efficient or timely deliveries of required raw materials and components, we may be unable to manufacture sufficient quantities of products on a timely basis. This could cause us to lose sales, incur additional costs, delay new product introductions or suffer harm to our reputation.
The industry in which we compete is highly competitive, and our failure to compete successfully could adversely affect our results of operations and financial condition.
We operate in markets that are highly competitive. Some of our competitors have established brands and are larger in size or are divisions of large diversified companies 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 constructionconstruction 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.
In addition, we cannot be certain that we do not or will not infringe third parties' intellectual property rights. Any such claim, even if it is without merit, may be expensive and time-consuming to defend, subject us to damages, cause us to cease making, using or selling certain products that incorporate the disputed intellectual property, require us to redesign our products, divert management time and attention, and/or require us to enter into costly royalty or licensing arrangements. Furthermore, in connection with our sale of Generac Portable Products to a private equity firm in 1998, we granted the private equity firm an exclusive perpetual license for the use of the “Generac Portable Products” trademark in connection with the manufacture and sale of certain engine driven consumer products. This perpetual license was eventually transferred to another company when the private equity firm sold that business. Currently, this trademark is not being used in commerce and, as such, there is a rebuttable presumption that the trademark has been abandoned. However, in the event that this trademark is used in the future, we could suffer competitive confusion and our business could be negatively impacted.
Our operations are subject to various environmental, health and safety laws and regulations, and non-compliance with or liabilities under such laws and regulations could result in substantial costs, fines, sanctions and claims.
Our operations are subject to a variety of foreign, federal, state and local environmental, health and safety laws and regulations including those governing, among other things, emissions to air,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.
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 products or develop new products to comply with new regulations, particularly those relating to air emissions. For example, we were required to modify our spark-ignited air-cooled gaseous engines to comply with the 2011 EPA and CARB regulations, as well as the continued implementation of Tier 4 nonroad diesel engine changes associated with acquisitions serving the mobile product markets. Typically, additional costs associated with significant compliance modifications are passed on to the market. While we have been able to meet previous deadlines and requirements, failure to comply with other existing and future regulatory standards could adversely affect our position in the markets we serve.
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.
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.
We may experience material disruptions to our manufacturing operations.
While we seek to operate our facilities in compliance with applicable rules and regulations and take measures to minimize the risks of disruption at our facilities, a material disruption at one of our manufacturing facilities could prevent us from meeting customer demand, reduce our sales and/or negatively impact our financial results. Any of our manufacturing facilities, or any of our equipment within an otherwise operational facility, could cease operations unexpectedly due to a number of events, including:
● | equipment or information technology infrastructure failure; |
● | disruptions in the transportation |
● | 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.
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 |
● | 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 2013.designs. Any delay in our suppliers’ deliveries may impair our ability to deliver products to our customers. A wide variety of factors could cause such delays including, but not limited to, lack of capacity, economic downturns, availability of credit, weather events or natural disasters.
As a U.S. corporation that conducts business in a variety of foreign countries including, but not limited to, Mexico, Italy and Brazil,, we are subject to the Foreign Corrupt 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.
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.
Our total assets include goodwill and other indefinite-lived intangibles. If we determine these have become impaired, in the future, net income could be materially adversely affected.
Goodwill represents the excess of cost over the fair market value of net assets acquired in business combinations. Indefinite-lived intangibles are comprised of certain trade names.tradenames. At December 31, 2013,2016, goodwill and other indefinite-lived intangibles totaled $891.1 million, most of which arose from the CCMP Transaction.$833.0 million. We review goodwill and other intangibles at least annually for impairment and any excess in carrying value over the estimated fair value is charged to the statement of operations. A reduction in net income resulting from the write-down or impairment of goodwill or indefinite-lived intangibles could have a material adverse effect on our financial statements.
We are unable to determine the specific impact of changes in selling prices or changes in volumes of our products on our net sales.
Because of the wide range of products that we sell, the level of customization for many of our products, the frequent rollout of new products and the fact that we do not apply pricing changes uniformly across our entire portfolio of products, we are unable to determine with specificity the effect of volume changes or changes in selling prices on our net sales.
We may not realize all of the anticipated benefits of our acquisitions or those benefits may take longer to realize than expected. We may also encounter significant unexpected difficulties in integrating acquired businesses.
Our ability to realize the anticipated benefits of our acquisitions will depend, to a large extent, on our ability to integrate the acquired businesses with our business. The combination of independent businesses is a complex, costly and time-consuming process. Further, integrating and managing businesses with international operations may pose challenges not previously experienced by our management. As a result, we willmay be required to devote significant management attention and resources to integrating the business practices and operations of any acquired businesses with ours. The integration process may disrupt our business and, if implemented ineffectively, wouldcould preclude realization of the full benefits expected by us. Our failure to meet the challenges involved in integrating an acquired business into our existing operations or otherwise to realize the anticipated benefits of the transaction could cause an interruption of, or a loss of momentum in, our activities and could adversely affect our results of operations.
In addition, the overall integration of our acquired businesses may result in material unanticipated problems, expenses, liabilities, competitive responses, loss of customer relationships, and diversion of management's attention, and may cause our stock price to decline.
● | managing a larger company; |
● | maintaining employee morale and retaining key management and other employees; |
● | complying with newly applicable foreign regulations; |
● | integrating two business cultures, which may prove to be incompatible; |
● | the possibility of faulty assumptions underlying expectations regarding the integration process; |
● | retaining existing customers and attracting new customers; |
● | consolidating corporate and administrative infrastructures and eliminating duplicative operations; |
● | the diversion of management's attention from ongoing business concerns and performance shortfalls as a result of the diversion of management's attention to the acquisition; |
● | unanticipated issues in integrating information technology, communications and other systems; |
● | unanticipated changes in applicable laws and regulations; |
● | managing tax costs or inefficiencies associated with integrating the operations of the combined company; |
● | unforeseen expenses or delays associated with the acquisition; |
● | difficulty comparing financial reports due to differing financial and/or internal reporting systems; and |
● | making any necessary modifications to internal financial control standards to comply with the Sarbanes-Oxley Act of 2002 and the rules and regulations promulgated thereunder. |
Many of these factors will be outside of our control and any one of them could result in increased costs, decreases in the amount of expected revenues and diversion of management's time and energy, which could materially impact our business, financial condition and results of operations. In addition, even if the operations of our acquired businesses are integrated successfully with our operations, we may not realize the full benefits of the transaction, including the synergies, cost savings or sales or growth opportunities that we expect. These benefits may not be achieved within the anticipated time frame, or at all. Or, additional unanticipated costs may be incurred in the integration of our businesses. All of these factors could cause dilution to our earnings per share, decrease or delay the expected accretive effect of the acquisition, and cause a decrease in the price of our common stock. As a result, we cannot assure you that the combination of our acquisitions with our business will result in the realization of the full benefits anticipated from the transaction.
We may encounter difficulties in implementing or operating a new enterprise resource planning (ERP) system across our subsidiaries, which may adversely affect our operations and financial reporting.
In 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, and we will be implementing the new ERP system at our other locations in future years. The ERP system may not provide the benefits anticipated, could add costs and complications to ongoing operations, and may impact our ability to process transactions efficiently, all of which may have a material adverse effect on the Company’s business and results of operations.
Failures or security breaches of our networks or information technology systems could have an adverse effect on our business.
We rely heavily on information technology (IT) both in our products and services for customers and in our IT systems. Further, we collect and store sensitive information in our data centers and on our networks. 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.
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 boardof 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.
We do not anticipate paying haveplans to paydividends on our common stock in the foreseeable future.
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.
Risks related to our capital structure
We have a significant amount of indebtedness which could adversely affect our cash flow and our ability to remain in compliance with debt covenants and make payments on our indebtedness.
We have a significantsignificant amount of indebtedness. As of December 31, 2013,2016, we had total indebtedness of $1,187.8$1,052.9 million. Our significant level of indebtedness increases the possibility that we may be unable to generate cash sufficient to pay, when due, the principal of, interest on or other amounts due in respect of our indebtedness. Our significant indebtedness, combined with our 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. |
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. Our existing credit facilities do not contain any financial maintenance covenants.
We may need additional capital to finance our growth strategy or to refinance our existing credit facilities, and we may not be able to obtain it on acceptable terms, or at all, which may limit our ability to grow.
We may require additional financing to expand our business. Financing may not be available to us or may be available to us only on terms that are not favorable. The terms of our senior secured credit facilities limit our ability to incur additional debt. In addition, economic conditions, including a downturn in the credit markets, could impact our ability to finance our growth on acceptable terms or at all. If we are unable to raise additional funds or obtain capital on acceptable terms, we may have to delay, modify or abandon some or all of our growth strategies. In the future, if we are unable to refinance our credit facilities on acceptable terms, our liquidity could be adversely affected.
Item 1B. Unresolved Staff Comments
None.
We own, operate or lease manufacturing, distribution and distributionoffice facilities located principally in Wisconsin (USA), Mexico, Italy and Brazilglobally totaling over 3four million square feet. We also operate a dealer training center at our Eagle, Wisconsin facility, which allows us to train new industrial and residential dealers on the service and installation of our products and provide existing dealers with training on product innovations. We also have inventory warehouses in the United States that accommodate material storage and rapid response requirements of our customers.
The following table shows the location and activities ofprovides information about our principal operations:
Location | Owned/ Leased | Activities | Segment | ||||
Waukesha, WI | Owned | Corporate headquarters, manufacturing, storage, | Domestic | ||||
Eagle, WI | Owned | Manufacturing, office, training | Domestic | ||||
Whitewater, WI | Owned | Manufacturing, office, distribution | Domestic | ||||
Oshkosh, WI | Owned | Manufacturing, office, storage, R&D | Domestic | ||||
Berlin, WI | Owned | Manufacturing, office | Domestic | ||||
Jefferson, WI | Owned | Manufacturing, distribution, R&D | Domestic | ||||
| Various WI | |||||||
| Leased | Domestic | ||||||
Maquoketa, IA | Owned | Storage, rental property | Domestic | ||||
Vergennes, VT | Leased | Office | Domestic | ||||
Winooski, VT | Leased | Manufacturing, R&D | Domestic | ||||
Mexico City, Mexico | Owned | Manufacturing, sales, distribution, storage, office, R&D | International | ||||
Mexico City, Mexico | Leased | Office, storage and warehouse | International | ||||
Curitiba, Brazil | Leased | Manufacturing, sales, distribution, storage, office | International | ||||
Milan, Italy | | Leased | Manufacturing, sales, distribution, storage, office, R&D | International | |||
Casole d’Elsa, Italy | | Leased | Manufacturing, | International | |||
Balsicas, Spain | | Leased | Manufacturing, office, storage, R&D | International | |||
Foshan, China | Owned | Manufacturing, office, storage, R&D | International | ||||
Saint-Nizier-sous-Charlieu, France | Leased | Sales, | International | ||||
Ribeirao Preto, Brazil | Leased | Manufacturing, office, storage | International | ||||
Fellbach, Germany | Leased | Sales, office, storage | International | ||||
Crewe, England | Leased | Sales, office, storage | International | ||||
Celle, Germany | Owned | Manufacturing, office, sales, R&D | International | ||||
Charzyno, Poland | Owned | Manufacturing | International |
As of December 31, 2013,2016, substantially all of our owneddomestically-owned and a portion of our internationally-owned properties are subject to collateral provisions under our senior secured credit facilities.
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, 2013,2016, we believe that there is no litigation pending that would have a material effect on our results of operations or financial condition.
Not Applicable.
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 20132016 and 2012,2015, respectively.
| 2013 | ||||||||
| High | Low | |||||||
| Fourth Quarter | $ | 57.05 | $ | 39.01 | ||||
| Third Quarter | $ | 44.30 | $ | 37.11 | ||||
| Second Quarter | $ | 41.48 | $ | 32.41 | ||||
| First Quarter | $ | 41.40 | $ | 32.72 | ||||
| 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 | ||||
| 2016 | High | Low | ||||||
Fourth Quarter | $ | 43.49 | $ | 35.74 | ||||
Third Quarter | $ | 38.00 | $ | 33.13 | ||||
Second Quarter | $ | 39.25 | $ | 33.86 | ||||
First Quarter | $ | 38.51 | $ | 27.26 | ||||
2015 | High | Low | ||||||
Fourth Quarter | $ | 32.53 | $ | 26.88 | ||||
Third Quarter | $ | 39.78 | $ | 27.16 | ||||
Second Quarter | $ | 49.35 | $ | 39.62 | ||||
First Quarter | $ | 50.41 | $ | 43.74 | ||||
Purchases of Contents
The following table summarizes the stock repurchase activity for the twelvethree months ended December 31, 2013,2016, which consisted of the withholding of shares upon the vesting of restricted stock awards to pay withholding taxes:
| (in thousands, except share and per share data) | Total Number of Shares Purchased | Average Price Paid per Share | Total Number Of Shares Purchased As Part Of Publicly Announced Plans Or Programs | Approximate Dollar Value Of Shares That May Yet Be Purchased Under The Plans Or Programs | ||||||||||||
| 01/01/13 - 01/31/13 | - | $ | - | N/A | N/A | |||||||||||
| 02/01/13 - 02/28/13 | 162,819 | $ | 40.18 | N/A | N/A | |||||||||||
| 03/01/13 - 03/31/13 | - | $ | - | N/A | N/A | |||||||||||
| 04/01/13 - 04/30/13 | - | $ | - | N/A | N/A | |||||||||||
| 05/01/13 - 05/31/13 | - | $ | - | N/A | N/A | |||||||||||
| 06/01/13 - 06/30/13 | - | $ | - | N/A | N/A | |||||||||||
| 07/01/13 - 07/31/13 | - | $ | - | N/A | N/A | |||||||||||
| 08/01/13 - 08/31/13 | 227 | $ | 42.09 | N/A | N/A | |||||||||||
| 09/01/13 - 09/30/13 | - | $ | - | N/A | N/A | |||||||||||
| 10/01/13 - 10/31/13 | - | $ | - | N/A | N/A | |||||||||||
| 11/01/13 - 11/30/13 | 412 | $ | 46.42 | N/A | N/A | |||||||||||
| 12/01/13 - 12/31/13 | - | $ | - | N/A | N/A | |||||||||||
| Total | 163,458 | $ | 40.20 | |||||||||||||
Total Number of Shares Purchased | Average Price Paid per Share | Total Number Of Shares Purchased As Part Of Publicly Announced Plans Or Programs | Approximate Dollar Value Of Shares That May Yet Be Purchased Under The Plans Or Programs | |||||||||||||
10/01/16 - 10/31/16 | 38,699 | $ | 38.58 | 38,500 | $ | 248,639,009 | ||||||||||
11/01/16 - 11/30/16 | 716,809 | 39.66 | 716,000 | 220,244,705 | ||||||||||||
12/01/16 - 12/31/16 | 481,000 | 41.84 | 481,000 | 200,120,516 | ||||||||||||
Total | 1,236,508 | $ | 40.47 | |||||||||||||
For equity compensation plan information, please refer to note 10Note 15, “Share Plans,” to the consolidated financial statements in Item 8 in Part II of this Annual Report on Form 10-K.
Stock Performance Graph
The line graph below compares the cumulative total stockholder return on our common stock with the cumulative total return of the Standard & Poor’sPoor’s S&P 500 Index, andthe S&P 500 Industrials Index and the Russell 2000 Index for the yearfive-year period ended December 31, 2013.2016. The graph and table assume that $100 was invested on February 11, 2010 (first day of trading)December 31, 2011 in each of our common stock, the S&P 500 Index, the S&P 500 Industrials Index and the Russell 2000 Index, and that all dividends were reinvested. Cumulative total stockholder returns for our common stock, the S&P 500 Index, and the S&P 500 Industrials Index and the Russell 2000 Index are based on our fiscal year.
Company / Market / Peer Group | 12/31/2011 | 12/31/2012 | 12/31/2013 | 12/31/2014 | 12/31/2015 | 12/31/2016 | ||||||||||||||||||
Generac Holdings Inc. | $ | 100.00 | $ | 157.76 | $ | 296.17 | $ | 244.51 | $ | 155.67 | $ | 213.03 | ||||||||||||
S&P 500 Index - Total Returns | 100.00 | 116.00 | 153.57 | 174.60 | 177.01 | 198.18 | ||||||||||||||||||
S&P 500 Industrials Index | 100.00 | 115.35 | 162.27 | 178.22 | 173.70 | 206.46 | ||||||||||||||||||
Russell 2000 Index | 100.00 | 116.35 | 161.52 | 169.42 | 161.95 | 196.45 | ||||||||||||||||||
Holders
As of February 24, 2014,17, 2017, there were approximately 139199 registered holders of record of Generac’s common stock. A substantially greater number of holders of Generac common stock are “street name” or beneficial holders, whose shares are held of record by banks, brokers and other financial institutions.
Dividends
We 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
For information required by this item will be included inon securities authorized for issuance under our 2014 Proxy Statementequity compensation plans, see “Item 12 - Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters,” which is incorporated herein by reference.
Recent Sales of Unregistered Securities
None.
Use of Proceeds from Registered Securities
Not applicable.
The following table sets forth our selected historical consolidated financial data for the periods and at the dates indicated. The selected historical consolidated financial data for the years ended December 31, 2013, 20122016, 2015 and 20112014 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, 20102013 and December 31, 2009 are2012 is derived from our audited historical consolidated financial statements not included in this annual report.
The results indicated below and elsewhere in this annual report are not necessarily indicative of our futurefuture performance. 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.
Year Ended December 31, | ||||||||||||||||||||
(U.S. Dollars in thousands, except per share data) | 2016 | 2015 | 2014 | 2013 | 2012 | |||||||||||||||
Statement of Operations Data: | ||||||||||||||||||||
Net sales | $ | 1,444,453 | $ | 1,317,299 | $ | 1,460,919 | $ | 1,485,765 | $ | 1,176,306 | ||||||||||
Costs of goods sold | 930,347 | 857,349 | 944,700 | 916,205 | 735,906 | |||||||||||||||
Gross profit | 514,106 | 459,950 | 516,219 | 569,560 | 440,400 | |||||||||||||||
Operating expenses: | ||||||||||||||||||||
Selling and service | 164,607 | 130,242 | 120,408 | 107,515 | 101,448 | |||||||||||||||
Research and development | 37,229 | 32,922 | 31,494 | 29,271 | 23,499 | |||||||||||||||
General and administrative | 74,700 | 52,947 | 54,795 | 55,490 | 46,031 | |||||||||||||||
Amortization of intangibles (1) | 32,953 | 23,591 | 21,024 | 25,819 | 45,867 | |||||||||||||||
Tradename and goodwill impairment (2) | - | 40,687 | - | - | - | |||||||||||||||
Gain on remeasurement of contingent consideration (3) | - | - | (4,877 | ) | - | - | ||||||||||||||
Total operating expenses | 309,489 | 280,389 | 222,844 | 218,095 | 216,845 | |||||||||||||||
Income from operations | 204,617 | 179,561 | 293,375 | 351,465 | 223,555 | |||||||||||||||
Other income (expense): | ||||||||||||||||||||
Interest expense | (44,568 | ) | (42,843 | ) | (47,215 | ) | (54,435 | ) | (49,114 | ) | ||||||||||
Investment income | 44 | 123 | 130 | 91 | 79 | |||||||||||||||
Loss on extinguishment of debt (4) | (574 | ) | (4,795 | ) | (2,084 | ) | (15,336 | ) | (14,308 | ) | ||||||||||
Gain (loss) on change in contractual interest rate (5) | (2,957 | ) | (2,381 | ) | 16,014 | - | - | |||||||||||||
Costs related to acquisitions | (1,082 | ) | (1,195 | ) | (396 | ) | (1,086 | ) | (1,062 | ) | ||||||||||
Other, net | 902 | (5,487 | ) | (1,462 | ) | (1,983 | ) | (2,798 | ) | |||||||||||
Total other expense, net | (48,235 | ) | (56,578 | ) | (35,013 | ) | (72,749 | ) | (67,203 | ) | ||||||||||
Income before provision for income taxes | 156,382 | 122,983 | 258,362 | 278,716 | 156,352 | |||||||||||||||
Provision for income taxes | 57,570 | 45,236 | 83,749 | 104,177 | 63,129 | |||||||||||||||
Net income | 98,812 | 77,747 | 174,613 | 174,539 | 93,223 | |||||||||||||||
Net income attributable to noncontrolling interests | 24 | - | - | - | - | |||||||||||||||
Net income attributable to Generac Holdings Inc. | $ | 98,788 | $ | 77,747 | $ | 174,613 | $ | 174,539 | $ | 93,223 | ||||||||||
Net income attributable to common shareholders per common share - diluted: | $ | 1.50 | $ | 1.12 | $ | 2.49 | $ | 2.51 | $ | 1.35 | ||||||||||
Statement of Cash Flows data: | ||||||||||||||||||||
Depreciation | $ | 21,465 | $ | 16,742 | $ | 13,706 | $ | 10,955 | $ | 8,293 | ||||||||||
Amortization of intangible assets | 32,953 | 23,591 | 21,024 | 25,819 | 45,867 | |||||||||||||||
Expenditures for property and equipment | (30,467 | ) | (30,651 | ) | (34,689 | ) | (30,770 | ) | (22,392 | ) | ||||||||||
Other Financial Data: | ||||||||||||||||||||
Adjusted EBITDA attributable to Generac Holdings Inc. (6) | $ | 274,603 | $ | 270,816 | $ | 337,283 | $ | 402,613 | $ | 289,809 | ||||||||||
Adjusted net income attributable to Generac Holdings Inc. (7) | 198,257 | 198,436 | 234,165 | 301,664 | 220,792 | |||||||||||||||
| (Dollars in thousands, except per share data) | Year ended December 31, 2013 | Year ended December 31, 2012 | Year ended December 31, 2011 | Year ended December 31, 2010 | Year ended December 31, 2009 | |||||||||||||||
| Statement of operations data: | ||||||||||||||||||||
| Net sales | $ | 1,485,765 | $ | 1,176,306 | $ | 791,976 | $ | 592,880 | $ | 588,248 | ||||||||||
| Costs of goods sold | 916,205 | 735,906 | 497,322 | 355,523 | 352,398 | |||||||||||||||
| Gross profit | 569,560 | 440,400 | 294,654 | 237,357 | 235,850 | |||||||||||||||
| Operating expenses: | ||||||||||||||||||||
| Selling and service | 107,515 | 101,448 | 77,776 | 57,954 | 59,823 | |||||||||||||||
| Research and development | 29,271 | 23,499 | 16,476 | 14,700 | 10,842 | |||||||||||||||
| General and administrative | 55,490 | 46,031 | 30,012 | 22,599 | 14,713 | |||||||||||||||
| Amortization of intangibles (1) | 25,819 | 45,867 | 48,020 | 51,808 | 51,960 | |||||||||||||||
| Trade name write-down (2) | — | — | 9,389 | — | — | |||||||||||||||
| Total operating expenses | 218,095 | 216,845 | 181,673 | 147,061 | 137,338 | |||||||||||||||
| Income from operations | 351,465 | 223,555 | 112,981 | 90,296 | 98,512 | |||||||||||||||
| Other income (expense): | ||||||||||||||||||||
| Interest expense | (54,435 | ) | (49,114 | ) | (23,718 | ) | (27,397 | ) | (70,862 | ) | ||||||||||
| (Loss) gain on extinguishment of debt (3) | (15,336 | ) | (14,308 | ) | (377 | ) | (4,809 | ) | 14,745 | |||||||||||
| Investment income | 91 | 79 | 110 | 235 | 2,205 | |||||||||||||||
| Costs related to acquisition | (1,086 | ) | (1,062 | ) | (875 | ) | — | — | ||||||||||||
| Other, net | (1,983 | ) | (2,798 | ) | (1,155 | ) | (1,105 | ) | (1,206 | ) | ||||||||||
| Total other expense, net | (72,749 | ) | (67,203 | ) | (26,015 | ) | (33,076 | ) | (55,118 | ) | ||||||||||
| Income before provision for income taxes | 278,716 | 156,352 | 86,966 | 57,220 | 43,394 | |||||||||||||||
| Provision (benefit) for income taxes (4) | 104,177 | 63,129 | (237,677 | ) | 307 | 339 | ||||||||||||||
| Net income | $ | 174,539 | $ | 93,223 | $ | 324,643 | $ | 56,913 | $ | 43,055 | ||||||||||
| Income per share - diluted: | ||||||||||||||||||||
| Common Stock (formerly Class A non-voting common stock) (5) | 2.51 | 1.35 | 4.79 | (1.65 | ) | (41,111 | ) | |||||||||||||
| Class B Common Stock (5) | n/a | n/a | n/a | 505 | 4,171 | |||||||||||||||
| Statement of cash flows data: | ||||||||||||||||||||
| Depreciation | 10,955 | 8,293 | 8,103 | 7,632 | 7,715 | |||||||||||||||
| Amortization | 25,819 | 45,867 | 48,020 | 51,808 | 51,960 | |||||||||||||||
| Expenditures for property and equipment | (30,770 | ) | (22,392 | ) | (12,060 | ) | (9,631 | ) | (4,525 | ) | ||||||||||
| Other financial data: | ||||||||||||||||||||
| Adjusted EBITDA (6) | 402,613 | 289,809 | 188,476 | 156,249 | 159,087 | |||||||||||||||
| Adjusted Net Income (7) | 301,664 | 220,792 | 147,176 | 115,954 | 83,643 | |||||||||||||||
| (Dollars in thousands) | As of December 31, 2013 | As of December 31, 2012 | As of December 31, 2011 | As of December 31, 2010 | As of December 31, 2009 | |||||||||||||||
| Balance sheet data: | ||||||||||||||||||||
| Current assets | $ | 654,179 | $ | 522,553 | $ | 383,265 | $ | 272,519 | $ | 345,017 | ||||||||||
| Property, plant and equipment, net | 146,390 | 104,718 | 84,384 | 75,287 | 73,374 | |||||||||||||||
| Goodwill | 608,287 | 552,943 | 547,473 | 527,148 | 525,875 | |||||||||||||||
| Other intangibles and other assets | 389,349 | 423,633 | 537,671 | 334,929 | 392,977 | |||||||||||||||
| Total assets | $ | 1,798,205 | $ | 1,603,847 | $ | 1,552,793 | $ | 1,209,883 | $ | 1,337,243 | ||||||||||
| Total current liabilities | $ | 250,845 | $ | 294,859 | $ | 165,390 | $ | 86,685 | $ | 131,971 | ||||||||||
| Long-term borrowings, less current portion | 1,175,349 | 799,018 | 575,000 | 657,229 | 1,052,463 | |||||||||||||||
| Other long-term liabilities | 54,940 | 46,342 | 43,514 | 24,902 | 17,418 | |||||||||||||||
| Redeemable stock (8) | — | — | — | — | 878,205 | |||||||||||||||
| Stockholders' equity | 317,071 | 463,628 | 768,889 | 441,067 | (742,814 | ) | ||||||||||||||
| Total liabilities, redeemable stock and stockholders' equity (8) | $ | 1,798,205 | $ | 1,603,847 | $ | 1,552,793 | $ | 1,209,883 | $ | 1,337,243 | ||||||||||
(U.S. Dollars in thousands) | As of December 31, 2016 | As of December 31, 2015 | As of December 31, 2014 | As of December 31, 2013 | As of December 31, 2012 | |||||||||||||||
Balance Sheet Data: | ||||||||||||||||||||
Current assets | $ | 683,509 | $ | 632,017 | $ | 707,637 | $ | 627,310 | $ | 473,866 | ||||||||||
Property, plant and equipment, net | 212,793 | 184,213 | 168,821 | 146,390 | 104,718 | |||||||||||||||
Goodwill | 704,640 | 669,719 | 635,565 | 608,287 | 552,943 | |||||||||||||||
Other intangibles and other assets | 260,742 | 292,686 | 352,396 | 394,237 | 459,470 | |||||||||||||||
Total assets | $ | 1,861,684 | $ | 1,778,635 | $ | 1,864,419 | $ | 1,776,224 | $ | 1,590,997 | ||||||||||
Total current liabilities | $ | 341,939 | $ | 213,224 | $ | 240,522 | $ | 250,845 | $ | 294,859 | ||||||||||
Long-term borrowings, less current portion | 1,006,758 | 1,037,132 | 1,065,858 | 1,155,298 | 785,031 | |||||||||||||||
Other long-term liabilities | 78,737 | 62,408 | 68,240 | 53,010 | 47,479 | |||||||||||||||
Redeemable noncontrolling interests | 33,138 | - | - | - | - | |||||||||||||||
Stockholders' equity | 401,112 | 465,871 | 489,799 | 317,071 | 463,628 | |||||||||||||||
Total liabilities and stockholders' equity | $ | 1,861,684 | $ | 1,778,635 | $ | 1,864,419 | $ | 1,776,224 | $ | 1,590,997 | ||||||||||
(2) During the fourth quarter of 2011, the Company decided2015, our Board of Directors approved a plan to strategically transition and consolidate certain productsof our brands acquired through acquisitions over the past several years to their more widely known Generac brand. Based on this decision, the Company recordedGenerac® tradename. This brand strategy change resulted in a $9.4reclassification to a two year remaining useful life for the impacted tradenames and a $36.1 million non-cash charge which primarilyto write-down to net realizable value. Additionally, during the fourth quarter of 2015, a $4.6 million goodwill impairment charge was recorded related to the write downwrite-down of the impacted trade nameOttomotores reporting unit goodwill. Refer to net realizable value.
(3) During the second quarter of 2014, we recorded a gain of $4.9 million related to an adjustment to a certain earn-out obligation in connection with the Tower Light acquisition.
(4) For the years ended December 31, 2016, 2015, 2014 and 2013, represents the non-cash write-off of original issue discount and deferred financing costs due to voluntary debt prepayments. Additionally, for the year ended December 31, 2013, represents the loss on extinguishment of debt as a result of a reverse stock split which occurred immediately priorrefinancing transaction in May 2013. For the year ended December 31, 2012, represents the loss on extinguishment of debt as a result of the refinancing transactions in February and May 2012. Refer to Note 10, “Credit Agreements,” to the initial public offering (IPO). Atconsolidated financial statements in Item 8 of this Annual Report on Form 10-K for further information on the timelosses on extinguishment of debt.
(5) For the year ended December 31, 2016, represents a non-cash loss in the third quarter relating to the continued 25 basis point increase in borrowing costs as a result of the IPOcredit agreement leverage ratio remaining above 3.0 times and expected to remain above 3.0 times based on February 17, 2010, all sharescurrent projections. For the year ended December 31, 2015, represents a non-cash loss relating to a 25 basis point increase in borrowing costs as a result of Class B common stock were converted into sharesthe credit agreement leverage ratio rising above 3.0 times effective third quarter 2015 and expected to remain above 3.0 times based on projections at that time. For the year ended December 31, 2014, represents a non-cash gain relating to a 25 basis point reduction in borrowing costs as a result of Class A common stock,the credit agreement leverage ratio falling below 3.0 times effective second quarter 2014 and expected to remain below 3.0 times based on projections at that time. Refer to Note 10, “Credit Agreements,” to the Class A common stock becameconsolidated financial statements in Item 8 of this Annual Report on Form 10-K for further information on the one class of outstanding common stock.
(6) Adjusted EBITDA represents net income before noncontrolling interests, interest expense, taxes, depreciation and amortization, as further adjusted for the other items reflected in the reconciliation table set forth below. The computation of adjusted EBITDA is based on the definition of EBITDA contained in Generac's Newthe Term Loan Credit Agreement and NewAmended ABL Credit AgreementFacility (terms defined in Note 10, “Credit Agreements,” to the consolidated financial statements in Item 7 - Management’s Discussion and Analysis8 of Financial Condition and Results of Operations – Liquidity and Financial Position)this Annual Report on Form 10-K), dated as of May 31, 2013, which is substantially the same definition that was contained in the Company’s previous credit agreements.
We view Adjusted EBITDA as a key measure of our performance. We present Adjusted EBITDA not only due to its importance for purposes of our New Term Loan Credit Agreement and New ABL Credit Agreement credit agreements, but also because it assists us in comparing our performance across reporting periods on a consistent basis because it excludes items that we do not believe are indicative of our core operating performance. Our management uses Adjusted EBITDA:
● | for planning purposes, including the preparation of our annual operating budget and developing and refining our internal projections for future periods; |
● | to allocate resources to enhance the financial performance of our business; |
● | as a benchmark for the determination of the bonus component of compensation for our senior executives under our management incentive plan, as described further in our Proxy Statement; |
● | to evaluate the effectiveness of our business strategies and as a supplemental tool in evaluating our performance against our budget for each period; and |
● | in communications with our 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 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. |
The adjustments included in the reconciliation table listed below are provided for under our New Term Loan Credit Agreement and NewAmended ABL Credit AgreementFacility and also are presented to illustrate the operating performance of our business in a manner consistent with the presentation used by our management and board of directors. These adjustments eliminate the impact of a number of items that:
● | we do not consider indicative of our ongoing operating performance, such as non-cash write-downs and other charges, non-cash gains and write-offs relating to the retirement of debt, severance costs and other restructuring-related business optimization expenses; |
● | we believe to be akin to, or associated with, interest expense, such as administrative agent fees, revolving credit facility commitment fees and letter of credit fees; or |
● | are non-cash in nature, such as share-based compensation. |
We explain in more detail in footnotes (a) through (d)(h) below why we believe these adjustments are useful in calculating Adjusted EBITDA as a measure of our operating performance.
Adjusted EBITDA does not represent, and should not be a substitute for, net income or cash flows from operations as determined in accordance with U.S. GAAP. Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under U.S. GAAP. Some of the limitations are:
● | Adjusted EBITDA does not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments; |
● | Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; |
● | Adjusted EBITDA does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments on our debt; |
● | although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements; |
● | several of the adjustments that we use in calculating Adjusted EBITDA, such as non-cash write-downs and other charges, while not involving cash expense, do have a negative impact on the value our assets as reflected in our consolidated balance sheet prepared in accordance with U.S. GAAP; and |
● | other companies may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure. |
Furthermore, as noted above, one of our uses of Adjusted EBITDA is as a benchmark for determining elements of compensation for our senior executives. At the same time, some or all of these senior executives have responsibility for monitoring our financial results, generally including the items that are included as adjustments in calculating Adjusted EBITDA (subject ultimately to review by our boardBoard of directorsDirectors in the context of the board'sBoard's review of our financial statements). While many of the adjustments (for example, transaction costs and credit facility fees), involve mathematical application of items reflected in our financial statements, others involve a degree of judgment and discretion. While we believe that all of these adjustments are appropriate, and while the calculations are subject to review by our boardBoard of directorsDirectors in the context of the board'sBoard's review of our financial statements, and certification by our chief financial officerChief Financial Officer in a compliance certificate provided to the lenders under our New Term Loan Credit Agreement and NewAmended ABL Credit Agreement,Facility, this discretion may be viewed as an additional limitation on the use of Adjusted EBITDA as an analytical tool.
Because of these limitations, Adjusted EBITDA should not be considered as a measure of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our U.S. GAAP results and using Adjusted EBITDA only supplementally.
The following table presents a reconciliation of net income to Adjusted EBITDA:
| (Dollars in thousands) | Year ended December 31, 2013 | Year ended December 31, 2012 | Year ended December 31, 2011 | Year ended December 31, 2010 | Year ended December 31, 2009 | |||||||||||||||
| Net income | $ | 174,539 | $ | 93,223 | $ | 324,643 | $ | 56,913 | $ | 43,055 | ||||||||||
| Interest expense | 54,435 | 49,114 | 23,718 | 27,397 | 70,862 | |||||||||||||||
| Depreciation and amortization | 36,774 | 54,160 | 56,123 | 59,440 | 59,675 | |||||||||||||||
| Income taxes provision (benefit) | 104,177 | 63,129 | (237,677 | ) | 307 | 339 | ||||||||||||||
| Non-cash write-down and other charges (income) (a) | 78 | 247 | 10,400 | (361 | ) | (1,592 | ) | |||||||||||||
| Non-cash share-based compensation expense (b) | 12,368 | 10,780 | 8,646 | 6,363 | — | |||||||||||||||
| Loss (gain) on extinguishment of debt (c) | 15,336 | 14,308 | 377 | 4,809 | (14,745 | ) | ||||||||||||||
| Transaction costs and credit facility fees (d) | 3,863 | 4,117 | 1,719 | 1,019 | 1,188 | |||||||||||||||
| Other | 1,043 | 731 | 527 | 362 | 305 | |||||||||||||||
| Adjusted EBITDA | $ | 402,613 | $ | 289,809 | $ | 188,476 | $ | 156,249 | $ | 159,087 | ||||||||||
EBITDA attributable to Generac Holdings Inc.:
Year Ended December 31, | ||||||||||||||||||||
(U.S. Dollars in thousands) | 2016 | 2015 | 2014 | 2013 | 2012 | |||||||||||||||
Net income attributable to Generac Holdings Inc. | $ | 98,788 | $ | 77,747 | $ | 174,613 | $ | 174,539 | $ | 93,223 | ||||||||||
Net income attributable to noncontrolling interests (a) | 24 | - | - | - | - | |||||||||||||||
Net income | 98,812 | 77,747 | 174,613 | 174,539 | 93,223 | |||||||||||||||
Interest expense | 44,568 | 42,843 | 47,215 | 54,435 | 49,114 | |||||||||||||||
Depreciation and amortization | 54,418 | 40,333 | 34,730 | 36,774 | 54,160 | |||||||||||||||
Provision for income taxes | 57,570 | 45,236 | 83,749 | 104,177 | 63,129 | |||||||||||||||
Non-cash write-down and other adjustments (b) | 357 | 3,892 | (3,853 | ) | 78 | 247 | ||||||||||||||
Non-cash share-based compensation expense (c) | 9,493 | 8,241 | 12,612 | 12,368 | 10,780 | |||||||||||||||
Tradename and goodwill impairment (d) | - | 40,687 | - | - | - | |||||||||||||||
Loss on extinguishment of debt (e) | 574 | 4,795 | 2,084 | 15,336 | 14,308 | |||||||||||||||
(Gain) loss on change in contractual interest rate (f) | 2,957 | 2,381 | (16,014 | ) | - | - | ||||||||||||||
Transaction costs and credit facility fees (g) | 2,442 | 2,249 | 1,851 | 3,863 | 4,117 | |||||||||||||||
Business optimization expenses (h) | 7,316 | 1,947 | - | - | - | |||||||||||||||
Other | (120 | ) | 465 | 296 | 1,043 | 731 | ||||||||||||||
Adjusted EBITDA | 278,387 | 270,816 | 337,283 | 402,613 | 289,809 | |||||||||||||||
Adjusted EBITDA attributable to noncontrolling interests | 3,784 | - | - | - | - | |||||||||||||||
Adjusted EBITDA attributable to Generac Holdings Inc. | $ | 274,603 | $ | 270,816 | $ | 337,283 | $ | 402,613 | $ | 289,809 | ||||||||||
(a) For the year ended December 31, 2016, includes the noncontrolling interests’ share of expenses related to Pramac purchase accounting, including the step-up in value of inventories and intangible amortization of $8.0 million.
(b) Represents the following non-cash charges:
We believe that adjusting net income for these non-cash charges is useful for the following reasons:
● | The gains/losses on disposals of assets result from the sale of assets that are no longer useful in our business and therefore represent gains or losses that are not from our core operations; |
● | The adjustments for unrealized mark-to-market gains and losses on commodity contracts represent non-cash items to reflect changes in the fair value of forward contracts that have not been settled or terminated. We believe it is useful to adjust net income for these items because the charges do not represent a cash outlay in the period in which the charge is incurred, although Adjusted EBITDA must always be used together with our U.S. GAAP statements of comprehensive income and cash flows to capture the full effect of these contracts on our operating performance; |
● | The purchase accounting adjustments represent non-cash items to reflect fair value at the date of acquisition, and therefore do not reflect our ongoing operations; and |
● | The adjustment to a certain earn-out obligation in connection with the Tower Light acquisition recorded in the year ended December 31, 2014, is a one-time charge that we believe does not reflect our ongoing operations. |
(c• The loss 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;
(d) During the loss (gain)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. Refer to Note 2, “Significant Accounting Policies – Goodwill and Other Indefinite-Lived Intangible Assets,” to the consolidated financial statements in Item 8 of this Annual Report on extinguishmentForm 10-K for further information on the 2015 impairment charges.
(e) For the years ended December 31, 2016, 2015, 2014 and 2013, represents the non-cash write-off of original issue discount and deferred financing costs due to voluntary debt from:
(f• for) For the year ended December 31, 2009,2016, represents a non-cash gainsloss in the third quarter relating to the continued 25 basis point increase in borrowing costs as a result of the credit agreement leverage ratio remaining above 3.0 times and expected to remain above 3.0 times based on current projections. For the year ended December 31, 2015, represents a non-cash loss relating to a 25 basis point increase in borrowing costs as a result of the credit agreement leverage ratio rising above 3.0 times effective third quarter 2015 and expected to remain above 3.0 times based on projections at that time. For the year ended December 31, 2014, represents a non-cash gain relating to a 25 basis point reduction in borrowing costs as a result of the credit agreement leverage ratio falling below 3.0 times effective second quarter 2014 and expected to remain below 3.0 times based on projections at that time. 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;the contractual interest rate.
● | administrative agent fees and revolving credit facility commitment fees under our Term Loan and Amended ABL Facility, which we believe to be akin to, or associated with, interest expense and whose inclusion in Adjusted EBITDA is therefore similar to the inclusion of interest expense in that calculation; |
● | transaction costs relating to the acquisition of a business; and |
● | other financing costs incurred relating to the dividend recapitalization transactions completed in May 2012 and 2013. |
(h) For the year ended December 31, 2016, represents charges relating to business optimization and restructuring costs to address the significant and extended downturns for capital spending within the oil & gas industry. For the year ended December 31, 2015, represents severance and non-recurring restructuring charges related to the inclusionintegration of interest expense inour facilities, which represent expenses that calculation;
(7) Adjusted Net Income is defined as net income before noncontrolling interests and provision (benefit) for income taxes adjusted for the following items: cash income tax expense, amortization of intangible assets, amortization of deferred financing costs and original issue discount related to the Company’s debt, losses (gains) on extinguishment of the Company’sour debt, intangible asset impairment charges, certain transaction costs and other purchase accounting adjustments, andlosses on extinguishment of debt, business optimization expenses, certain other non-cash gains and losses, as reflected in the reconciliation table set forth below.
We believe Adjusted Net Income is used by securities analysts, investors and other interested partiesparties in the evaluation of our companycompany’s operations. Management believes the disclosure of Adjusted Net Income offers an additional financial metric that, when used in conjunction with U.S. GAAP results and the reconciliation to U.S. GAAP results, provides a more complete understanding of our results of operations, our cash flows, and the factors and trends affecting our business.
The adjustments included in the reconciliation table listed below are presented to illustrate the operating performance of our business in a manner consistent with the presentation used by investors and securities analysts. Similar to the Adjusted EBITDA reconciliation, these adjustments eliminate the impact of a number of items we do not consider indicative of our ongoing operating performance or cash flows, such as amortization costs, transaction costs and write-offs relating to the retirement of debt. We also make adjustments to present cash taxes paid as a result of our favorable tax attributes.
Similar to Adjusted EBITDA, Adjusted Net Income does not represent, and should not be a substitute for, net income or cash flows from operations as determined in accordance with U.S. GAAP. Adjusted Net Income has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under U.S. GAAP. Some of the limitations are:
● | Adjusted Net Income does not reflect changes in, or cash requirements for, our working capital needs; |
● | although amortization is a non-cash charge, the assets being amortized may have to be replaced in the future, and Adjusted Net Income does not reflect any cash requirements for such replacements; and |
● | other companies may calculate Adjusted Net Income differently than we do, limiting its usefulness as a comparative measure. |
The following table presents a reconciliation of net income to Adjusted Net Income:
Year Ended December 31, | ||||||||||||||||||||
(U.S. Dollars in thousands) | 2016 | 2015 | 2014 | 2013 | 2012 | |||||||||||||||
Net income attributable to Generac Holdings Inc. | $ | 98,788 | $ | 77,747 | $ | 174,613 | $ | 174,539 | $ | 93,223 | ||||||||||
Net income attributable to noncontrolling interests | 24 | - | - | - | - | |||||||||||||||
Net income | 98,812 | 77,747 | 174,613 | 174,539 | 93,223 | |||||||||||||||
Provision for income taxes | 57,570 | 45,236 | 83,749 | 104,177 | 63,129 | |||||||||||||||
Income before provision for income taxes | 156,382 | 122,983 | 258,362 | 278,716 | 156,352 | |||||||||||||||
Amortization of intangible assets | 32,953 | 23,591 | 21,024 | 25,189 | 45,867 | |||||||||||||||
Amortization of deferred finance costs and original issue discount | 3,940 | 5,429 | 6,615 | 4,772 | 3,759 | |||||||||||||||
Tradename and goodwill impairment | - | 40,687 | - | - | - | |||||||||||||||
Loss on extinguishment of debt | 574 | 4,795 | 2,084 | 15,336 | 14,308 | |||||||||||||||
(Gain) loss on change in contractual interest rate | 2,957 | 2,381 | (16,014 | ) | - | - | ||||||||||||||
Transaction costs and other purchase accounting adjustments (a) | 5,653 | 2,710 | (3,623 | ) | 2,842 | 3,317 | ||||||||||||||
Business optimization expenses | 7,316 | 1,947 | - | - | - | |||||||||||||||
Adjusted net income before provision for income taxes | 209,775 | 204,523 | 268,448 | 326,855 | 223,603 | |||||||||||||||
Cash income tax expense (b) | (9,299 | ) | (6,087 | ) | (34,283 | ) | (25,821 | ) | (2,811 | ) | ||||||||||
Adjusted net income | 200,476 | 198,436 | 234,165 | 301,034 | 220,792 | |||||||||||||||
Adjusted net income attributable to noncontrolling interests | 2,219 | - | - | - | - | |||||||||||||||
Adjusted net income attributable to Generac Holdings Inc. | $ | 198,257 | $ | 198,436 | $ | 234,165 | $ | 301,034 | $ | 220,792 | ||||||||||
(a) Represents transaction costs incurred directly in connection with any investment, as defined in our credit agreement, equity issuance or debt issuance or refinancing, and certain purchase accounting adjustments. Additionally, the year ended December 31, 2014 includes a gain of $4.9 million related to an adjustment to an earn-out obligation in connection with the Tower Light acquisition.
(b) For the year ended December 31, 2016, amount is based on a cash income tax rate of 5.9%. Cash income tax expense for 2016 is based on the projected taxable income and corresponding cash tax rate for the full year after considering the effects of current and deferred income tax items, and is calculated by applying the derived cash tax rate to the period’s pretax income. For the years ended December 31, 2015, 2014, 2013 and 2012, amounts are based on actual cash income taxes paid during each year.
| (Dollars in thousands) | Year ended December 31, 2013 | Year ended December 31, 2012 | Year ended December 31, 2011 | Year ended December 31, 2010 | Year ended December 31, 2009 | |||||||||||||||
| Net income | $ | 174,539 | $ | 93,223 | $ | 324,643 | $ | 56,913 | $ | 43,055 | ||||||||||
| Provision (benefit) for income taxes | 104,177 | 63,129 | (237,677 | ) | 307 | 339 | ||||||||||||||
| Income before provision (benefit) for income taxes | 278,716 | 156,352 | 86,966 | 57,220 | 43,394 | |||||||||||||||
| Amortization of intangible assets | 25,819 | 45,867 | 48,020 | 51,808 | 51,960 | |||||||||||||||
| Amortization of deferred finance costs and original issue discount | 4,772 | 3,759 | 1,986 | 2,439 | 3,417 | |||||||||||||||
| Loss (gain) on extinguishment of debt | 15,336 | 14,308 | 377 | 4,809 | (14,745 | ) | ||||||||||||||
| Trade name write-down | — | — | 9,389 | — | — | |||||||||||||||
| Transaction costs and other purchase accounting adjustments | 2,842 | 3,317 | 875 | — | — | |||||||||||||||
| Adjusted net income before provision for income taxes | 327,485 | 223,603 | 147,613 | 116,276 | 84,026 | |||||||||||||||
| Cash income tax expense | (25,821 | ) | (2,811 | ) | (437 | ) | (322 | ) | (383 | ) | ||||||||||
| Adjusted net income | $ | 301,664 | $ | 220,792 | $ | 147,176 | $ | 115,954 | $ | 83,643 | ||||||||||
Item(8) Includes our Series A Preferred Stock and Class B Common Stock.
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 power generation equipment and other engine powered products serving the residential, light commercial and industrial and construction markets. UnlikePower generation is our primary focus, which differentiates us from our primary competitors inthat also have broad operations outside of the generator market, power generation is our main focus.equipment market. As the only significant market participant focused predominantly on these products, we have one of the leading market positions in the power equipment market in North America and an expanding presence internationally. We believe we have one of the widest rangeranges of products in the marketplace, including residential, commercial and industrial standby generators, as well as portable and mobile generators used in a variety of applications. Other engine powered products that we design and manufacture include light towers which provide temporary lighting for various end marketsmarkets; commercial and industrial mobile heaters used in the oil & gas, construction and other industrial markets; and a broad product line of outdoor power washersequipment for residential and commercial use.
Over the past several years, we have executed a number of acquisitions that support our strategic plan. A summary of these acquisitions can be found in Note 1, “Description of Business,” to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K.
Business driversDrivers and operational factors
In operating our business and monitoring its performance, we pay attention to a number of business drivers and trends as well as operational factors. The statements in this section are based on our current expectations.
Business driversDrivers 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 home standby generators are only approximatelyEffect of large scale and baseline power disruptions.Power disruptions are an important driver of customer awareness and have historically influenced demand for generators.generators, both in the United States and internationally. Increased frequency and duration of major power outage events, 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 standbyportable or portablestandby generator during the immediate and subsequent period, which we believe may last for sixnine to twelve months following a major power outage event for standby generators. For example, the multiple major outage events that occurred during the second half of both 2011 and 2012 drove strong demand for portable and home standby generators, and the increased awareness of these products contributed to substantial organic revenue growth in 2012 with strong growth continuing during 2013. While thereMajor power disruptions are localized power outages that occur practically every day across the U.S., 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 residentialImpact of business capital investment cycle.
We are subject to various factors that can affect our results of operations, which we attempt to mitigate through factors we can control, including continued product development, expanded distribution, pricing and cost control. Certain operational and other factors that affect our business include the following:
Effect of commodity, currency and component price fluctuations.
Industry-wide price fluctuations of key commodities, such as steel, copper and aluminum,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.
Factors influencing interest expense.
Factors influencing provision for income taxes and cash income taxes paid. We had approximately $960$592 million of tax-deductible goodwill and intangible asset amortization remaining as of December 31, 20132016 related to our acquisition by CCMP in 2006 that we expect to generate aggregate cash tax savings of approximately $374$231 million through 2021, assuming continued profitability and a 39% tax rate. The recognition of the tax benefit associated with these assets for tax purposes is expected to be $122 million annually through 2020 and $102 million in 2021, which generates annual cash tax savings of $48 million through 2020 and $40 million in 2021, assuming profitability and a 39% tax rate. As a result of the asset acquisition of the Magnum Products business in the fourth quarter of 2011, we had approximately $48.3$38.0 million of incremental tax deductible goodwill and intangible assets remaining as of December 31, 2013.2016. We expect these assets to generate aggregate cash tax savings of $18.9$14.9 million through 2026 assuming continued profitability and a 39% tax rate. The amortization of these assets for tax purposes is expected to be $3.8 million annually through 2025 and $2.8 million in 2026, which generates an additional annual cash tax savings of $1.5 million through 2025 and $1.1 million in 2026, assuming profitability and a 39% tax rate. Based on current business plans, we believe that our cash tax obligations through 2026 will be significantly reduced by these tax attributes. Other domestic acquisitions have resulted in additional tax deductible goodwill and intangible assets that will generate tax savings, but are not material to the Company’s consolidated financial statements.
Components of net salesNet Sales and expenses
Net 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 and constructionindustrial markets. We also sell engines to certain customers and service parts to our dealer network. Net sales, which include shipping and handling charges billed to customers, are generally recognized upon shipment of products to our customers. Related freight costs are included in cost of sales. Our generators and other products are fueled by natural gas, liquid propane, gasoline, diesel or Bi-Fuel™ systems with power output from 800W to several megawatts (mW) using our multi-generator systems. Our products are primarily manufactured and assembled at our Wisconsin (USA), Mexico, Italy and Brazil facilities and distributed through thousands of outlets primarily across the U.S. and Canada, with an expanding presence internationally including Latin America, Europe, the Middle East, Africa and Asia/Pacific regions. Our smaller kW generators for the residential and commercial markets, as well as light towers and power washers, are primarily built to stock, while our larger kW products for the industrial markets are generally customized and built to order.
We are not dependent on any one channel or customer for our net sales, with no single customer representing more than 6%7% of our sales, for the year ended December 31, 2013 and our top ten customers representing less than 24%22% of our total sales for the same period.
Costs of goods sold
The principal elements of costs of goods sold in our manufacturing operations are component parts, raw materials, factory overhead and labor. Component parts and raw materials comprised over 85%approximately 78% of costs of goods sold for the year ended December 31, 2013.2016. The principal component parts are engines and alternators. We design and manufacture air-cooled engines for certain of our productsgenerators up to 20kW.22kW, along with certain liquid-cooled engines. 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’rewe 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 suppliers. In some cases, these relationships are proprietary.
The principal raw materials used in our manufacturing and warehousing 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, manufacturing efficiencies, price increases and select hedging transactions. However, there is typically a lag between raw material price fluctuations and their effect on our costs of goods sold.
Other sources of costs include our manufacturing and warehousing facilities, factory overhead, labor and shipping costs. Factory overhead includes utilities, support personnel, depreciation, general supplies, support and maintenance. Although we attempt to maintain a flexible manufacturing cost structure, our margins can be impacted when we cannot timely adjust labor and manufacturing costs to match fluctuations in net sales.
Operating 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.
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 ourResearch and development. Our research and development expenses support numerous projects covering all of our product lines. We currently operate engineering facilities at eightmany locations globally and employ over 250300 personnel with focus on new product development, existing product improvement and cost containment. Our commitmentWe are committed to research and development, has resulted inand rely on a significant portfoliocombination of over 100 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 administrativeAmortization of intangibles.
Our amortization of intangiblesOther 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.
Other income (expense) includes the interest expense on our outstanding borrowings, amortization of debt financing costs and original issue discount as well as, and expenses related to interest rate swap agreements. Other income (expense) also includes other financial items such as losslosses on extinguishment of debt, andgains (losses) on change in contractual interest rate, interest income earned on our cash and cash equivalents.
Costs related to acquisition.
Results of operations
Year ended December 31, 20132016 compared to year ended December 31, 2012
The following table sets forth our consolidated statement of operations data for the periods indicated:
Year Ended December 31, | ||||||||||||||||
(U.S. Dollars in thousands) | 2016 | 2015 | $ Change | % Change | ||||||||||||
Net sales | $ | 1,444,453 | $ | 1,317,299 | 127,154 | 9.7 | % | |||||||||
Cost of goods sold | 930,347 | 857,349 | 72,998 | 8.5 | % | |||||||||||
Gross profit | 514,106 | 459,950 | 54,156 | 11.8 | % | |||||||||||
Operating expenses: | ||||||||||||||||
Selling and service | 164,607 | 130,242 | 34,365 | 26.4 | % | |||||||||||
Research and development | 37,229 | 32,922 | 4,307 | 13.1 | % | |||||||||||
General and administrative | 74,700 | 52,947 | 21,753 | 41.1 | % | |||||||||||
Amortization of intangible assets | 32,953 | 23,591 | 9,362 | 39.7 | % | |||||||||||
Tradename and goodwill impairment | - | 40,687 | (40,687 | ) | -100.0 | % | ||||||||||
Total operating expenses | 309,489 | 280,389 | 29,100 | 10.4 | % | |||||||||||
Income from operations | 204,617 | 179,561 | 25,056 | 14.0 | % | |||||||||||
Total other expense, net | (48,235 | ) | (56,578 | ) | 8,343 | -14.7 | % | |||||||||
Income before provision for income taxes | 156,382 | 122,983 | 33,399 | 27.2 | % | |||||||||||
Provision for income taxes | 57,570 | 45,236 | 12,334 | 27.3 | % | |||||||||||
Net income | 98,812 | 77,747 | 21,065 | 27.1 | % | |||||||||||
Net income attributable to noncontrolling interests | 24 | - | 24 | N/A | ||||||||||||
Net income attributable to Generac Holdings Inc. | $ | 98,788 | $ | 77,747 | 21,041 | 27.1 | % | |||||||||
| (Dollars in thousands) | Year ended December 31, 2013 | Year ended December 31, 2012 | ||||||
| Net sales | $ | 1,485,765 | $ | 1,176,306 | ||||
| Costs of goods sold | 916,205 | 735,906 | ||||||
| Gross profit | 569,560 | 440,400 | ||||||
| Operating expenses: | ||||||||
| Selling and service | 107,515 | 101,448 | ||||||
| Research and development | 29,271 | 23,499 | ||||||
| General and administrative | 55,490 | 46,031 | ||||||
| Amortization of intangibles | 25,819 | 45,867 | ||||||
| Total operating expenses | 218,095 | 216,845 | ||||||
| Income from operations | 351,465 | 223,555 | ||||||
| Total other expense, net | (72,749 | ) | (67,203 | ) | ||||
| Income before provision for income taxes | 278,716 | 156,352 | ||||||
| Provision for income taxes | 104,177 | 63,129 | ||||||
| Net income | $ | 174,539 | $ | 93,223 | ||||
| (Dollars in thousands) | Year ended December 31, 2013 | Year ended December 31, 2012 | ||||||
| Residential power products | $ | 843,727 | $ | 705,444 | ||||
| Commercial & Industrial power products | 569,890 | 410,341 | ||||||
| Other | 72,148 | 60,521 | ||||||
| Net sales | $ | 1,485,765 | $ | 1,176,306 | ||||
The following sets forth our reportable segment information for the periods indicated:
Net Sales | ||||||||||||||||
Year Ended December 31, | ||||||||||||||||
(U.S. Dollars in thousands) | 2016 | 2015 | $ Change | % Change | ||||||||||||
Domestic | $ | 1,173,559 | $ | 1,204,589 | (31,030 | ) | -2.6 | % | ||||||||
International | 270,894 | 112,710 | 158,184 | 140.3 | % | |||||||||||
Total net sales | $ | 1,444,453 | $ | 1,317,299 | 127,154 | 9.7 | % | |||||||||
Adjusted EBITDA | ||||||||||||||||
Year Ended December 31, | ||||||||||||||||
2016 | 2015 | $ Change | % Change | |||||||||||||
Domestic | $ | 261,428 | $ | 254,882 | 6,546 | 2.6 | % | |||||||||
International | 16,959 | 15,934 | 1,025 | 6.4 | % | |||||||||||
Total Adjusted EBITDA | $ | 278,387 | $ | 270,816 | 7,571 | 2.8 | % | |||||||||
The following table sets forth our product class information for the periods indicated:
Year Ended December 31, | ||||||||||||||||
(U.S. Dollars in thousands) | 2016 | 2015 | $ Change | % Change | ||||||||||||
Residential products | $ | 772,436 | $ | 673,764 | 98,672 | 14.6 | % | |||||||||
Commercial & industrial products | 557,532 | 548,440 | 9,092 | 1.7 | % | |||||||||||
Other | 114,485 | 95,095 | 19,390 | 20.4 | % | |||||||||||
Total net sales | $ | 1,444,453 | $ | 1,317,299 | 127,154 | 9.7 | % | |||||||||
Net sales increased $309.5 million, or 26.3%, to $1,485.8 million. The decrease in Domestic sales for the year ended December 31, 20132016 was primarily due to significant declines in shipments of mobile products into oil & gas and general rental markets. Partially offsetting these impacts was the contribution from $1,176.3 million the CHP acquisition, along with increased shipments of portable and home standby generators.
The increase in International sales for the year ended December 31, 2016 was due to the contribution from the Pramac acquisition. Partially offsetting this impact were declines in organic shipments of mobile products into the European region.
The total contribution from non-annualized recent acquisitions for the year ended December 31, 2012. Residential product sales increased 19.6%2016 was $236.6 million.
Net income attributable to $843.7 million from $705.4 million for the comparable period in 2012. The increase in residential product sales was primarily driven by increases in shipments for home standby generators dueGenerac Holdings Inc. Net income attributable to a combination of factors including the additional awareness and adoption of our products created by major power outages in recent years, the Company’s expanded distribution, increased sales and marketing initiatives, overall strong operational execution and an improving environment for residential investment. The strength in home standby generators was partially offset by a decline in shipments of portable generators due to less severe power outage events relative to the prior year. In addition, increased revenue from power washer products contributed to the year-over-year sales growth in residential products. Commercial & industrial product sales increased 38.9% to $569.9 million from $410.3 million for the comparable period in 2012. The increase was driven by the acquisitions of Ottomotores, Tower Light and Baldor Generators along with strong organic growth for stationary and mobile generators. The increase in organic revenues was primarily driven by strong shipments to national account customers and increased sales of natural gas generators used in light commercial applications.
Gross profit. Gross profit margin for the year ended December 31, 2013 increased2016 was 35.6% compared to 38.3% from 37.4%34.9% for the year ended December 31, 2012. Gross2015, which includes the impact of the aforementioned $2.7 million of business optimization charges classified within cost of goods sold, as well as $4.2 million of expense relating to the purchase accounting adjustment for the step-up in value of inventories relating to the Pramac acquisition. Excluding the impact of these adjustments, gross profit margin improvedwas 36.1%, an improvement of 120 basis points over the prior yearyear. The increase was primarily due to the combination of improved product mix, improved pricing and a moderation in product costs due tofavorable impacts from lower commodity pricescosts and execution of cost reduction initiatives.overseas sourcing benefits from a stronger U.S. Dollar, along with an overall favorable organic product mix. In addition, gross margin in the prior year was negatively impacted by temporary increases in certain costs associated with the west coast port congestion as well as other overhead-related costs that did not repeat in the current year. These margin improvementsfactors were partially offset by the mix impact from the Ottomotores and Baldor acquisitions.Pramac acquisition.
Operating expenses.
Other expense. Other expense in the Ottomotores, Tower Lightprior year included a non-cash $4.8 million loss on extinguishment of debt resulting from $150.0 million of voluntary prepayments of Term Loan debt, and Baldor Generator businesses, as well as increased sales, engineering and administrative infrastructure to supporta $2.4 million non-cash loss resulting from an increase in our Term Loan interest rate spread of 25 basis points. In the strategic growth initiatives and higher sales levelscurrent year, other expense included a $3.0 million non-cash loss resulting from a continuation of the Company. These increases25 basis point spread increase, and a $0.6 million loss on extinguishment of debt resulting from a $25.0 million voluntary prepayment of Term Loan debt.
Income tax expense. The effective income tax rates for the years ended December 31, 2016 and 2015 were mostly36.8%.
Adjusted EBITDA. Adjusted EBITDA margins for the Domestic segment for the year ended December 31, 2016 were 22.3% of net sales as compared to 21.2% of net sales for the year ended December 31, 2015. This increase was primarily due to overall favorable product mix; lower commodity costs and overseas sourcing benefits from a stronger U.S. Dollar; and the benefit of cost-reduction actions within domestic mobile products, partially offset by warranty rate improvements resulting in increased promotional activities.
Adjusted EBITDA margins for the International segment for the year ended December 31, 2016 were 6.3% of net sales as compared to 14.1% of net sales for the year ended December 31, 2015. This decrease was primarily due to a $17.6 million favorable adjustment to warranty reserves driven by better claims experience, which impacted selling and service expense, as well as alarge decline in mobile products margins given the amortizationreduced operating leverage on lower organic sales volume, unfavorable sales mix, foreign currency impacts with the weakness in the British Pound, and, to a lesser extent, the Pramac acquisition sales mix.
Adjusted net income. Adjusted Net Income of intangibles.
Year ended December 31, 2015 compared to year ended December 31, 2014
The following table sets forth our consolidated statement of operations data for the periods indicated:
Year Ended December 31, | ||||||||||||||||
(U.S. Dollars in thousands) | 2015 | 2014 | $ Change | % Change | ||||||||||||
Net sales | $ | 1,317,299 | $ | 1,460,919 | (143,620 | ) | -9.8 | % | ||||||||
Cost of goods sold | 857,349 | 944,700 | (87,351 | ) | -9.2 | % | ||||||||||
Gross profit | 459,950 | 516,219 | (56,269 | ) | -10.9 | % | ||||||||||
Operating expenses: | ||||||||||||||||
Selling and service | 130,242 | 120,408 | 9,834 | 8.2 | % | |||||||||||
Research and development | 32,922 | 31,494 | 1,428 | 4.5 | % | |||||||||||
General and administrative | 52,947 | 54,795 | (1,848 | ) | -3.4 | % | ||||||||||
Amortization of intangible assets | 23,591 | 21,024 | 2,567 | 12.2 | % | |||||||||||
Tradename and goodwill impairment | 40,687 | - | 40,687 | N/A | ||||||||||||
Gain on remeasurement of contingent consideration | - | (4,877 | ) | 4,877 | -100.0 | % | ||||||||||
Total operating expenses | 280,389 | 222,844 | 57,545 | 25.8 | % | |||||||||||
Income from operations | 179,561 | 293,375 | (113,814 | ) | -38.8 | % | ||||||||||
Total other expense, net | (56,578 | ) | (35,013 | ) | (21,565 | ) | 61.6 | % | ||||||||
Income before provision for income taxes | 122,983 | 258,362 | (135,379 | ) | -52.4 | % | ||||||||||
Provision for income taxes | 45,236 | 83,749 | (38,513 | ) | -46.0 | % | ||||||||||
Net income | $ | 77,747 | $ | 174,613 | (96,866 | ) | -55.5 | % | ||||||||
The following table sets forth our reportable segment information for the periods indicated:
Net Sales | ||||||||||||||||
Year Ended December 31, | ||||||||||||||||
(U.S. Dollars in thousands) | 2015 | 2014 | $ Change | % Change | ||||||||||||
Domestic | $ | 1,204,589 | $ | 1,343,367 | (138,778 | ) | -10.3 | % | ||||||||
International | 112,710 | 117,552 | (4,842 | ) | -4.1 | % | ||||||||||
Total net sales | $ | 1,317,299 | $ | 1,460,919 | (143,619 | ) | -9.8 | % | ||||||||
Adjusted EBITDA | ||||||||||||||||
Year Ended December 31, | ||||||||||||||||
2015 | 2014 | $ Change | % Change | |||||||||||||
Domestic | $ | 254,882 | $ | 322,769 | (67,887 | ) | -21.0 | % | ||||||||
International | 15,934 | 14,514 | 1,420 | 9.8 | % | |||||||||||
Total Adjusted EBITDA | $ | 270,816 | $ | 337,283 | (66,467 | ) | -19.7 | % | ||||||||
The following table sets forth our product class information for the periods indicated:
Year Ended December 31, | ||||||||||||||||
(U.S. Dollars in thousands) | 2015 | 2014 | $ Change | % Change | ||||||||||||
Residential products | $ | 673,764 | $ | 722,206 | (48,442 | ) | -6.7 | % | ||||||||
Commercial & industrial products | 548,440 | 652,216 | (103,776 | ) | -15.9 | % | ||||||||||
Other | 95,095 | 86,497 | 8,598 | 9.9 | % | |||||||||||
Total net sales | $ | 1,317,299 | $ | 1,460,919 | (143,620 | ) | -9.8 | % | ||||||||
Net sales. The decrease in Domestic sales for the year ended December 31, 20132015 was primarily due to lower demand of home standby generators as a result of the significant decline in the power outage severity environment during 2015, and a reduction in shipments into oil & gas and general rental markets and, to a lesser extent, reduced shipments to telecom national account customers. Partially offsetting these impacts was the contribution from $63.1 millionthe CHP acquisition.
The decrease in International sales for the year ended December 31, 2012.2015 was primarily due to the negative impact of foreign currency translation.
The contribution from non-annualized recent acquisitions to the year ended December 31, 2015 was $62.8 million.
Gross profit. Gross profit margin for the year ended December 31, 2015 decreased to 34.9% from 35.3% for the year ended December 31, 2014. The decline in gross margin was primarily due to unfavorable absorption of manufacturing overhead-related costs, partially offset by the favorable impact of lower commodity costs and overseas sourcing benefits from a stronger U.S. dollar.
Operating expenses. Operating expenses for the year ended December 31, 2015 include a non-cash $36.1 million impairment charge relating to tradenames as a result of a new brand strategy to transition and consolidate various brands to the Generac® tradename, and a non-cash $4.6 million impairment charge relating to the write-down of the goodwill of the Ottomotores reporting unit. Additionally, operating expenses for the year ended December 31, 2014 include a $4.9 million gain relating to a remeasurement of a contingent earn-out obligation from the Tower Light acquisition. Excluding the impact of these items, operating expenses increased $12.0 million primarily due to the addition of recurring operating expenses associated with the CHP acquisition, increased marketing and advertising expenses, and a $2.6 million increase in the amortization of intangible assets. This was partially offset by reductions in variable operating expenses on lower sales volumes.
Other expense. The increase in other expense was primarily due to a $16.0 million non-cash gain recorded in the year ended December 31, 2014 relating to a 25 basis point reduction in borrowing costs as a result of the credit agreement leverage ratio falling below 3.0 times effective second quarter 2014 and remaining below 3.0 times based on projections at that time, and a $2.4 million non-cash loss recorded in the year ended December 31, 2015 relating to a 25 basis point increase in borrowing costs as a result of our credit agreement leverage ratio rising above 3.0 times effective third quarter 2015 and remaining above 3.0 times based on projections at the time. Additionally, $150.0 million of voluntary prepayments of Term Loan debt were made in the year ended December 31, 2015, resulting in a non-cash $4.8 million loss on extinguishment of debt compared to voluntary prepayments of Term Loan debt of $87.0 million in the year ended December 31, 2014, which resulted in a non-cash $2.1 million loss on extinguishment of debt. The debt repayments resulted in a year-over-year decrease in interest expense of $4.4 million.
Income tax expense. The effective tax rate for 2015 was 36.8% as compared to 32.4% for 2014. The increase in income tax expenserate was primarily driven by the increase in pre-tax income during 2013 comparedattributable to 2012, partially offset by a lower effective tax rate. The decrease in the effective income tax rate year-over-year is primarilyCompany’s federal domestic production activity deduction due to the lower tax rate of a foreign subsidiary acquired during the fourth quarter of 2012 and the reinstatement of the federal research and development tax credit in 2013.pre-tax income.
Net income.
As a result of the factors identified above, we generated net income ofAdjusted EBITDA. Adjusted EBITDA as reconciled in “Item 6 - Selected Financial Data,” increased to $402.6 million as compared to $289.8 million in 2012 due tomargins for the factors discussed above.
Adjusted EBITDA margins for the International segment for the year ended December 31, 2015 were 14.1% of net sales as compared to 12.3% of net sales for the year ended December 31, 2014. This increase was primarily due to lower operating expenses.
| (Dollars in thousands) | Year ended December 31, 2012 | Year ended December 31, 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 (benefit) for income taxes | 63,129 | (237,677 | ) | |||||
| Net income | $ | 93,223 | $ | 324,643 | ||||
| (Dollars in thousands) | Year ended December 31, 2012 | Year ended December 31, 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 | ||||||
Liquidity and financial position
Our primary cash requirements include payment for our raw material and component supplies, salaries & benefits, operating expenses, interest and principal payments on our debt and capital expenditures. We finance our operations primarily through cash flow generated from operations and, if necessary, borrowings under our revolvingAmended ABL Facility.
The Company’s credit facility.
The Company’s credit agreements also provide for the $250.0 million Amended ABL Credit Agreement.Facility. The amendment provides for a one year extension of the maturity date in respect of the $150.0 million senior secured ABL revolving credit facility provided under the ABL Credit Agreement (ABL Facility). The extended maturity date of the Amended ABL Facility is May 29, 2020. In May 2015, the Company borrowed $100.0 million under the Amended ABL Facility, the proceeds of which were used as a voluntary prepayment of Term Loan borrowings. As of December 31, 2018.
At December 31, 2016, we had cash and cash equivalents of $67.3 million and $145.6 million of availability under our revolving ABL credit facility, net of outstanding letters of credit.
In August 2015, our Board of Directors approved a $200.0 million stock repurchase program, which we completed with stock repurchases in the third quarter of 2016. In October 2016, our Board of Directors approved a $250.0 million stock repurchase program, under which we may repurchase an additional $250.0 million of common stock over 24 months from time to time; in amounts and at prices we deem appropriate, subject to market conditions and other considerations. The repurchases may be executed using open market purchases, privately negotiated agreements or other transactions. The actual timing, number and value of shares repurchased under the program will be determined by management at its discretion and will depend on a number of factors, including the market price of our shares of common stock and general market and economic conditions, applicable legal requirements, and compliance with the terms of the Company’s outstanding indebtedness. The repurchases may be funded from cash on hand, available borrowings, or proceeds from potential debt or other capital market sources. The stock repurchase program may be suspended or discontinued at any time without prior notice. For the year ended December 31, 2016, we repurchased 3,968,706 shares of our common stock for $149.9 million, and for the year ended December 31, 2015, the Company repurchased 3,303,500 shares of its common stock for $99.9 million, all funded with cash on hand.
Refer to Note 6,10, “Credit Agreements,” of ourto the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for additional information.
Long-term liquidity
We believe that our cashcash flow from operations and our availability under our revolving credit facility,Amended ABL Facility, combined with our relatively low ongoing capital expenditure requirements and favorable tax attributes which(which result in a lower cash tax rate as compared to the U.S. statutory tax rate, providesrate) provide us with sufficient capital to continue to grow our business in the future. We will use a significant portion of our cash flow to pay interest and principal on our outstanding debt as well as repurchase shares of our common stock, impacting the amount available for working capital, capital expenditures and other general corporate purposes. As we continue to expand our business, we may in the future require additional capital to fund working capital, capital expenditures or acquisitions.
Cash flow
Year ended December 31, 20132016 compared to year ended December 31, 2012
The following table summarizes our cash flows by category for the periods presented:
| Year ended December 31, | ||||||||||||||||
| (Dollars in thousands) | 2013 | 2012 | Change | % Change | ||||||||||||
| Net cash provided by operating activities | $ | 259,944 | $ | 235,594 | $ | 24,350 | 10.3 | % | ||||||||
| Net cash used in investing activities | $ | (144,549 | ) | $ | (69,345 | ) | $ | (75,204 | ) | (108.5 | )% | |||||
| Net cash used in financing activities | $ | (73,399 | ) | $ | (151,352 | ) | $ | 77,953 | 51.5 | % | ||||||
Year Ended December 31, | ||||||||||||||||
(U.S. Dollars in thousands) | 2016 | 2015 | Change | % Change | ||||||||||||
Net cash provided by operating activities | $ | 253,409 | $ | 188,619 | $ | 64,790 | 34.3 | % | ||||||||
Net cash used in investing activities | (105,822 | ) | (104,328 | ) | (1,494 | ) | 1.4 | % | ||||||||
Net cash used in financing activities | (195,705 | ) | (154,483 | ) | (41,222 | ) | 26.7 | % | ||||||||
The 34.3% increase in net cash provided by operating activities was $259.9 million for 2013primarily driven by a reduction in working capital investment during the current year as compared to $235.6 millionthe larger investment that was incurred in 2012. Thisthe prior year, and an overall increase of $24.4 million, or 10.3%, is primarily attributable to strongin operating earnings as a result of strong organic sales growth and improved operating margins partially offset by increased working capital investments, such as increases in inventory levels to support higher production rates and replenish finished good inventories.
Net cash used forin investing activities for the year ended December 31, 2013 was $144.6 million. This included2016 primarily represents cash payments of $30.8$76.7 million related to the acquisitions of businesses and $30.5 million for the purchase of property and equipment, $122.4 million for the acquisitions of the Tower Light and Baldor Generators businesses, partially offset by cash proceeds of $2.3 million from the sale of a business and $6.3 million relating to the finalization of the Ottomotores purchase price.equipment. Net cash used forin investing activities for the year ended December 31, 2012 was $69.3 million. This included $22.42015 primarily represents cash payments of $74.6 million related to the acquisition of CHP and $30.7 million for the purchase of property and equipment and $47.0 million for the acquisition of the Ottomotores businesses.
Net cash used forin financing activities was $73.4 million for the year ended December 31, 2013,2016 primarily representingrepresents $149.9 million payments for the net cash impactrepurchase of debt prepayments and the dividend recapitalization transaction that occurred during the first half of 2013, including cash proceeds from long-term borrowings of $1,200.0 million offset by $901.2 million of long-term borrowing repayments. The Company paid $22.4 million for transaction fees incurred in connection with May 2013 refinancing transaction. Following the refinancing, the Company paid a special cash dividend of $5.00 per share ($340.8 million) on the Company’s common stock, (incremental to the $2.6$65.4 million cash dividends paid during 2013,of debt repayments ($37.6 million of long-term borrowings and $27.8 million of short-term borrowings) and $12.4 million related to the 2012 dividend, due tonet settlement of equity awards. These payments were partially offset by $28.7 million cash proceeds from short-term borrowings and $7.9 million of excess tax benefits from equity awards.
Net cash used in financing activities for the vestingyear ended December 31, 2015 primarily represents $174.0 million of restricted stock awards)debt repayments ($150.8 million of long-term borrowings and $23.2 million of short-term borrowings), partially offset by $126.4 million cash proceeds from borrowings ($100.0 million from long-term borrowings under the Amended ABL facility and $26.4 million from short-term borrowings). In addition, the Company paid $15.0$99.9 million in taxes related tofor the repurchase of its common stock and $13.0 million for the net share settlement of equity awards, which was partially offset by approximately $11.6$9.6 million of excess tax benefits offrom equity awards. Finally, the Company received net cash proceeds of $16.0 million from short-term borrowings, which were more than offset by approximately $19.0 million of short-term borrowing repayments.
Year ended December 31, 20122015 compared to year ended December 31, 2011
The following table summarizes our cash flows by category for the periods presented:
| Year ended December 31, | ||||||||||||||||
| (Dollars in thousands) | 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 | % | ||||||||
The 25.4% decrease in nTable of Contents
Net cash used forin investing activities for the year ended December 31, 20122015 was $69.3 million. This included $22.4primarily related to cash payments of $74.6 million related to the acquisition of CHP and $30.7 million for the purchase of property and equipment and $47.0 million for the acquisition of the Ottomotores businesses.equipment. Net cash used forin investing activities for the year ended December 31, 20112014 was $96.0primarily attributable to cash payments of $61.2 million related to the acquisition of businesses and included $12.1$34.7 million 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.
Net cash used in financing activities was $151.4 million for the year ended December 31, 2012, an increase2015 primarily represents $174.0 million of $92.1debt repayments ($150.8 million in netof long-term borrowings and $23.2 million 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 of $1,455.6under the Amended ABL facility and $26.4 million offset by $1,175.1 million of long-term borrowing repayments. The Company made $25.7 million of cash payments for transaction fees incurred in connection with these refinancing transactions. Following the refinancing,from short-term borrowings). In addition, the Company paid a special cash dividend$99.9 million for the repurchase of $6.00 per share ($404.3 million, which excludes dividends for unvested restricted stock) on the Company’sits common stock duringand $13.0 million for the second quarternet share settlement of 2012. equity awards, which was partially offset by $9.6 million of excess tax benefits from equity awards.
Net cash used in financing activities was $59.2 million for the year ended December 31, 2011,2014 primarily related torepresents $120.4 million of debt repayments ($94.0 million of long-term borrowing repayments.
Senior secured credit facilities
Refer to Note 12, “Special Cash Dividend,10, “Credit Agreements,” of ourto the consolidated financial statements in Item 8 and the “Liquidity and Financial Position” section included in Item 87 of this Annual Report on Form 10-K for additional information. Remaining funds from the New Term Loans were used for general corporate purposes and to pay related financing fees and expenses.
Covenant Compliance
The Term Loan on May 31, 2020. The New Term Loan initially bears interest at rates based upon either a base rate plus an applicable margin of 1.75% or adjusted LIBOR rate plus an applicable margin of 2.75%, subject to a LIBOR floor of 0.75%. Beginning in the second quarter of 2014, the applicable margin related to base rate loans can be reduced to 1.50% and the applicable margin related to LIBOR rate loans can be reduced to 2.50%, in each case, if the Borrower’s net debt leverage ratio falls below 3.00 to 1.00.
The New Term Loan Credit Agreement contains customary events of default, including, among others, nonpayment of principal, interest or other amounts, failure to perform covenants, inaccuracy of representations or warranties in any material respect, cross-defaults with other material indebtedness, certain undischarged judgments, thethe occurrence of certain ERISA, or bankruptcy or insolvency events, or the occurrence of a change in control (defined(as defined in the New Term Loan Credit Agreement)Loan). A bankruptcy or insolvency event of default will cause the obligations under the New Term Loan Credit Agreement to automatically become immediately due and payable.
The NewAmended ABL Credit AgreementFacility also contains covenants and events of default substantially similar to those in the New Term Loan, Credit Agreement, as described above.
Contractual obligations
The following table summarizes our expected paymentspayments for significant contractual obligations as of December 31, 2013:
(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) | $ | 1,198,824 | $ | 13,021 | $ | 24,803 | $ | 23,999 | $ | 1,137,001 | ||||||||||||||
| Capital lease obligation, including current portion | 2,529 | 185 | 389 | 418 | 1,537 | |||||||||||||||||||
| Interest on long-term debt(2) | 263,935 | 42,316 | 83,417 | 81,560 | 56,642 | |||||||||||||||||||
| Operating leases | 6,228 | 1,952 | 3,443 | 833 | - | |||||||||||||||||||
| Total contractual cash obligations(3) | $ | 1,471,516 | $ | 57,474 | $ | 112,052 | $ | 106,810 | $ | 1,195,180 | ||||||||||||||
(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) | $ | 1,043,753 | $ | 14,399 | $ | 320 | $ | 100,034 | $ | 929,000 | ||||||||||
Capital lease obligations, including current portion | 4,647 | 566 | 1,064 | 1,034 | 1,983 | |||||||||||||||
Interest on long-term debt | 212,971 | 36,369 | 67,782 | 64,176 | 44,644 | |||||||||||||||
Operating leases | 36,839 | 7,922 | 13,682 | 9,506 | 5,730 | |||||||||||||||
Total contractual cash obligations (2) | $ | 1,298,210 | $ | 59,256 | $ | 82,848 | $ | 174,750 | $ | 981,357 | ||||||||||
(1) On May 31, 2013, the Borrower amended and restated its then existing Credit Agreement by entering into a new credit agreement (“NewThe Term Loan Credit Agreement”) with certain commercial banks and other lenders. The New Term Loan Credit Agreement provides for a $1,200.0 million$1.2 billion term loan B credit facility (“New Term Loan”) and includes a $300.0 million uncommitted incremental term loan facility. The New Term Loan Credit Agreement matures on May 31, 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 $2.1$0.6 million to our pension plans in 2014.
Capital expenditures
Our operations require capital expenditures for technology, tooling, equipment, capacity expansion, systems and upgrades. Capital expenditures were $30.8$30.5 million and $22.4$30.7 million for the years ended December 31, 20132016 and 2012,2015, respectively, and were funded through cash from operations.
Off-Balance Sheet Arrangements
We have an arrangement with a finance company to provide floor plan financing for selected dealers. This arrangement provides liquidity for our dealers by financing dealer purchases of products with credit availability from the finance company. We receive payment from the finance company after shipment of product to the dealer and our dealers are given a longer period of time to pay the finance provider. If our dealers do not pay the finance company, we may be required to repurchase the applicable inventory held by the dealer. We do not indemnify the finance company for any credit losses they may incur.
Total inventory financed under this arrangement accounted for approximately 7%8% and 9% of net sales for the yearyears ended December 31, 20122016 and approximately 8% of net sales for the year ended December 31, 2013.2015, respectively. The amount financed by dealers which remained outstanding was $16.6$33.9 million and $24.3$32.4 million as of December 31, 20122016 and 2013,2015, respectively.
Critical accounting policies
In preparing the financial statements in accordance with accounting principles generally accepted in the U.S., GAAP, management is required to make estimates and assumptions that have an impact on the asset, liability, revenue and expense amounts reported. These estimates can also affect supplemental information disclosures of the Company, including information about contingencies, risk and financial condition. The Company believes, given current facts and circumstances, that its estimates and assumptions are reasonable, adhere to accounting principles generally accepted in the U.S., GAAP, and are consistently applied. Inherent in the nature of an estimate or assumption is the fact that actual results may differ from estimates and estimates may vary as new facts and circumstances arise. The Company makes routine estimates and judgments in determining net realizable value of accounts receivable, inventories, property plant and equipment, and prepaid expenses. Management believes the Company’s most critical accounting estimates and assumptions are in the following areas: goodwill and other indefinite-lived intangible asset impairment assessment,assessment; business combinations and purchase accounting,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 Indefinite-Lived Intangible Assets
Refer to Note 2, “Significant Accounting Policies – Goodwill and Other Indefinite-Lived Intangible Assets,” to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K for further information on the Company’s policy regarding the accounting for goodwill and other intangible assets.
The Company performed the required annual impairment tests for goodwill and other indefinite-lived intangible assets for the fiscal years 2016, 2015 and 2014, and found no impairment following the 2016 and 2014 tests. There were no reporting units with a carrying value at-risk of exceeding fair value as of the October 31, 2016 impairment test date.
After performing the impairment tests for fiscal year 2015, the Company determined that the fair value of the Ottomotores reporting unit was less than its carrying value, resulting in a non-cash goodwill impairment charge of $4.6 million in the fourth quarter of 2015. The fair value was determined using a discounted cash flow analysis, which utilizes key estimates and assumptions as discussed below. Additionally, in the fourth quarter of 2015, the Company’s Board of Directors approved a plan to strategically transition and consolidate certain of the Company’s brands acquired through acquisitions over the past several years to the Generac® tradename. This brand strategy change resulted in a reclassification to a two year remaining useful life for the impacted tradenames, causing the fair value to be less than the carrying value using the relief-from-royalty approach in a discounted cash flow analysis. As such, a $36.1 million non-cash impairment charge was recorded in the fourth quarter of 2015 to write-down the impacted tradenames to net realizable value. See Note 2, “Significant Accounting Policies – Goodwill and Other Indefinite-Lived Intangible Assets,” to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K for further information on the impairment charges recorded in 2015.
When preparing a discounted cash flow analysis for purposes of our annual impairment test, we make a number of key estimates and assumptions. We estimate the future cash flows of the business based on historical and forecasted revenues and operating costs. This, in turn, involves further estimates, such as estimates of future growth rates and inflation rates. In addition, we apply a discount rate to the estimated future cash flows for the purpose of the valuation. This discount rate is based on the estimated weighted average cost of capital for the business and may change from year to year. Weighted average cost of capital includes certain assumptions such as market capital structures, market betas, risk-free rate of return and estimated costs of borrowing.
As noted above, a considerable amount of management judgment and assumptions are required in performing the goodwill and indefinite-lived intangible asset impairment tests. While we believe our judgments and assumptions are reasonable, different assumptions could change the estimated fair values. A number of factors, many of which we have no ability to control, could cause actual results to differ from the estimates and assumptions we employed. These factors include:
● | a prolonged global or regional economic downturn; |
● | a significant decrease in the demand for our products; |
● | the inability to develop new and enhanced products and services in a timely manner; |
● | a significant adverse change in legal factors or in the business climate; |
● | an adverse action or assessment by a regulator; |
● | successful efforts by our competitors to gain market share in our markets; |
● | 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 values may change significantly. Such change could result in impairment charges in future periods, which could have a significant impact on our operating results and financial condition.
Business Combinations and Purchase Accounting
We account for business combinations using the acquisition method of accounting, and accordingly, the assets and liabilities of the acquired business are recorded at their respective fair values. The excess of the purchase price over the estimated fair value of assets and liabilities is recorded as goodwill. Assigning fair market values to the assets acquired and liabilities assumed at the date of an acquisition requires knowledge of current market values, and the values of assets in use, and often requires the application of judgment regarding estimates and assumptions. While the ultimate responsibility resides with management, for material acquisitions we retain the services of certified valuation specialists to assist with assigning estimated values to certain acquired assets and assumed liabilities, including intangible assets and tangible long-lived assets. Acquired intangible assets, excluding goodwill, are valued using certain discounted cash flow methodologies based on future cash flows specific to the type of intangible asset purchased. This methodology incorporates various estimates and assumptions, the most significant being projected revenue growth rates, earnings margins, and forecasted cash flows based on the discount rate and terminal growth rate. See Note 1, “Description of Business,” to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K for further information on the Company’s business acquisitions.
Defined Benefit Pension Obligations
The Company’s pension benefit obligation and related pension expense or income are calculated in accordance with the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 715-30, Defined Benefit Plans—Pension, and are impacted by certain actuarial assumptions, including the discount rate and the expected rate of return on plan assets. Such rates are evaluated on an annual basis considering factors including market interest rates and historical asset performance. Actuarial valuations for fiscal year 2016 used a discount rate of 4.14% for the salaried pension plan and 4.16% for the hourly pension plan. Our discount rate was selected using a methodology that matches plan cash flows with a selection of “Aa” or higher rated bonds, resulting in a discount rate that better matches a bond yield curve with comparable cash flows. In estimating the expected return on plan assets, we study historical markets and preserve the long-term historical relationships between equities and fixed-income securities. We evaluate current market factors such as inflation and interest rates before we determine long-term capital market assumptions and review peer data and historical returns to check for reasonableness and appropriateness. Changes in the discount rate and return on assets can have a significant effect on the funded status of our pension plans, stockholders' equity and related expense. We cannot predict these changes in discount rates or investment returns and, therefore, cannot reasonably estimate whether the impact in subsequent years will be significant.
The funded status of our pension plans is the difference between the projected benefit obligation and the fair value of its plan assets. The projected benefit obligation is the actuarial present value of all benefits expected to be earned by the employees' service. No compensation increase is assumed in the calculation of the projected benefit obligation, as the plans were frozen effective December 31, 2008. Further information regarding the funded status of our pension plans can be found in Note 14, “Benefit Plans,” to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K.
Our funding policy for our pension plans is to contribute amounts at least equal to the minimum annual amount required by applicable regulations. Given this policy, we expect to make $0.6 million in contributions to our pension plans in 2017.
Product Warranty Reserves and Other Contingencies
The reserves, if any, for product warranty, product liability, litigation and customer rebates are fact-specific and take into account such factors as specific customer situations, historical experience, and current and expected economic conditions. Further information on these reserves are reflected under Notes 2, 9, and 16 to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K.
Income Taxes
We account for income taxes in accordance with ASC 740, Income Taxes. Our estimate of income taxes payable, deferred income taxes and the effective tax rate is based on an analysis of many factors including interpretations of federal, state and international income tax laws; the difference between tax and financial reporting bases of assets and liabilities; estimates of amounts currently due or owed in various jurisdictions; and current accounting standards. We review and update our estimates on a quarterly basis as facts and circumstances change and actual results are known.
In assessing the realizability of the deferred tax assets on our balance sheet, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the years in which those temporary differences become deductible. We consider the taxable income in prior carryback years, scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment.
Refer to Note 13, “Income Taxes” to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K for further information on the Company’s income taxes.
Share Based Compensation
Under the fair value recognition provisions of ASC 718, Compensation – Stock Compensation, share based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period. Determining the fair value of share based awards at the grant date requires judgment, including estimating expected dividends and market volatility of our stock. In addition, judgment is also required in estimating the amount of share based awards that are expected to be forfeited. If actual results differ significantly from these estimates, share based compensation expense and our results of operations could be impacted. See Note 15, “Share Plans” to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K for further information on the Company’s share based compensation.
New Accounting Standards
For information with respect to new accounting pronouncements and the impact of these pronouncements on our consolidated financial statements, see Note 2, “Significant Accounting Policies - New Accounting Pronouncements,” to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk from changes in foreign currency exchange rates, commodity prices and interest rates. To reduce the risk from these changes, we use financial instruments from time to time. We do not hold or issue financial instruments for trading purposes.
Foreign Currency
We are exposed to foreign currency exchange risk as a result of transactions denominated in currencies other than the U.S. Dollar, as well as operating businesses in foreign countries. Periodically, we utilize foreign currency forward purchase and sales contracts to manage the volatility associated with certain foreign currency purchases and sales in the normal course of business. Contracts typically have maturities of twelve months or less. Realized gains and losses on transactions denominated in foreign currency are recorded in earnings as a component of cost of goods sold on the statements of comprehensive income.
The following is a summary of the foreign currency contracts outstanding as of December 31, 2016 (in thousands):
Currency Denomination | Trade Dates | Effective Dates | Notional Amount | Expiration Dates | |||||||||
GBP | 9/28/16 | – | 12/20/16 | 9/28/16 | – | 1/9/17 | 5,850 | 1/27/17 | – | 6/28/17 | |||
USD | 9/26/16 | – | 12/19/16 | 9/26/16 | – | 12/19/16 | 7,950 | 1/13/17 | – | 6/30/17 | |||
Commodity Prices
We are a purchaser of commodities and of components manufactured from commodities including steel, aluminum, copper and others. As a result, we are exposed to fluctuating market prices for those commodities. While such materials are typically available from numerous suppliers, commodity raw materials are subject to price fluctuations. We generally buy these commodities and components based upon market prices that are established with the supplier as part of the purchase process. Depending on the supplier, these market prices may reset on a periodic basis based on negotiated lags and calculations. To the extent that commodity prices increase and we do not have firm pricing from our suppliers, or our suppliers are not able to honor such prices, we may experience a decline in our gross margins to the extent we are not able to increase selling prices of our products or obtain manufacturing efficiencies or supply chain savings to offset increases in commodity costs.
Periodically, we engage in certain commodity risk management activities to mitigate the impact of potential price fluctuations on our financial results. These derivatives typically have maturities of less than eighteen months. As of December 31, 2016, we had the following commodity forward contract outstanding (in thousands):
Hedged Item | Trade Date | Effective Date | Notional Amount | Fixed Price (per LB) | Expiration Date | ||||||
Copper | October 19, 2016 | October 20, 2016 | $ | 3,502 | $ | 2.118 | December 31, 2017 | ||||
For additional information on the Company’s commodity forward contracts, including amounts charged to the statement of comprehensive income during 2016, see Note 4, “Derivative Instruments and Hedging Activity,” to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K.
Interest Rates
As of December 31, 2016, all of the outstanding debt under our Term Loan was subject to floating interest rate risk. As of December 31, 2016, we had the following interest rate swap contracts outstanding (in thousands):
Hedged Item | Contract Date | Effective Date | Notional Amount | Fixed LIBOR Rate | Expiration Date | ||||||
Interest rate | October 23, 2013 | July 1, 2014 | $ | 100,000 | 1.7420 | % | July 1, 2018 | ||||
Interest rate | October 23, 2013 | July 1, 2014 | $ | 100,000 | 1.7370 | % | July 1, 2018 | ||||
Interest rate | May 19, 2014 | July 1, 2014 | $ | 100,000 | 1.6195 | % | July 1, 2018 | ||||
At December 31, 2016, the fair value of these interest rate swaps was a liability of $1.7 million. For additional information on the Company’s interest rate swaps, including amounts charged to the statement of comprehensive income during 2016, see Note 4, “Derivative Instruments and Hedging Activities,” and Note 5, “Accumulated Other Comprehensive Loss,” to our consolidated financial statements in Item 8 of this Annual Report on Form 10-K. Even after giving effect to these swaps, we are exposed to risks due to changes in interest rates with respect to the portion of our Term Loan that is not covered by the swaps. A hypothetical change in the LIBOR interest rate of 100 basis points would have changed annual cash interest expense by approximately $6.3 million (or, without the swaps in place, $9.3 million) in 2016. The existence of a 0.75% LIBOR floor provision in our Term Loan limits the impact of a hypothetical 100 basis point change in LIBOR at current December 31, 2016 LIBOR rates.
Item 8. Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Generac Holdings Inc.
Waukesha, Wisconsin
We have audited the accompanying consolidated balance sheet of Generac Holdings Inc. and subsidiaries (the "Company") as of December 31, 2016, and the related consolidated statements of comprehensive income, stockholders' equity and cash flows for the year ended December 31, 2016. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Generac Holdings Inc. and subsidiaries as of December 31, 2016, and the consolidated results of their operations and their cash flows for the year ended December 31, 2016, in conformity accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013) and our report dated February 24, 2017 expressed an unqualified opinion thereon.
/s/ Deloitte & Touche LLP
Milwaukee, WI
February 24, 2017
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Generac Holdings Inc.
Waukesha, Wisconsin
We have audited the accompanying consolidated balance sheet of Generac Holdings Inc. (the Company) as of December 31, 2015, and the related consolidated statements of comprehensive income, stockholders' equity and cash flows for each of the two years in the period ended December 31, 2015. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Generac Holdings Inc. at December 31, 2015, and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
Milwaukee, WI
February 26, 2016 (except for Note 6, Segment Reporting, and Note 2, New Accounting Pronouncements, as to which the date is February 24, 2017)
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Generac Holdings Inc.
Waukesha, Wisconsin
We have audited the internal control over financial reporting of Generac Holdings Inc. and its subsidiaries (the "Company") as of December 31, 2016, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. As described in Management’s Report on Internal Control Over Financial Reporting, management excluded from its assessment the internal control over financial reporting at the PR Industrial business ("Pramac"), which was acquired on March 1, 2016 and whose financial statements constitute 22.5% and 11.1% of net and total assets, respectively, 12.6% of revenues, and 0.7% of net income of the total consolidated financial statement amounts as of and for the year ended December 31, 2016. Accordingly, our audit did not include the internal control over financial reporting at Pramac. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control 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 by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company'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 the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2016 and the related consolidated statement of comprehensive income, stockholders’ equity and cash flows for the year ended December 31, 2016 of Generac Holdings Inc. and our report dated February 24, 2017 expressed an unqualified opinion on those financial statements.
/s/ Deloitte & Touche LLP
Milwaukee, WI
February 24, 2017
Generac Holdings Inc. | |||
Consolidated Balance Sheets | |||
(U.S. Dollars in Thousands, Except Share and Per Share Data) |
December 31, | ||||||||
2016 | 2015 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 67,272 | $ | 115,857 | ||||
Accounts receivable, less allowance for doubtful accounts of $5,642 and $2,494 at December 31, 2016 and 2015, respectively | 241,857 | 182,185 | ||||||
Inventories | 349,731 | 325,375 | ||||||
Prepaid expenses and other assets | 24,649 | 8,600 | ||||||
Total current assets | 683,509 | 632,017 | ||||||
Property and equipment, net | 212,793 | 184,213 | ||||||
Customer lists, net | 45,312 | 39,313 | ||||||
Patents, net | 48,061 | 53,772 | ||||||
Other intangible assets, net | 2,925 | 2,768 | ||||||
Tradenames, net | 158,874 | 161,057 | ||||||
Goodwill | 704,640 | 669,719 | ||||||
Deferred income taxes | 3,337 | 34,812 | ||||||
Other assets | 2,233 | 964 | ||||||
Total assets | $ | 1,861,684 | $ | 1,778,635 | ||||
Liabilities and stockholders’ equity | ||||||||
Current liabilities: | ||||||||
Short-term borrowings | $ | 31,198 | $ | 8,594 | ||||
Accounts payable | 181,519 | 108,332 | ||||||
Accrued wages and employee benefits | 21,189 | 13,101 | ||||||
Other accrued liabilities | 93,068 | 82,540 | ||||||
Current portion of long-term borrowings and capital lease obligations | 14,965 | 657 | ||||||
Total current liabilities | 341,939 | 213,224 | ||||||
Long-term borrowings and capital lease obligations | 1,006,758 | 1,037,132 | ||||||
Deferred income taxes | 17,278 | 4,950 | ||||||
Other long-term liabilities | 61,459 | 57,458 | ||||||
Total liabilities | 1,427,434 | 1,312,764 | ||||||
Redeemable noncontrolling interest | 33,138 | – | ||||||
Stockholders’ equity: | ||||||||
Common stock, par value $0.01, 500,000,000 shares authorized, 70,261,481 and 69,582,669 shares issued at December 31, 2016 and 2015, respectively | 702 | 696 | ||||||
Additional paid-in capital | 449,049 | 443,109 | ||||||
Treasury stock, at cost, 7,564,874 and 3,567,575 shares at December 31, 2016 and 2015, respectively | (262,402 | ) | (111,516 | ) | ||||
Excess purchase price over predecessor basis | (202,116 | ) | (202,116 | ) | ||||
Retained earnings | 456,052 | 358,173 | ||||||
Accumulated other comprehensive loss | (40,163 | ) | (22,475 | ) | ||||
Stockholders’ equity attributable to Generac Holdings Inc. | 401,122 | 465,871 | ||||||
Noncontrolling interests | (10 | ) | – | |||||
Total stockholders’ equity | 401,112 | 465,871 | ||||||
Total liabilities and stockholders’ equity | $ | 1,861,684 | $ | 1,778,635 | ||||
See notes to consolidated financial statements. |
Generac Holdings Inc. | |||||
Consolidated Statements of Comprehensive Income | |||||
(U.S. Dollars in Thousands, Except Share and Per Share Data) |
Year Ended December 31, | ||||||||||||
2016 | 2015 | 2014 | ||||||||||
Net sales | $ | 1,444,453 | $ | 1,317,299 | $ | 1,460,919 | ||||||
Costs of goods sold | 930,347 | 857,349 | 944,700 | |||||||||
Gross profit | 514,106 | 459,950 | 516,219 | |||||||||
Operating expenses: | ||||||||||||
Selling and service | 164,607 | 130,242 | 120,408 | |||||||||
Research and development | 37,229 | 32,922 | 31,494 | |||||||||
General and administrative | 74,700 | 52,947 | 54,795 | |||||||||
Amortization of intangibles | 32,953 | 23,591 | 21,024 | |||||||||
Tradename and goodwill impairment | – | 40,687 | – | |||||||||
Gain on remeasurement of contingent consideration | – | – | (4,877 | ) | ||||||||
Total operating expenses | 309,489 | 280,389 | 222,844 | |||||||||
Income from operations | 204,617 | 179,561 | 293,375 | |||||||||
Other (expense) income: | ||||||||||||
Interest expense | (44,568 | ) | (42,843 | ) | (47,215 | ) | ||||||
Investment income | 44 | 123 | 130 | |||||||||
Loss on extinguishment of debt | (574 | ) | (4,795 | ) | (2,084 | ) | ||||||
Gain (loss) on change in contractual interest rate | (2,957 | ) | (2,381 | ) | 16,014 | |||||||
Costs related to acquisition | (1,082 | ) | (1,195 | ) | (396 | ) | ||||||
Other, net | 902 | (5,487 | ) | (1,462 | ) | |||||||
Total other expense, net | (48,235 | ) | (56,578 | ) | (35,013 | ) | ||||||
Income before provision for income taxes | 156,382 | 122,983 | 258,362 | |||||||||
Provision for income taxes | 57,570 | 45,236 | 83,749 | |||||||||
Net income | 98,812 | 77,747 | 174,613 | |||||||||
Net income attributable to noncontrolling interests | 24 | - | - | |||||||||
Net income attributable to Generac Holdings Inc. | $ | 98,788 | $ | 77,747 | $ | 174,613 | ||||||
Net income attributable to common shareholders per common share - basic: | $ | 1.51 | $ | 1.14 | $ | 2.55 | ||||||
Weighted average common shares outstanding - basic: | 64,905,793 | 68,096,051 | 68,538,248 | |||||||||
Net income attributable to common shareholders per common share - diluted: | $ | 1.50 | $ | 1.12 | $ | 2.49 | ||||||
Weighted average common shares outstanding - diluted: | 65,382,774 | 69,200,297 | 70,171,044 | |||||||||
Other comprehensive income (loss): | ||||||||||||
Foreign currency translation adjustment | $ | (18,545 | ) | $ | (7,624 | ) | $ | (3,082 | ) | |||
Net unrealized gain (loss) on derivatives | 535 | (965 | ) | (1,420 | ) | |||||||
Pension liability adjustment | 322 | 1,881 | (8,850 | ) | ||||||||
Other comprehensive loss | (17,688 | ) | (6,708 | ) | (13,352 | ) | ||||||
Total comprehensive income | 81,124 | 71,039 | 161,261 | |||||||||
Comprehensive loss attributable to noncontrolling interests | (973 | ) | – | – | ||||||||
Comprehensive income attributable to Generac Holdings Inc. | $ | 82,097 | $ | 71,039 | $ | 161,261 | ||||||
See notes to consolidated financial statements. |
Generac Holdings Inc. | |||||||||||
Consolidated Statements of Stockholders' Equity | |||||||||||
(U.S. Dollars in Thousands, Except Share Data) |
Generac Holdings Inc. | ||||||||||||||||||||||||||||||||||||||||||||
Common Stock | Additional Paid-In | Treasury Stock | Excess Purchase Price Over Predecessor | Retained | Accumulated Other Comprehensive | Total Stockholders' | Noncontrolling | |||||||||||||||||||||||||||||||||||||
Shares | Amount | Capital | Shares | Amount | Basis | Earnings | Income (Loss) | Equity | Interest | Total | ||||||||||||||||||||||||||||||||||
Balance at December 31, 2013 | 68,767,367 | $ | 688 | $ | 421,672 | (163,458 | ) | $ | (6,571 | ) | $ | (202,116 | ) | $ | 105,813 | $ | (2,415 | ) | $ | 317,071 | $ | – | $ | 317,071 | ||||||||||||||||||||
Unrealized loss on interest rate swaps, net of tax of $(860) | – | – | – | – | – | – | – | (1,420 | ) | (1,420 | ) | – | (1,420 | ) | ||||||||||||||||||||||||||||||
Foreign currency translation adjustment | – | – | – | – | – | – | – | (3,082 | ) | (3,082 | ) | – | (3,082 | ) | ||||||||||||||||||||||||||||||
Common stock issued under equity incentive plans, net of shares withheld for employee taxes and strike price | 354,904 | 3 | (10,378 | ) | – | – | – | – | – | (10,375 | ) | – | (10,375 | ) | ||||||||||||||||||||||||||||||
Net share settlement of restricted stock awards | – | – | – | (34,854 | ) | (1,770 | ) | – | – | – | (1,770 | ) | – | (1,770 | ) | |||||||||||||||||||||||||||||
Excess tax benefits from equity awards | – | – | 10,972 | – | – | – | – | – | 10,972 | – | 10,972 | |||||||||||||||||||||||||||||||||
Share-based compensation | – | – | 12,612 | – | – | – | – | – | 12,612 | – | 12,612 | |||||||||||||||||||||||||||||||||
Dividends declared | – | – | 28 | – | – | – | – | 28 | – | 28 | ||||||||||||||||||||||||||||||||||
Pension liability adjustment, net of tax of $(5,658) | – | – | – | – | – | – | – | (8,850 | ) | (8,850 | ) | – | (8,850 | ) | ||||||||||||||||||||||||||||||
Net income | – | – | – | – | – | – | 174,613 | – | 174,613 | – | 174,613 | |||||||||||||||||||||||||||||||||
Balance at December 31, 2014 | 69,122,271 | $ | 691 | $ | 434,906 | (198,312 | ) | $ | (8,341 | ) | $ | (202,116 | ) | $ | 280,426 | $ | (15,767 | ) | $ | 489,799 | $ | - | $ | 489,799 | ||||||||||||||||||||
Unrealized loss on interest rate swaps, net of tax of $(609) | – | – | – | – | – | – | – | (965 | ) | (965 | ) | – | (965 | ) | ||||||||||||||||||||||||||||||
Foreign currency translation adjustment | – | – | – | – | – | – | – | (7,624 | ) | (7,624 | ) | – | (7,624 | ) | ||||||||||||||||||||||||||||||
Common stock issued under equity incentive plans, net of shares withheld for employee taxes and strike price | 460,398 | 5 | (9,626 | ) | – | – | – | – | – | (9,621 | ) | – | (9,621 | ) | ||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||
Net share settlement of restricted stock awards | – | – | – | (65,763 | ) | (3,233 | ) | – | – | – | (3,233 | ) | – | (3,233 | ) | |||||||||||||||||||||||||||||
Stock repurchases | – | – | – | (3,303,500 | ) | (99,942 | ) | – | – | – | (99,942 | ) | – | (99,942 | ) | |||||||||||||||||||||||||||||
Excess tax benefits from equity awards | – | – | 9,559 | – | – | – | – | – | 9,559 | – | 9,559 | |||||||||||||||||||||||||||||||||
Share-based compensation | – | – | 8,241 | – | – | – | – | – | 8,241 | – | 8,241 | |||||||||||||||||||||||||||||||||
Dividends declared | – | – | 29 | – | – | – | – | 29 | – | 29 | ||||||||||||||||||||||||||||||||||
Pension liability adjustment, net of tax of $1,176 | – | – | – | – | – | – | – | 1,881 | 1,881 | – | 1,881 | |||||||||||||||||||||||||||||||||
Net income | – | – | – | – | – | – | 77,747 | – | 77,747 | – | 77,747 | |||||||||||||||||||||||||||||||||
Balance at December 31, 2015 | 69,582,669 | $ | 696 | $ | 443,109 | (3,567,575 | ) | $ | (111,516 | ) | $ | (202,116 | ) | $ | 358,173 | $ | (22,475 | ) | $ | 465,871 | $ | - | $ | 465,871 | ||||||||||||||||||||
Acquisition of business | – | – | – | – | – | – | – | – | – | 53 | 53 | |||||||||||||||||||||||||||||||||
Unrealized gain on interest rate swaps, net of tax of $341 | – | – | – | – | – | – | – | 535 | 535 | – | 535 | |||||||||||||||||||||||||||||||||
Foreign currency translation adjustment | – | – | – | – | – | – | – | (18,545 | ) | (18,545 | ) | 13 | (18,532 | ) | ||||||||||||||||||||||||||||||
Common stock issued under equity incentive plans, net of shares withheld for employee taxes and strike price | 678,812 | 6 | (11,473 | ) | – | – | – | – | – | (11,467 | ) | – | (11,467 | ) | ||||||||||||||||||||||||||||||
Net share settlement of restricted stock awards | – | – | – | (28,593 | ) | (949 | ) | – | – | – | (949 | ) | – | (949 | ) | |||||||||||||||||||||||||||||
Stock repurchases | – | – | – | (3,968,706 | ) | (149,937 | ) | – | – | – | (149,937 | ) | – | (149,937 | ) | |||||||||||||||||||||||||||||
Excess tax benefits from equity awards | – | – | 7,920 | – | – | – | – | – | 7,920 | – | 7,920 | |||||||||||||||||||||||||||||||||
Share-based compensation | – | – | 9,493 | – | – | – | – | – | 9,493 | – | 9,493 | |||||||||||||||||||||||||||||||||
Pension liability adjustment, net of tax of $207 | – | – | – | – | – | – | – | 322 | 322 | – | 322 | |||||||||||||||||||||||||||||||||
Redemption value adjustment | – | – | – | – | – | – | (909 | ) | – | (909 | ) | – | (909 | ) | ||||||||||||||||||||||||||||||
Net income | – | – | – | – | – | – | 98,788 | – | 98,788 | (76 | ) | 98,712 | ||||||||||||||||||||||||||||||||
Balance at December 31, 2016 | 70,261,481 | $ | 702 | $ | 449,049 | (7,564,874 | ) | $ | (262,402 | ) | $ | (202,116 | ) | $ | 456,052 | $ | (40,163 | ) | $ | 401,122 | $ | (10 | ) | $ | 401,112 | |||||||||||||||||||
See notes to consolidated financial statements. |
Generac Holdings Inc. | |||||
Consolidated Statements of Cash Flows | |||||
(U.S. Dollars in Thousands) |
Year Ended December 31, | ||||||||||||
2016 | 2015 | 2014 | ||||||||||
Operating activities | ||||||||||||
Net income | $ | 98,812 | $ | 77,747 | $ | 174,613 | ||||||
Adjustment to reconcile net income to net cash provided by operating activities: | ||||||||||||
Depreciation | 21,465 | 16,742 | 13,706 | |||||||||
Amortization of intangible assets | 32,953 | 23,591 | 21,024 | |||||||||
Amortization of original issue discount and deferred financing costs | 3,940 | 5,429 | 6,615 | |||||||||
Tradename and goodwill impairment | – | 40,687 | – | |||||||||
Loss on extinguishment of debt | 574 | 4,795 | 2,084 | |||||||||
(Gain) loss on change in contractual interest rate | 2,957 | 2,381 | (16,014 | ) | ||||||||
Gain on remeasurement of contingent consideration | – | – | (4,877 | ) | ||||||||
Deferred income taxes | 39,347 | 26,955 | 37,878 | |||||||||
Share-based compensation expense | 9,493 | 8,241 | 12,612 | |||||||||
Other | 127 | 540 | 1,248 | |||||||||
Net changes in operating assets and liabilities, net of acquisitions: | ||||||||||||
Accounts receivable | (9,082 | ) | 9,610 | (2,988 | ) | |||||||
Inventories | 15,514 | 9,084 | 3,508 | |||||||||
Other assets | 406 | 5,063 | 2,456 | |||||||||
Accounts payable | 32,908 | (27,771 | ) | 15,269 | ||||||||
Accrued wages and employee benefits | 5,196 | (5,361 | ) | (9,405 | ) | |||||||
Other accrued liabilities | 6,719 | 445 | 6,229 | |||||||||
Excess tax benefits from equity awards | (7,920 | ) | (9,559 | ) | (10,972 | ) | ||||||
Net cash provided by operating activities | 253,409 | 188,619 | 252,986 | |||||||||
Investing activities | ||||||||||||
Proceeds from sale of property and equipment | 1,360 | 105 | 394 | |||||||||
Expenditures for property and equipment | (30,467 | ) | (30,651 | ) | (34,689 | ) | ||||||
Acquisition of business, net of cash acquired | (61,386 | ) | (73,782 | ) | (61,196 | ) | ||||||
Deposit paid related to acquisition | (15,329 | ) | – | – | ||||||||
Net cash used in investing activities | (105,822 | ) | (104,328 | ) | (95,491 | ) | ||||||
Financing activities | ||||||||||||
Proceeds from short-term borrowings | 28,712 | 26,384 | 6,550 | |||||||||
Proceeds from long-term borrowings | – | 100,000 | – | |||||||||
Repayments of short-term borrowings | (27,755 | ) | (23,149 | ) | (26,444 | ) | ||||||
Repayments of long-term borrowings and capital lease obligations | (37,627 | ) | (150,826 | ) | (94,035 | ) | ||||||
Stock repurchases | (149,937 | ) | (99,942 | ) | – | |||||||
Payment of debt issuance costs | (4,557 | ) | (2,117 | ) | (4 | ) | ||||||
Cash dividends paid | (76 | ) | (1,436 | ) | (902 | ) | ||||||
Taxes paid related to the net share settlement of equity awards | (14,008 | ) | (12,956 | ) | (12,160 | ) | ||||||
Proceeds from the exercise of stock options | 1,623 | – | – | |||||||||
Excess tax benefits from equity awards | 7,920 | 9,559 | 10,972 | |||||||||
Net cash used in financing activities | (195,705 | ) | (154,483 | ) | (116,023 | ) | ||||||
Effect of exchange rate changes on cash and cash equivalents | (467 | ) | (3,712 | ) | (1,858 | ) | ||||||
Net increase (decrease) in cash and cash equivalents | (48,585 | ) | (73,904 | ) | 39,614 | |||||||
Cash and cash equivalents at beginning of period | 115,857 | 189,761 | 150,147 | |||||||||
Cash and cash equivalents at end of period | $ | 67,272 | $ | 115,857 | $ | 189,761 | ||||||
Supplemental disclosure of cash flow information | ||||||||||||
Cash paid during the period | ||||||||||||
Interest | $ | 42,456 | $ | 39,524 | $ | 42,592 | ||||||
Income taxes | 8,889 | 6,087 | 34,283 | |||||||||
See notes to consolidated financial statements. |
Generac Holdings Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 2016, 2015, and 2014
(U.S. Dollars in Thousands, Except Share and Per Share Data)
1. | Description of Business |
Founded in 1959, Generac Holdings Inc. (the Company) is a leading designer and manufacturer of a wide range of power generation equipment and other engine powered products serving the residential, light-commercial and industrial markets. Generac’s power products are available globally through a broad network of independent dealers, distributors, retailers, wholesalers and equipment rental companies, as well as sold direct to certain end user customers.
Over the years, the Company has executed a number of acquisitions that support our strategic plan (refer to Item 1 in this Annual Report on Form 10-K for discussion of our Powering Ahead strategic plan). A summary of these acquisitions include the following:
● | In October 2011, the Company acquired substantially all the assets of Magnum Products (Magnum), a supplier of generator powered light towers and mobile generators for a variety of industrial applications. The Magnum business is a strategic fit for the Company as it provides diversification through the introduction of new engine powered products, distribution channels and end markets. |
● | In December 2012, the Company acquired the equity of Ottomotores UK and its affiliates (Ottomotores), with operations in Mexico City, Mexico and Curitiba, Brazil. Ottomotores is a leading manufacturer in the Mexican market for industrial diesel gensets and is a market participant throughout all of Latin America. |
● | In August 2013, the Company acquired the equity of Tower Light SRL and its wholly-owned subsidiaries (Tower Light). Headquartered outside Milan, Italy, Tower Light is a leading developer and supplier of mobile light towers throughout Europe, the Middle East and Africa. |
● | In November 2013, the Company purchased the assets of Baldor Electric Company’s generator division (Baldor Generators). Baldor Generators offers a complete line of power generation equipment throughout North America with power output up to 2.5MW, which expands the Company’s commercial and industrial product lines. |
● | In September 2014, the Company acquired the equity of Pramac America LLC (Powermate), resulting in the ownership of the Powermate trade name and the right to license the DeWalt brand name for certain residential engine powered tools. This acquisition expands Generac’s residential product portfolio in the portable generator category. |
● | In October 2014, the Company acquired MAC, Inc. (MAC). MAC is a leading manufacturer of premium-grade commercial and industrial mobile heaters for the United States and Canadian markets. The acquisition expands the Company’s portfolio of mobile power products and provides increased access to the oil & gas market. |
● | In August 2015, the Company acquired Country Home Products and its subsidiaries (CHP). CHP is a leading manufacturer of high-quality, innovative, professional-grade engine powered equipment used in a wide variety of property maintenance applications, which are primarily sold in North America under the DR® Power Equipment brand. The acquisition provides an expanded product lineup and additional scale to the Company’s residential engine powered products. |
● | In March 2016, the Company acquired a majority ownership interest in PR Industrial S.r.l and its subsidiaries (Pramac). Headquartered in Siena, Italy, Pramac is a leading global manufacturer of stationary, mobile and portable generators primarily sold under the Pramac® brand. Pramac products are sold in over 150 countries through a broad distribution network. |
● | In January 2017, the Company acquired Motortech GmbH & affiliates (Motortech), headquartered in Celle, Germany. Motortech is a leading manufacturer of gaseous-engine control systems and accessories, which are sold primarily to European gas-engine manufacturers and to aftermarket customers. |
2. | Significant Accounting Policies |
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its subsidiaries that are consolidated in conformity with U.S. generally accepted accounting principles (U.S. GAAP). All intercompany amounts and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
Concentration of Credit Risk
The Company maintains the majority of its domestic cash in one commercial bank in multiple operating and investment accounts. Balances on deposit are insured by the Federal Deposit Insurance Corporation (FDIC) up to specified limits. Balances in excess of FDIC limits are uninsured.
One customer accounted for approximately 9% and 11% of accounts receivable at December 31, 2016 and 2015, respectively. No one customer accounted for greater than 7%, 7% and 8%, of net sales during the years ended December 31, 2016, 2015, or 2014, 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 | 15 | – | 20 | |||
Buildings and improvements | 10 | – | 40 | |||
Machinery and equipment | 3 | – | 10 | |||
Dies and tools | 3 | – | 10 | |||
Vehicles | 3 | – | 6 | |||
Office equipment and systems | 3 | – | 15 | |||
Leasehold improvements | 2 | – | 20 |
Total depreciation expense was $21,465, $16,742, and $13,706 for the years ended December 31, 2016, 2015, and 2014, respectively.
Goodwill and Other Indefinite-Lived Intangible Assets
Goodwill represents the excess of the purchase price over fair value of identifiable net assets acquired from business acquisitions. Goodwill is not amortized, but is reviewed for impairment on an annual basis and between annual tests if indicators of impairment are present. The Company evaluates goodwill for impairment annually onas of October 131 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 and other indefinite-lived intangible assets for the fiscal years 2013, 20122016, 2015 and 20112014, and found no impairment following the 2016 and 2014 tests. There were no reporting units with a carrying value at-risk of exceeding fair value as of the October 31, 2016 impairment test date.
After performing the impairment tests for fiscal year 2015, the Company determined that the fair value of the Ottomotores reporting unit was less than its carrying value, resulting in a non-cash goodwill impairment charge in the fourth quarter of 2015 of $4,611 to write-down the balance of the Ottomotores goodwill.
Other indefinite-lived intangible assets consist of trade names.certain tradenames. The Company tests the carrying value of these trade namestradenames by comparing the assetsassets’ fair value to its carrying value. Fair value wasis measured using a relief-from-royalty approach, which assumes the fair value of the trade nametradename is the discounted cash flows of the amount that would be paid had the Company not owned the trade nametradename and instead licensed the trade nametradename from another company. The Company conducts its annual impairment test for indefinite-lived intangible assets on October 31st of each year.
In the fourth quarter of 2011, we came out2015, the Company’s Board of Directors approved a three-year cumulative loss positionplan to strategically transition and as partconsolidate certain 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.
Other than the impairment charges discussed above, the Company found no other impairment when performing the required annual impairment tests for goodwill and our results of operations couldother indefinite-lived intangible assets for fiscal year 2015. There can be impacted.
| Currency Denomination | Effective Date | Notional Amount (Thousands) | Expiration Date | |||
| Number of Contracts Outstanding | Contract Date | Exchange Rate | ||||
| USD | 3 | October 23, 2013 | Various effective dates between 4/1/2014 and 7/14/2014 | 650 | (EUR:USD) 1.349-1.3515 | May 28, 2014 – October 31, 2014 |
| GBP | 4 | October 23, 2013 | Various effective dates between 2/3/2014 and 5/2/2014 | 4,000 | (EUR:GBP) 0.8384-0.8492 | April 30, 2014 – July 31, 2014 |
| Hedged Item | Number of Contracts Outstanding | Effective Date | Aggregate Notional Amount (Thousands) | Fixed Copper Price |
| Copper | 1 | October 1, 2013 to June 30, 2014 | $2,169 | $3.12 per LB |
| Hedged Item | Effective Date | Notional Amount (Thousands) | Expiration Date | ||
| Contract Date | Fixed LIBOR Rate | ||||
| Interest rate | October 23, 2013 | July 1, 2014 | $100,000 | 1.742% | July 1, 2018 |
| Interest rate | October 23, 2013 | July 1, 2014 | $100,000 | 1.737% | July 1, 2018 |
Impairment 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.
| Generac Holdings Inc. | ||||||||
| Consolidated Balance Sheets | ||||||||
| (Dollars in Thousands, Except Share and Per Share Data) | ||||||||
| December 31, | ||||||||
| 2013 | 2012 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 150,147 | $ | 108,023 | ||||
| Restricted cash | 6,645 | – | ||||||
Accounts receivable, less allowance for doubtful accounts of $2,658 at December 31, 2013 and $1,166 at December 31, 2012 | 164,907 | 134,978 | ||||||
| Inventories | 300,253 | 225,817 | ||||||
| Deferred income taxes | 26,869 | 48,687 | ||||||
| Prepaid expenses and other assets | 5,358 | 5,048 | ||||||
| Total current assets | 654,179 | 522,553 | ||||||
| Property and equipment, net | 146,390 | 104,718 | ||||||
| Customer lists, net | 42,764 | 37,823 | ||||||
| Patents, net | 62,418 | 70,302 | ||||||
| Other intangible assets, net | 4,447 | 5,783 | ||||||
| Deferred financing costs, net | 20,051 | 13,987 | ||||||
| Trade names, net | 173,196 | 158,831 | ||||||
| Goodwill | 608,287 | 552,943 | ||||||
| Deferred income taxes | 85,104 | 136,754 | ||||||
| Other assets | 1,369 | 153 | ||||||
| Total assets | $ | 1,798,205 | $ | 1,603,847 | ||||
| Liabilities and stockholders’ equity | ||||||||
| Current liabilities: | ||||||||
| Short-term borrowings | $ | 9,575 | $ | 12,550 | ||||
| Accounts payable | 109,238 | 94,543 | ||||||
| Accrued wages and employee benefits | 26,564 | 19,435 | ||||||
| Other accrued liabilities | 92,997 | 86,081 | ||||||
| Current portion of long-term borrowings and capital lease obligations | 12,471 | 82,250 | ||||||
| Total current liabilities | 250,845 | 294,859 | ||||||
| Long-term borrowings and capital lease obligations | 1,175,349 | 799,018 | ||||||
| Other long-term liabilities | 54,940 | 46,342 | ||||||
| Total liabilities | 1,481,134 | 1,140,219 | ||||||
| Stockholders’ equity: | ||||||||
Common stock, par value $0.01, 500,000,000 shares authorized, 68,767,367 and 68,295,960 shares issued at December 31, 2013 and 2012, respectively | 688 | 683 | ||||||
| Additional paid-in capital | 421,672 | 743,349 | ||||||
| Treasury stock, at cost, 163,458 and 0 shares, respectively | (6,571 | ) | – | |||||
| Excess purchase price over predecessor basis | (202,116 | ) | (202,116 | ) | ||||
| Retained earnings (accumulated deficit) | 105,813 | (63,792 | ) | |||||
| Accumulated other comprehensive loss | (2,415 | ) | (14,496 | ) | ||||
| Total stockholders’ equity | 317,071 | 463,628 | ||||||
| Total liabilities and stockholders’ equity | $ | 1,798,205 | $ | 1,603,847 | ||||
| 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, | ||||||||||||
| 2013 | 2012 | 2011 | ||||||||||
| Net sales | $ | 1,485,765 | $ | 1,176,306 | $ | 791,976 | ||||||
| Costs of goods sold | 916,205 | 735,906 | 497,322 | |||||||||
| Gross profit | 569,560 | 440,400 | 294,654 | |||||||||
| Operating expenses: | ||||||||||||
| Selling and service | 107,515 | 101,448 | 77,776 | |||||||||
| Research and development | 29,271 | 23,499 | 16,476 | |||||||||
| General and administrative | 55,490 | 46,031 | 30,012 | |||||||||
| Amortization of intangibles | 25,819 | 45,867 | 48,020 | |||||||||
| Trade name write-down | – | – | 9,389 | |||||||||
| Total operating expenses | 218,095 | 216,845 | 181,673 | |||||||||
| Income from operations | 351,465 | 223,555 | 112,981 | |||||||||
| Other (expense) income: | ||||||||||||
| Interest expense | (54,435 | ) | (49,114 | ) | (23,718 | ) | ||||||
| Loss on extinguishment of debt | (15,336 | ) | (14,308 | ) | (377 | ) | ||||||
| Investment income | 91 | 79 | 110 | |||||||||
| Costs related to acquisition | (1,086 | ) | (1,062 | ) | (875 | ) | ||||||
| Other, net | (1,983 | ) | (2,798 | ) | (1,155 | ) | ||||||
| Total other expense, net | (72,749 | ) | (67,203 | ) | (26,015 | ) | ||||||
| Income before provision for income taxes | 278,716 | 156,352 | 86,966 | |||||||||
| Provision (benefit) for income taxes | 104,177 | 63,129 | (237,677 | ) | ||||||||
| Net income | 174,539 | 93,223 | 324,643 | |||||||||
| Net income per common share - basic: | $ | 2.56 | $ | 1.38 | $ | 4.84 | ||||||
| Weighted average common shares outstanding - basic: | 68,081,632 | 67,360,632 | 67,130,356 | |||||||||
| Net income per common share - diluted: | $ | 2.51 | $ | 1.35 | $ | 4.79 | ||||||
| Weighted average common shares outstanding - diluted: | 69,667,529 | 69,193,138 | 67,797,371 | |||||||||
| Dividends declared per share | $ | 5.00 | $ | 6.00 | $ | – | ||||||
| Other comprehensive income (loss): | ||||||||||||
| Amortization of unrealized loss on interest rate swaps | $ | 2,381 | $ | 2,082 | $ | – | ||||||
| Foreign currency translation adjustment | 1,238 | (34 | ) | – | ||||||||
| Net unrealized gain (loss) on derivatives | 774 | 365 | (683 | ) | ||||||||
| Pension liability adjustment | 7,688 | (1,552 | ) | (4,922 | ) | |||||||
| Other comprehensive income (loss) | 12,081 | 861 | (5,605 | ) | ||||||||
| Comprehensive income | $ | 186,620 | $ | 94,084 | $ | 319,038 | ||||||
| See notes to consolidated financial statements. | ||||||||||||
| Generac Holdings Inc. | ||||||||||||||||||||||||||||||
| Consolidated Statements of Stockholders' Equity | ||||||||||||||||||||||||||||||
| (Dollars in Thousands, Except Share Data) | ||||||||||||||||||||||||||||||
| Excess Purchase | Retained | Accumulated | ||||||||||||||||||||||||||||
| Additional | Price 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, 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 | ||||||||||||||||||
| 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 withheld for employee taxes and strike price | 471,407 | 5 | (8,587 | ) | – | – | – | – | – | (8,582 | ) | |||||||||||||||||||
| Treasury stock purchases | – | – | – | (163,458 | ) | (6,571 | ) | – | – | – | (6,571 | ) | ||||||||||||||||||
| Excess tax benefits from equity awards | – | – | 11,553 | – | – | – | – | – | 11,553 | |||||||||||||||||||||
| Share-based compensation | – | – | 12,368 | – | – | – | – | – | 12,368 | |||||||||||||||||||||
| Dividends declared | – | – | (337,011 | ) | – | – | – | (4,934 | ) | – | (341,945 | ) | ||||||||||||||||||
| Pension liability adjustment, net of tax of $5,060 | – | – | – | – | – | – | – | 7,688 | 7,688 | |||||||||||||||||||||
| Net income | – | – | – | – | – | – | 174,539 | – | 174,539 | |||||||||||||||||||||
| Balance at December 31, 2013 | 68,767,367 | $ | 688 | $ | 421,672 | (163,458 | ) | $ | (6,571 | ) | $ | (202,116 | ) | $ | 105,813 | $ | (2,415 | ) | $ | 317,071 | ||||||||||
| See notes to condensed consolidated financial statements. | ||||||||||||||||||||||||||||||
| Generac Holdings Inc. | |||||||||||||
| Consolidated Statements of Cash Flows | |||||||||||||
| (Dollars in Thousands) | |||||||||||||
| Year Ended December 31, | |||||||||||||
| 2013 | 2012 | 2011 | |||||||||||
| Operating activities | |||||||||||||
| Net income | $ | 174,539 | $ | 93,223 | $ | 324,643 | |||||||
| Adjustment to reconcile net income to net cash provided by operating activities: | |||||||||||||
| Depreciation | 10,955 | 8,293 | 8,103 | ||||||||||
| Amortization of intangible assets | 25,819 | 45,867 | 48,020 | ||||||||||
| Trade name write-down | – | – | 9,389 | ||||||||||
| Amortization of original issue discount | 2,074 | 1,598 | – | ||||||||||
| Amortization of deferred finance costs | 2,698 | 2,161 | 1,986 | ||||||||||
| Amortization of unrealized loss on interest rate swaps | 2,381 | 2,082 | – | ||||||||||
| Loss on extinguishment of debt | 15,336 | 14,308 | 377 | ||||||||||
| Provision for losses on accounts receivable | 1,037 | 204 | (7 | ) | |||||||||
| Deferred income taxes | 82,675 | 62,429 | (238,170 | ) | |||||||||
| Loss on disposal of property and equipment | 370 | 261 | 10 | ||||||||||
| Share-based compensation expense | 12,368 | 10,780 | 8,646 | ||||||||||
| Net changes in operating assets and liabilities: | |||||||||||||
| Accounts receivable | (5,257 | ) | (137 | ) | (22,235 | ) | |||||||
| Inventories | (52,488 | ) | (31,656 | ) | (11,224 | ) | |||||||
| Other assets | (10,902 | ) | (8,416 | ) | (6,834 | ) | |||||||
| Accounts payable | (5,847 | ) | (3,898 | ) | 18,517 | ||||||||
| Accrued wages and employee benefits | 6,248 | 3,168 | 6,516 | ||||||||||
| Other accrued liabilities | 9,491 | 39,915 | 22,175 | ||||||||||
| Excess tax benefits from equity awards | (11,553 | ) | (4,588 | ) | (200 | ) | |||||||
| Net cash provided by operating activities | 259,944 | 235,594 | 169,712 | ||||||||||
| Investing activities | |||||||||||||
| Proceeds from sale of property and equipment | 80 | 91 | 14 | ||||||||||
| Expenditures for property and equipment | (30,770 | ) | (22,392 | ) | (12,060 | ) | |||||||
| Proceeds from sale of business, net | 2,254 | – | – | ||||||||||
| Acquisition of business, net of cash acquired | (116,113 | ) | (47,044 | ) | (83,907 | ) | |||||||
| Net cash used in investing activities | (144,549 | ) | (69,345 | ) | (95,953 | ) | |||||||
| Financing activities | |||||||||||||
| Proceeds from short-term borrowings | 16,007 | 23,018 | – | ||||||||||
| Proceeds from long-term borrowings | 1,200,000 | 1,455,614 | – | ||||||||||
| Repayments of short-term borrowings | (18,982 | ) | (23,000 | ) | – | ||||||||
| Repayments of long-term borrowings and capital lease obligations | (901,184 | ) | (1,175,124 | ) | (59,355 | ) | |||||||
| Payment of debt issuance costs | (22,376 | ) | (25,691 | ) | – | ||||||||
| Cash dividends paid | (343,429 | ) | (404,332 | ) | – | ||||||||
| Taxes paid related to the net share settlement of equity awards | (15,020 | ) | (6,425 | ) | (371 | ) | |||||||
| Excess tax benefits from equity awards | 11,553 | 4,588 | 200 | ||||||||||
| Proceeds from exercise of stock options | 32 | – | 310 | ||||||||||
| Net cash used in financing activities | (73,399 | ) | (151,352 | ) | (59,216 | ) | |||||||
| Effect of exchange rate changes on cash and cash equivalents | 128 | – | – | ||||||||||
| Net increase (decrease) in cash and cash equivalents | 42,124 | 14,897 | 14,543 | ||||||||||
| Cash and cash equivalents at beginning of period | 108,023 | 93,126 | 78,583 | ||||||||||
| Cash and cash equivalents at end of period | $ | 150,147 | $ | 108,023 | $ | 93,126 | |||||||
| Supplemental disclosure of cash flow information | |||||||||||||
| Cash paid during the period | |||||||||||||
| Interest | $ | 55,828 | $ | 33,076 | $ | 24,264 | |||||||
| Income taxes | 25,821 | 2,811 | 437 | ||||||||||
| See notes to consolidated financial statements | |||||||||||||
| Weighted Average | 2013 | 2012 | |||||
| Amortization Years | Cost | Accumulated Impairment | Amortized Cost | Cost | Accumulated Impairment | Amortized Cost | |
| Indefinite lived intangible assets | |||||||
| Trade names | $ 182,585 | $ (9,389) | $ 173,196 | $ 168,220 | $ (9,389) | $ 158,831 | |
| Cost | Accumulated Amortization | Amortized Cost | Cost | Accumulated Amortization | Amortized Cost | ||
| Finite lived intangible assets | |||||||
| Trade names | 0 | $ 8,775 | $ (8,775) | $ - | $ 8,775 | $ (8,775) | $ - |
| Customer lists | 7 | 294,627 | (251,863) | 42,764 | 273,355 | (235,532) | 37,823 |
| Patents | 15 | 118,921 | (56,503) | 62,418 | 118,921 | (48,619) | 70,302 |
| Unpatented technology | 12 | 13,169 | (9,064) | 4,105 | 13,165 | (7,696) | 5,469 |
| Software | 8 | 1,046 | (912) | 134 | 1,014 | (779) | 235 |
| Non-compete/other | 2 | 345 | (137) | 208 | 113 | (34) | 79 |
| Total finite lived intangible assets | $ 436,883 | $ (327,254) | $ 109,629 | $ 415,343 | $ (301,435) | $ 113,908 | |
The Company periodically evaluates the carrying value of long-lived assetsassets (excluding goodwill and trade names)indefinite-lived tradenames). Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the sum of the expected future undiscounted cash flows is less than the carrying amount of an asset, a loss is recognized for the difference between the fair value and carrying value of the asset. Such analyses necessarily involve significant judgments.
Debt Issuance Costs
Debt discounts and Other Indefinite-Lived Intangible Assets
| Year ended December 31, 2013 | Year ended December 31, 2012 | |||||||||||
| Gross | Accumulated Impairment | Net Goodwill | Gross | Accumulated Impairment | Net Goodwill | |||||||
| Balance at beginning of year | $ | 1,056,136 | $ | (503,193) | $ | 552,943 | $ | 1,050,666 | $ | (503,193) | $ | 547,473 |
| Acquisition of business, net | 56,605 | — | 56,605 | 5,470 | — | 5,470 | ||||||
| Sale of business, net | (1,261) | — | (1,261) | — | — | — | ||||||
| Balance at end of year | $ | 1,111,480 | $ | (503,193) | $ | 608,287 | $ | 1,056,136 | $ | (503,193) | $ | 552,943 |
Income Taxes
The Company is a C Corporation and therefore accounts for income taxes pursuant to the liability method. Accordingly, the current or deferred tax consequences of a transaction are measured by applying the provision of enacted tax laws to determine the amount of taxes payable currently or in future years. Deferred income taxes are provided for temporary differences between the income tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the years in which those temporary differences become deductible. The Company considers taxable income in prior carryback years, the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies, as appropriate, in making this assessment.
Revenue Recognition
Sales, net of estimated returns and allowances, are recognized upon shipment of product to the customer, which is generally when title passes, the Company has no further obligations, and the customer is required to pay.pay subject to agreed upon payment terms. The Company, at the request of certain customers, will warehouse inventory billed to the customer but not delivered. Unless all revenue recognition criteria have been met, the Company does not recognize revenue on these transactions until the customers take possession of the product. 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 promotion,programs, discounts and incentive expenses which are recognized as a reduction of sales.
Shipping and Handling Costs
Shipping and handling costs billed to customers are included in net sales, and the related costs are included in cost of goods sold in the consolidated statements of comprehensive income.
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 $19,910, $13,360,$45,488, $39,258, and $11,742$32,352 for the years ended December 31, 2013, 2012,2016, 2015, and 2011,2014, respectively.
Research and Development
The Company expenses research and development costs as incurred. Total expenditures incurred for research and development were $29,271, $23,499,$37,229, $32,922, and $16,476$31,494 for the years ended December 31, 2013, 20122016, 2015 and 2011,2014, respectively.
Foreign Currency Translation and Transactions
Balance sheet amounts for non-U.S. Dollar functional currency balance sheet accountsbusinesses are translated into dollarsU.S. Dollars at the rates of exchange in effect at fiscal year-end. Income and expenses incurred in a foreign currency are translated at the average rates of exchange in effect during the year. The related translation adjustments are made directly to accumulated other comprehensive loss, a separate component of Stockholders’ Equity.
| December 31, | ||||||||
| 2013 | 2012 | |||||||
| Foreign currency translation adjustments | $ | 1,204 | $ | (34 | ) | |||
| Pension liability, net of tax of $886 and $(4,174) | (4,393 | ) | (12,081 | ) | ||||
| Unrealized gain (loss) on cash flow hedges, net of tax of $462 and $(109) | 774 | (2,381 | ) | |||||
| Accumulated other comprehensive loss | $ | (2,415 | ) | $ | (14,496 | ) | ||
| Foreign Currency Translation Adjustments | Defined Benefit Pension Plan | Unrealized gain (loss) on cash flow hedges | Total | |||||||||||||
| Beginning Balance | $ | (34 | ) | $ | (12,081 | ) | $ | (2,381 | ) | $ | (14,496 | ) | ||||
| Other comprehensive income before reclassifications | 1,238 | 6,994 | 774 | 9,006 | ||||||||||||
| Amounts reclassified from accumulated other comprehensive loss | - | 694 | 2,381 | 3,075 | ||||||||||||
| Net current-period other comprehensive income | 1,238 | 7,688 | 3,155 | 12,081 | ||||||||||||
| Ending Balance | $ | 1,204 | $ | (4,393 | ) | $ | 774 | $ | (2,415 | ) | ||||||
Amounts reclassified from other accumulated comprehensive loss for the year ended December 31, | | ||||||||
| 2013 | 2012 | Affected line item in the statement where net income is presented | |||||||
| Amortization of unrealized loss on interest rate swaps | |||||||||
| Gross | $ | (2,490 | ) | $ | (2,177 | ) | Interest expense | ||
| Tax benefit | 109 | 95 | |||||||
| Net of tax | (2,381 | ) | (2,082 | ) | |||||
| Amortization of defined benefit pension actuarial losses | ||||||||||||
| Gross | (1,108 | ) | (909 | ) | (1 | ) | ||||||
| Tax benefit | 414 | 356 | ||||||||||
| Net of tax | (694 | ) | (553 | ) | ||||||||
Fair Value of Financial Instruments
The Company believes the carrying amount of its financial instruments (cash and cash equivalents, restricted cash, 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, which have an aggregate carrying value of $1,197,000 was approximately $1,199,993 (level 2) at December 31, 2013, as calculated based on independent valuations whose inputs and significant value drivers are observable.
The Company believes the carrying amount of its financial instruments (cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, short-term borrowings and ABL facility borrowings), excluding Term Loan borrowings, approximates the fair value of these instruments based upon their short-term nature. The fair value of Term Loan borrowings, which have an aggregate carrying value of $903,673, was approximately $904,780 (Level 2) at December 31, 2016, as calculated based on independent valuations whose inputs and significant value drivers are observable.
For the fair value of the assets and liabilities measured 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.
| Fair Value Measurement Using | ||||||||||||
Total December 31, 2013 | Quoted Prices in Active Markets for Identical Contracts (Level 1) | Significant Other Observable Inputs (Level 2) | ||||||||||
| Interest rate swaps | $ | 1,236 | $ | – | $ | 1,236 | ||||||
| Commodity contracts | $ | 69 | $ | – | $ | 69 | ||||||
| Foreign currency contracts | $ | 56 | $ | – | $ | 56 | ||||||
| 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 | ||||||
Use of Estimates
The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principlesGAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, andthe disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Derivative Instruments and Hedging Activities
The Company records all derivatives in accordance with ASC 815, Derivatives and Hedging, which requires 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.
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, | |||||||||||||||||||||||||||||||||||
| 2013 | 2012 | 2011 | 2013 | 2012 | 2011 | 2013 | 2012 | 2011 | ||||||||||||||||||||||||||||||
| Derivatives designated as hedging instruments | ||||||||||||||||||||||||||||||||||||||
| Interest rate swaps (1) | $ | 774 | $ | 365 | $ | (683 | ) | Interest Expense | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||||
| Derivatives not designated as hedging instruments | ||||||||||||||||||||||||||||||||||||||
| Commodity and foreign currency contracts | $ | - | $ | - | $ | - | Cost of goods sold | $ | - | $ | - | $ | - | $ | (661 | ) | $ | 386 | $ | (861 | ) | |||||||||||||||||
| Interest rate swaps (2) | $ | - | $ | - | $ | - | Interest Expense | $ | (2,381 | ) | $ | (2,082 | ) | $ | - | $ | 2,973 | $ | 1,695 | $ | - | |||||||||||||||||
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.
| Year ended December 31, | ||||||||||||
| 2013 | 2012 | 2011 | ||||||||||
| Residential power products | $ | 843,727 | $ | 705,444 | $ | 491,016 | ||||||
| Commercial & industrial power products | 569,890 | 410,341 | 250,270 | |||||||||
| Other | 72,148 | 60,521 | 50,690 | |||||||||
| Total | $ | 1,485,765 | $ | 1,176,306 | $ | 791,976 | ||||||
New Accounting Pronouncements
In February 2013,May 2014, the Financial Accounting Standards Board (“FASB”)FASB issued Accounting Standards Update (“ASU”) No. 2013-02,ASU 2014-09, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (“ASU 2013-02”)Revenue from Contracts with Customers. This guidance is the culmination of the FASB’s deliberationjoint project with the International Accounting Standards Board to clarify the principles for recognizing revenue. The core principal of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides a five-step process that entities should follow in order to achieve that core principal. ASU 2014-09, as amended by ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations, ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, and ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, becomes effective for the Company in 2018. The guidance can be applied either on reporting reclassification adjustments from accumulated othera full retrospective basis or on a modified retrospective basis in which the cumulative effect of initially applying the standard is recognized at the date of initial application. While the Company is continuing to assess all potential impacts the standard may have on its financial statements, it believes that the adoption will not have a significant impact on its revenue related to equipment and parts sales, which represent substantially all of the revenue for the Company. The Company has not yet determined its method of adoption.
In February 2016, the FASB issued ASU 2016-02, Leases. This guidance is being issued to increase transparency and comparability among organizations by requiring the recognition of lease assets and lease liabilities on the statement of financial position and by disclosing key information about leasing arrangements. The guidance should be applied using a modified retrospective approach and is effective for the Company in 2019, with early adoption permitted. The Company is currently assessing the impact the adoption of this guidance will have on its results of operations and financial position.
In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation: Improvements to Employee Share-Based Payment Accounting. This guidance is a part of the FASB’s initiative to reduce complexity in accounting standards, and includes simplification involving several aspects of the accounting for share-based payment transactions, including excess tax benefits. The guidance should be applied on a modified retrospective basis and is effective for the Company in 2017, with early adoption permitted. While the Company is still currently assessing all impacts of the guidance, the primary impact of adoption will be the recognition of excess tax benefits within the provision for income taxes on the statement of comprehensive income (AOCI). The amendments in ASU 2013-02 do not change the current requirements for reporting net income or other comprehensive income. However, the amendments require disclosure of amounts reclassified out of AOCI in its entirety, by component,rather than within additional paid-in capital on the facebalance sheet. Additionally, this change will result in excess tax benefits from stock compensation to be reflected in net cash from operating activities on the statement of cash flows.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments. This guidance is being issued to decrease diversity in practice for how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This guidance should be applied on a retrospective basis and is effective for the Company in 2018, with early adoption permitted. The Company does not believe that this guidance will have a significant impact on its presentation of the statement of operations or in the notes thereto. Amounts that are not required to be reclassified in their entirety to net income must be cross-referenced to other disclosures that provide additional detail. This standard is effective prospectively for annual and interim reporting periods beginning after December 15, 2012. The Company’s adoption of this standard did not have a material impact on the Company’s financial condition or results of operations.cash flows.
In July 2013,January 2017, the FASB issued ASU No. 2013-10,2017-04, InclusionIntangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment. This guidance is being issued to simplify the subsequent measurement of goodwill by eliminating Step 2 of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) asgoodwill impairment test. Under the new guidance, the recognition of a Benchmark goodwill impairment charge is calculated based on the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. This guidance should be applied on a prospective basis and is effective for the Company in 2020. Early adoption is permitted for goodwill impairment tests performed after January 1, 2017. The Company is currently assessing the impact the adoption will have on its results of operations and financial position.
In the first quarter of 2016, the Company adopted ASU 2015-03, Interest Rate for Hedge Accounting Purposes ("ASU 2013-10")– Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs. ASU 2013-10 permitsAs a result, the Fed Funds Effective Swap RateCompany adjusted the impacted line items in the December 31, 2015 consolidated balance sheet to be used as a U.S. benchmark interest rate for hedge accounting purposes, in additionconform to the United States Treasury ratecurrent period’s presentation; decreasing both the Deferred financing costs, net and London Interbank Offered Rate ("LIBOR")Long-term borrowings and capital lease obligations line items by $12,965. Also in the first quarter of 2016, the Company adopted ASU 2015-17, Income Taxes: Balance Sheet Classification of Deferred Taxes. In addition,As a result, the restriction on using different benchmark rates for similar hedges is removed. The provisions of ASU 2013-10 are effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. The adoption of ASU 2013-10 did not have a material impact onCompany adjusted the Company’s financial condition or results of operations.impacted line items in the December 31, 2015 consolidated balance sheet to conform to the current period’s presentation; decreasing the Deferred income taxes line item within current assets by $29,355, increasing the Deferred income taxes line item within noncurrent assets by $28,139, and decreasing the Deferred income taxes line within noncurrent liabilities by $1,216.
There are several other new accounting pronouncements issued by the FASB. Each of these pronouncements, as applicable, has been or will be adopted by the Company. Management does not believe any of these accounting pronouncements has had or will have a material impact on the Company’sCompany’s consolidated financial statements.
3. | Acquisitions |
Acquisition of Tower Light
On AugustMarch 1, 2013, a subsidiary of2016, the Company acquired all of the shares of Tower Light SRL and its wholly-owned subsidiaries (collectively, “Tower Light”)a 65% ownership interest in Pramac for a purchase price, net of cash acquired, and inclusive of estimated earn-out payments, of $85,812.$60,886. Headquartered outside Milan,in Siena, Italy, Tower LightPramac is a leading developerglobal manufacturer of stationary, mobile and supplier of mobile light towers throughout Europe,portable generators primarily sold under the Middle East and Africa. Tower Light has built a leading market position in the equipment rental markets by leveraging its broad product offering and strong global distribution networkPramac® brand. Pramac products are sold in over 50150 countries worldwide.
The 35% noncontrolling interest in Pramac had an acquisition date fair value of $34,253, and was recorded as a redeemable noncontrolling interest in the consolidated balance sheet, as the noncontrolling interest holder has within its control the right to require the Company to redeem its interest in Pramac. The noncontrolling interest holder has a put option to sell their interests to the Company any time within five years from the date of acquisition. The put option price is either (i) a fixed amount if voluntarily exercised within the first two years after the acquisition, or (ii) based on a multiple of earnings, subject to the terms of the acquisition. Additionally, the Company holds a call option that it may redeem commencing five years from the date of acquisition, or earlier upon the occurrence of certain circumstances. The call option price is based on a multiple of earnings that is subject to the terms of the acquisition. Both the put and call option only provide for the complete transfer of the noncontrolling interest, with no partial transfers of interest permitted.
The redeemable noncontrolling interest is recorded at the greater of the initial fair value, increased or decreased for the noncontrolling interests’ share of comprehensive net income (loss), or the estimated redemption value, with any adjustment to the redemption value impacting retained earnings, but not net income. However, the redemption value adjustments are reflected in the earnings per share calculation, as detailed in Note 12, "Earnings Per Share," to the consolidated financial statements. The following table presents the changes in the redeemable noncontrolling interest:
Year Ended | ||||
December 31, 2016 | ||||
Beginning Balance - January 1 | $ | - | ||
Noncontrolling interest of Pramac | 34,253 | |||
Net income | 100 | |||
Foreign currency translation | (2,124 | ) | ||
Redemption value adjustment | 909 | |||
Ending Balance - December 31 | $ | 33,138 | ||
The Company recorded a preliminary purchase price allocation during the first quarter of 2016, which was updated in the fourth quarter of 2016, based upon its estimates of the fair value of the acquired assets and assumed liabilities. The preliminary purchase price allocation as of the balance sheet date was as follows:
March 1, 2016 | ||||
Accounts receivable | $ | 51,289 | ||
Inventories | 39,889 | |||
Property and equipment | 19,138 | |||
Intangible assets | 34,471 | |||
Goodwill | 46,202 | |||
Other assets | 7,698 | |||
Total assets acquired | 198,687 | |||
Short-term borrowings | 21,105 | |||
Accounts payable | 40,270 | |||
Long-term debt and capital lease obligations (including current portion) | 18,599 | |||
Other liabilities | 23,521 | |||
Redeemable noncontrolling interest | 34,253 | |||
Noncontrolling interest | 53 | |||
Net assets acquired | $ | 60,886 | ||
The goodwill ascribed to this acquisition is not deductible for tax purposes. The accompanying consolidated financial statements include the results of Pramac from the date of acquisition through December 31, 2016.
Acquisition of CHP
On August 1, 2015, the Company acquired CHP for a purchase price, net of cash acquired, of $74,570. Headquartered in Vergennes, Vermont, CHP is a leading manufacturer of high-quality, innovative, professional-grade engine powered equipment used in a wide variety of property maintenance applications, with sales primarily in North America. The acquisition purchase price was funded solely through cash on hand.
The Company recorded a preliminary purchase price allocation during the third quarter of 20132015 based upon its estimates of the fair value of the acquired assets and assumed liabilities. As a result, the Company recorded approximately $67,900$81,726 of intangible assets, including approximately $38,400$30,076 of goodwill, as of the acquisition date. Based on revisedThe purchase accounting estimates related to earn-out projections, an additional $9,328 of goodwillprice allocation was recorded duringfinalized in the fourth quarter of 2013.2015, resulting in a $6,552 decrease to total intangible assets, including an increase of $6,208 in goodwill. The goodwill ascribed to this acquisition is not deductible for tax purposes. In addition, the Company assumed $12,000 of debt along with this acquisition. The accompanying consolidated financial statements include the results of Tower LightCHP from August 1, 2013the date of acquisition through December 31, 2013. This acquisition is not material to the Company’s consolidated financial statements.
Acquisition of Ottomotores
On December 8, 2012, a subsidiary ofOctober 1, 2014, the Company acquired allMAC 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 in 1950 and is located in Mexico City, Mexico and Curitiba, Brazil. Ottomotores$53,747. MAC is a leading manufacturer inof premium-grade commercial and industrial mobile heaters within the Mexican market for industrial diesel gensets ranging in size from 15kW to 3,250kWUnited States and is a significant market participant throughout all of Latin America.
The Company recorded a preliminary purchase price allocation during the fourth quarter of 20122014 based upon its estimates of the fair value 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 of goodwill, as of the acquisition date. The purchase price allocation was finalized during the second quarter of 2013, resulting in an additional $2,590 of intangible assets and a $439 decrease to goodwill. The goodwill ascribed to this acquisition is not deductible for tax purposes. This acquisition is not material to the Company’s consolidated financial statements.
Pro Forma Information
The following unaudited pro forma information of the Company gives effect to these acquisitions as though the transactions had occurred on January 1, 2014:
Year Ended December 31, | ||||||||||||
2016 | 2015 | 2014 | ||||||||||
Net Sales: | ||||||||||||
As reported | $ | 1,444,453 | $ | 1,317,299 | $ | 1,460,919 | ||||||
Pro forma | 1,473,799 | 1,556,459 | 1,776,843 | |||||||||
Net income attributable to Generac Holdings Inc.: | ||||||||||||
As reported | $ | 98,788 | $ | 77,747 | $ | 174,613 | ||||||
Pro forma | 100,907 | 78,618 | 174,926 | |||||||||
Net income attributable to Generac Holdings Inc. per common share - diluted | ||||||||||||
As reported | $ | 1.50 | $ | 1.12 | $ | 2.49 | ||||||
Pro forma | 1.53 | 1.14 | 2.49 | |||||||||
This acquisitionunaudited pro forma information is presented for informational purposes only and is not materialnecessarily indicative of the results of operations that actually would have been achieved had the acquisitions been consummated on January 1, 2014.
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 both December 31, 2016 and 2015, the Company had one commodity contract outstanding, 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 financial statements.
Foreign Currencies
The Company is responsibleexposed to foreign currency exchange risk as a result of transactions denominated in currencies other than the U.S. Dollar. The Company periodically utilizes foreign currency forward purchase and sales contracts to manage the volatility associated with certain foreign currency purchases and sales in the normal course of business. Contracts typically have maturities of twelve months or less. As of December 31, 2016 and 2015, the Company had thirty-eight and six foreign currency contracts outstanding, respectively.
Because these contracts do not qualify for hedge accounting, the related gains and losses are recorded in cost of goods sold in the Company’s consolidated statements of comprehensive income. Net losses recognized for the estimatesyears ended December 31, 2016, 2015 and 2014 were $385, $624 and $149, respectively.
Interest Rate Swaps
In October 2013, the Company entered into two interest rate swap agreements, and in May 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 fair valuesgains or losses are reported as a component of accumulated other comprehensive loss (AOCL). The cash flows of the acquiredswaps are recognized as adjustments to interest expense each period. The ineffective portions of the derivatives’ changes in fair value, if any, are immediately recognized in earnings.
Fair Value
The following table presents the fair value of the Company’s derivatives:
December 31, | December 31, | |||||||
Commodity contracts | $ | 623 | $ | (400 | ) | |||
Foreign currency contracts | (150 | ) | (171 | ) | ||||
Interest rate swaps | (1,739 | ) | (2,618 | ) | ||||
The fair value of the commodity contract is included in other assets, the fair value of the foreign currency contracts are included in other accrued liabilities, and assumedthe fair value of the interest rate swaps are included in other long-term liabilities described in this Note 3.
The amount of gains (losses) recognized in AOCL in the consolidated balance sheets on the effective portion of interest rate swaps designated as hedging instruments for the years ended December 31, 2016, 2015 and 2014 were $535, $(965) and $(1,420), respectively. The amount of gains (losses) recognized in cost of goods sold in the consolidated statements of comprehensive income for commodity and foreign currency contracts not designated as hedging instruments for the years ended December 31, 2016, 2015 and 2014 were $354, $(2,533) and $(778), respectively.
5. | Accumulated Other Comprehensive Loss |
The following presents a tabular disclosure of changes in AOCL during the years ended December 31, 2016 and 2015, net of tax:
Foreign Currency Translation Adjustments | Defined Benefit Pension Plan | Unrealized Gain (Loss) on Cash Flow Hedges | Total | |||||||||||||
Beginning Balance – January 1, 2016 | $ | (9,502 | ) | $ | (11,362 | ) | $ | (1,611 | ) | $ | (22,475 | ) | ||||
Other comprehensive income (loss) before reclassifications | (18,545 | ) | (273 | ) | 535 | (18,283 | ) | |||||||||
Amounts reclassified from AOCL | - | 595 | - | 595 | ||||||||||||
Net current-period other comprehensive income (loss) | (18,545 | ) | 322 | 535 | (17,688 | ) | ||||||||||
Ending Balance – December 31, 2016 | $ | (28,047 | ) | $ | (11,040 | ) | $ | (1,076 | ) | $ | (40,163 | ) | ||||
Foreign Currency Translation Adjustments | Defined Benefit Pension Plan | Unrealized Loss on Cash Flow Hedges | Total | |||||||||||||
Beginning Balance – January 1, 2015 | $ | (1,878 | ) | $ | (13,243 | ) | $ | (646 | ) | $ | (15,767 | ) | ||||
Other comprehensive income (loss) before reclassifications | (7,624 | ) | 1,105 | (965 | ) | (7,484 | ) | |||||||||
Amounts reclassified from AOCL | - | 776 | - | 776 | ||||||||||||
Net current-period other comprehensive income (loss) | (7,624 | ) | 1,881 | (965 | ) | (6,708 | ) | |||||||||
Ending Balance – December 31, 2015 | $ | (9,502 | ) | $ | (11,362 | ) | $ | (1,611 | ) | $ | (22,475 | ) | ||||
(1) | Represents unrecognized actuarial losses of $(412), net of tax benefit of $139, included in the computation of net periodic pension cost for the year ended December 31, 2016. See Note 14, “Benefit Plans,” to the consolidated financial statements for additional information. |
(2) | Represents unrealized gains of $876, net of tax effect of $(341) for the year ended December 31, 2016. |
(3) | Represents actuarial losses of $941, net of tax effect of $(346), amortized to net periodic pension cost for the year ended December 31, 2016. See Note 14, “Benefit Plans,” to the consolidated financial statements for additional information. |
(4) | Represents unrecognized actuarial gains of $1,829, net of tax effect of $(724), 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. |
(5) | Represents unrealized losses of $(1,574), net of tax benefit of $609 for the year ended December 31, 2015. |
(6) | Represents actuarial losses of $1,228, net of tax effect of $(452), amortized to net periodic pension cost for the year ended December 31, 2015. See Note 14, “Benefit Plans,” to the consolidated financial statements for additional information. |
6. | Segment Reporting |
Effective in the second quarter of 2016, the Company changed its segment reporting from one reportable segment to two reportable segments – Domestic and International – as a result of the recent Pramac acquisition and the ongoing strategy to expand the business internationally. The Domestic segment includes the legacy Generac business and the impact of acquisitions that are based in the United States, all of which have revenues that are substantially derived from the U.S. and Canada. The International segment includes the Ottomotores, Tower Light and Pramac acquisitions, all of which have revenues that are substantially derived from outside of the U.S and Canada. Both reportable segments design and manufacture a wide range of power generation equipment and other engine powered products. The Company has multiple operating segments, which it aggregates into the two reportable segments, based on materially similar economic characteristics, products, production processes, classes of customers and distribution methods. All segment information has been retrospectively applied to all periods presented to reflect the new reportable segment structure.
Net Sales | ||||||||||||
Year Ended December 31, | ||||||||||||
Reportable Segments | 2016 | 2015 | 2014 | |||||||||
Domestic | $ | 1,173,559 | $ | 1,204,589 | $ | 1,343,367 | ||||||
International | 270,894 | 112,710 | 117,552 | |||||||||
Total | $ | 1,444,453 | $ | 1,317,299 | $ | 1,460,919 | ||||||
The Company's product offerings consist primarily of power generation equipment and other engine powered products geared for varying end customer uses. Residential products and commercial & industrial products are each a similar class of products based on similar power output and end customer. The breakout of net sales between residential, commercial & industrial, and other products by product class is as follows:
Net Sales | ||||||||||||
Year Ended December 31, | ||||||||||||
Product Classes | 2016 | 2015 | 2014 | |||||||||
Residential products | $ | 772,436 | $ | 673,764 | $ | 722,206 | ||||||
Commercial & industrial products | 557,532 | 548,440 | 652,216 | |||||||||
Other | 114,485 | 95,095 | 86,497 | |||||||||
Total | $ | 1,444,453 | $ | 1,317,299 | $ | 1,460,919 | ||||||
Management evaluates the performance of its segments based primarily on Adjusted EBITDA, which is reconciled to Income before provision for income taxes below. The computation of Adjusted EBITDA is based on the definition that is contained in the Company’s credit agreements.
Adjusted EBITDA | ||||||||||||
Year Ended December 31, | ||||||||||||
2016 | 2015 | 2014 | ||||||||||
Domestic | $ | 261,428 | $ | 254,882 | $ | 322,769 | ||||||
International | 16,959 | 15,934 | 14,514 | |||||||||
Total adjusted EBITDA | $ | 278,387 | $ | 270,816 | $ | 337,283 | ||||||
Interest expense | (44,568 | ) | (42,843 | ) | (47,215 | ) | ||||||
Depreciation and amortization | (54,418 | ) | (40,333 | ) | (34,730 | ) | ||||||
Non-cash write-down and other adjustments (1) | (357 | ) | (3,892 | ) | 3,853 | |||||||
Non-cash share-based compensation expense (2) | (9,493 | ) | (8,241 | ) | (12,612 | ) | ||||||
Tradename and goodwill impairment (3) | - | (40,687 | ) | - | ||||||||
Loss on extinguishment of debt (4) | (574 | ) | (4,795 | ) | (2,084 | ) | ||||||
Gain (loss) on change in contractual interest rate (5) | (2,957 | ) | (2,381 | ) | 16,014 | |||||||
Transaction costs and credit facility fees (6) | (2,442 | ) | (2,249 | ) | (1,851 | ) | ||||||
Business optimization expenses (7) | (7,316 | ) | (1,947 | ) | - | |||||||
Other | 120 | (465 | ) | (296 | ) | |||||||
Income before provision for income taxes | $ | 156,382 | $ | 122,983 | $ | 258,362 | ||||||
(1) | Includes gains/losses on disposal of assets, unrealized mark-to-market adjustments on commodity contracts, and certain foreign currency and purchase accounting related adjustments. |
(2) | Represents share-based compensation expense to account for stock options, restricted stock and other stock awards over their respective vesting periods. |
(3) | Represents the 2015 impairment of certain tradenames due to a change in brand strategy to transition and consolidate various brands to the Generac® tradename ($36,076) and the impairment of goodwill related to the Ottomotores reporting unit ($4,611). |
(4) | Represents the write-off of original issue discount and capitalized debt issuance costs due to voluntary debt prepayments. |
(5) | For the year ended December 31, 2016, represents a non-cash loss in the third quarter 2016 relating to the continued 25 basis point increase in borrowing costs as a result of the credit agreement leverage ratio remaining above 3.0 times and expected to remain above 3.0 based on current projections. For the year ended December 31, 2015, represents a non-cash loss relating to a 25 basis point increase in borrowing costs as a result of the credit agreement leverage ratio rising above 3.0 times effective third quarter 2015 and expected to remain above 3.0 times based on projections at the time. For the year ended December 31, 2014 represents a non-cash gain relating to a 25 basis point reduction in borrowing costs as a result of the credit agreement leverage ratio falling below 3.0 times effective second quarter 2014 and expected to remain below 3.0 times based on projections at the time. |
(6) | Represents transaction costs incurred directly in connection with any investment, as defined in our credit agreement; equity issuance, debt issuance or refinancing; together with certain fees relating to our senior secured credit facilities. |
(7) | Represents charges relating to business optimization and restructuring costs. |
The following tables summarize additional financial information by reportable segment:
Assets | ||||||||||||
Year Ended December 31, | ||||||||||||
2016 | 2015 | 2014 | ||||||||||
Domestic | $ | 1,521,665 | $ | 1,605,043 | $ | 1,672,336 | ||||||
International | 340,019 | 173,592 | 192,083 | |||||||||
Total | $ | 1,861,684 | $ | 1,778,635 | $ | 1,864,419 | ||||||
Depreciation and Amortization | ||||||||||||
Year Ended December 31, | ||||||||||||
2016 | 2015 | 2014 | ||||||||||
Domestic | $ | 42,346 | $ | 35,327 | $ | 29,410 | ||||||
International | 12,072 | 5,006 | 5,320 | |||||||||
Total | $ | 54,418 | $ | 40,333 | $ | 34,730 | ||||||
Capital Expenditures | ||||||||||||
Year Ended December 31, | ||||||||||||
2016 | 2015 | 2014 | ||||||||||
Domestic | $ | 26,936 | $ | 29,368 | $ | 33,976 | ||||||
International | 3,531 | 1,283 | 713 | |||||||||
Total | $ | 30,467 | $ | 30,651 | $ | 34,689 | ||||||
The Company’s sales in the United States represent approximately 77%, 85%, and 84% of total sales for the years ended December 31, 2016, 2015 and 2014, respectively. Approximately 87% and 93% of the Company’s identifiable long-lived assets are located in the United States as of December 31, 2016 and 2015, respectively.
7. | Balance Sheet Details |
Inventories consist of the following:
December 31, | ||||||||
2016 | 2015 | |||||||
Raw material | $ | 218,911 | $ | 179,769 | ||||
Work-in-process | 2,950 | 2,567 | ||||||
Finished goods | 127,870 | 143,039 | ||||||
Total | $ | 349,731 | $ | 325,375 | ||||
| December 31, | ||||||||
| 2013 | 2012 | |||||||
| Raw material | $ | 183,787 | $ | 168,459 | ||||
| Work-in-process | 9,620 | 8,580 | ||||||
| Finished goods | 113,404 | 55,777 | ||||||
| Reserves for excess and obsolescence | (6,558 | ) | (6,999 | ) | ||||
| Total | $ | 300,253 | $ | 225,817 | ||||
As of December 31, 20132016 and 2012,2015, inventories totaling $6,504$10,598 and $4,401,$11,253, respectively, were on consignment at customer locations.
Property and equipment consists of the following:
| December 31, | ||||||||
| 2013 | 2012 | |||||||
| Land and improvements | $ | 7,416 | $ | 6,511 | ||||
| Buildings and improvements | 96,161 | 68,934 | ||||||
| Machinery and equipment | 54,847 | 42,581 | ||||||
| Dies and tools | 17,071 | 15,406 | ||||||
| Vehicles | 1,979 | 1,872 | ||||||
| Office equipment | 17,304 | 12,993 | ||||||
| Leasehold improvements | 2,229 | 1,393 | ||||||
| Construction in progress | 9,724 | 3,439 | ||||||
| Gross property and equipment | 206,731 | 153,129 | ||||||
| Accumulated depreciation | (60,341 | ) | (48,411 | ) | ||||
| Total | $ | 146,390 | $ | 104,718 | ||||
December 31, | ||||||||
2016 | 2015 | |||||||
Land and improvements | $ | 12,079 | $ | 8,553 | ||||
Buildings and improvements | 122,747 | 104,774 | ||||||
Machinery and equipment | 81,687 | 72,280 | ||||||
Dies and tools | 23,269 | 20,066 | ||||||
Vehicles | 1,474 | 1,244 | ||||||
Office equipment and systems | 66,929 | 29,395 | ||||||
Leasehold improvements | 2,319 | 3,338 | ||||||
Construction in progress | 8,654 | 30,482 | ||||||
Gross property and equipment | 319,158 | 270,132 | ||||||
Accumulated depreciation | (106,365 | ) | (85,919 | ) | ||||
Total | $ | 212,793 | $ | 184,213 | ||||
8. | Goodwill and Intangible Assets |
The changes in the carrying amount of goodwill by reportable segment for the years ended December 31, 2016 and 2015 are as follows:
Domestic | International | Total | ||||||||||
Balance at December 31, 2014 | $ | 582,686 | $ | 52,879 | $ | 635,565 | ||||||
Acquisitions of businesses, net | 38,765 | - | 38,765 | |||||||||
Impairment | - | (4,611 | ) | (4,611 | ) | |||||||
Balance at December 31, 2015 | 621,451 | 48,268 | 669,719 | |||||||||
Acquisitions of businesses, net | - | 46,202 | 46,202 | |||||||||
Foreign currency translation | - | (11,281 | ) | (11,281 | ) | |||||||
Balance at December 31, 2016 | $ | 621,451 | $ | 83,189 | $ | 704,640 | ||||||
The details of the following:
Year Ended December 31, 2016 | Year Ended December 31, 2015 | |||||||||||||||||||||||
Gross | Accumulated Impairment | Net | Gross | Accumulated Impairment | Net | |||||||||||||||||||
Domestic | $ | 1,124,644 | $ | (503,193 | ) | $ | 621,451 | $ | 1,124,644 | $ | (503,193 | ) | $ | 621,451 | ||||||||||
International | 87,800 | (4,611 | ) | 83,189 | 52,879 | (4,611 | ) | 48,268 | ||||||||||||||||
Total | $ | 1,212,444 | $ | (507,804 | ) | $ | 704,640 | $ | 1,177,523 | $ | (507,804 | ) | $ | 669,719 | ||||||||||
See Note 3, “Acquisitions,” to the consolidated financial statements for further information regarding the Company’s acquisitions 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.
| December 31, | ||||||||
| 2013 | 2012 | |||||||
| Accrued commissions | $ | 10,254 | $ | 7,467 | ||||
| Accrued interest | 10,907 | 15,809 | ||||||
| Product warranty obligations – short term | 26,080 | 26,284 | ||||||
| Deferred revenue related to extended warranty – short term | 3,325 | 2,468 | ||||||
| Accrued dividends for unvested restricted stock | 2,472 | 3,957 | ||||||
| Accrued volume rebates | 9,418 | 7,991 | ||||||
| Accrued customer prepayments | 3,393 | 6,569 | ||||||
| Other accrued selling expenses | 8,659 | 7,753 | ||||||
| Earn-out obligations | 12,518 | - | ||||||
| Other accrued liabilities | 5,971 | 7,783 | ||||||
| Total | $ | 92,997 | $ | 86,081 | ||||
The following table summarizes intangible assets by major category as of Contents
Weighted Average | December 31, 2016 | December 31, 2015 | ||||||||||||||||||||||||||
Amortization Years | Gross | Accumulated Amortization | Net Book Value | Gross | Accumulated Amortization | Net Book Value | ||||||||||||||||||||||
Finite-lived intangible assets: | ||||||||||||||||||||||||||||
Tradenames | 8 | $ | 50,742 | $ | (20,189 | ) | $ | 30,553 | $ | 43,252 | $ | (10,516 | ) | $ | 32,736 | |||||||||||||
Customer lists | 9 | 333,935 | (288,623 | ) | 45,312 | 314,600 | (275,287 | ) | 39,313 | |||||||||||||||||||
Patents | 14 | 130,099 | (82,038 | ) | 48,061 | 126,491 | (72,719 | ) | 53,772 | |||||||||||||||||||
Unpatented technology | 15 | 13,169 | (11,771 | ) | 1,398 | 13,169 | (11,628 | ) | 1,541 | |||||||||||||||||||
Software | - | 1,046 | (1,046 | ) | - | 1,046 | (1,042 | ) | 4 | |||||||||||||||||||
Non-compete/other | 7 | 2,513 | (986 | ) | 1,527 | 1,731 | (508 | ) | 1,223 | |||||||||||||||||||
Total finite-lived intangible assets | $ | 531,504 | $ | (404,653 | ) | $ | 126,851 | $ | 500,289 | $ | (371,700 | ) | $ | 128,589 | ||||||||||||||
Indefinite-lived tradenames | 128,321 | - | 128,321 | 128,321 | - | 128,321 | ||||||||||||||||||||||
Total intangible assets | $ | 659,825 | $ | (404,653 | ) | $ | 255,172 | $ | 628,610 | $ | (371,700 | ) | $ | 256,910 | ||||||||||||||
See Note 2, “Significant Accounting Policies – Goodwill and Other long-term liabilities consistIndefinite-Lived Intangible Assets,” to the consolidated financial statements for further information regarding the Company’s 2015 brand strategy change and resulting tradename impairment charge, which was netted against the gross intangible asset balance at December 31, 2015.
Amortization of intangible assets was $32,953, $23,591 and $21,024 in 2016, 2015 and 2014, respectively. Excluding the following:
| December 31, | ||||||||
| 2013 | 2012 | |||||||
| Accrued pension costs | $ | 10,385 | $ | 23,174 | ||||
| Product warranty obligations – long term | 7,654 | 9,827 | ||||||
| Deferred revenue related to extended warranty – long term | 19,767 | 11,006 | ||||||
| Deferred tax liabilities | 14,966 | - | ||||||
| Other long-term liabilities | 2,168 | 2,335 | ||||||
| Total | $ | 54,940 | $ | 46,342 | ||||
9. | Product Warranty Obligations |
The Company records a liability for product warranty obligations at the time of sale to a customer based upon historical warranty experience. The Company also records a liability for specific warranty matters when they become known and are reasonably estimable. TheAdditionally, the Company also sells extended warranty coverage for certain product.products. The sales of extended warranties are recorded as deferred revenue, and we recognize the revenue from sales of extended warrantieswhich is recognized over the life of the contracts. The Company’s product warranty obligations, including deferred revenue related to extended warranty coverage, are included in other accrued liabilities and other long-term liabilities in the consolidated balance sheets.
The following is a tabular reconciliation of the product warranty liability, excluding the deferred revenue related to our extended warranty coverage:
| For the year ended December 31, | ||||||||||||
| 2013 | 2012 | 2011 | ||||||||||
| Balance at beginning of year | $ | 36,111 | $ | 24,643 | $ | 17,835 | ||||||
| Payments | (18,484 | ) | (19,801 | ) | (17,562 | ) | ||||||
| Provision for warranties issued | 33,707 | 34,173 | 21,356 | |||||||||
| Changes in estimates for pre-existing warranties | (17,600 | ) | (2,904 | ) | 3,014 | |||||||
| Balance at end of year | $ | 33,734 | $ | 36,111 | $ | 24,643 | ||||||
Year Ended December 31, | ||||||||||||
2016 | 2015 | 2014 | ||||||||||
Balance at beginning of period | $ | 30,197 | $ | 30,909 | $ | 33,734 | ||||||
Product warranty reserve assumed in acquisition | 840 | 351 | 360 | |||||||||
Payments | (18,691 | ) | (21,686 | ) | (20,975 | ) | ||||||
Provision for warranty issued | 19,148 | 20,823 | 22,890 | |||||||||
Changes in estimates for pre-existing warranties | 201 | (200 | ) | (5,100 | ) | |||||||
Balance at end of period | $ | 31,695 | $ | 30,197 | $ | 30,909 | ||||||
The following is a tabular reconciliation of the deferred revenue related to extended warranty coverage:
Year Ended December 31, | ||||||||||||
2016 | 2015 | 2014 | ||||||||||
Balance at beginning of period | $ | 28,961 | $ | 27,193 | $ | 23,092 | ||||||
Deferred revenue contracts assumed in acquisition | - | 291 | - | |||||||||
Deferred revenue contracts issued | 7,733 | 5,978 | 7,343 | |||||||||
Amortization of deferred revenue contracts | (5,614 | ) | (4,501 | ) | (3,242 | ) | ||||||
Balance at end of period | $ | 31,080 | $ | 28,961 | $ | 27,193 | ||||||
| For the year ended December 31, | ||||||||||||
| 2013 | 2012 | 2011 | ||||||||||
| Balance at beginning of year | $ | 13,474 | $ | 9,737 | $ | 4,643 | ||||||
| Deferred revenue on extended warranty contracts sold | 11,998 | 5,547 | 6,368 | |||||||||
| Amortization of deferred revenue on extended warranty contracts | (2,380 | ) | (1,810 | ) | (1,274 | ) | ||||||
| Balance at end of year | $ | 23,092 | $ | 13,474 | $ | 9,737 | ||||||
Product warranty obligations and warranty related deferred revenues are included in the balance sheets as follows:
| December 31, | ||||||||
| 2013 | 2012 | |||||||
| Product warranty liability | ||||||||
| Current portion - other accrued liabilities | $ | 26,080 | $ | 26,284 | ||||
| Long-term portion - other long-term liabilities | 7,654 | 9,827 | ||||||
| Total | $ | 33,734 | $ | 36,111 | ||||
| Deferred revenue related to extended warranty | ||||||||
| Current portion - other accrued liabilities | $ | 3,325 | $ | 2,468 | ||||
| Long-term portion - other long-term liabilities | 19,767 | 11,006 | ||||||
| Total | $ | 23,092 | $ | 13,474 | ||||
December 31, | ||||||||
2016 | 2015 | |||||||
Product warranty liability | ||||||||
Current portion - other accrued liabilities | $ | 20,763 | $ | 21,726 | ||||
Long-term portion - other long-term liabilities | 10,932 | 8,471 | ||||||
Total | $ | 31,695 | $ | 30,197 | ||||
Deferred revenue related to extended warranties | ||||||||
Current portion - other accrued liabilities | $ | 6,728 | $ | 6,026 | ||||
Long-term portion - other long-term liabilities | 24,352 | 22,935 | ||||||
Total | $ | 31,080 | $ | 28,961 | ||||
10. | Credit Agreements |
Short-termTable of Contents
| December 31, | ||||||||
| 2013 | 2012 | |||||||
| ABL facility | $ | - | $ | - | ||||
| Other lines of credit, as described below | 9,575 | 12,550 | ||||||
| Total | $ | 9,575 | $ | 12,550 | ||||
December 31, | ||||||||
2016 | 2015 | |||||||
ABL facility | $ | - | $ | - | ||||
Other lines of credit | 31,198 | 8,594 | ||||||
Total | $ | 31,198 | $ | 8,594 | ||||
Long-term borrowingsborrowings are included in the consolidated balance sheets as follows:
| December 31, | ||||||||
| 2013 | 2012 | |||||||
| Term loan | $ | 1,197,000 | $ | 897,750 | ||||
| Discount on debt | (12,735 | ) | (16,482 | ) | ||||
| Capital lease obligation | 2,529 | - | ||||||
| Other | 1,026 | - | ||||||
| Total | 1,187,820 | 881,268 | ||||||
| Less current portion of debt | 12,286 | 82,250 | ||||||
| Less current portion of capital lease obligation | 185 | - | ||||||
| Total | $ | 1,175,349 | $ | 799,018 | ||||
December 31, | ||||||||
2016 | 2015 | |||||||
Term loan | $ | 929,000 | $ | 954,000 | ||||
Original issue discount and deferred financing costs | (26,677 | ) | (29,905 | ) | ||||
ABL facility | 100,000 | 100,000 | ||||||
Capital lease obligation | 4,647 | 1,694 | ||||||
Other | 14,753 | 12,000 | ||||||
Total | 1,021,723 | 1,037,789 | ||||||
Less: current portion of debt | 14,399 | 500 | ||||||
Less: current portion of capital lease obligation | 566 | 157 | ||||||
Total | $ | 1,006,758 | $ | 1,037,132 | ||||
Maturities of long-term borrowings outstanding at December 31, 2013,2016, are as follows:
| Year | ||||
| 2014 | $ | 12,750 | ||
| 2015 | 12,621 | |||
| 2016 | 12,229 | |||
| 2017 | 12,205 | |||
| After 2018 | 1,150,750 | |||
| Total | $ | 1,200,555 | ||
2017 | $ | 14,965 | ||
2018 | 745 | |||
2019 | 639 | |||
2020 | 100,547 | |||
After 2020 | 931,504 | |||
Total | $ | 1,048,400 |
The Company’s credit agreement (“Credit Agreement”) with certain commercial banks and other lenders. The Credit Agreementagreements provided for borrowings under a $150,000 revolving credit facility, a $325,000 tranche A term loan facility and a $250,000 tranche B term loan facility. The revolving credit facility and tranche A term loan facility were scheduled to mature in February 2017 and the tranche B term loan facility was scheduled to mature in February 2019. Proceeds received by the Company from loans made under the Credit Agreement were used 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 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.
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 cumulative catch-up gain of $16,014 in the second quarter of 2014, which represents the total cash interest savings over the remaining term of the loan, as the Company projected the net debt leverage ratio to remain below 3.00 to 1.00 using current forecasts at that time. The Newgain was recorded as original issue discount on long-term borrowings in the consolidated balance sheets and as a gain on change in contractual interest rate in the consolidated statements of comprehensive income.
Because the Company’s net debt leverage ratio was above 3.00 to 1.00 on July 1, 2015, it realized a 25 basis point increase in borrowing costs in the third quarter of 2015. As a result, the Company recorded a cumulative catch-up loss of $2,381 in the third quarter of 2015, which represents the additional cash interest expected to be paid while the net debt leverage ratio is expected to be above 3.00 to 1.00 using current forecasts at that time. The loss was recorded against original issue discount on long-term borrowings in the consolidated balance sheets and as a loss on change in contractual interest rate in the consolidated statements of comprehensive income.
As the Company’s net debt leverage ratio continued to be above 3.00 to 1.00 on July 1, 2016, the Company recorded a cumulative catch-up loss of $2,957 in the third quarter of 2016, which represents the additional cash interest expected to be paid while the net debt leverage ratio is expected to be above 3.00 to 1.00 using current forecasts at that time. The loss was recorded against original issue discount on long-term borrowings in the consolidated balance sheets and as a loss on change in contractual interest rate in the consolidated statements of comprehensive income. The Company’s net debt leverage ratio as of December 31, 2016 was above 3.00 to 1.00.
In May 2015, the Company amended certain provisions and covenants of the Term Loan. In connection with this amendment and in accordance with ASC 470-50, Debt Modifications and Extinguishments, the Company capitalized $1,528 of fees paid to creditors as original issue discount on long-term borrowings and expensed $49 of transaction fees in the second quarter of 2015.
In November 2016, the Company amended its Term Loan Credit Agreement contains restrictions on the Borrower’s ability to pay distributions and dividends (but which permitted the payment of the special cash dividend described in Note 12 – Special Cash Dividend below.). Payments can be made by the Borrower to the Company or other parent companies for certain expenses such as operating expenses in the ordinary course, fees and expenses related to any debt or equity offering and to pay franchise or similar taxes. Dividends can be used to repurchase equity interests, subject to limitations in certain circumstances. Additionally, the New Term Loan Credit Agreement restricts the aggregate amount of dividends and distributions that can be paid and, in certain circumstances, requires pro forma compliance with certain fixed charge coverage ratios or gross leverage ratios, as applicable, in order to pay certain dividends and distributions. The New Term Loan Credit Agreement also contains other affirmative and negative covenants that, among other things, limit the incurrence of additional indebtedness, liens on property, sale and leaseback transactions, investments, loans and advances, mergers or consolidations, asset sales, acquisitions, transactions with affiliates, prepayments of certain other indebtedness and modifications of our organizational documents. The New Term Loan Credit Agreement does not contain any financial maintenance covenants.
The Company’s credit agreements also originally provided for a $150,000 senior secured ABL revolving credit facility provided under the ABL Credit Agreement (the “ABL Facility”)(ABL Facility). The extended maturity date of the ABL Facility isoriginally was May 31, 2018.
In May 2015, the Company amended its ABL Facility. The New ABL Credit Agreement requires the Borrower to maintain a minimum consolidated fixed charge coverage ratio of 1.0x, tested on a quarterly basis, when Availability plus the amount of Qualified Cash (up to $5,000) (as defined in the New ABL Credit Agreement) underamendment (i) increased the ABL Facility is less thanfrom $150,000 to $250,000 (Amended ABL Facility), (ii) extended the greatermaturity date from May 31, 2018 to May 29, 2020, (iii) increased the uncommitted incremental facility from $50,000 to $100,000, (iv) reduced the interest rate spread by 50 basis points and (v) reduced the unused line fee by 12.5 basis points across all tiers. Additionally, the amendment relaxes certain restrictions on the Company’s ability to, among other things, (i) make additional investments and acquisitions (including foreign acquisitions), (ii) make restricted payments and (iii) incur additional secured and unsecured debt (including foreign subsidiary debt). In connection with this amendment and in accordance with ASC 470-50, the Company capitalized $540 of (i) 10.0%new debt issuance costs in 2015.
In May 2015, the Company borrowed $100,000 under the Amended ABL Facility, the proceeds of which were used as a voluntary prepayment towards the Line Cap (as defined in the New ABL Credit Agreement) and (ii) $10,000. The New ABL Credit Agreement also contains covenants and events of default substantially similar to those in the New Term Loan Credit Agreement, as described above.Loan. As of December 31, 2013, no amounts were2016, there was $100,000 outstanding under the Amended ABL Facility. As of December 31, 2013, the Company had $150,147 of unrestricted cash and cash equivalents and $147,492Facility, leaving $145,593 of availability, under the ABL Facility, net of outstanding letters of credit.
In April, September and December 2014, the Company made an $80,000 voluntary prepaymentprepayments of debtthe Term Loan of $12,000, $50,000 and $25,000, respectively, with available cash on hand that was applied to future principal amortizations onand the Excess Cash Flow payment requirement in the Term Loan Credit Agreement.Loan. As a result of the prepayments, the Company wrote off $1,839$2,084 of original issue discount and capitalized debt issuance costs during the first quarter of 2013. On May 2, 2013, the Company made an additional $30,000 voluntary prepayment of existing debt with available cash on hand. As a result, the Company wrote off $924 of original issue discount and capitalized debt issuance costs during the second quarter of 2013.
In March and May 2015, the Company made voluntary prepayments of the Term Loan of $50,000 and $100,000, respectively, which were applied to the Excess Cash Flow payment requirement in the Term Loan. As a result of the prepayments, the Company wrote off $4,795 of original issue discount and capitalized debt issuance costs during the year ended December 31, 2012.
In November 2016, the Company made a voluntary prepayment of the Term Loan of $25,000, which will be applied to the Excess Cash Flow payment requirement in the Term Loan. As a result of the prepayment, the Company wrote off $574 of original issue discount and capitalized debt issuance costs during the year ended ended December 31, 2012.
As of December 31, 20132016 and December 31, 2012,2015, short-term borrowings consisted primarily of borrowings by our foreign subsidiaries on local lines of credit, which totaled $9,575$31,198 and $12,550,$8,594, respectively.
11. | Stock Repurchase Program |
In August 2015, the Company’s Board of Directors approved a $200,000 stock repurchase program. Under the program, the Company may repurchase up to $200,000 of its common stock over the following 24 months, in amounts and at prices the Company deems appropriate, subject to market conditions and other considerations. The Company completed the program in the third quarter of 2016.
In October 2016, the Company’s Board of Directors approved a $250,000 stock repurchase program. Under the program, the Company may repurchase an additional $250,000 of its common stock over the following 24 months. The Company may repurchase its common stock from time to time, in amounts and at prices the Company deems appropriate, subject to market conditions and other considerations. The repurchase may be executed using open market purchases, privately negotiated agreements or other transactions. The actual timing, number and value of shares repurchased under the program will be determined by management at its discretion and will depend on a number of factors, including the market price of the Company’s shares of common stock and general market and economic conditions, applicable legal requirements, and compliance with the terms of the Company’s outstanding indebtedness. The repurchases may be funded with cash on hand, available borrowings or proceeds from potential debt or other capital markets sources. The stock repurchase program may be suspended or discontinued at any time without prior notice. For the year ended December 31, 2016, the Company repurchased 3,968,706 shares of its common stock for $149,937. Since the inception of the programs, the Company has repurchased 7,272,206 shares of its common stock for $249,879, all funded with cash on hand.
12. | Earnings Per Share |
Basic earnings per share is calculated by dividing net income attributable to the common shareholders of the Company by the weighted average number of common shares outstanding during the period.period, exclusive of restricted shares. Except where the result would be anti-dilutive, dilutivediluted earnings per share is calculated by assuming the vesting of unvested restricted stock and the exercise of stock options, as well as their related income tax benefits. The following table reconciles the numerator and the denominator used to calculate basic and diluted earnings per share:
| Year ended December 31, | ||||||||||||
| 2013 | 2012 | 2011 | ||||||||||
| Numerator- net income | $ | 174,539 | $ | 93,223 | $ | 324,643 | ||||||
| Denominator- weighted average shares | ||||||||||||
| Basic | 68,081,632 | 67,360,632 | 67,130,356 | |||||||||
| Dilutive effect of stock compensation awards (1) | 1,585,897 | 1,832,506 | 667,015 | |||||||||
| Diluted | 69,667,529 | 69,193,138 | 67,797,371 | |||||||||
| Net income per share | ||||||||||||
| Basic | $ | 2.56 | $ | 1.38 | $ | 4.84 | ||||||
| Diluted | $ | 2.51 | $ | 1.35 | $ | 4.79 | ||||||
Year Ended December 31, | ||||||||||||
2016 | 2015 | 2014 | ||||||||||
Numerator | ||||||||||||
Net income attributable to Generac Holdings Inc. | $ | 98,788 | $ | 77,747 | $ | 174,613 | ||||||
Redeemable noncontrolling interest redemption value adjustment | (909 | ) | - | - | ||||||||
Net income attributable to common shareholders | $ | 97,879 | $ | 77,747 | $ | 174,613 | ||||||
Denominator | ||||||||||||
Weighted average shares, basic | 64,905,793 | 68,096,051 | 68,538,248 | |||||||||
Dilutive effect of stock compensation awards (1) | 476,981 | 1,104,246 | 1,632,796 | |||||||||
Diluted shares | 65,382,774 | 69,200,297 | 70,171,044 | |||||||||
Net income attributable to common shareholders per share | ||||||||||||
Basic | $ | 1.51 | $ | 1.14 | $ | 2.55 | ||||||
Diluted | $ | 1.50 | $ | 1.12 | $ | 2.49 | ||||||
(1) Excludes approximately 10,30015,800, 161,400 and 363,00081,600 stock options and restricted stock awards for the twelve month periodsyears ended December 31, 20132016, 2015 and December 31, 2012,2014, 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 periodyear ended December 31, 2011.2015, as the impact of such awards was anti-dilutive.
13. | Income Taxes |
The Company’sCompany’s provision for income taxes consists of the following:
| Year ended December 31, | ||||||||||||
| 2013 | 2012 | 2011 | ||||||||||
| Current: | ||||||||||||
| Federal | $ | 48,287 | $ | 34,170 | $ | 14,312 | ||||||
| State | 5,648 | 3,854 | 1,885 | |||||||||
| Foreign | 2,214 | 81 | – | |||||||||
| 56,149 | 38,105 | 16,197 | ||||||||||
| Deferred: | ||||||||||||
| Federal | 42,003 | 21,972 | 15,632 | |||||||||
| State | 5,523 | 3,048 | 1,887 | |||||||||
| Foreign | 167 | 25 | – | |||||||||
| 47,693 | 25,045 | 17,519 | ||||||||||
| Change in valuation allowance | 335 | (21 | ) | (271,393 | ) | |||||||
| Provision for income taxes | $ | 104,177 | $ | 63,129 | $ | (237,677 | ) | |||||
Year Ended December 31, | ||||||||||||
2016 | 2015 | 2014 | ||||||||||
Current: | ||||||||||||
Federal | $ | 11,717 | $ | 13,614 | $ | 38,161 | ||||||
State | 2,047 | 1,966 | 1,645 | |||||||||
Foreign | 4,460 | 3,588 | 5,701 | |||||||||
| 18,224 | 19,168 | 45,507 | ||||||||||
Deferred: | ||||||||||||
Federal | 41,264 | 31,869 | 42,474 | |||||||||
State | 3,029 | 1,387 | (3,134 | ) | ||||||||
Foreign | (5,585 | ) | (7,326 | ) | (1,462 | ) | ||||||
| 38,708 | 25,930 | 37,878 | ||||||||||
Change in valuation allowance | 638 | 138 | 364 | |||||||||
Provision for income taxes | $ | 57,570 | $ | 45,236 | $ | 83,749 | ||||||
As of DecemberDecember 31, 2013,2016, due to the carryforward of unutilized net operating losses, and research and development credits, the Company is subjectopen to U.S. Federal income tax examinations for the tax years 2006 through 2013,federal and to state income tax examinations for the tax years 2006 through 2013.2015. In addition, the Company is subject to audit by various foreign taxing jurisdictions for the tax years 20072011 through 2013.
Significant components of deferred tax assets and liabilities are as follows:
| December 31, | ||||||||
| 2013 | 2012 | |||||||
| Deferred tax assets: | ||||||||
| Goodwill and intangible assets | $ | 74,992 | $ | 125,457 | ||||
| Accrued expenses | 24,263 | 26,606 | ||||||
| Deferred revenue | 4,413 | 3,503 | ||||||
| Inventories | 4,483 | 2,544 | ||||||
| Pension obligations | 4,043 | 9,064 | ||||||
| Stock-based compensation | 6,609 | 6,408 | ||||||
| Operating loss and credit carryforwards | 976 | 24,915 | ||||||
| Interest rate swaps | - | 1,119 | ||||||
| Other | 2,089 | 36 | ||||||
| Valuation allowance | (1,021 | ) | (806 | ) | ||||
| Total deferred tax assets | 120,847 | 198,846 | ||||||
| Deferred tax liabilities: | �� | |||||||
| Depreciation | 15,163 | 12,274 | ||||||
| Debt refinancing costs | 7,494 | - | ||||||
| Prepaid expenses | 1,183 | 1,131 | ||||||
| Total deferred tax liabilities | 23,840 | 13,405 | ||||||
| Net deferred tax asset | $ | 97,007 | $ | 185,441 | ||||
December 31, | ||||||||
2016 | 2015 | |||||||
Deferred tax assets: | ||||||||
Accrued expenses | $ | 22,758 | $ | 18,982 | ||||
Deferred revenue | 10,645 | 9,389 | ||||||
Inventories | 10,159 | 9,772 | ||||||
Pension obligations | 7,512 | 7,684 | ||||||
Stock-based compensation | 7,291 | 7,974 | ||||||
Operating loss and credit carryforwards | 20,927 | 15,677 | ||||||
Other | 2,822 | 2,842 | ||||||
Valuation allowance | (4,362 | ) | (1,523 | ) | ||||
Total deferred tax assets | 77,752 | 70,797 | ||||||
Deferred tax liabilitites: | ||||||||
Goodwill and intangible assets | 58,133 | 12,455 | ||||||
Depreciation | 25,194 | 19,507 | ||||||
Debt refinancing costs | 7,193 | 7,732 | ||||||
Prepaid expenses | 1,173 | 1,241 | ||||||
Total deferred tax liabilities | 91,693 | 40,935 | ||||||
Net deferred tax assets (liabilities) | $ | (13,941 | ) | $ | 29,862 | |||
As of December 31, 2016 and noncurrent components2015, deferred tax assets of $3,337 and $34,812, and deferred taxes included intax liabilities of $17,278 and $4,950, respectively, were reflected on the consolidated balance sheets aresheets.
The Company had approximately $592,000 of tax-deductible goodwill and intangible asset amortization remaining as follows:
| December 31, | ||||||||
| 2013 | 2012 | |||||||
| Net current deferred tax assets | $ | 26,869 | $ | 48,687 | ||||
| Net long-term deferred tax assets | 86,125 | 137,560 | ||||||
| Net long-term deferred tax liabilities | (14,966 | ) | - | |||||
| Valuation allowance | (1,021 | ) | (806 | ) | ||||
| Net deferred tax assets | $ | 97,007 | $ | 185,441 | ||||
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 as well as atand continued through December 31, 2012 and 2013.2016.
In addition, the Company has state net operating loss carryforwards of approximately $10, which expire between 2023 and 2025.
At December 31, 2013 and 2012,2016, the Company has no reserveshad state research and development credits, and state manufacturing credit carryforwards of approximately $17,498 and $3,736, respectively, which expire between 2017 and 2031.
Changes in the Company’s gross liability for unrecognized tax benefits, excluding interest and penalties, were as follows:
December 31, | ||||||||
2016 | 2015 | |||||||
Unrecognized tax benefit, beginning of period | $ | 7,239 | $ | 6,394 | ||||
Increase in unrecognized tax benefit for positions taken in current period | 704 | 845 | ||||||
Unrecognized tax benefit, end of period | $ | 7,943 | $ | 7,239 | ||||
The unrecognized tax benefit as of December 31, 2016 and 2015, if recognized, would impact the effective tax rate.
Interest and penalties are recorded for uncertainas a component of income tax positions.
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, 2017.
The Company considers the earnings of certain non-U.S. subsidiaries to be indefinitely invested outside the United States on the basis of estimates that future domestic cash generation will be sufficient to meet future domestic cash needs and the Company’s specific plans for reinvestment of those subsidiary earnings. The Company has not provided for additional U.S. income taxes on approximately $8,666$7,551 of undistributed earnings of consolidated non-U.S. subsidiaries. It is not practicable to estimate the amount of unrecognized withholding taxes and deferred tax liability on such earnings.
A reconciliation of the statutory tax rates and the effective tax rates for thethe years ended December 31, 2013, 20122016, 2015 and 20112014 are as follows:
| Year ended December 31, | ||||||||||||
| 2013 | 2012 | 2011 | ||||||||||
| U.S. statutory rate | 35.0 | % | 35.0 | % | 35.0 | % | ||||||
| State taxes | 3.7 | 4.1 | 4.0 | |||||||||
| Valuation allowance | 0.2 | - | (312.3 | ) | ||||||||
| Other | -1.5 | 1.3 | - | |||||||||
| Effective tax rate | 37.4 | % | 40.4 | % | (273.3 | )% | ||||||
Year Ended December 31, | ||||||||||||
2016 | 2015 | 2014 | ||||||||||
U.S. statutory rate | 35.0 | % | 35.0 | % | 35.0 | % | ||||||
State taxes | 4.1 | 4.1 | 3.1 | |||||||||
Research and development credits | (1.0 | ) | (2.3 | ) | (5.0 | ) | ||||||
Other | (1.3 | ) | - | (0.7 | ) | |||||||
Effective tax rate | 36.8 | % | 36.8 | % | 32.4 | % | ||||||
14. | Benefit Plans |
Medical and Dental Plan
The Company maintains medical and dental benefit plans covering its full-time domestic employees of the Company and their dependents. Certain plans are partially or fully self-funded plans under which participant claims are obligations of the plan. These plans are funded through employer and employee contributions at a level sufficient to pay for the benefits provided by the plan. The Company’s contributions to the planplans were $9,500, $8,741,$15,019, $14,352, and $6,700$11,701 for the years ended December 31, 2013, 2012,2016, 2015, and 2011,2014, 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, 2013, and 2012, were $1,389 and $1,185, respectively.
The Company estimates claims incurred but not yet reported based on its historical experience. During 2013, the Company paid premiums of $2,700 for other standard medical benefits covering certain full-time employees.
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.
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, | |||||||
| 2013 | 2012 | ||||||
| Accumulated benefit obligation at end of period | $ | 52,825 | $ | 59,744 | |||
| Change in projected benefit obligation | |||||||
| Projected benefit obligation at beginning of period | $ | 59,744 | $ | 53,467 | |||
| Interest cost | 2,423 | 2,453 | |||||
| Net actuarial (gain) loss | (7,695 | ) | 5,332 | ||||
| Benefits paid | (1,647 | ) | (1,508 | ) | |||
| Projected benefit obligation at end of period | $ | 52,825 | $ | 59,744 | |||
| Change in plan assets | |||||||
| Fair value of plan assets at beginning of period | $ | 36,570 | $ | 31,423 | |||
| Actual return on plan assets | 6,465 | 4,268 | |||||
| Company contributions | 1,052 | 2,387 | |||||
| Benefits paid | (1,647 | ) | (1,508 | ) | |||
| Fair value of plan assets at end of period | $ | 42,440 | $ | 36,570 | |||
| Funded status: accrued pension liability included in other long-term liabilities | $ | (10,385 | ) | $ | (23,174 | ) | |
| Amounts recognized in accumulated other comprehensive income | |||||||
| Net actuarial loss | $ | (4,393 | ) | $ | (12,081 | ) | |
Year Ended December 31, | ||||||||
2016 | 2015 | |||||||
Accumulated benefit obligation at end of period | $ | 65,956 | $ | 63,894 | ||||
Change in projected benefit obligation | ||||||||
Projected benefit obligation at beginning of period | $ | 63,894 | $ | 68,376 | ||||
Interest cost | 2,747 | 2,681 | ||||||
Net actuarial loss (gain) | 1,363 | (5,254 | ) | |||||
Benefits paid | (2,048 | ) | (1,909 | ) | ||||
Projected benefit obligation at end of period | $ | 65,956 | $ | 63,894 | ||||
Change in plan assets | ||||||||
Fair value of plan assets at beginning of period | $ | 43,985 | $ | 45,452 | ||||
Actual return (loss) on plan assets | 3,820 | (384 | ) | |||||
Company contributions | 731 | 826 | ||||||
Benefits paid | (2,048 | ) | (1,909 | ) | ||||
Fair value of plan assets at end of period | $ | 46,488 | $ | 43,985 | ||||
Funded status: accrued pension liability included in other long-term liabilities | $ | (19,468 | ) | $ | (19,909 | ) | ||
Amounts recognized in accumulated other comprehensive loss | ||||||||
Net actuarial loss, net of tax | $ | (11,040 | ) | $ | (11,362 | ) | ||
The actuarial loss for the Pension Plans that was amortized from OCIAOCL into net periodic benefit(benefit) cost during 20132016 is $1,108.$941. The amount in OCIAOCL as of December 31, 20132016 that is expected to be recognized as a component of net periodic pension expense during the next fiscal year is $106.
The components of net periodic pension (benefit) cost are as follows:
| Year ended December 31, | ||||||||||||
| 2013 | 2012 | 2011 | ||||||||||
| Components of net periodic pension expense: | ||||||||||||
| Interest cost | $ | 2,423 | $ | 2,453 | $ | 2,369 | ||||||
| Expected return on plan assets | (2,520 | ) | (2,398 | ) | (2,342 | ) | ||||||
| Amortization of net loss | 1,108 | 909 | 273 | |||||||||
| Net periodic pension expense | $ | 1,011 | $ | 964 | $ | 300 | ||||||
Year Ended December 31, | ||||||||||||
2016 | 2015 | 2014 | ||||||||||
Interest cost | $ | 2,747 | $ | 2,681 | $ | 2,591 | ||||||
Expected return on plan assets | (2,868 | ) | (3,041 | ) | (2,933 | ) | ||||||
Amortization of net loss | 941 | 1,228 | 106 | |||||||||
Net periodic pension (benefit) cost | $ | 820 | $ | 868 | $ | (236 | ) | |||||
Weighted-average assumptions used to determine the benefit obligations are as follows:
| December 31, | ||||||||
| 2013 | 2012 | |||||||
Discount rate – salaried pension plan | 4.98 | % | 4.10 | % | ||||
| Discount rate – hourly pension plan | 5.01 | % | 4.14 | % | ||||
| Rate of compensation increase (1) | n/a | n/a | ||||||
December 31, | ||||||||
2016 | 2015 | |||||||
Discount rate – salaried pension plan | 4.14 | % | 4.36 | % | ||||
Discount rate – hourly pension plan | 4.16 | % | 4.39 | % | ||||
Rate of compensation increase (1) | n/a | n/a | ||||||
(1) | No compensation increase was assumed as the plans were frozen effective December 31, 2008. |
Weighted-average assumptions used to determine net periodic pension expense(benefit) cost are as follows:
| Year ended December 31, | ||||||||||||
| 2013 | 2012 | 2011 | ||||||||||
| Discount rate | 4.14 | % | 4.65 | % | 5.23 | % | ||||||
| Expected long-term rate of return on plan assets | 6.95 | 7.57 | 7.62 | |||||||||
| Rate of compensation increase (1) | n/a | n/a | n/a | |||||||||
Year Ended December 31, | ||||||||||||
2016 | 2015 | 2014 | ||||||||||
Discount rate | 4.39 | % | 3.99 | % | 5.01 | % | ||||||
Expected long-term rate of return on plan assets | 6.62 | % | 6.75 | % | 6.88 | % | ||||||
Rate of compensation increase (1) | n/a | n/a | n/a | |||||||||
(1) | No compensation increase was assumed as the plans were frozen effective December 31, |
To determine the long-term rate of return assumption for plan assets, the Company studies historical markets and preserves the long-term historical relationships between equities and fixed-income securities consistent with the widely accepted capital market principle that assets with higher volatility generate a greater return over the long run. The Company evaluates current market factors such as inflation and interest rates before it determines long-term capital market assumptions and reviews peer data and historical returns to check for reasonableness and appropriateness.
The Pension Plan’sPlans’ weighted-average asset allocation at December 31, 20132016 and 2012,2015, by asset category, is as follows:
| December 31, 2013 | December 31, 2012 | |||||||||||||||||||
| Asset Category | Target | Dollars | % | Dollars | % | |||||||||||||||
| Fixed Income | 24 | % | 7,307 | 17 | % | 8,736 | 24 | % | ||||||||||||
| Domestic equity | 49 | % | 23,903 | 56 | % | 17,926 | 49 | % | ||||||||||||
| International equity | 17 | % | 7,424 | 18 | % | 6,257 | 17 | % | ||||||||||||
| Real estate | 10 | % | 3,806 | 9 | % | 3,651 | 10 | % | ||||||||||||
| Total | 100 | % | $ | 42,440 | 100 | % | $ | 36,570 | 100 | % | ||||||||||
December 31, 2016 | December 31, 2015 | |||||||||||||||||||
Asset Category | Target | Dollars | % | Dollars | % | |||||||||||||||
Fixed Income | 20 | % | $ | 7,812 | 17 | % | $ | 8,571 | 19 | % | ||||||||||
Domestic equity | 49 | % | 19,615 | 42 | % | 20,479 | 47 | % | ||||||||||||
International equity | 21 | % | 13,466 | 29 | % | 9,687 | 22 | % | ||||||||||||
Real estate | 10 | % | 5,595 | 12 | % | 5,248 | 12 | % | ||||||||||||
Total | 100 | % | $ | 46,488 | 100 | % | $ | 43,985 | 100 | % | ||||||||||
The fair values of the Pension Plan'sPlans’ assets at December 31, 20132016 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 | $ | 37,860 | $ | 37,860 | $ | – | $ | – | ||||||||
Other investments | 8,628 | – | – | 8,628 | ||||||||||||
Total | $ | 46,488 | $ | 37,860 | $ | – | $ | 8,628 | ||||||||
Total | Quoted prices in active markets for identical asset (level 1) | Significant observable inputs (level 2) | Significant unobservable inputs (level 3) | |||||||||||||
| Mutual fund | $ | 39,759 | $ | 39,759 | $ | – | $ | – | ||||||||
| Collective trust | 2,681 | – | 2,681 | – | ||||||||||||
Total | $ | 42,440 | $ | 39,759 | $ | 2,681 | $ | – | ||||||||
The fair values of the Pension Plan'sPlan's assets at December 31, 20122015 are as follows:
Total | Quoted prices in active markets for identical asset (level 1) | Significant observable inputs (level 2) | Significant unobservable inputs (level 3) | |||||||||||||
| Mutual fund | $ | 33,683 | $ | 33,683 | $ | – | $ | – | ||||||||
| Collective trust | 2,887 | – | 2,887 | – | ||||||||||||
Total | $ | 36,570 | $ | 33,683 | $ | 2,887 | $ | – | ||||||||
Total | Quoted Prices in Active Markets for Identical Asset (Level 1) |
Significant Observable Inputs (Level 2) |
Significant Unobservable I nputs (Level 3) | |||||||||||||
Mutual funds | $ | 40,310 | $ | 40,310 | $ | – | $ | – | ||||||||
Other investments | 3,675 | – | – | 3,675 | ||||||||||||
Total | $ | 43,985 | $ | 40,310 | $ | – | $ | 3,675 | ||||||||
A reconciliation of beginning and ending balances for Level 3 assets for the years ended December 31, 2016 and 2015 is as follows:
Year Ended December 31, | ||||||||
2016 | 2015 | |||||||
Balance at beginning of period | $ | 3,675 | $ | 3,185 | ||||
Purchases | 4,400 | 408 | ||||||
Realized gains | 553 | 82 | ||||||
Balance at end of period | $ | 8,628 | $ | 3,675 | ||||
Mutual Funds – This category includes investments in mutual funds that encompass both equity and fixed income securities that are designed to provide a diverse portfolio. The plan’s mutual funds are designed to track exchange indices, and invest in diverse industries. Some mutual funds are classified as regulated investment companies. Investment managers have the ability to shift investments from value to growth strategies, from small to large capitalization funds, and from U.S. to international investments. These investments are valued at the closing price reported on the active market on which the individual securities are traded. These investments are classified within Level 1 of the fair value hierarchy.
Other Investments – This category includes 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.
The Company’sCompany’s target allocation for equity securities and real estate is generally between 65% –- 85%, with the remainder allocated primarily to bonds.fixed income (bonds). The Company regularly reviews its actual asset allocation and periodically rebalances its investments to the targeted allocation when considered appropriate.
The Company expects to make estimated contributions of $2,149$568 to the Pension Plans in 2014.
The following benefit payments are expected to be paid from the Pension Plans:
| Year | ||||
| 2014 | $ | 1,776 | ||
| 2015 | 1,838 | |||
| 2016 | 1,971 | |||
| 2017 | 2,176 | |||
| 2018 | 2,279 | |||
| Years 2019 – 2023 | 13,353 | |||
2017 | $ | 2,258 | ||
2018 | 2,354 | |||
2019 | 2,430 | |||
2020 | 2,556 | |||
2021 | 2,692 | |||
2022 – 2026 | 16,021 |
Certain of the Company’sCompany’s foreign subsidiaries participate in local defined benefit or other post-employment benefit plans. These plans provide benefits that are generally based on years of credited service and a percentage of the employee’s eligible compensation earned throughout the applicable service period. Liabilities recorded under these plans are included in accrued wages and employee benefits in the Company’s consolidated balance sheets and are not material.
15. | Share Plans |
The Company adopted an equity incentive plan (Plan) on February 10, 2010 in connection with ourits initial public offering. The plan,Plan, as amended, allows for granting of up to 9.1 million stock-based awards to executives, directors and employees. Awards available for grant under the Plan include stock options, stock appreciation rights, restricted stock, other stock-based awards and performance-based compensation awards. Total share-based compensation costexpense related to the equity incentive planPlan was $12,368, $10,780$9,493, $8,241 and $8,646 in 2013, 2012$12,612 for the years ended December 31, 2016, 2015 and 2011,2014, respectively, net of actualestimated forfeitures, which is recorded in operating expenses in the consolidated statements of comprehensive income.
Stock Options - Stock options granted in 20132016 have an exercise price of between $29.81$33.23 per share and $48.36$35.37 per share,share; stock options granted in 20122015 have an exercise price of between $15.94$28.36 per share and $32.05$49.70 per share, and the stock options granted in 20112014 have an exercise price of between $6.15$42.20 per share and $13.73$59.01 per share. On June 21, 2013, the Company paid a special cash dividend of $5.00 per share on its common stock, and on June 29, 2012, the Company paid a special cash dividend of $6.00 per share on its common stock. In connection with these special dividends, and pursuant to the terms of the Company’s stock option plan, certain adjustments are 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, the strike price for all outstanding stock options as of the special dividend dates, were adjusted by the $5.00 and $6.00 special dividend amounts. There was no change to compensation expense as a result of these adjustments. On June 10, 2013 and July 2, 2012, the strike price of all stock option awards outstanding prior to the special dividend dates were restated to reflect these $5.00 and $6.00 adjustments, respectively. The exercise prices noted above reflect these adjustments.
Stock options issued in 2013 and 2012 - 2016 vest in equal installments over four years, subject to the grantee’s continued employment or service and expire 10ten years after the date of grant. Stock options issued in 2011 and 2010 vest in equal installments over five years, subject to the grantee’s continued employment or service and expire 10ten years after the date of grant.
Stock option exercises arecan be net-share settled such that the Company withholds shares with value equivalent to the exercise price of the stock option awards plus the employees’ minimum statutory obligation for the applicable income and other employment taxes. Total shares withheld were approximately 323,427, 667,041473,743, 272,296 and 55,202235,644 in 2013, 20122016, 2015 and 2011,2014, respectively, and were based on the value of the stock on the exercise dates as determined based upon an average of the Company’s high and low stock sales price on the exercise dates. The net-share settlement has the effect of share repurchases by the Company as they reduce the number of shares that would have otherwise been issued. Total payments for the employees’employees' tax obligations to the taxing authorities were $8,449, $6,425$13,056, $9,768 and $371$10,411 in 2013, 20122016, 2015 and 2011,2014, respectively, and are reflected as a financing activity within the Consolidated Statementconsolidated statements of cash flows.
Employees can also utilize a cashless for cash exercise of stock options, such that all exercised shares will be sold in the market immediately. Cash Flows. The net-share settlements hadequivalent to the effectexercise price of share repurchasesthe awards plus the employees’ minimum statutory tax obligations is retained by the Company, as they reducedwith the numberremaining cash being transferred to the employee. Total proceeds from the cashless for cash exercise of shares that would have otherwise been issuedstock options were $1,623 in 2016, and are reflected as a resultfinancing activity in the consolidated statement of the option exercise and did not represent an expense to the Company.
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, expectedExpected volatility is calculated based on an analysis of historic and implied volatility measures for a set of peer companies. The average expected life is based on the contractual term of the option using the simplified method. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with a remaining term equal to the expected life assumed at the date of grant. The compensation expense recognized is net of estimated forfeitures. Forfeitures are estimated based on actual share option forfeiture history. The weighted-average assumptions used in the Black-Scholes-Merton option pricing model for 2013, 20122016, 2015 and 20112014 are as follows:
| 2013 | 2012 | 2011 | ||||||||||
| Weighted average grant date fair value | $ | 16.30 | $ | 12.13 | $ | 11.10 | ||||||
| Assumptions: | ||||||||||||
| Expected stock price volatility | 47 | % | 45 | % | 50 | % | ||||||
| Risk free interest rate | 1.21 | % | 1.22 | % | 2.69 | % | ||||||
| Expected annual dividend per share | $ | - | $ | - | $ | - | ||||||
| Expected life of options (years) | 6.25 | 6.25 | 6.5 | |||||||||
2016 | 2015 | 2014 | ||||||||||
Weighted average grant date fair value | $ | 13.77 | $ | 19.07 | $ | 26.35 | ||||||
Assumptions: | ||||||||||||
Expected stock price volatility | 41 | % | 41 | % | 45 | % | ||||||
Risk free interest rate | 1.31 | % | 1.72 | % | 1.90 | % | ||||||
Expected annual dividend per share | $ | - | $ | - | $ | - | ||||||
Expected life of options (years) | 6.25 | 6.25 | 6.25 | |||||||||
The Company periodically evaluates its forfeiture rates and updates the rates it uses in the determination of its stock-based compensation expense. The impact of the change to the forfeiture rates on non-cash compensation expense was immaterial for the years ended December 31, 2013, 20122016, 2015 and 2011. 2014.
A summary of the Company’sCompany’s stock option activity and related information for the three years ended December 31, 20132016, 2015 and 2014 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, 2010 | 4,236,259 | 13.02 | 9.1 | $ | 13,349 | |||
| Granted | 179,877 | 21.26 | ||||||
| Exercised | (107,591) | 13.00 | ||||||
| Expired | - | - | ||||||
| Forfeited | - | - | ||||||
| Outstanding as of December 31, 2011 | 4,308,545 | 13.36 | 8.2 | $ 63,193 | ||||
| Granted | 256,112 | 21.28 | ||||||
| Exercised | (1,113,827) | 13.21 | ||||||
| Expired | - | - | ||||||
| Forfeited | (10,788) | 20.52 | ||||||
| Outstanding as of December 31, 2012 | 3,440,042 | 14.38 | 9.0 | $ | 68,549 | |||
| 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 | |||
| Exercisable as of December 31, 2013 | 802,034 | 2.82 | 9.5 | $ | 42,856 | |||
Number of Options | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Term (in years) | Aggregate Intrinsic Value ($ in thousands) | |||||||||||||
Outstanding as of December 31, 2013 | 2,937,301 | $ | 5.74 | 9.5 | $ | 148,369 | ||||||||||
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 | |||||||||||
Granted | 398,313 | 33.24 | ||||||||||||||
Exercised | (995,469 | ) | 2.89 | |||||||||||||
Forfeited | (47,894 | ) | 37.41 | |||||||||||||
Outstanding as of December 31, 2016 | 1,482,964 | 27.49 | 7.5 | $ | 23,840 | |||||||||||
Exercisable as of December 31, 2016 | 787,654 | 17.64 | 6.7 | $ | 19,897 | |||||||||||
As of December 31, 2013,2016, there was $11,855$8,051 of total unrecognized compensation cost, net of expected forfeitures, related to unvested options. The cost is expected to be recognized over the remaining service period, having a weighted-average period of 2.02.7 years. Total share-based compensation cost related to the stock options for 2013, 20122016, 2015 and 20112014 was $9,034, $6,835$4,366, $4,198 and $6,475,$8,509, respectively, which is recorded in operating expenses in the consolidated statements of comprehensive income.
Restricted Stock
–Restricted stock vesting is net-share settled such that, upon vesting, the Company withholds shares with value equivalent to the employees’ minimum statutory obligation for the applicable income and other employment taxes.taxes, and then pays those taxes on behalf of the employee. In effect, the Company repurchases these shares and classifies as treasury stock, and usespays the cash to the taxing authorities on behalf of the employees to satisfy the tax withholding requirements. Total shares withheld were approximately 163,45828,593, 65,763 and 34,854 in 2013,2016, 2015 and zero in 2012 and 2011,2014, 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 $6,571$952, $3,233 and $1,770 in 2013,2016, 2015 and zero in 2012 and 2011,2014, respectively, and are reflected as a financing activity within the Consolidated Statementconsolidated statements of Cash Flows.
A summary of the Company's restricted share awardsstock activity for the three years endedended December 31, 20132016, 2015 and 2014 is as follows:
Non-vested Stock Awards | Shares | Weighted-Average Grant-Date Fair Value | |||
| Non-vested as of December 31, 2010 | 430,155 | $ | 13.02 | ||
| Granted | 59,147 | 20.59 | |||
| Vested | - | - | |||
| Forfeited | - | - | |||
| Non-vested as of December 31, 2011 | 489,302 | $ | 13.93 | ||
| Granted | 195,771 | 26.94 | |||
| Vested | - | - | |||
| Forfeited | (20,002) | 11.96 | |||
| 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 | ||
Shares | Weighted- Average Grant- Date Fair Value | |||||||
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 | ||||||
Granted | 232,295 | 33.56 | ||||||
Vested | (95,858 | ) | 41.93 | |||||
Forfeited | (18,074 | ) | 38.30 | |||||
Non-vested as of December 31, 2016 | 361,403 | 38.18 | ||||||
As of December 31, 2013,2016, there was $5,216$7,192 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 1.9 years. Total share-based compensation cost related to the restricted stock for 2013, 20122016, 2015 and 20112014 was $3,074, $3,645$5,127, $4,043 and 1,871,$4,103, respectively, which is recorded in operating expenses in the consolidated statements of comprehensive income.
During 2013, 20122016, 2015 and 2011, 7,291, 10,8642014, 19,326, 16,260 and 16,6808,869 shares, respectively, of fully vested stock were granted to certain members of the Company’s boardBoard of directorsDirectors as a component of their compensation for their service on the board.Board. Total compensation cost for these share grants in 2013, 20122016, 2015 and 20112014 was $260, $300$670, $615 and $300,$509, respectively, which is recorded in operating expenses in the consolidated statements of comprehensive income.
16. | Commitments and Contingencies |
The Company leases certainmanufacturing and office facilities, machinery and computer equipment, automobiles and warehouse space under operating leases with lease terms generally ranging between 3-5 years.
| Amount | ||||
| Year | ||||
| 2014 | $ | 1,952 | ||
| 2015 | 1,900 | |||
| 2016 | 1,543 | |||
| 2017 | 830 | |||
| 2018 | 3 | |||
| Total | $ | 6,228 | ||
2017 | $ | 7,922 | ||
2018 | 7,314 | |||
2019 | 6,368 | |||
2020 | 5,559 | |||
2021 | 3,946 | |||
After 2021 | 5,730 | |||
Total | $ | 36,839 |
Total rent expense for thethe years ended December 31, 2013, 20122016, 2015 and 2011, which includes short-term data processing equipment rentals,2014, was approximately $2,457, $2,870,$9,146, $4,796, and $1,309,$4,102, respectively.
The Company has an arrangement with a finance company to provide floorfloor 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, 20132016 and 20122015 was approximately $24,300$33,900 and 16,600,$32,400, respectively.
In the normal course of business, the Company is named as a defendant in various lawsuits in which claims are asserted against the Company. In the opinion of management, the liabilities, if any, which may result from such lawsuits are not expected to have a material adverse effect on the financial position, results of operations, or cash flows of the Company.
17. | Quarterly Financial Information (Unaudited) |
Quarters Ended 2016 | ||||||||||||||||||
Q1 | Q2 | Q3 | Q4 | |||||||||||||||
Net sales | $ | 286,535 | $ | 367,376 | $ | 373,121 | $ | 417,421 | ||||||||||
Gross profit | 98,060 | 124,147 | 137,772 | 154,127 | ||||||||||||||
Operating income | 26,964 | 44,082 | 56,340 | 77,231 | ||||||||||||||
Net income attributable to Generac Holdings Inc. | 10,208 | 20,888 | 26,183 | 41,509 | ||||||||||||||
Net income attributable to common shareholders per common share - basic: | $ | 0.15 | $ | 0.32 | $ | 0.41 | $ | 0.64 | ||||||||||
Net income attributable to common shareholders per common share - diluted: | $ | 0.15 | $ | 0.31 | $ | 0.40 | $ | 0.64 | ||||||||||
Quarters Ended 2015 | ||||||||||||||||
Q1 | Q2 | Q3 | Q4 | |||||||||||||
Net sales | $ | 311,818 | $ | 288,360 | $ | 359,291 | $ | 357,830 | ||||||||
Gross profit | 102,603 | 95,897 | 130,326 | 131,124 | ||||||||||||
Operating income | 44,911 | 39,467 | 67,867 | 27,316 | ||||||||||||
Net income attributable to Generac Holdings Inc. | 19,685 | 14,844 | 34,036 | 9,182 | ||||||||||||
Net income attributable to common shareholders per common share - basic: | $ | 0.29 | $ | 0.22 | $ | 0.50 | $ | 0.14 | ||||||||
Net income attributable to common shareholders per common share - diluted: | $ | 0.28 | $ | 0.21 | $ | 0.49 | $ | 0.14 | ||||||||
18. | Valuation and Qualifying Accounts |
For the years ended December 31, 2016, 2015 and 2014:
Balance at Beginning of Year | Additions Charged to Earnings | Charges to Reserve, Net (1) | Reserves Established for Acquisitions | Balance at End of Year | ||||||||||||||||
Year ended December 31, 2016 | ||||||||||||||||||||
Allowance for doubtful accounts | $ | 2,494 | $ | 1,654 | $ | (1,110 | ) | $ | 2,604 | $ | 5,642 | |||||||||
Reserves for inventory | 10,582 | 5,359 | (5,357 | ) | 2,447 | 13,031 | ||||||||||||||
Valuation of deferred tax assets | 1,523 | 638 | – | 2,201 | 4,362 | |||||||||||||||
Year ended December 31, 2015 | ||||||||||||||||||||
Allowance for doubtful accounts | $ | 2,275 | $ | 481 | $ | (325 | ) | $ | 63 | $ | 2,494 | |||||||||
Reserves for inventory | 9,387 | 3,739 | (3,158 | ) | 614 | 10,582 | ||||||||||||||
Valuation of deferred tax assets | 1,385 | 138 | – | – | 1,523 | |||||||||||||||
Year ended December 31, 2014 | ||||||||||||||||||||
Allowance for doubtful accounts | $ | 2,658 | $ | 672 | $ | (1,264 | ) | $ | 209 | $ | 2,275 | |||||||||
Reserves for inventory | 6,558 | 2,797 | (2,250 | ) | 2,282 | 9,387 | ||||||||||||||
Valuation of deferred tax assets | 1,021 | 364 | – | – | 1,385 | |||||||||||||||
(1) | Deductions from the allowance for doubtful accounts equal accounts receivable written off, less recoveries, against the allowance. Deductions from the reserves for inventory excess and obsolete items equal inventory written off against the reserve as items were disposed of. |
19. | Subsequent Events |
On January 1, 2017, the Company usedacquired Motortech GmbH and its affiliates (Motortech), headquartered in Celle, Germany. Motortech is a portionleading manufacturer of gaseous-engine control systems and accessories, which are sold primarily to European gas-engine manufacturers and to aftermarket customers. Motortech employs over 250 people at its German headquarters, manufacturing plant in Poland, and sales offices located in the proceeds fromUnited States and China. Prior to December 31, 2016, a cash deposit of $15,329 was paid, which is recorded in other current assets on the May 30, 2012 debt refinancing (see Note #6 – Credit Agreements) together with cash on itsconsolidated balance sheet to pay a special cash dividend of $6.00 per share on its common stock, resulting in payments totaling $404,332 to stockholders. Related dividends declared but unpaid as of December 31, 2013 of $1,172, which relate to dividends earned on unvested restricted stock awards, are included in other accrued liabilities in the consolidated balance sheet. Payment of these dividends will be made when the underlying restricted stock awards vest.
| Quarters Ended 2013 | ||||||||||||||||
| Q1 | Q2 | Q3 | Q4 | |||||||||||||
| Net sales | $ | 399,572 | $ | 346,688 | $ | 363,269 | $ | 376,236 | ||||||||
| Gross profit | 153,462 | 130,953 | 139,463 | 145,682 | ||||||||||||
| Operating income | 96,525 | 76,433 | 87,289 | 91,218 | ||||||||||||
| Net income | 50,674 | 28,254 | 47,093 | 48,518 | ||||||||||||
Net income per common share, basic: | $ | 0.75 | $ | 0.41 | $ | 0.69 | $ | 0.71 | ||||||||
Net income per common share, diluted: | $ | 0.73 | $ | 0.40 | $ | 0.67 | $ | 0.69 | ||||||||
| 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 | ||||||||
| 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, 2013 | ||||||||||||||||||||
| Allowance for doubtful accounts | $ | 1,166 | $ | 496 | $ | 1,037 | $ | (41 | ) | $ | 2,658 | |||||||||
| Reserves for inventory | 6,999 | 1,131 | 72 | (1,644 | ) | 6,558 | ||||||||||||||
| Valuation of deferred tax assets | 806 | (120 | ) | 335 | – | 1,021 | ||||||||||||||
| Year ended December 31, 2012 | ||||||||||||||||||||
| Allowance for doubtful accounts | $ | 789 | $ | 383 | $ | 204 | $ | (210 | ) | $ | 1,166 | |||||||||
| Reserves for inventory | 4,717 | 1,694 | 1,785 | (1,197 | ) | 6,999 | ||||||||||||||
| Valuation of deferred tax assets | – | 827 | (21 | ) | – | 806 | ||||||||||||||
| 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 | ) | – | – | ||||||||||||||
In April 2016, the Company dismissed Ernst & Young LLP as its independent registered public accounting firm, and appointed Deloitte & Touche LLP as its new independent registered public accounting firm. See the Company's 8-K filed as of April 20, 2016 for full disclosures related to the change in or disagreements with, accountants reportable herein.
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by us in reports we file or submit under the SecuritiesSecurities Exchange Act of 1934 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.
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 reportingreporting as of December 31, 20132016 based on the criteria established in the 1992 2013 Internal 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, 2013.2016. In conducting this assessment, our management excluded the Tower LightPramac business, which was acquired on March 1, 2016 and Baldor Generators businesses because they were acquired during 2013whose financial statements constitute 22.5% and constituted 4.2%11.1% of net and 15.1% of total and net assets, respectively, as of December 31, 2013 and 2.8% and 1.0%12.6% of revenues, and 0.7% of net income respectively,of the total consolidated financial statement amounts as of and for the year then ended. ended December 31, 2016.
In January 2016, we implemented a new global enterprise resource planning (ERP) system for a majority of our business, with another subsidiary of the Company implementing in October 2016. In connection with this ERP system implementation, we have updated our internal controls over financial reporting, as necessary, to accommodate modifications to our business processes and accounting procedures. Additional implementations will occur at our remaining locations over a multi-year period.
Our independent registered public accounting firm has issued an attestation report on our internal control over financial reporting as of December 31, 2013.2016. Its report appears in the consolidated financial statements included in this Annual Report on Form 10-K on page 36.
Changes in Internal Control Over Financial Reporting
Other than the assessment of controls for the ERP system implementation and Pramac acquisition noted above, there have been no changes in our internal control over financial reporting that occurred during the three monthsyear ended December 31, 20132016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
The information required by Item 10 not already provided herein under “Item 1 – Business – Executive Officers”, will be included in our 2014 Proxy Statement, and is incorporated by reference herein.
Item 11. Executive Compensation
The information required by this item will be included in our 2017 Proxy Statement and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item, including under the heading “Securities Authorized for Issuance Under Equity Compensation Plans,” will be included in our 2017 Proxy Statement and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item will be included in our 20142017 Proxy Statement and is incorporated herein by reference.
ItemItem 13. Certain Relationships 14. Principal Accountant Fees and Related Transactions, and Director IndependenceServic
The information required by this item will be included in our 20142017 Proxy Statement and is incorporated herein by reference.
(a)(1) Financial Statements
Included in Part II of this report:
Page | |
Reports of Independent Registered Public Accounting | 38 |
Consolidated | 41 |
Consolidated statements of comprehensive income | 42 |
Consolidated statements of | 43 |
Consolidated statements of cash flows for the | 44 |
Notes to consolidated financial statements | 45 |
(a)(2) Financial Statement Schedules
All financial statement schedules have been omitted, since the required information is not applicable or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financialfinancial statements and notes thereto.
(a)(3) Exhibits
See the Exhibits Index following the signature pages for a list of the exhibits being filed or furnished with or incorporated by reference into this Annual Report on Form 10-K.
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 3, 2014
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons and on behalf of the Registrant in the capacities and on the dates indicated.
Signature | | Title | Date | |||||||
/s/ Aaron Jagdfeld | Chairman, President and Chief Executive | February 24, 2017 | ||||||||
Aaron Jagdfeld | Officer | |||||||||
/s/ York A. Ragen | Chief Financial Officer and | February 24, 2017 | ||||||||
| York A. Ragen | Chief Accounting Officer | |||||||||
/s/ Todd A. Adams | Lead Director | February 24, 2017 | ||||||||
Todd A. Adams | ||||||||||
/s/ John D. Bowlin | Director | February 24, 2017 | ||||||||
John D. Bowlin | ||||||||||
/s/ Robert D. Dixon | Director | February 24, 2017 | ||||||||
Robert D. Dixon | ||||||||||
/s/ | Director | February 24, 2017 | ||||||||
Andrew G. Lampereur | ||||||||||
/s/ Bennett Morgan | Director | February 24, 2017 | ||||||||
Bennett Morgan | ||||||||||
/s/ | Director | February 24, 2017 | ||||||||
David A. Ramon | ||||||||||
/s/ | Director | February 24, 2017 | ||||||||
Kathryn Roedel | ||||||||||
/s/ | Director | February 24, 2017 | ||||||||
Dominick Zarcone | ||||||||||
EXHIBIT INDEX
Exhibits | Description | ||
3.1 | |||
Third Amended and Restated Certificate of Incorporation of Generac Holdings Inc. (incorporated by reference to Exhibit 3.1 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010). | |||
3.2 | Amended and Restated Bylaws of Generac Holdings Inc. (incorporated by reference to Exhibit 3.1 of the | ||
| 4.1 | Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 of the Registration Statement on Form S-1 filed with the SEC on January 25, 2010). | ||
| 10.1 | Restatement Agreement, dated as of May 31, 2013, to that certain Credit Agreement, dated as of February 9, 2012, as amended and restated as of May 31, 2012, among Generac Power Systems, Inc., Generac Acquisition Corp., the lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, and Bank of America, N.A. and Goldman Sachs Bank USA, as syndication agents (incorporated by reference to Exhibit 10.1 to the | ||
| 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 | ||
| 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 | ||
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 | ||
| 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 | ||
| 10.6 | Credit Agreement, dated as of May 30, 2012, among Generac Power Systems, Inc., its Domestic Subsidiaries listed as Borrowers on the signature pages thereto, Generac Acquisition Corp., the lenders party thereto, Bank of America, N.A. as Administrative Agent, JPMorgan Chase Bank, N.A. and Goldman Sachs Bank USA, as syndication agents, and Wells Fargo Bank, National Association, as Documentation Agent (incorporated by reference to Exhibit 10.3 of the | ||
Exhibits | Description | ||||
10.7 | Amendment No. 1 dated as of May 31, 2013 to the Credit Agreement, dated as of May 30, 2012, among Generac Power Systems, Inc., its Domestic Subsidiaries listed as Borrowers on the signature pages thereto, Generac Acquisition Corp., the lenders party thereto, Bank of America, N.A. as Administrative Agent, JPMorgan Chase Bank, N.A. and Goldman Sachs Bank USA, as syndication agents, and Wells Fargo Bank, National Association, as Documentation Agent (incorporated by reference to Exhibit 10.4 to the | ||||
| 10.8 | First Amendment to the Guarantee and Collateral Agreement, dated as of May 31, 2013, to that certain Guarantee and Collateral Agreement, dated as of May 30, 2012, among Generac Holdings Inc., Generac Acquisition Corp., Generac Power Systems, Inc., certain subsidiaries of Generac Power Systems, Inc. and Bank of America, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed with the SEC on June 4, 2013). | ||||
| 10.9 | 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 | ||||
| 10.10 | Replacement Term Loan Amendment dated as of November 2, 2016 to the Credit Agreement, dated as of February 9, 2012, as amended and restated as of May 30, 2012, as further amended and restated as of May 31, 2013, and as amended by the First Amendment dated as of May 18, 2015, among Generac Power Systems, Inc., Generac Acquisition Corp., the lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent and the other agents named therein. | ||||
10.11+ | 2009 Executive Management Incentive Compensation Program (incorporated by reference to Exhibit 10.46 of the Registration Statement on Form S-1 filed with the SEC on December 17, 2009). | ||||
10.12+ | Generac Holdings Inc. Amended and Restated 2010 Equity Incentive Plan (incorporated by reference to Appendix A to the Definitive Proxy Statement on Schedule 14A of the Company filed with the SEC on April 27, 2012) | ||||
10.13+ | Generac Holdings Inc. Annual Performance Bonus Plan (incorporated by reference to Exhibit 10.63 of the Registration Statement on Form S-1 filed with the SEC on January 25, 2010). | ||||
10.14+ | Amended and Restated Employment Agreement, dated | ||||
10.15+ | 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). | ||||
10.16 | Form of Confidentiality, Non-Competition and Intellectual Property Agreement (incorporated by reference to Exhibit 10.40 of the Registration Statement on Form S-1 filed with the SEC on November 24, 2009). | ||||
10.17+ | Form of Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.44 of the Registration Statement on Form S-1 filed with the SEC on January 25, 2010). | ||||
10.18+ | Form of Nonqualified Stock Option Award Agreement (incorporated by reference to Exhibit 10.45 of the Registration Statement on Form S-1 filed with the SEC on January 25, 2010). | ||||
| 10.19+ | Amended Form of Restricted Stock Award Agreement pursuant to the 2010 Equity Incentive Plan (incorporated by reference to Exhibit 10.3 of the Quarterly Report on Form 10-Q filed with the SEC on May 8, 2012). | ||||
| 10.20+ | Amended Form of Nonqualified Stock Option Award Agreement pursuant to the 2010 Equity Incentive Plan (incorporated by reference to Exhibit 10.4 of the Quarterly Report on Form 10-Q filed with the SEC on May 8, 2012). | ||||
| 10.21+ | Amended Form of Restricted Stock Award Agreement with accelerated vesting pursuant to the 2010 Equity Incentive Plan (incorporated by reference to Exhibit 10.5 of the Quarterly Report on Form 10-Q filed with the SEC on May 8, 2012). | ||||
| Exhibits Number | Description | ||||
10.22 | Form of | ||||
10.23 | Form of | ||||
10.24+ | Form of | ||||
21.1* | List of Subsidiaries of Generac Holdings Inc. | ||||
23.1* | Consent of Deloitte & Touche, Independent Registered Public Accounting Firm. | ||||
| 23.2* | Consent of Ernst & Young, Independent Registered Public Accounting Firm. | ||||
31.1* | Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||||
31.2* | Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||||
32.1** | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002. | ||||
| 32.2** | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002. | ||||
101* | The following financial information from the | ||||
| | |||||
*Filed herewith. | |||||
| | **Furnished herewith. | ||||
| | +Indicates management contract or compensatory plan or arrangement. | ||||
75