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1111160001474735falseGENERAC HOLDINGS INC.false--12-31Q22019falsefalsetruefalse80noIncludes gains/losses on disposal of assets, unrealized mark-to-market adjustments on commodity contracts, and certain foreign currency and purchase accounting related adjustments.Recorded in the other accrued liabilities lineRecorded in the property & equipment, net lineRecorded in the operating lease and other long-term liabilities lineRepresents unrealized losses of $(9,531), net of tax effect of $2,478 for the three months ended June 30, 2019.Represents unrealized gains of $11,860, net of tax effect of $(3,083), for the six months ended June 30, 2018.Excludes approximately 41,000 and 142,600 stock options for the three months ended June 30, 2019 and 2018, respectively, as the impact of such awards was anti-dilutive. Excludes approximately 76,000 and 81,800 stock options for the six months ended June 30, 2019 and 2018, respectively, as the impact of such awards was anti-dilutive.Represents unrealized gains of $2,878, net of tax effect of $(748), for the three months ended June 30, 2018.Represents unrealized losses of $(16,455), net of tax effect of $4,278 for the six months ended June 30, 2019.Recorded in the current portion of long-term borrowings and finance lease obligations lineRepresents 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.Recorded in the operating lease and other assets line Represents the non-cash write-off of original issue discount and deferred financing costs due to a voluntary prepayment of Term Loan debt.Represents severance and other non-recurring restructuring charges related to the consolidation of certain of our facilities. Represents share-based compensation expense to account for stock options, restricted stock and other stock awards over their respective vesting periods.Recorded in the long-term borrowings and finance lease obligations 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Table of Contents

 

  

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

(Mark One)

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

   
 

For the quarterly period ended June 30, 2019

   

OR

   

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

   
 

For the transition period from               to

 

Commission File Number 001-34627

 

GENERAC HOLDINGS INC.

(Exact name of registrant as specified in its charter)

 

Delaware

20-5654756

(State or other jurisdiction of

(IRS Employer

incorporation or organization)

Identification No.)

   

S45 W29290 Hwy 59, Waukesha, WI

53189

(Address of principal executive offices)

(Zip Code)

 

(262544-4811

(Registrant’s telephone number, including area code)

 

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.01 par value

GNRC

New York Stock Exchange

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐

 

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

 

Large accelerated filer

Accelerated filer ☐

Non-accelerated filer ☐

Smaller reporting company ☐

Emerging growth company ☐

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

 

As of July 31, 2019, there were 62,372,967 shares of registrant’s common stock outstanding.

 



 

 

 

 

GENERAC HOLDINGS INC.

TABLE OF CONTENTS

 

 

Page

PART I. FINANCIAL INFORMATION

     

Item 1.

Condensed Consolidated Financial Statements (Unaudited)

 
     
 

Condensed Consolidated Balance Sheets as of June 30, 2019 and December 31, 2018

1

     
 

Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2019 and 2018

2

     
 

Condensed Consolidated Statements of Stockholders’ Equity for the Three and Six Months Ended June 30, 2019 and 2018

3

     
 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2019 and 2018

5

     
 

Notes to Condensed Consolidated Financial Statements

6

     

Item 2.

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

19

     

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

30

     

Item 4.

Controls and Procedures

30

     

PART II. OTHER INFORMATION

     

Item 1.

Legal Proceedings

30

     

Item 1A.

Risk Factors

31

     

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

31

     

Item 6.

Exhibits

32

     
 

Signatures

33

 

 

 

PART I. FINANCIAL INFORMATION

 

PART I. FINANCIAL INFORMATION
Item 1.           Financial Statements

 

 

 

Generac Holdings Inc.

 

Condensed Consolidated Balance Sheets

 

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

 

(Unaudited)

 

 

   

June 30,

   

December 31,

 
   

2019

   

2018

 

Assets

               

Current assets:

               

Cash and cash equivalents

  $ 110,367     $ 224,482  

Accounts receivable, less allowance for doubtful accounts

    341,535       326,133  

Inventories

    570,327       544,750  

Prepaid expenses and other assets

    29,481       25,404  

Total current assets

    1,051,710       1,120,769  
                 

Property and equipment, net

    300,795       278,929  
                 

Customer lists, net

    58,935       61,194  

Patents, net

    79,690       29,970  

Other intangible assets, net

    12,622       3,043  

Tradenames, net

    150,527       152,283  

Goodwill

    817,392       764,655  

Deferred income taxes

    3,391       163  

Operating lease and other assets

    48,047       15,308  

Total assets

  $ 2,523,109     $ 2,426,314  
                 

Liabilities and stockholders’ equity

               

Current liabilities:

               

Short-term borrowings

  $ 57,031     $ 45,583  

Accounts payable

    259,696       328,091  

Accrued wages and employee benefits

    30,289       40,819  

Other accrued liabilities

    130,891       144,236  

Current portion of long-term borrowings and finance lease obligations

    2,456       1,977  

Total current liabilities

    480,363       560,706  
                 

Long-term borrowings and finance lease obligations

    883,476       876,396  

Deferred income taxes

    85,192       71,300  

Operating lease and other long-term liabilities

    143,950       95,647  

Total liabilities

    1,592,981       1,604,049  
                 

Redeemable noncontrolling interests

    59,117       61,004  
                 

Stockholders’ equity:

               

Common stock, par value $0.01, 500,000,000 shares authorized, 71,471,341 and 71,186,418 shares issued at June 30, 2019 and December 31, 2018, respectively

    715       712  

Additional paid-in capital

    485,703       476,116  

Treasury stock, at cost

    (324,149 )     (321,473 )

Excess purchase price over predecessor basis

    (202,116 )     (202,116 )

Retained earnings

    939,618       831,123  

Accumulated other comprehensive loss

    (33,831 )     (23,813 )

Stockholders’ equity attributable to Generac Holdings, Inc.

    865,940       760,549  

Noncontrolling interests

    5,071       712  

Total stockholders' equity

    871,011       761,261  

Total liabilities and stockholders’ equity

  $ 2,523,109     $ 2,426,314  

 

See notes to consolidated financial statements.

 

1

Table of Contents

 

 

Generac Holdings Inc.

Condensed Consolidated Statements of Comprehensive Income

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

(Unaudited)

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2019

   

2018

   

2019

   

2018

 
                                 

Net sales

  $ 541,916     $ 497,581     $ 1,012,269     $ 897,672  

Costs of goods sold

    346,078       319,108       654,256       577,272  

Gross profit

    195,838       178,473       358,013       320,400  
                                 

Operating expenses:

                               

Selling and service

    52,309       48,269       99,598       92,889  

Research and development

    17,694       12,616       31,303       24,469  

General and administrative

    27,658       26,639       52,420       50,114  

Amortization of intangibles

    7,251       5,482       12,593       11,114  

Total operating expenses

    104,912       93,006       195,914       178,586  

Income from operations

    90,926       85,467       162,099       141,814  
                                 

Other (expense) income:

                               

Interest expense

    (10,452 )     (11,002 )     (20,724 )     (21,115 )

Investment income

    452       367       1,366       713  

Loss on extinguishment of debt

          (1,332 )           (1,332 )

Other, net

    (393 )     (887 )     (1,454 )     (2,281 )

Total other expense, net

    (10,393 )     (12,854 )     (20,812 )     (24,015 )
                                 

Income before provision for income taxes

    80,533       72,613       141,287       117,799  

Provision for income taxes

    18,827       18,382       33,812       29,798  

Net income

    61,706       54,231       107,475       88,001  

Net (loss) income attributable to noncontrolling interests

    (252 )     970       656       1,095  

Net income attributable to Generac Holdings Inc.

  $ 61,958     $ 53,261     $ 106,819     $ 86,906  
                                 

Net income attributable to Generac Holdings Inc. per common share - basic:

  $ 0.99     $ 0.83     $ 1.75     $ 1.25  

Weighted average common shares outstanding - basic:

    61,921,711       61,534,423       61,841,823       61,696,014  
                                 

Net income attributable to Generac Holdings Inc. per common share - diluted:

  $ 0.98     $ 0.82     $ 1.74     $ 1.24  

Weighted average common shares outstanding - diluted:

    62,405,863       62,054,447       62,349,030       62,259,712  
                                 

Comprehensive income attributable to Generac Holdings Inc.

  $ 57,398     $ 47,884     $ 96,925     $ 92,587  

 

See notes to consolidated financial statements.

 

2

Table of Contents

 

 

Generac Holdings Inc.

Condensed Consolidated Statements of Stockholders' Equity

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

(Unaudited)

 

   

Generac Holdings Inc.

                 
                                           

Excess

   

Retained

   

Accumulated

                         
                   

Additional

                   

Purchase Price

   

Earnings

   

Other

   

Total

                 
   

Common Stock

   

Paid-In

   

Treasury Stock

   

Over

   

(Accumulated

   

Comprehensive

   

Stockholders'

   

Noncontrolling

         
   

Shares

   

Amount

   

Capital

   

Shares

   

Amount

   

Predecessor Basis

   

Deficit)

   

Income (Loss)

   

Equity

   

Interest

   

Total

 

Balance at April 1, 2019

    71,395,561     $ 714     $ 481,391       (9,097,711 )   $ (324,115 )   $ (202,116 )   $ 878,416     $ (29,870 )   $ 804,420     $ 5,535     $ 809,955  

Unrealized gain/loss on interest rate swaps, net of tax of ($2,478)

                                              (7,053 )     (7,053 )           (7,053 )

Foreign currency translation adjustment

                                              3,092       3,092       (17 )     3,075  

Common stock issued under equity incentive plans, net of shares

    75,780       1       (22 )                                   (21 )           (21 )

withheld for employee taxes and strike price

                                                                                       

Net share settlement of restricted stock awards

                      (583 )     (34 )                       (34 )           (34 )

Cash dividends paid to noncontrolling interest of subsidiary

                                                          (285 )     (285 )

Share-based compensation

                4,334                                     4,334             4,334  

Redemption value adjustment

                                        (756 )           (756 )           (756 )

Net income

                                        61,958             61,958       (162 )     61,796  
                                                                                         

Balance at June 30, 2019

    71,471,341     $ 715     $ 485,703       (9,098,294 )   $ (324,149 )   $ (202,116 )   $ 939,618     $ (33,831 )   $ 865,940     $ 5,071     $ 871,011  

 

   

Generac Holdings Inc.

                 
                                           

Excess

   

Retained

   

Accumulated

                         
                   

Additional

                   

Purchase Price

   

Earnings

   

Other

   

Total

                 
   

Common Stock

   

Paid-In

   

Treasury Stock

   

Over

   

(Accumulated

   

Comprehensive

   

Stockholders'

   

Noncontrolling

         
   

Shares

   

Amount

   

Capital

   

Shares

   

Amount

   

Predecessor Basis

   

Deficit)

   

Income (Loss)

   

Equity

   

Interest

   

Total

 

Balance at January 1, 2019

    71,186,418     $ 712     $ 476,116       (9,047,060 )   $ (321,473 )   $ (202,116 )   $ 831,123     $ (23,813 )   $ 760,549     $ 712     $ 761,261  

Acquisition of business

                                                          4,125       4,125  

Unrealized gain/loss on interest rate swaps, net of tax of ($4,278)

                                              (12,177 )     (12,177 )           (12,177 )

Foreign currency translation adjustment

                                              2,159       2,159       38       2,197  

Common stock issued under equity incentive plans, net of shares

    284,923       3       1,659                                     1,662             1,662  

withheld for employee taxes and strike price

                                                                                       

Net share settlement of restricted stock awards

                      (51,234 )     (2,676 )                       (2,676 )           (2,676 )

Cash dividends paid to noncontrolling interest of subsidiary

                                                          (285 )     (285 )

Share-based compensation

                7,928                                     7,928             7,928  

Redemption value adjustment

                                        1,676             1,676             1,676  

Net income

                                        106,819             106,819       481       107,300  
                                                                                         

Balance at June 30, 2019

    71,471,341     $ 715     $ 485,703       (9,098,294 )   $ (324,149 )   $ (202,116 )   $ 939,618     $ (33,831 )   $ 865,940     $ 5,071     $ 871,011  

 

3

Table of Contents

 

Generac Holdings Inc.

Condensed Consolidated Statements of Stockholders' Equity

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

(Unaudited)

 

   

Generac Holdings Inc.

                 
                                           

Excess

   

Retained

   

Accumulated

                         
                   

Additional

                   

Purchase Price

   

Earnings

   

Other

   

Total

                 
   

Common Stock

   

Paid-In

   

Treasury Stock

   

Over

   

(Accumulated

   

Comprehensive

   

Stockholders'

   

Noncontrolling

         
   

Shares

   

Amount

   

Capital

   

Shares

   

Amount

   

Predecessor Basis

   

Deficit)

   

Income (Loss)

   

Equity

   

Interest

   

Total

 

Balance at April 1, 2018

    70,989,164     $ 710     $ 464,055       (9,038,902 )   $ (321,025 )   $ (202,116 )   $ 636,816     $ (8,372 )   $ 570,068     $ 126     $ 570,194  

Unrealized gain/loss on interest rate swaps, net of tax of $748

                                              2,130       2,130       5       2,135  

Foreign currency translation adjustment

                                              (10,658 )     (10,658 )     (10 )     (10,668 )

Common stock issued under equity incentive plans, net of shares 

    41,183             658                                     658             658  

withheld for employee taxes and strike price

                                                                                       

Net share settlement of restricted stock awards

                      (578 )     (27 )                       (27 )           (27 )

Share-based compensation

                3,885                                     3,885             3,885  

Redemption value adjustment

                                        (2,305 )           (2,305 )           (2,305 )

Net income

                                        53,261             53,261       122       53,383  
                                                                                         

Balance at June 30, 2018

    71,030,347     $ 710     $ 468,598       (9,039,480 )   $ (321,052 )   $ (202,116 )   $ 687,772     $ (16,900 )   $ 617,012     $ 243     $ 617,255  

 

   

Generac Holdings Inc.

                 
                                           

Excess

   

Retained

   

Accumulated

                         
                   

Additional

                   

Purchase Price

   

Earnings

   

Other

   

Total

                 
   

Common Stock

   

Paid-In

   

Treasury Stock

   

Over

   

(Accumulated

   

Comprehensive

   

Stockholders'

   

Noncontrolling

         
   

Shares

   

Amount

   

Capital

   

Shares

   

Amount

   

Predecessor Basis

   

Deficit)

   

Income (Loss)

   

Equity

   

Interest

   

Total

 

Balance at January 1, 2018

    70,820,173     $ 708     $ 459,816       (8,448,874 )   $ (294,005 )   $ (202,116 )   $ 610,836     $ (21,198 )   $ 554,041     $ 279     $ 554,320  

Unrealized gain/loss on interest rate swaps, net of tax of $3,083

                                              8,777       8,777       5       8,782  

Foreign currency translation adjustment

                                              (4,479 )     (4,479 )           (4,479 )

Common stock issued under equity incentive plans, net of shares

    210,174       2       1,791                                     1,793             1,793  

withheld for employee taxes and strike price

                                                                                       

Net share settlement of restricted stock awards

                      (30,606 )     (1,391 )                       (1,391 )           (1,391 )

Stock repurchases

                      (560,000 )     (25,656 )                       (25,656 )           (25,656 )

Cash dividends paid to noncontrolling interest of subsidiary

                                                          (314 )     (314 )

Share-based compensation

                6,991                                     6,991             6,991  

Redemption value adjustment

                                        (9,970 )           (9,970 )           (9,970 )

Net income

                                        86,906             86,906       273       87,179  
                                                                                         

Balance at June 30, 2018

    71,030,347     $ 710     $ 468,598       (9,039,480 )   $ (321,052 )   $ (202,116 )   $ 687,772     $ (16,900 )   $ 617,012     $ 243     $ 617,255  

 

See notes to consolidated financial statements. 

 

4

Table of Contents

 

 

Generac Holdings Inc.

Condensed Consolidated Statements of Cash Flows

(U.S. Dollars in Thousands)

(Unaudited)

 

   

Six Months Ended June 30,

 
   

2019

   

2018

 

Operating activities

               

Net income

  $ 107,475     $ 88,001  

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

               

Depreciation

    14,754       12,169  

Amortization of intangible assets

    12,593       11,114  

Amortization of original issue discount and deferred financing costs

    2,376       2,367  

Loss on extinguishment of debt

          1,332  

Deferred income taxes

    11,108       6,257  

Share-based compensation expense

    7,928       6,991  

Other

    400       599  

Net changes in operating assets and liabilities, net of acquisitions:

               

Accounts receivable

    (8,794 )     (24,876 )

Inventories

    (21,157 )     (85,592 )

Other assets

    (3,086 )     (13,047 )

Accounts payable

    (68,539 )     33,442  

Accrued wages and employee benefits

    (14,912 )     4,510  

Other accrued liabilities

    (16,077 )     36,578  

Excess tax benefits from equity awards

    (1,455 )     (188 )

Net cash provided by operating activities

    22,614       79,657  
                 

Investing activities

               

Proceeds from sale of property and equipment

    49       196  

Proceeds from beneficial interests in
securitization transactions

    1,396       1,929  

Expenditures for property and equipment

    (34,376 )     (12,326 )

Acquisition of business, net of cash acquired

    (112,941 )     (71,926 )

Net cash used in investing activities

    (145,872 )     (82,127 )
                 

Financing activities

               

Proceeds from short-term borrowings

    35,790       12,133  

Proceeds from long-term borrowings

          50,000  

Repayments of short-term borrowings

    (24,325 )     (8,172 )

Repayments of long-term borrowings and finance lease obligations

    (2,000 )     (50,797 )

Stock repurchases

          (25,656 )

Cash dividends paid to noncontrolling interest of subsidiary

    (285 )     (314 )

Payment of debt issuance costs

          (1,473 )

Taxes paid related to equity awards

    (4,441 )     (1,725 )

Proceeds from exercise of stock options

    3,419       2,124  

Net cash provided by (used in) financing activities

    8,158       (23,880 )
                 

Effect of exchange rate changes on cash and cash equivalents

    985       (408 )
                 

Net decrease in cash and cash equivalents

    (114,115 )     (26,758 )

Cash and cash equivalents at beginning of period

    224,482       138,472  

Cash and cash equivalents at end of period

  $ 110,367     $ 111,714  

 

See notes to consolidated financial statements 

 

5

Table of Contents

 

Generac Holdings Inc.
Notes to Condensed Consolidated Financial Statements

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

(Unaudited) 

 

 

 

1. Description of Business and Basis of Presentation

 

Founded in 1959, Generac Holdings Inc. (the Company) is a leading designer and manufacturer of energy solutions and other power products.  As an industry leader serving residential, light commercial and industrial markets, the Company’s products and solutions 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 its strategic plan (as discussed in Item 1 of the Annual Report on Form 10-K for the year ended December 31, 2018). A summary of acquisitions affecting the reporting periods presented include:

 

 

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

 

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

 

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

 

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

 

The condensed 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.

 

The condensed consolidated balance sheet as of June 30, 2019, the condensed consolidated statements of comprehensive income for the three and six months ended June 30, 2019 and 2018, the condensed consolidated statements of stockholders’ equity for the three and six months ended June 30, 2019 and 2018, and the condensed consolidated statements of cash flows for the six months ended June 30, 2019 and 2018 have been prepared by the Company and have not been audited. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary for the fair presentation of the financial position, results of operation and cash flows have been made. The results of operations for any interim period are not necessarily indicative of the results to be expected for the full year.

 

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

 

Certain information and footnote disclosure normally included in consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2018.

 

New Accounting Standards Not Yet Adopted

 

In June 2016, the Financial Standards Accounting Board (FASB) issued Accounting Standards Update (ASU) 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which represents a new credit loss standard that will change the impairment model for most financial assets and certain other financial instruments. Specifically, this guidance will require entities to utilize a new “expected loss” model as it relates to trade and other receivables. In addition, entities will be required to recognize an allowance for estimated credit losses on available-for-sale debt securities, regardless of the length of time that a security has been in an unrealized loss position. This guidance will be effective for annual reporting periods beginning after December 15, 2019, including interim periods within those annual reporting periods, and early adoption is permitted. The Company is currently evaluating the potential impact that the adoption of this guidance may have on the Company’s consolidated financial statements.

 

 

 

 

Recently Adopted Accounting Standards

 

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

 

On January 1, 2019, the Company adopted ASU 2016-02, Leases. This guidance was issued to increase transparency and comparability among organizations by requiring the recognition of lease assets and lease liabilities in the balance sheet and by disclosing key information about leasing arrangements. The Company adopted this standard using the modified retrospective approach as of the date of adoption, meaning no prior period balances were impacted by the adoption. Additionally, the Company elected to adopt the standard using the package of practical expedients permitted under the standard’s transition guidance, which allowed the Company to carryforward its historical lease classifications, and embedded lease and initial direct cost assessments. The adoption of the standard had a material impact on the Company’s condensed consolidated balance sheet primarily related to the recognition of right-of-use (ROU) assets and lease liabilities for operating leases. However, the adoption did not have a material impact on the condensed consolidated statement of comprehensive income and statement of cash flows. Refer to Note 9, “Leases,” for further information regarding the Company’s leases.

 

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

 

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

 

2. Acquisitions

 

Acquisition of Pika

 

On April 26, 2019, the Company acquired Pika for a purchase price, net of cash acquired, of $49,068. The acquisition purchase price was funded solely through cash on hand.

 

The Company recorded a preliminary purchase price allocation during the second quarter of 2019 based upon its estimates of the fair value of the acquired assets and assumed liabilities. As a result, the Company recorded approximately $55,986 of intangible assets, including $23,204 of goodwill recorded in the Domestic segment, as of the acquisition date. The goodwill ascribed to the acquisition is not deductible for tax purposes. The accompanying condensed consolidated financial statements include the results of Pika from the date of acquisition through June 30, 2019.

 

Acquisition of Neurio

 

On March 12, 2019, the Company acquired Neurio for a purchase price of $59,071, net of cash acquired and inclusive of estimated deferred payments of $8,047. The acquisition purchase price was funded solely through cash on hand.

 

The Company recorded a preliminary purchase price allocation in the second quarter of 2019 based upon its estimates of the fair value of the acquired assets and assumed liabilities. As a result, the Company recorded approximately $58,763 of intangible assets, including $24,263 of goodwill recorded in the Domestic segment, as of the acquisition date. Substantially all of the goodwill ascribed to this acquisition is deductible for tax purposes. The accompanying condensed consolidated financial statements include the results of Neurio from the date of acquisition through June 30, 2019.

 

7

 

Acquisition of Selmec

 

On June 1, 2018, the Company acquired Selmec for a purchase price of $79,972, net of cash acquired and inclusive of estimated earnout payments of $14,902. The acquisition purchase price was funded solely through cash on hand.

 

The Company finalized the Selmec purchase price allocation during the second quarter of 2019 based upon its estimates of the fair value of the acquired assets and assumed liabilities. As a result, the Company recorded approximately $79,826 of intangible assets, including approximately $46,196 of goodwill recorded in the International segment, as of the acquisition date. The goodwill adjustment recorded during the second quarter of 2019 was not material to the condensed consolidated financial statements. The goodwill ascribed to the acquisition is not deductible for tax purposes. The accompanying condensed consolidated financial statements include the results of Selmec from the date of acquisition through June 30, 2019.

 

Overall, the net sales contribution from all non-annualized acquisitions to the three and six month periods ended June 30, 2019 was $12,342 and $27,205, respectively.

 

 

3. Redeemable Noncontrolling Interest

 

On March 1, 2016, the Company acquired a 65% ownership interest in PR Industrial S.r.l. and its subsidiaries (Pramac). The 35% noncontrolling interest in Pramac had an acquisition date fair value of $34,253, and was recorded as a redeemable noncontrolling interest in the condensed consolidated balance sheet, as the noncontrolling interest holder had within its control the right to require the Company to redeem its interest in Pramac. In February 2019, the Company amended its agreement with the noncontrolling interest holder of Pramac, extending the agreement by 5 years, allowing the Company to exercise its call option rights in partial increments at certain times during the five year period, and providing that the noncontrolling interest holder no longer holds the right to put its shares to the Company until April 1, 2021.

 

The redeemable noncontrolling interest is recorded at the greater of the initial fair value, increased or decreased for the noncontrolling interests’ share of comprehensive income (loss), or the estimated redemption value, with any adjustments to the redemption value impacting retained earnings, but not net income. However, the redemption value adjustments are reflected in the earnings per share calculation, as detailed in Note 14, “Earnings Per Share,” to the condensed consolidated financial statements. The following table presents the changes in the redeemable noncontrolling interest:

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2019

   

2018

   

2019

   

2018

 

Balance at beginning of period

  $ 57,357     $ 54,404     $ 61,004     $ 43,929  

Net income

    (90 )     848       175       822  

Foreign currency translation

    1,094       (4,522 )     (386 )     (1,686 )

Redemption value adjustment

    756       2,305       (1,676 )     9,970  

Balance at end of period

  $ 59,117     $ 53,035     $ 59,117     $ 53,035  

 

 

4. Derivative Instruments and Hedging Activities

 

The Company records all derivatives in accordance with Accounting Standards Codification (ASC) 815, Derivatives and Hedging, which requires derivative instruments to be reported on the condensed 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.

 

The Company periodically utilizes commodity derivatives and foreign currency forward purchase and sales contracts in the normal course of business. Because these contracts do not qualify for hedge accounting, the related gains and losses are recorded in the Company’s condensed consolidated statements of comprehensive income. These gains and losses are not material to the Company’s condensed consolidated financial statements.

 

Interest Rate Swaps

 

The Company entered into two interest rate swap agreements in October 2013 and one interest rate swap agreement in May 2014, all of which expired in July 2018. In 2017, the Company entered into twenty interest rate swap agreements, all of which are still outstanding as of June 30, 2019. 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 therefore, the effective portions of the gains or losses are reported as a component of accumulated other comprehensive loss (AOCL) in the condensed consolidated balance sheets. The amount of losses, net of tax, recognized for the three and six months ended June 30, 2019 were $(7,053) and $(12,177), respectively. The amount of gains, net of tax, recognized for the three and six months ended June 30, 2018 were $2,130 and $8,777, respectively. The cash flows of the swaps are recognized as adjustments to interest expense each period. The ineffective portions of the derivatives’ changes in fair value, if any, are immediately recognized in earnings.

 

8

 

Fair Value 

 

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

 

   

June 30,
201
9

   

December 31,
201
8

 

Commodity contracts

  $ (65 )   $ (160 )

Foreign currency contracts

    72       (117 )

Interest rate swaps

    (8,148 )     8,307  

 

The fair value of the commodity contracts is included in other accrued liabilities, the fair value of the foreign currency contracts is included in other assets and the fair value of the interest rate swaps is included in other long-term liabilities in the condensed consolidated balance sheets as of June 30, 2019. The fair values of the commodity and foreign currency contracts are included in other accrued liabilities, and the fair value of the interest rate swaps is included in other assets in the consolidated balance sheet as of December 31, 2018. Excluding the impact of credit risk, the fair value of the derivative contracts as of June 30, 2019 and December 31, 2018 is a liability of $8,279 and an asset of $8,220, respectively, which represents the amount the Company would pay/receive upon exit of the agreements on those dates.

 

 

5. Fair Value Measurements

 

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

 

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 $860,083, was approximately $879,000 (Level 2) at June 30, 2019, as calculated based on independent valuations whose inputs and significant value drivers are observable.

 

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

 

 

 

6. Accumulated Other Comprehensive Loss

 

The following presents a tabular disclosure of changes in AOCL during the three and six months ended June 30, 2019 and 2018, net of tax:

 

   

Foreign

Currency

Translation

Adjustments

   

Defined

Benefit

Pension Plan

   

Unrealized

Gain (Loss) on

Cash Flow

Hedges

           

Total

 
                                         

Beginning Balance – April 1, 2019

  $ (19,765 )   $ (10,541 )   $ 436             $ (29,870 )

Other comprehensive income (loss) before reclassifications

    3,092       -       (7,053 )     (1)       (3,961 )

Amounts reclassified from AOCL

    -       -       -               -  

Net current-period other comprehensive income (loss)

    3,092       -       (7,053 )             (3,961 )

Ending Balance – June 30, 2019

  $ (16,673 )   $ (10,541 )   $ (6,617 )           $ (33,831 )

 

   

Foreign

Currency

Translation

Adjustments

   

Defined

Benefit

Pension Plan

   

Unrealized

Gain on Cash

Flow Hedges

           

Total

 
                                         

Beginning Balance – April 1, 2018

  $ (6,677 )   $ (10,978 )   $ 9,283             $ (8,372 )

Other comprehensive income (loss) before reclassifications

    (10,658 )     -       2,130       (2)       (8,528 )

Amounts reclassified from AOCL

    -       -       -               -  

Net current-period other comprehensive income (loss)

    (10,658 )     -       2,130               (8,528 )

Ending Balance – June 30, 2018

  $ (17,335 )   $ (10,978 )   $ 11,413             $ (16,900 )

 

   

Foreign

Currency

Translation

Adjustments

   

Defined

Benefit

Pension Plan

   

Unrealized

Gain (Loss) on

Cash Flow

Hedges

           

Total

 
                                         

Beginning Balance – January 1, 2019

  $ (18,832 )   $ (10,541 )   $ 5,560             $ (23,813 )

Other comprehensive income (loss) before reclassifications

    2,159       -       (12,177 )     (3)       (10,018 )

Amounts reclassified from AOCL

    -       -       -               -  

Net current-period other comprehensive income (loss)

    2,159       -       (12,177 )             (10,018 )

Ending Balance – June 30, 2019

  $ (16,673 )   $ (10,541 )   $ (6,617 )           $ (33,831 )

 

   

Foreign

Currency

Translation

Adjustments

   

Defined

Benefit

Pension Plan

   

Unrealized

Gain on Cash

Flow Hedges

           

Total

 
                                         

Beginning Balance – January 1, 2018

  $ (12,856 )   $ (10,978 )   $ 2,636             $ (21,198 )

Other comprehensive income (loss) before reclassifications

    (4,479 )     -       8,777       (4)       4,298  

Amounts reclassified from AOCL

    -       -       -               -  

Net current-period other comprehensive income (loss)

    (4,479 )     -       8,777               4,298  

Ending Balance – June 30, 2018

  $ (17,335 )   $ (10,978 )   $ 11,413             $ (16,900 )

 

 

(1)

Represents unrealized losses of $(9,531), net of tax effect of $2,478 for the three months ended June 30, 2019.

 

(2)

Represents unrealized gains of $2,878, net of tax effect of $(748), for the three months ended June 30, 2018.

 

(3)

Represents unrealized losses of $(16,455), net of tax effect of $4,278 for the six months ended June 30, 2019.

 

(4)

Represents unrealized gains of $11,860, net of tax effect of $(3,083), for the six months ended June 30, 2018.

 

 

 

7. Segment Reporting

 

The Company has two reportable segments for financial reporting purposes - Domestic and International. The Domestic segment includes the legacy Generac business and the impact of acquisitions that are based in the U.S. and Canada, all of which have revenues that are substantially derived from the U.S. and Canada. The International segment includes the Ottomotores, Tower Light, Pramac, Motortech and Selmec businesses, 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 power 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.

 

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

 

   

Net Sales by Segment

 
   

Three Months Ended June 30, 2019

 

Product Classes

 

Domestic

   

International

   

Total

 

Residential products

  $ 255,182     $ 13,192     $ 268,374  

Commercial & industrial products

    138,540       91,889       230,428  

Other

    32,216       10,897       43,114  

Total net sales

  $ 425,938     $ 115,978     $ 541,916  

 

   

Three Months Ended June 30, 2018

 

Product Classes

 

Domestic

   

International

   

Total

 

Residential products

  $ 234,131     $ 12,267     $ 246,398  

Commercial & industrial products

    120,521       95,107       215,628  

Other

    29,027       6,528       35,555  

Total net sales

  $ 383,679     $ 113,902     $ 497,581  

 

   

Six Months Ended June 30, 2019

 

Product Classes

 

Domestic

   

International

   

Total

 

Residential products

  $ 460,363     $ 25,841     $ 486,204  

Commercial & industrial products

    260,986       178,566       439,552  

Other

    63,837       22,675       86,513  

Total net sales

  $ 785,186     $ 227,083     $ 1,012,269  

 

   

Six Months Ended June 30, 2018

 

Product Classes

 

Domestic

   

International

   

Total

 

Residential products

  $ 410,816     $ 26,056     $ 436,872  

Commercial & industrial products

    218,292       172,461       390,753  

Other

    57,247       12,800       70,047  

Total net sales

  $ 686,355     $ 211,317     $ 897,672  

 

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

 

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

 

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

 

11

 

In accordance with ASU 2014-09, Revenue from Contracts with Customers, extended warranty revenues are reported within net sales in the condensed consolidated statements of comprehensive income. Previously, these amounts were reported net within selling and service expense on the condensed consolidated statements of comprehensive income, in amounts that were not material. To report extended warranty in accordance with ASU 2014-09, the net sales and gross profit amounts for the three months ended June 30, 2018 have been revised by $2,632 and $2,217, respectively, and the net sales and gross profit amounts for the six months ended June 30, 2018 have been revised by $5,089 and $4,155, respectively, from the amounts previously reported in the Company’s second quarter 2018 Form 10-Q, with equal offsets to selling and service expenses. The revisions impacted the Domestic segment and the Other product class. There was no impact to income from operations, net income or comprehensive income, earnings per share, the condensed consolidated balance sheets, the condensed consolidated statements of stockholders’ equity, or the condensed consolidated statements of cash flows.

 

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 contained in the Company’s credit agreements.

 

   

Adjusted EBITDA

 
   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2019

   

2018

   

2019

   

2018

 

Domestic

  $ 104,531     $ 90,602     $ 185,506     $ 156,077  

International

    7,355       11,628       13,508       17,934  

Total adjusted EBITDA

  $ 111,886     $ 102,230     $ 199,014     $ 174,011  
                                 

Interest expense

    (10,452 )     (11,002 )     (20,724 )     (21,115 )

Depreciation and amortization

    (14,740 )     (11,600 )     (27,347 )     (23,283 )

Non-cash write-down and other adjustments (1)

    (1,726 )     (1,316 )     (326 )     (2,622 )

Non-cash share-based compensation expense (2)

    (4,334 )     (3,885 )     (7,928 )     (6,991 )

Loss on extinguishment of debt (3)

    -       (1,332 )     -       (1,332 )

Transaction costs and credit facility fees (4)

    (413 )     (441 )     (1,699 )     (703 )

Business optimization expenses (5)

    (73 )     (29 )     (242 )     (167 )

Other

    385       (12 )     539       1  

Income before provision for income taxes

  $ 80,533     $ 72,613     $ 141,287     $ 117,799  

 

 

(1)

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

 

(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 non-cash write-off of original issue discount and deferred financing costs due to a voluntary prepayment of Term Loan debt.

 

(4)

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.

 

(5)

Represents severance and other non-recurring restructuring charges related to the consolidation of certain of our facilities.

 

The Company’s sales in the United States represented approximately 74% and 73% of total sales for the three months ended June 30, 2019 and 2018, respectively. The Company’s sales in the United States represented approximiately 73% and 72% of total sales for the six month periods ended June 30, 2019 and 2018, respectively. Approximately 80% of the Company’s identifiable long-lived assets were located in the United States at June 30, 2019 and December 31, 2018.

 

 

8. Balance Sheet Details

 

Inventories consist of the following:

 

   

June 30,
2019

   

December 31,

2018

 
                 

Raw material

  $ 340,716     $ 348,980  

Work-in-process

    7,453       6,971  

Finished goods

    222,158       188,799  

Total

  $ 570,327     $ 544,750  

 

12

 

Property and equipment consists of the following:

 

   

June 30,
2019

   

December 31,

2018

 
                 

Land and improvements

  $ 17,941     $ 15,975  

Buildings and improvements

    174,901       163,161  

Machinery and equipment

    109,537       103,726  

Dies and tools

    20,135       28,198  

Vehicles

    3,321       2,070  

Office equipment and systems

    89,007       82,638  

Leasehold improvements

    3,809       2,137  

Construction in progress

    28,339       26,543  

Gross property and equipment

    446,990       424,448  

Accumulated depreciation

    (146,195 )     (145,519 )

Total

  $ 300,795     $ 278,929  

 

Total property and equipment included capital leases of $20,158 at December 31, 2018, primarily made up of buildings and improvements. Amortization of capital leases is recorded within depreciation expense in the condensed consolidated statements of comprehensive income. The initial measurement of capital leases is accounted for as a non-cash item in the condensed consolidated statement of cash flows. Refer to Note 9, “Leases,” for further information regarding the Company’s accounting for leases under ASC 842 in 2019.

 

 

9. Leases

 

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

 

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

 

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

 

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

 

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

 

13

 

The components of total lease cost consist of the following:

 

   

Three Months Ended

June 30, 2019

   

Six Months Ended

June 30, 2019

 
                 

Operating lease cost

  $ 2,352     $ 4,951  

Finance lease cost:

               

Amortization of ROU assets

    704       1,122  

Interest on lease liabilities

    561       1,142  

Total lease cost

  $ 3,617     $ 7,215  

 

Prior to the adoption of ASC 842, lease expense consisted of payments on operating leases.

 

As of January 1, 2019, the date of the adoption of ASU 2016-02, the Company recognized ROU assets and lease liabilities related to operating leases of $42,024 and $42,056, respectively, and there was no cumulative effect adjustment made to retained earnings. Supplemental balance sheet information related to the Company’s leases was as follows:

 

   

June 30, 2019

 

Operating Leases

       

Operating lease ROU assets (1)

  $ 39,799  
         

Operating lease liabilities - current (2)

  $ 7,753  

Operating lease liabilities - noncurrent (3)

    33,012  

Total operating lease liabilities

  $ 40,765  
         

Finance Leases

       

Finance lease ROU assets, gross

  $ 29,221  

Accumulated depreciation - finance lease ROU assets

    (2,786 )

Finance lease ROU assets, net (4)

  $ 26,435  
         

Finance lease liabilities - current (5)

  $ 1,648  

Finance lease liabilities - noncurrent (6)

    24,363  

Total finance lease liabilities

  $ 26,011  

 

 

(1)

Recorded in the operating lease and other assets line

 

(2)

Recorded in the other accrued liabilities line

 

(3)

Recorded in the operating lease and other long-term liabilities line

 

(4)

Recorded in the property & equipment, net line

 

(5)

Recorded in the current portion of long-term borrowings and finance lease obligations line

 

(6)

Recorded in the long-term borrowings and finance lease obligations line

 

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

 

   

Three Months Ended

June 30, 2019

   

Six Months Ended

June 30, 2019

 

Cash paid for amounts included in the measurement of lease liabilities

               

Operating cash flows from operating leases

  $ 2,768     $ 5,386  

Operating cash flows from finance leases

    466       922  

Financing cash flows from finance leases

    827       1,356  
                 

ROU assets obtained in exchange for lease liabilities

               

Operating leases

    2,396       2,793  

Finance leases

    995       7,971  

 

14

 

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

 

   

June 30, 2019

 

Weighted average remaining lease term (in years)

       

Operating Leases

    7.13  

Finance Leases

    14.32  
         

Weighted average discount rate

       

Operating Leases

    5.50 %

Finance Leases

    7.83 %

 

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

 

   

As of June 30, 2019

 
   

Finance

Leases

   

Operating

Leases

 

Remainder of 2019

  $ 1,806     $ 4,978  

2020

    3,498       8,861  

2021

    3,122       6,904  

2022

    2,792       5,373  

2023

    2,659       4,624  

After 2023

    32,026       18,591  

Total minimum lease payments

    45,903       49,331  

Interest

    (19,892 )     (8,566 )

Present value of minimum lease payments

  $ 26,011     $ 40,765  

 

   

As of December 31, 2018

 
   

Capital

Leases

   

Operating

Leases

 

2019

  $ 2,166     $ 8,914  

2020

    2,477       7,575  

2021

    2,053       6,379  

2022

    1,995       4,955  

2023

    1,889       4,482  

After 2023

    18,108       18,614  

Total minimum lease payments

    28,688     $ 50,919  

Interest

    (8,517 )        

Present value of minimum lease payments

  $ 20,171          

 

 

10. Product Warranty Obligations

 

The Company records a liability for standard product warranty obligations accounted for as assurance warranties at the time of sale to a customer based upon historical warranty experience. The Company also records a liability for specific warranty matters when they become known and are reasonably estimable. The following is a tabular reconciliation of the Company’s standard product warranty liability accounted for as an assurance warranty:

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2019

   

2018

   

2019

   

2018

 

Balance at beginning of period

  $ 43,562     $ 36,319     $ 41,785     $ 35,422  

Product warranty reserve assumed in acquisition

    195       -       407       -  

Payments

    (5,657 )     (4,907 )     (11,291 )     (9,892 )

Provision for warranty issued

    8,178       6,275       15,138       11,478  

Changes in estimates for pre-existing warranties

    (954 )     973       (715 )     1,652  

Balance at end of period

  $ 45,324     $ 38,660     $ 45,324     $ 38,660  

 

15

 

Additionally, the Company sells extended warranty coverage for certain products, which it accounts for as a service warranty. The sales of extended warranties are recorded as deferred revenue, and typically have a duration of5 to 10 years. The deferred revenue related to extended warranty coverage is amortized over the duration of the extended warranty contract period, following the standard warranty period, using the straight-line method. Revenue is recognized on extended warranty contracts when the revenue recognition criteria are met, resulting in ratable recognition over the contract term. The amortization of deferred revenue is recorded to net sales in the condensed consolidated statements of comprehensive income. The following is a tabular reconciliation of the deferred revenue related to extended warranty coverage:

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2019

   

2018

   

2019

   

2018

 

Balance at beginning of period

  $ 70,844     $ 60,113     $ 68,340     $ 57,854  

Deferred revenue contracts issued

    7,114       5,526       12,914       10,242  

Amortization of deferred revenue contracts

    (3,441 )     (2,632 )     (6,737 )     (5,089 )

Balance at end of period

  $ 74,517     $ 63,007     $ 74,517     $ 63,007  

 

The timing of recognition of the Company’s deferred revenue balance related to extended warranties at June 30, 2019 is as follows:

 

Remainder of 2019

  $ 7,708  

2020

    15,097  

2021

    14,998  

2022

    12,660  

2023

    9,405  

After 2023

    14,649  

Total

  $ 74,517  

 

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

 

   

June 30,

   

December 31,

 
   

2019

   

2018

 

Product warranty liability

               

Current portion - other accrued liabilities

  $ 26,948     $ 25,396  

Long-term portion - other long-term liabilities

    18,376       16,389  

Total

  $ 45,324     $ 41,785  
                 

Deferred revenue related to extended warranties

               

Current portion - other accrued liabilities

  $ 13,925     $ 13,646  

Long-term portion - other long-term liabilities

    60,592       54,694  

Total

  $ 74,517     $ 68,340  

 

 

11. Contract Balances

 

In certain cases, the Company’s customers pay for their goods in advance. These prepayments are recognized as customer deposits (contract liabilities) and recorded in other accrued liabilities in the condensed consolidated balance sheets. The balance of customer deposits was $8,577 and $14,174 at June 30, 2019 and December 31, 2018, respectively. During the six months ended June 30, 2019, the Company recognized revenue of $8,177 related to amounts included in the December 31, 2018 customer deposit balance. The Company typically recognizes revenue within one year of the receipt of the customer deposit.

 

 

 

12. Credit Agreements

 

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

 

   

June 30,

   

December 31,

 
   

2019

   

2018

 

ABL facility

  $ 26,405     $ 18,459  

Other lines of credit

    30,626       27,124  

Total

  $ 57,031     $ 45,583  

 

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

 

   

June 31,

   

December 31,

 
   

2019

   

2018

 

Term loan

  $ 879,000     $ 879,000  

Original issue discount and deferred financing costs

    (20,064 )     (22,440 )

Finance lease obligation

    26,011       20,171  

Other

    985       1,642  

Total

    885,932       878,373  

Less: current portion of debt

    808       1,075  

Less: current portion of finance lease obligation

    1,648       902  

Total

  $ 883,476     $ 876,396  

 

The Company’s credit agreements originally provided for a $1,200,000 term loan B credit facility (Term Loan) and currently include a $300,000 uncommitted incremental term loan facility. The maturity date of the Term Loan is May 31, 2023. The Term Loan is guaranteed by all of the Company’s wholly-owned domestic restricted subsidiaries, and is secured by associated collateral agreements which pledge a first priority lien on virtually all of the Company’s assets, including fixed assets and intangibles, other than all cash, trade accounts receivable, inventory, and other current assets and proceeds thereof, which are secured by a second priority lien. The Term Loan initially bore interest at rates based upon either a base rate plus an applicable margin of 1.75% or adjusted LIBOR rate plus an applicable margin of 2.75%, subject to a LIBOR floor of 0.75%. The Term Loan agreement has been amended a number of times since inception.

 

In June 2018, the Company amended the Term Loan, which further reduced the applicable margin rates to base rate plus a fixed applicable margin of 0.75% or adjusted LIBOR rate plus a fixed applicable margin of 1.75%.

 

The Term Loan does not require an Excess Cash Flow payment if the Company’s secured leverage ratio is maintained below 3.75 to 1.00 times. As of June 30, 2019, the Company’s net secured leverage ratio was 1.81 to 1.00 times, and the Company was in compliance with all covenants of the Term Loan. There are no financial maintenance covenants on the Term Loan.

 

The Company’s credit agreements also originally provided for a senior secured ABL revolving credit facility (ABL Facility). Borrowings under the ABL Facility are guaranteed by all of the Company’s wholly-owned domestic restricted subsidiaries, and are secured by associated collateral agreements which pledge a first priority lien on all cash, trade accounts receivable, inventory, and other current assets and proceeds thereof, and a second priority lien on all other assets, including fixed assets and intangibles of the Company and certain domestic subsidiaries. ABL Facility borrowings initially bore interest at rates based upon either a base rate plus an applicable margin of 1.00% or adjusted LIBOR rate plus an applicable margin of 2.00%, in each case, subject to adjustments based upon average availability under the ABL Facility. The ABL Facility agreement has been amended a number of times since inception.

 

In June 2018, the Company amended the ABL Facility; increasing it from $250,000 to $300,000 and extending the maturity date to June 12, 2023. In addition, the ABL Facility amendment modified the pricing by reducing certain applicable interest rates to either a base rate plus an applicable margin of 0.375% or an adjusted LIBOR rate plus an applicable margin of 1.375%.

 

As of June 30, 2019, there was $26,405 outstanding under the ABL Facility, leaving $273,191 of availability, net of outstanding letters of credit.

 

As of June 30, 2019 and December 31, 2018, short-term borrowings consisted of borrowings by the Company’s foreign subsidiaries on local lines of credit and the ABL Facility, which totaled $57,031 and $45,583, respectively.

 

 

 

13. Stock Repurchase Program

 

In August 2015, the Company’s Board of Directors approved a $200,000 stock repurchase program, which the Company completed in the third quarter of 2016. In October 2016, the Company’s Board of Directors approved another $250,000 stock repurchase program, which expired in the fourth quarter of 2018. In September 2018, the Company’s Board of Directors approved another stock repurchase program, which commenced in October 2018, and under which the Company may repurchase an additional $250,000 of its common stock over the following 24 months. The Company may repurchase its common stock from time to time, in amounts and at prices the Company deems appropriate, subject to market conditions and other considerations. The repurchases may be executed using open market purchases, privately negotiated agreements or other transactions. The actual timing, number and value of shares repurchased under the program will be determined by management at its discretion and will depend on a number of factors, including the market price of the Company’s 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. During the six months ended June 30, 2018, the Company repurchased 560,000 shares of its common stock for $25,656, funded with cash on hand. There were noshare repurchases during the three and six months ended June 30, 2019. Since the inception of the above noted programs, the Company has repurchased 8,676,706 shares of its common stock for $305,547, all funded with cash on hand.

 

 

14. Earnings Per Share

 

Basic earnings per share is calculated by dividing net income attributable to the common stockholders of the Company by the weighted average number of common shares outstanding during the period, exclusive of restricted shares. Except where the result would be anti-dilutive, diluted earnings per share is calculated by assuming the vesting of unvested restricted stock and the exercise of stock options. Refer to Note 3, “Redeemable Noncontrolling Interest” for further information regarding the accounting for redeemable noncontrolling interests.

 

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

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2019

   

2018

   

2019

   

2018

 

Numerator

                               

Net income attributable to Generac Holdings Inc.

  $ 61,958     $ 53,261     $ 106,819     $ 86,906  

Redeemable noncontrolling interest redemption value adjustment

    (756 )     (2,305 )     1,676       (9,970 )

Net income attributable to common shareholders

  $ 61,202     $ 50,956     $ 108,495     $ 76,936  
                                 

Denominator

                               

Weighted average shares, basic

    61,921,711       61,534,423       61,841,823       61,696,014  

Dilutive effect of stock compensation awards (1)

    484,152       520,024       507,207       563,698  

Diluted shares

    62,405,863       62,054,447       62,349,030       62,259,712  
                                 

Net income attributable to common shareholders per share

                               

Basic

  $ 0.99     $ 0.83     $ 1.75     $ 1.25  

Diluted

  $ 0.98     $ 0.82     $ 1.74     $ 1.24  

 

(1) Excludes approximately 41,000 and 142,600 stock options for the three months ended June 30, 2019 and 2018, respectively, as the impact of such awards was anti-dilutive. Excludes approximately 76,000 and 81,800 stock options for the six months ended June 30, 2019 and 2018, respectively, as the impact of such awards was anti-dilutive.

 

 

15. Income Taxes

 

The effective income tax rates for the six months ended June 30, 2019 and 2018 were 23.9% and 25.3%, respectively. The decrease in the effective income tax rate in 2019 was primarily due to the mix of taxable income in the jurisdictions where we pay tax and additional tax deductions related to stock compensation.

 

 

16. Benefit Plans

 

In June 2019, the Compensation Committee of the Company’s Board of Directors approved a resolution to terminate the Company’s defined benefit pension plan (the Pension Plan). After this approval, during the second quarter of 2019, the Company commenced the plan termination process.  In the third quarter of 2019, the Company intends to amend the Pension Plan to provide eligible participants choice of a lump sum or annuity payment.  The Company expects to complete the lump sum payments and the transfer of the remaining Pension Plan assets to a third-party administrator within the next twelve months.  Termination of the Pension Plan will not result in a reduction of benefits to plan participants.  The decision to terminate the Pension Plan follows the Company’s decision in 2008 to freeze benefits being accrued under the previous noncontributory salaried and hourly pension plans, which were merged into one plan effective December 31, 2018.  Upon settlement of the pension liability, the Company will reclassify the related pension losses currently recorded to AOCL, to the consolidated statements of comprehensive income.

 

 

 

17. Commitments and Contingencies

 

The Company has an arrangement with a finance company to provide floor plan financing for certain dealers. The Company receives payment from the finance company after shipment of product to the dealer. The Company participates in the cost of dealer financing up to certain limits 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 June 30, 2019 and December 31, 2018 was approximately $53,304 and $47,200, 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.

 

 

Item 2.       Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

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

 

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

 

 

our business, financial and operating results, and future economic performance; 

 

proposed new product and service offerings; and 

 

management's goals, expectations, objectives and other similar expressions concerning matters that are not historical facts.

 

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

 

 

frequency and duration of power outages impacting demand for our products;

 

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

 

the impact on our results of possible fluctuations in interest rates, foreign currency exchange rates, commodities, product mix and regulatory tariffs;

 

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

 

the risk that our acquisitions will not be integrated successfully;

 

difficulties we may encounter as our business expands globally or into new markets;

 

our dependence on our distribution network;

 

our ability to invest in, develop or adapt to changing technologies and manufacturing techniques;

 

loss of our key management and employees;

 

increase in product and other liability claims or recalls;

 

failures or security breaches of our networks or information technology systems; and

 

changes in environmental, health and safety, or product compliance laws and regulations affecting our products or operations.

 

Should one or more of these risks or uncertainties materialize, or should any of these assumptions prove incorrect, our actual results may vary in material respects from those projected in any forward-looking statements. A detailed discussion of these and other factors that may affect future results is contained in our filings with the Securities and Exchange Commission, including in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2018. Stockholders, potential investors and other readers should consider these factors carefully in evaluating the forward-looking statements.

 

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

 

Overview

 

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

 

Business Drivers 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 Drivers and Trends

 

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

 

Increasing penetration opportunity. Many potential customers are still not aware of the costs and benefits of automatic backup power solutions. We estimate that penetration rates for home standby generators are only approximately 4.5% of U.S. single-family detached, owner-occupied households with a home value of over $100,000, as defined by the U.S. Census Bureau's 2017 American Housing Survey for the United States. The decision to purchase backup power for many light-commercial buildings such as convenience stores, restaurants and gas stations is more return-on-investment driven and as a result, these applications have relatively lower penetration rates as compared to buildings used in code-driven or mission critical applications such as hospitals, wastewater treatment facilities, 911 call centers, data centers and certain industrial locations. The emergence of lower cost, cleaner burning natural gas-fueled generators has helped to increase the penetration of standby generators over the past decade in the light-commercial market. In addition, the installed base of backup power for telecommunications infrastructure is still increasing due to the growing importance for uninterrupted voice and data services, in particular as 5G networks roll-out. We believe by expanding our distribution network, continuing to develop our product line and targeting our marketing efforts, we can continue to build awareness and increase penetration for our standby generators for residential, commercial and industrial purposes.

 

Effect of large scale and baseline power disruptions. Power disruptions are an important driver of customer awareness for back-up power and have historically influenced demand for generators, both in the United States and internationally. Increased frequency and duration of major power outage events, that have a broader impact beyond a localized level, increases product awareness and may drive consumers to accelerate their purchase of a standby or portable generator during the immediate and subsequent period, which we believe may last for six to twelve months following a major power outage event for standby generators. For example, the major outage events that occurred during the second half of 2017 drove strong demand for portable and home standby generators, and the increased awareness of these products contributed to strong revenue growth in both 2017 and 2018. In addition, demand for home standby generators is currently increasing in the California market due to the threat of utility shut-offs that could cause major power outage events in the future. Major power disruptions are unpredictable by nature and, as a result, our sales levels and profitability may fluctuate from period to period. In addition, there are smaller, more localized power outages that occur frequently across the United States that drive the baseline level of demand for back-up power solutions. The level of baseline power outage activity occurring across the United States can also fluctuate, and may cause our financial results to fluctuate from year to year.

 

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

 

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

 

Factors Affecting Results of Operations

 

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

 

Effect of commodity, currency and component price fluctuations.    Industry-wide price fluctuations of key commodities, such as steel, copper and aluminum, along with other components we use in our products, as well as changes in labor costs required to produce our products, can have a material impact on our results of operations. Also, acquisitions in recent years have further expanded our commercial and operational presence outside of the United States. These international acquisitions, along with our existing global supply chain, expose us to fluctuations in foreign currency exchange rates and regulatory tariffs that can have a material impact on our results of operations.

 

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

 

Seasonality.    Although there is demand for our products throughout the year, in each of the past five years approximately 20% to 24% of our net sales occurred in the first quarter, 22% to 25% in the second quarter, 24% to 28% in the third quarter and 27% to 29% in the fourth quarter, with different seasonality depending on the occurrence, timing and severity of major power outage activity in each year. Major outage activity is unpredictable by nature and, as a result, our sales levels and profitability may fluctuate from period to period. The seasonality experienced during a major power outage, and for the subsequent quarters following the event, will vary relative to other periods where no major outage events occurred. We maintain a flexible production and supply chain infrastructure in order to respond to outage-driven peak demand.

 

Factors influencing interest expense and cash interest expense. Interest expense can be impacted by a variety of factors, including market fluctuations in LIBOR, interest rate election periods, interest rate swap agreements, repayments or borrowings of indebtedness, and amendments to our credit agreements. Interest expense decreased slightly during the six months ended June 30, 2019 compared to the six months ended June 30, 2018, primarily due to lower interest rate spreads resulting from Term Loan and ABL Facility amendments in June 2018 and new interest rate swaps beginning in July 2018. Refer to Note 12, “Credit Agreements,” to the condensed consolidated financial statements for further information.

 

Factors influencing provision for income taxes and cash income taxes paid.   We had approximately $347 million of tax-deductible goodwill and intangible asset amortization remaining as of December 31, 2018 related to our acquisition by CCMP Capital Advisors, LLC in 2006 that we expect to generate aggregate cash tax savings of approximately $90 million through 2021, assuming continued profitability of our U.S. business and a combined federal and state tax rate of 26%. 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 $32 million through 2020 and $26 million in 2021. Based on current business plans, we believe that our cash tax obligations through 2021 will be significantly reduced by these tax attributes, after which our cash tax obligation will increase. Other domestic acquisitions have resulted in additional tax deductible goodwill and intangible assets that will generate tax savings, but are not material to the Company’s condensed consolidated financial statements.

 

Acquisitions.   Over the years, we have executed a number of acquisitions that support our strategic plan. A summary of the recent acquisitions can be found in Note 1, “Description of Business and Basis of Presentation,” to the condensed consolidated financial statements in Item 1 of this quarterly report on Form 10-Q, and in Item 8 (Note 1 “Description of Business”) of the Annual Report on Form 10-K for the year ended December 31, 2018.

 

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Recent Updates

 

The Company recently completed two acquisitions – Neurio Technology, Inc. (“Neurio,” acquired on March 12, 2019) and Pika Energy, Inc. (“Pika,” acquired on April 26, 2019). Neurio is a leading energy data company focused on metering technology and sophisticated analytics to optimize energy use within a home or business. Pika is a manufacturer of energy storage technologies that capture and store solar or grid power for homeowners or business owners. Together, these acquisitions provide the Company with the technology to enter the rapidly developing market for energy management and storage. By combining Generac’s strong distribution, brand, and market creation capabilities with Neurio’s valuable energy monitoring technologies and Pika’s expertise in energy storage, we believe we are well positioned to offer a new, differentiated line of products and solutions to help homeowners and business owners reduce their overall energy costs.

 

Further information on these recent acquisitions can be found in Notes 1, “Description of Business and Basis of Presentation,” and Note 2, “Acquisitions” to the condensed consolidated financial statements in Item 1 of this quarterly report on Form 10-Q.

 

Results of Operations

 

Three months ended June 30, 2019 compared to the three months ended June 30, 2018

 

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

 

   

Three Months Ended June 30,

                 

(U.S. Dollars in thousands)

 

2019

   

2018

   

$ Change

   

% Change

 
                                 

Net sales

  $ 541,916     $ 497,581     $ 44,335       8.9 %

Cost of goods sold

    346,078       319,108       26,970       8.5 %

Gross profit

    195,838       178,473       17,365       9.7 %

Operating expenses:

                               

Selling and service

    52,309       48,269       4,040       8.4 %

Research and development

    17,694       12,616       5,078       40.3 %

General and administrative

    27,658       26,639       1,019       3.8 %

Amortization of intangible assets

    7,251       5,482       1,769       32.3 %

Total operating expenses

    104,912       93,006       11,906       12.8 %

Income from operations

    90,926       85,467       5,459       6.4 %

Total other income (expense), net

    (10,393 )     (12,854 )     2,461       -19.1 %

Income before provision for income taxes

    80,533       72,613       7,920       10.9 %

Provision for income taxes

    18,827       18,382       445       2.4 %

Net income

    61,706       54,231       7,475       13.8 %

Net income attributable to noncontrolling interests

    (252 )     970       (1,222 )     -126.0 %

Net income attributable to Generac Holdings Inc.

  $ 61,958     $ 53,261       8,697       16.3 %

 

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

  

   

Net Sales

                 
   

Three Months Ended June 30,

                 

(U.S. Dollars in thousands)

 

2019

   

2018

   

$ Change

   

% Change

 

Domestic

  $ 425,938     $ 383,679       42,259       11.0 %

International

    115,978       113,902       2,076       1.8 %

Total net sales

  $ 541,916     $ 497,581       44,335       8.9 %

 

   

Adjusted EBITDA

                 
   

Three Months Ended June 30,

                 
   

2019

   

2018

   

$ Change

   

% Change

 

Domestic

  $ 104,531     $ 90,602       13,929       15.4 %

International

    7,355       11,628       (4,273 )     -36.7 %

Total Adjusted EBITDA

  $ 111,886     $ 102,230       9,656       9.4 %

 

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

 

   

Three Months Ended June 30,

                 

(U.S. Dollars in thousands)

 

2019

   

2018

   

$ Change

   

% Change

 

Residential products

  $ 268,374     $ 246,398       21,976       8.9 %

Commercial & industrial products

    230,428       215,628       14,800       6.9 %

Other

    43,114       35,555       7,559       21.3 %

Total net sales

  $ 541,916     $ 497,581       44,335       8.9 %

 

Net sales.    The increase in Domestic sales for the three months ended June 30, 2019 was primarily due to strong growth in shipments of home standby generators, as well as strong C&I stationary generator shipments primarily driven by telecom customers. Partially offsetting the year-over-year sales growth was a decrease in sales of portable generators as the prior year quarter benefitted from channel replenishment following elevated outage activity.

 

International sales for the three months ended June 30, 2019 increased 1.8% compared to the prior year quarter. Core sales, which excludes the impact of the Selmec and Captiva acquisitions, as well as the unfavorable impact of currency, declined by approximately 3% due to the timing of certain large projects that shipped during the prior year quarter.

 

Overall, the net sales contribution from non-annualized recent acquisitions to the three months ended June 30, 2019 was $12.3 million.

 

Gross profit.    Gross profit margin for the second quarter of 2019 was 36.1% compared to 35.9% in the prior-year second quarter. The increase is driven by favorable sales mix and pricing actions, partially offset by realization of higher input costs, including regulatory tariffs, logistics costs, labor rates and commodities.

 

Operating expenses.   The increase in Operating expenses was primarily driven by recurring operating expenses from recent acquisitions, an increase in employee headcount related to strategic initiatives, higher intangible amortization expenses, and higher variable costs given the increased sales volumes.

 

Other expense.    The decrease in Other expense, net was primarily due to the $1.3 million loss on extinguishment of debt recorded in the second quarter of 2018 resulting from a $50.0 million voluntary prepayment of Term Loan debt that did not repeat in the second quarter of 2019.

 

Provision for income taxes.    The effective income tax rates for the three months ended June 30, 2019 and 2018 were 23.4% and 25.3%, respectively. The decrease in the effective income tax rate in 2019 was primarily driven by a higher mix of domestic pre-tax income and additional stock compensation deductions compared to the prior year quarter.

 

Net income attributable to Generac Holdings Inc.    The increase was primarily driven by higher operating earnings as outlined above and a lower effective tax rate during the current year quarter.

 

Adjusted EBITDA.   Adjusted EBITDA for the Domestic segment was $104.5 million, or 24.5% of net sales, as compared to $90.6 million, or 23.6% of net sales in the prior year quarter. Favorable sales mix, pricing initiatives and fixed operating cost leverage were partially offset by higher input costs, as well as increased employee costs and recurring operating expenses from recent acquisitions.

 

Adjusted EBITDA for the International segment, before deducting for non-controlling interests, was $7.4 million, or 6.3% of net sales, as compared to $11.6 million, or 10.2% of net sales, in the prior year. Unfavorable sales mix and decreased operating leverage contributed the decline.

 

Adjusted Net Income.    Adjusted Net Income of $74.9 million for the three months ended June 30, 2019 increased 8.8% from $68.9 million for the three months ended June 30, 2018, due to the factors outlined above.

 

See “Non-GAAP Measures” for a discussion of how we calculate Adjusted EBITDA and Adjusted Net Income and the limitations on their usefulness.

 

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Six months ended June 30, 2019 compared to the six months ended June 30, 2018

 

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

 

   

Six Months Ended June 30,

                 

(U.S. Dollars in thousands)

 

2019

   

2018

   

$ Change

   

% Change

 
                                 

Net sales

  $ 1,012,269     $ 897,672     $ 114,597       12.8 %

Cost of goods sold

    654,256       577,272       76,984       13.3 %

Gross profit

    358,013       320,400       37,613       11.7 %

Operating expenses:

                               

Selling and service

    99,598       92,889       6,709       7.2 %

Research and development

    31,303       24,469       6,834       27.9 %

General and administrative

    52,420       50,114       2,306       4.6 %

Amortization of intangible assets

    12,593       11,114       1,479       13.3 %

Total operating expenses

    195,914       178,586       17,328       9.7 %

Income from operations

    162,099       141,814       20,285       14.3 %

Total other expense, net

    (20,812 )     (24,015 )     3,203       -13.3 %

Income before provision for income taxes

    141,287       117,799       23,488       19.9 %

Provision for income taxes

    33,812       29,798       4,014       13.5 %

Net income

    107,475       88,001       19,474       22.1 %

Net income attributable to noncontrolling interests

    656       1,095       (439 )     -40.1 %

Net income attributable to Generac Holdings Inc.

  $ 106,819     $ 86,906     $ 19,913       22.9 %

 

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

 

   

Net Sales

                 
   

Six Months Ended June 30,

                 

(U.S. Dollars in thousands)

 

2019

   

2018

   

$ Change

   

% Change

 

Domestic

  $ 785,186     $ 686,355     $ 98,831       14.4 %

International

    227,083       211,317       15,766       7.5 %

Total net sales

  $ 1,012,269     $ 897,672     $ 114,597       12.8 %

 

   

Adjusted EBITDA

                 
   

Six Months Ended June 30,

                 
   

2019

   

2018

   

$ Change

   

% Change

 

Domestic

  $ 185,506     $ 156,077     $ 29,429       18.9 %

International

    13,508       17,934       (4,426 )     -24.7 %

Total Adjusted EBITDA

  $ 199,014     $ 174,011     $ 25,003       14.4 %

 

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

 

   

Six Months Ended June 30,

                 

(U.S. Dollars in thousands)

 

2019

   

2018

   

$ Change

   

% Change

 

Residential products

  $ 486,204     $ 436,872     $ 49,332       11.3 %

Commercial & industrial products

    439,552       390,753       48,799       12.5 %

Other

    86,513       70,047       16,466       23.5 %

Total net sales

  $ 1,012,269     $ 897,672     $ 114,597       12.8 %

 

Net sales.    The increase in Domestic sales for the six months ended June 30, 2019 was primarily due to strong growth in shipments of home standby generators, as well as strong C&I stationary generator shipments compared to the prior year period. These increases were partially offset by a decrease in sales of portable generators as the prior year benefitted from channel replenishment and elevated outage activity.

 

The increase in International sales for the six months ended June 30, 2019 was primarily due to continued market share gains and further execution of synergies, particularly in Europe, Middle East, China, and Brazil. This increase in sales was also driven by the Selmec and Captiva acquisitions, partially offset by an unfavorable foreign currency impact.

 

Overall, the net sales contribution from all non-annualized recent acquisitions to the six months ended June 30, 2019 was $27.2 million.

 

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Gross profit.    Gross profit margin for the six months ended June 30, 2019 was 35.4% compared to 35.7% in the prior-year period. The decrease in gross profit margin was the result of a favorable sales mix shift towards higher margin home standby generator sales and price increases implemented since prior year, more than offset by the impact of recent acquisitions and the realization of higher input costs, including regulatory tariffs, logistics costs, labor rates, and commodities.

 

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

 

Other expense.    The decrease in Other expense, net was primarily due to the $1.3 million loss on extinguishment of debt recorded in the second quarter of 2018 resulting from a $50.0 million voluntary prepayment of Term Loan debt that did not repeat in the current year, as well as an increase in investment income.

 

Provision for income taxes.    The effective income tax rates for the six months ended June 30, 2019 and 2018 were 23.9% and 25.3%, respectively. The decrease in the effective income tax rate in 2019 was primarily driven by a higher mix of domestic pre-tax income as well as additional stock compensation deductions and state tax credits compared to the prior year period.

 

Net income attributable to Generac Holdings Inc.    The increase was primarily driven by higher operating earnings as outlined above and a lower effective tax rate recorded during the current year period.

 

Adjusted EBITDA.   Adjusted EBITDA for the Domestic segment was $185.5 million, or 23.6% of net sales, as compared to $156.1 million in the prior year, or 22.7% of net sales. Adjusted EBITDA margin in the current year benefitted from favorable sales mix, pricing initiatives, and fixed operating cost leverage on the higher sales volumes. These favorable impacts were partially offset by higher input costs, increased employee costs and recurring operating expenses from recent acquisitions.

 

Adjusted EBITDA for the International segment, before deducting for non-controlling interests, was $13.5 million, or 5.9% of net sales, as compared to $17.9 million in the prior year, or 8.4% of net sales. The decrease in Adjusted EBITDA margin as compared to the prior year was primarily due to unfavorable sales mix, decreased operating leverage and higher input costs.

 

Adjusted Net Income.    Adjusted Net Income of $131.5 million for the six months ended June 30, 2019 increased 14.3% from $115.0 million for the six months ended June 30, 2018, due to the factors outlined above partially offset by an increase in cash income tax expense.

 

See “Non-GAAP Measures” for a discussion of how we calculate Adjusted EBITDA and Adjusted Net Income and the limitations on their usefulness.

 

Liquidity and Financial Condition

 

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

 

Our credit agreements originally provided for a $1.2 billion Term Loan and include a $300.0 million uncommitted incremental term loan facility. The Term Loan matures on May 31, 2023, and bears interest at rates based upon either a base rate plus an applicable margin of 0.75% or adjusted LIBOR rate plus an applicable margin of 1.75%, subject to a LIBOR floor of 0.75%. The Term Loan does not require an Excess Cash Flow payment if the Company’s secured leverage ratio is maintained below 3.75 to 1.00 times. As of June 30, 2019, the Company’s secured leverage ratio was 1.81 to 1.00 times, and the Company was in compliance with all covenants of the Term Loan. There are no financial maintenance covenants on the Term Loan.

 

Our credit agreements also provide for the $300.0 million ABL Facility. The maturity date of the ABL Facility is June 12, 2023. As of June 30, 2019, there were $26.4 million of borrowings outstanding and $273.2 million of availability under the ABL Facility, net of outstanding letters of credit. We are in compliance with all covenants of the ABL Facility as of June 30, 2019.

 

In August 2015, our Board of Directors approved a $200.0 million stock repurchase program, which we completed in the third quarter of 2016. In October 2016, our Board of Directors approved a new $250.0 million stock repurchase program, which expired in the fourth quarter of 2018. In September 2018, the Board of Directors approved another stock repurchase program, which commenced in October 2018, and under which we may repurchase an additional $250.0 million of common stock over 24 months from time to time; in amounts and at prices we deem appropriate, subject to market conditions and other considerations. During the six months ended June 30, 2018, we repurchased 560,000 shares of our common stock for $25.7 million. There were no share repurchases during the six months ended June 30, 2019. Since the inception of all programs, we have repurchased 8,676,706 shares of our common stock for $305.5 million, all funded with cash on hand.

 

See Note 12, “Credit Agreements” to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

 

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Long-term Liquidity

 

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

 

Cash Flow

 

Six months ended June 30, 2019 compared to the six months ended June 30, 2018

 

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

 

 

Six Months Ended June 30,

   

(U.S. Dollars in thousands)

2019

 

2018

 

$ Change

 

% Change

               

Net cash provided by operating activities

 $                 22,614

 

 $                 79,657

 

 $               (57,043)

 

-71.6%

Net cash used in investing activities

                (145,872)

 

                  (82,127)

 

                  (63,745)

 

77.6%

Net cash provided by (used in) financing activities

                      8,158

 

                  (23,880)

 

                    32,038

 

-134.2%

 

 

The decrease in net cash provided by operating activities was driven by a variety of factors including higher working capital investments, timing of tax payments, as well as higher incentive compensation payments in the current year period partially offset by an increase in operating earnings as compared to the prior year period.

 

Net cash used in investing activities for the six months ended June 30, 2019 primarily represents cash payments of $112.9 million related to the acquisition of businesses and $34.4 million related to the purchase of property and equipment. Net cash used in investing activities for the six months ended June 30, 2018 primarily represents cash payments of $71.9 million related to the acquisition of businesses and $12.3 million for the purchase of property and equipment.

 

Net cash provided by financing activities for the six months ended June 30, 2019 primarily represents $35.8 million of cash proceeds from short-term borrowings partially offset by $26.3 million of debt repayments ($24.3 million of short-term borrowings and $2.0 million of long-term borrowings and finance lease obligations).

 

Net cash used in financing activities for the six months ended June 30, 2018 primarily represents $59.0 million of debt repayments ($50.8 million of long-term borrowings and finance lease obligations and $8.2 million of short-term borrowings) and $25.7 million cash used for the repurchase of our common stock. These payments were partially offset by $62.1 million of cash proceeds from borrowings ($50.0 million long-term and $12.1 million short-term).

 

Contractual Obligations

 

There have been no material changes to our contractual obligations since the February 26, 2019 filing of our Annual Report on Form 10-K for the year ended December 31, 2018.

 

Off-Balance Sheet Arrangements

 

There have been no material changes to off-balance sheet arrangements since the February 26, 2019 filing of our Annual Report on Form 10-K for the year ended December 31, 2018.

 

Critical Accounting Policies

 

There have been no material changes in our critical accounting policies since the February 26, 2019 filing of our Annual Report on Form 10-K for the year ended December 31, 2018.

 

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As discussed in our Annual Report on Form 10-K for the year ended December 31, 2018, in preparing the financial statements in accordance with U.S. GAAP, management is required to make estimates and assumptions that have an impact on the asset, liability, revenue and expense amounts reported. These estimates can also affect supplemental information disclosures of the Company, including information about contingencies, risk and financial condition. The Company believes, given current facts and circumstances, its estimates and assumptions are reasonable, adhere to U.S. GAAP, and are consistently applied. Inherent in the nature of an estimate or assumption is the fact that actual results may differ from estimates and estimates may vary as new facts and circumstances arise. The Company makes routine estimates and judgments in determining net realizable value of accounts receivable, inventories, property and equipment, prepaid expenses, product warranties and other reserves. Management believes the Company’s most critical accounting estimates and assumptions are in the following areas: goodwill and other indefinite-lived intangible asset impairment assessment; business combinations and purchase accounting; defined benefit pension obligations and income taxes.

 

Non-GAAP Measures

 

Adjusted EBITDA

 

The computation of Adjusted EBITDA attributable to Generac Holdings Inc. is based on the definition of EBITDA contained in our credit agreement, as amended. To supplement our condensed consolidated financial statements presented in accordance with U.S. GAAP, we provide the computation of Adjusted EBITDA attributable to the Company, taking into account certain charges and gains that were recognized during the periods presented.

 

We view Adjusted EBITDA as a key measure of our performance. We present Adjusted EBITDA not only due to its importance for purposes of our credit agreements but also because it assists us in comparing our performance across reporting periods on a consistent basis as 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 2019 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 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 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 Term Loan and ABL Facility, and also are presented to illustrate the operating performance of our business in a manner consistent with the presentation used by our management and 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, 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.

 

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We explain in more detail in footnotes (a) through (e) 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 of our assets as reflected in our consolidated balance sheet prepared in accordance with U.S. GAAP; and

 

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

 

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

 

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

 

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

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 

(U.S. Dollars in thousands)

 

2019

   

2018

   

2019

   

2018

 
                                 

Net income attributable to Generac Holdings Inc.

  $ 61,958     $ 53,261     $ 106,819     $ 86,906  

Net (loss) income attributable to noncontrolling interests

    (252 )     970       656       1,095  

Net income

    61,706       54,231       107,475       88,001  

Interest expense

    10,452       11,002       20,724       21,115  

Depreciation and amortization

    14,740       11,600       27,347       23,283  

Provision for income taxes

    18,827       18,382       33,812       29,798  

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

    1,726       1,316       326       2,622  

Non-cash share-based compensation expense (b)

    4,334       3,885       7,928       6,991  

Loss on extinguishment of debt (c)

    -       1,332       -       1,332  

Transaction costs and credit facility fees (d)

    413       441       1,699       703  

Business optimization expenses (e)

    73       29       242       167  

Other

    (385 )     12       (539 )     (1 )

Adjusted EBITDA

    111,886       102,230       199,014       174,011  

Adjusted EBITDA attributable to noncontrolling interests

    763       2,630       2,813       4,179  

Adjusted EBITDA attributable to Generac Holdings Inc.

  $ 111,123     $ 99,600     $ 196,201     $ 169,832  

 

(a)   Represents the following non-cash charges: transactional foreign currency gains/losses and certain purchase accounting related adjustments, gains/losses on disposals of assets and unrealized mark-to-market adjustments on commodity contracts. We believe that adjusting net income for these non-cash charges is useful for the following reasons:

 

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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.

 

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; and

  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.

 

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

 

(c) Represents the non-cash write-off of original issue discount and deferred financing costs due to a voluntary prepayment of Term Loan debt.

 

(d) Represents transaction costs incurred directly in connection with any investment, as defined in our credit agreement, equity issuance or debt issuance or refinancing, together with certain fees relating to our senior secured credit facilities, such as administrative agent fees and credit facility commitment fees under our Term Loan and ABL Facility, which we believe to be akin to, or associated with, interest expense and whose inclusion in Adjusted EBITDA is therefore similar to the inclusion of interest expense in that calculation.

 

(e) Represents severance and other non-recurring restructuring charges related to the consolidation of certain of our facilities. These charges represent expenses that are not from our core operations and do not reflect our ongoing operations.

 

Adjusted Net Income

 

To further supplement our condensed consolidated financial statements in accordance with U.S. GAAP, we provide the computation of Adjusted Net Income attributable to the Company, which is defined as net income before noncontrolling interest and provision for income taxes adjusted for the following items: cash income tax expense, amortization of intangible assets, amortization of deferred financing costs and original issue discount related to our debt, intangible impairment charges, certain transaction costs and other purchase accounting adjustments, losses on extinguishment of debt, business optimization expenses, certain other non-cash gains and losses, and adjusted net income attributable to noncontrolling interests, as set forth in the reconciliation table below. 

 

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

 

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

 

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

 

 

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

 

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

 

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

 

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

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 

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

 

2019

   

2018

   

2019

   

2018

 
                                 

Net income attributable to Generac Holdings Inc.

  $ 61,958     $ 53,261     $ 106,819     $ 86,906  

Net (loss) income attributable to noncontrolling interests

    (252 )     970       656       1,095  

Net income

    61,706       54,231       107,475       88,001  

Provision for income taxes

    18,827       18,382       33,812       29,798  

Income before provision for income taxes

    80,533       72,613       141,287       117,799  

Amortization of intangible assets

    7,251       5,482       12,593       11,114  

Amortization of deferred finance costs and original issue discount

    1,199       1,190       2,376       2,367  

Loss on extinguishment of debt

    -       1,332       -       1,332  

Transaction costs and other purchase accounting adjustments (a)

    173       794       1,208       814  

Business optimization expenses

    73       29       242       167  

Adjusted net income before provision for income taxes

    89,229       81,440       157,706       133,593  

Cash income tax expense (b)

    (14,105 )     (11,114 )     (24,615 )     (16,524 )

Adjusted net income

    75,124       70,326       133,091       117,069  

Adjusted net income attributable to noncontrolling interests

    222       1,383       1,696       2,044  

Adjusted net income attributable to Generac Holdings Inc.

  $ 74,902     $ 68,943     $ 131,395     $ 115,025  
                                 

Adjusted net income per common share attributable to Generac Holdings Inc. - diluted:

  $ 1.20     $ 1.11     $ 2.11     $ 1.85  

Weighted average common shares outstanding - diluted:

    62,405,863       62,054,447       62,349,030       62,259,712  

 

(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.

 

(b) Amounts for the three and six months ended June 30, 2019 are now based on an anticipated cash income tax rate of approximately 17% to 18% for the full year ended 2019. Amounts for the three and six months ended June 30, 2018 are based on an anticipated cash income tax rate of approximately 14% for the full year ended 2018. Cash income tax expense for the respective periods 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 for each respective period by applying the derived full year cash tax rate to the period’s pretax income.

 

New Accounting Standards

 

Refer to Note 1, “Description of Business and Basis of Presentation,” to the condensed consolidated financial statements for further information on the new accounting standards applicable to the Company.

 

Item 3.          Quantitative and Qualitative Disclosures about Market Risk

 

Refer to Note 4, “Derivative Instruments and Hedging Activities,” to the condensed consolidated financial statements for a discussion of changes in commodity, currency and interest rate related risks and hedging activities. Otherwise, there have been no material changes in market risk from the information provided in Item 7A (Quantitative and Qualitative Disclosures About Market Risk) of our Annual Report on Form 10-K for the year ended December 31, 2018.

 

Item 4.           Controls and Procedures

 

Disclosure Controls and Procedures

 

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) or 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended, or the Exchange Act. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

 

Changes in Internal Control Over Financial Reporting

 

There have been no changes during the three months ended June 30, 2019 in our internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II. OTHER INFORMATION

 

Item 1.          Legal Proceedings

 

From time to time, we are involved in legal proceedings primarily involving product liability, employment matters and general commercial disputes arising in the ordinary course of our business. As of June 30, 2019, we believe there is no litigation pending that would have a material effect on our results of operations or financial condition.

 

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Table of Contents

 

Item 1A.      Risk Factors

 

There have been no material changes in our risk factors since the February 26, 2019 filing of our Annual Report on Form 10-K for the year ended December 31, 2018.

 

Item 2.           Unregistered Sales of Equity Securities and Use of Proceeds

 

The following table summarizes the stock repurchase activity for the three months ended June 30, 2019, which consisted of the withholding of shares upon the vesting of restricted stock awards to pay related withholding taxes on behalf of the recipient: 

 

   

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

 
                                 

04/01/2019 – 04/30/2019

    88     $ 58.07       -     $ 250,000,000  

05/01/2019 – 05/31/2019

    389     $ 58.58       -       250,000,000  

06/01/2019 – 06/30/2019

    106     $ 59.72       -     $ 250,000,000  

Total

    583     $ 57.80                  

 

For equity compensation plan information, please refer to our Annual Report on Form 10-K for the year ended December 31, 2018. For information on the Company’s stock repurchase plans, refer to Note 13, “Stock Repurchase Program,” to the condensed consolidated financial statements.

 

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Table of Contents

 

Item 6.           Exhibits

 

Exhibits
Number

 

Description

10.1

Generac Holdings Inc. 2019 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 26, 2019).

   

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 materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2019 formatted in Inline eXtensible Business Reporting Language (iXBRL): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Comprehensive Income, (iii) the Condensed Consolidated Statements of Stockholders’ Equity, (iv) the Condensed Consolidated Statements of Cash Flows, and (v) related Notes to Condensed Consolidated Financial Statements.

    

* Filed herewith.

**

Furnished herewith

 

32

Table of Contents

 

SIGNATURES

 

Pursuant to the requirements 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/ York A. Ragen

   

York A. Ragen

     
   

Chief Financial Officer
(Duly Authorized Officer and Principal Financial and Accounting Officer)

 

Dated: August 6, 2019

 

33

 

ex_151464.htm

Exhibit 31.1

 

CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO
SECURITIES EXCHANGE ACT RULES 13a-14(a) AND 15d-14(a), AS ADOPTED
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

I, Aaron Jagdfeld, certify that:

 

 

1.

I have reviewed this quarterly report on Form 10-Q of Generac Holdings Inc.; 

 

 

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 

 

 

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 

 

 

4.

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: 

 

 

a.

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; 

 

 

b.

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

 

 

c.

Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and 

 

 

d.

Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 

 

 

5.

The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): 

 

 

a.

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and 

 

 

b.

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 

 

 

Date:  August 6, 2019

 

 

/s/ Aaron Jagdfeld

           

 

 

 

Name:

 

Aaron Jagdfeld

           

 

 

 

Title:

 

Chief Executive Officer

 

ex_151465.htm

Exhibit 31.2

 

CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO
SECURITIES EXCHANGE ACT RULES 13a-14(a) AND 15d-14(a), AS ADOPTED
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

I, York A. Ragen, certify that:

 

 

1.

I have reviewed this quarterly report on Form 10-Q of Generac Holdings Inc.; 

 

 

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 

 

 

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 

 

 

4.

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: 

 

 

a.

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; 

 

 

b.

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

 

 

c.

Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and 

 

 

d.

Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 

 

 

5.

The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): 

 

 

a.

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and 

 

 

b.

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 

 

 

Date:  August 6, 2019

 

 

/s/ York A. Ragen

       

 

 

 

Name:

 

York A. Ragen

           

 

 

 

Title:

 

Chief Financial Officer

ex_151466.htm

Exhibit 32.1

 

CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
BY SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

        Pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, as Chief Executive Officer of Generac Holdings Inc. (the “Company”), does hereby certify that to my knowledge:

 

 

1.

the Company's quarterly report on Form 10-Q for the fiscal quarter ended June 30, 2019 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

 

 

2.

the information contained in the Company's quarterly report on Form 10-Q for the fiscal quarter ended June 30, 2019 fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

 

 

Date: August 6, 2019

 

 

/s/ Aaron Jagdfeld

       

 

 

 

Name:

 

Aaron Jagdfeld

           

 

 

 

Title:

 

Chief Executive Officer

 

ex_151467.htm

Exhibit 32.2

 

CERTIFICATION OF THE CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
BY SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

        Pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, as Chief Financial Officer of Generac Holdings Inc. (the “Company”), does hereby certify that to my knowledge:

 

 

1.

the Company's quarterly report on Form 10-Q for the fiscal quarter ended June 30, 2019 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

 

 

2.

the information contained in the Company's quarterly report on Form 10-Q for the fiscal quarter ended June 30, 2019 fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

 

 

Date: August 6, 2019

 

 

/s/ York A. Ragen

       

 

 

 

Name:

 

York A. Ragen

           

 

 

 

Title:

 

 

Chief Financial Officer