gnrc20181231_10k.htm
 

Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549


FORM 10-K

 

(Mark One)

 

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

For the fiscal year ended December 31, 2018

Or

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

For the transition period from        to

 

Commission File Number 001-34627


GENERAC HOLDINGS INC.

(Exact name of registrant as specified in its charter)

 

DELAWARE
(State or other jurisdiction of incorporation or organization)

20-5654756
(IRS Employer Identification No.)

   

S45 W29290 Hwy 59, Waukesha, WI
(Address of principal executive offices)

53189
(Zip Code)

 

(262) 544-4811
(Registrant’s telephone number, including area code)

 

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

 

Common Stock, $0.01 par value
(Title of class)

New York Stock Exchange
(Name of exchange on which registered)

   

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None

 


     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐

     Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒

 

     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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐

 

     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 ☒

 

     The aggregate market value of the voting common equity held by non-affiliates of the registrant on June 29, 2018, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $3,115,194,826 based upon the closing price reported for such date on the New York Stock Exchange.

 

     As of February 19, 2019, 62,129,621 shares of registrant's common stock were outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the registrant’s Annual Report to Stockholders for the year ended December 31, 2018 furnished to the Securities and Exchange Commission are incorporated by reference into Part II of this Form 10-K. Portions of the registrant’s Proxy Statement for the 2019 Annual Meeting of Stockholders (the “2019 Proxy Statement”), which will be filed by the registrant on or prior to 120 days following the end of the registrant’s fiscal year ended December 31, 2018, are incorporated by reference into Part III of this Form 10-K.



 

 

 

 

2018 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

 

   

Page

PART I

 

Item 1.

Business

1

Item 1A.

Risk Factors

8

Item 1B.

Unresolved Staff Comments

15

Item 2.

Properties

16

Item 3.

Legal Proceedings

16

Item 4.

Mine Safety Disclosures

16

 

PART II

 

Item 5.

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

16

Item 6.

Selected Financial Data

18

Item 7.

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

23

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

35

Item 8.

Financial Statements and Supplementary Data

37

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

70

Item 9A.

Controls and Procedures

70

Item 9B.

Other Information

71

 

PART III

 

Item 10.

Directors, Executive Officers and Corporate Governance

71

Item 11.

Executive Compensation

71

Item 12.

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

71

Item 13.

Certain Relationships and Related Transactions, and Director Independence

72

Item 14.

Principal Accountant Fees and Services

72

 

PART IV

 

Item 15.

Exhibits and Financial Statement Schedules

72

Item 16.

Form 10-K Summary

74

 

 

 

Forward-Looking Statements

 

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

 

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

 

 

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

 

proposed new product and service offerings; and

 

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

 

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

 

 

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;

 

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 Item 1A of this Annual Report on Form 10-K. Stockholders, potential investors and other readers should consider these factors carefully in evaluating the forward-looking statements.

 

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

 

PART I

 

Item 1. Business

 

Founded in 1959, Generac Holdings Inc. (the Company or Generac) is a leading global designer and manufacturer of a wide range of power generation equipment and other power products serving the residential, light commercial and industrial markets. Power generation is 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 engine powered products that we design and manufacture include light towers which provide temporary lighting for various end markets; commercial and industrial mobile heaters and pumps used in the oil & gas, construction and other industrial markets; and a broad product line of outdoor power equipment for residential and commercial use.

 

 

We design, manufacture, source and modify engines, alternators, transfer switches and other components necessary for our products, which are fueled by natural gas, liquid propane, gasoline, diesel and Bi-Fuel™. Our products are available globally through a broad network of independent dealers, distributors, retailers, wholesalers and equipment rental companies under a variety of brand names. We also sell direct to certain national and regional account customers, as well as to individual consumers, that are the end users of our products.

 

We have a significant market share in the residential and light commercial markets for automatic standby generators, which we believe remain under-penetrated in the marketplace. We also have a leading market position for portable generators used in residential, light construction and recreational applications. We believe that our leading market position is largely attributable to our strategy of providing a broad product line of high-quality, innovative and affordable products through our extensive and multi-layered distribution network to whom we offer comprehensive support and programs from the factory. In addition, we are a leading provider of light towers, mobile generators, flameless heaters, outdoor power equipment and industrial diesel generators ranging in sizes up to 3,250kW.

 

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

 

Products

 

We design and manufacture stationary, portable and mobile generators with single-engine outputs ranging between 800W and 3,250kW. We have the ability to expand the power range for certain stationary generator solutions to much larger multi-megawatt systems through an integrated paralleling configuration called Modular Power Systems (MPS). Other engine powered products that we design and manufacture include light towers, mobile heaters, power washers and water pumps, along with a broad line of outdoor power equipment. We classify our products into three categories based on similar range of power output geared for varying end customer uses: Residential products, Commercial & Industrial (C&I) products and Other products. The following summary outlines our portfolio of products, including their key attributes and customer applications.

 

Residential Products

 

Our residential automatic standby generators range in output from 6kW to 60kW, operate on natural gas, liquid propane or diesel, and are permanently installed with an automatic transfer switch, which we also manufacture. Air-cooled engine residential standby generators range in outputs from 6kW to 22kW, are available in steel and aluminum enclosures and serve as an emergency backup for small to medium-sized homes. Liquid-cooled engine generators serve as emergency backup for larger homes and small businesses and range in output from 22kW to 60kW. We also provide a remote monitoring system for home standby generators called Mobile Link™, which allows our customers to check the status of their generator conveniently from a desktop PC, tablet computer or smartphone, and also provides the capability to receive maintenance and service alerts.

 

We provide a broad product line of portable and inverter generators that are fueled predominantly by gasoline, with certain models running on propane and diesel fuel, which range in size from 800W to 17.5kW. These products serve as an emergency home backup source of electricity and are also used for construction and recreational purposes. Our portable generators are targeted at homeowners, with price points ranging between the consumer value end of the market through the premium homeowner market; at professional contractors, starting at the value end through the premium contractor segment; and at the recreational market with our inverter product line. In addition, we offer manual transfer switches to supplement our portable generator product offering.

 

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

 

 

Further, we provide a broad product line of outdoor power equipment that includes trimmer & brush mowers, log splitters, lawn & leaf vacuums, and chipper shredders for the property maintenance needs of larger-acreage residences, commercial properties, municipalities and farms. These products are largely sold in North America through on-line catalogs, retail hardware stores and outdoor power equipment dealers primarily under the DR® brand name.

 

Residential products comprised 51.5%, 51.8% and 53.1%, respectively, of total net sales in 2018, 2017 and 2016.

 

Commercial & Industrial Products

 

We offer a full line of C&I generators fueled by diesel, natural gas, liquid propane and Bi-Fuel™. We believe we have one of the broadest product offerings in the industry with power outputs ranging from 10kW up to 3,250kW.

 

Our light-commercial standby generators include a full range of affordable systems from 22kW to 150kW and related transfer switches, providing three-phase power sufficient for most small and mid-sized businesses such as grocery stores, convenience stores, restaurants, gas stations, pharmacies, retail banks, small health care facilities and other small-footprint retail applications. Our light-commercial generators run on natural gas, liquid propane and diesel fuel.

 

We manufacture a broad product line of standard and configured stationary generators and related transfer switches for various industrial standby, continuous-duty and prime rated applications. Our single-engine industrial generators range in output from 10kW up to 3,250kW, which includes stationary and containerized packages, with our MPS technology extending our product range up to much larger multi-megawatt systems through an integrated paralleling configuration. We offer four fuel options for our industrial generators, including diesel, natural gas, liquid propane or Bi-Fuel™. Bi-Fuel™ generators operate on a combination of both diesel and natural gas to allow our customers the advantage of multiple fuel sources and extended run times. Our industrial standby generators are primarily used as emergency backup for larger applications in the healthcare, telecom, datacom, commercial office, municipal and manufacturing markets.

 

Our MPS technology combines the power of several smaller generators to produce the output of a larger generator, providing our customers with redundancy and scalability in a cost-effective manner. For larger industrial applications, our MPS products offer customers an efficient, affordable way to scale their standby power needs, and also offer superior reliability given their built-in redundancy which allows individual units to be taken off-line for routine maintenance while retaining coverage for critical circuits.

 

We provide a broad product line of light towers, mobile generators and mobile heaters, which provide temporary lighting, power and heat for various end markets, such as road and commercial construction, energy, mining, military and special events. We manufacture commercial mobile pumps which utilize wet and dry-priming pump systems for a wide variety of wastewater applications. We also manufacture various gaseous-engine control systems and accessories, which are sold to gas-engine manufacturers and aftermarket customers.

 

The acquisition of Selmec in June 2018 increased our industrial generator market share within the Latin American markets, as well as added specialized engineering capabilities.

 

C&I products comprised 40.6%, 40.8% and 38.6% respectively, of total net sales in 2018, 2017 and 2016.

 

Other Products

 

Our “Other Products” category primarily consists of aftermarket service parts and product accessories sold to our dealers, and the amortization of extended warranty deferred revenue. The acquisition of Selmec added a service platform, including robust integration, project management and remote monitoring services.

 

Other products comprised 7.9%, 7.4% and 8.3%, respectively, of total net sales in 2018, 2017 and 2016.

 

Distribution Channels and Customers

 

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

 

 

We believe our distribution network is a competitive advantage that has strengthened over the years as a result of adding, expanding and developing the various distribution channels through which we sell our products. We offer a broad set of tools, programs and factory support to help our distribution partners be successful. Our network is well balanced with no customer providing more than 6% of our sales in 2018.

 

Our overall dealer network located around the world is the industry's largest network of factory direct independent generator contractors in North America.

 

Our residential/light commercial dealer network sells, installs and services our residential and light commercial products to end users. We have increased our level of investment in recent years by focusing on a variety of initiatives to more effectively market and sell our home standby products and better align our dealer network with Generac.

 

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

 

Our retail distribution network includes thousands of locations across the globe and includes a variety of regional and national home improvement chains, retailers, clubs, buying groups and farm supply stores. These physical retail locations are supplemented by a growing presence of e-commerce retailers, along with a number of catalog retailers. This network primarily sells our residential standby, portable and light-commercial generators, as well as our other engine powered tools. The placement of our products at retail locations drives significant awareness for our brands and the automatic home standby product category.

 

Our wholesaler network distributes our residential and light-commercial generators, and consists of selling branches of both national and local distribution houses for electrical and HVAC products on a wholesale basis. They typically sell to electrical contractors who are not in our dealer network.

 

On a selective basis, we have established private label and licensing arrangements with third party partners to provide residential, light-commercial and industrial generators. These partners include leading home equipment, electrical equipment and construction machinery companies, each of which provides access to incremental channels of distribution for our products.

 

The distribution for our C&I mobile products includes international, national, regional and specialty equipment rental companies, equipment distributors and construction companies, which primarily serve non-residential building construction, road construction, energy markets and special events. In addition, international acquisitions over the years have provided access to numerous independent distributors in over 150 countries.

 

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

 

Business Strategy

 

We have been executing on our strategic plan, which serves as the framework for the significant investments we have made to capitalize on the long-term growth prospects of Generac. As we continue to move our strategic plan into the future, we are focused on a number of initiatives that are driven by the following four key objectives, which are now called “Powering Our Future”:

 

Growing the residential standby generator market. As the leader in the home standby generator market, it is incumbent upon us to continue to drive growth and increase the penetration rate of these products in households across the world. Central to this strategy is to increase the awareness, availability and affordability of home standby generators. Ongoing power outage activity, combined with expanding our residential/light commercial dealer base and overall distribution in affected regions, are key drivers in elevating the awareness of home standby generators over the long term. We intend to continue to supplement these key growth drivers by focusing on a variety of strategic initiatives targeted toward generating more sales leads, improving close rates and reducing the total overall cost of a home standby system. In addition, we intend to continue to focus on innovation in this growing product category and introduce new products into the marketplace. With only approximately 4.5% penetration of the addressable market of homes in the United States (which we define as single-family detached, owner-occupied households with a home value of over $100,000, as defined by the U.S. Census Bureau's 2017 American Housing Survey for the United States), we believe there are opportunities to further penetrate the residential standby generator market both domestically and internationally.

 

 

Gaining market share. We continue to put a strong focus on improving our share of the power equipment markets in which we participate around the world by emphasizing our innovation and continually expanding our product lines and services. We design and build a wide range of products from portable, stationary and mobile generators, power washers, light towers, mobile heaters, pumps, brush mowers and trimmers, and other engine powered equipment. Being number one or number two in all of these categories globally is our goal. We have many advantages over our competitors with strengths in our engineering and operations capabilities as well as a global distribution network that we believe can be leveraged further for continued market share gains in the markets we serve around the world.

 

Lead with gas power generation products. We will attempt to gain incremental market share within commercial and industrial markets through our leading position in the growing market for cleaner burning, more cost effective natural gas fueled standby power solutions. While still a smaller portion of the overall C&I market, we believe demand for these products continues to increase at a faster rate than traditional diesel fueled generators as a result of their lower capital investment and operating costs. We also intend to explore new gaseous generator related market opportunities, including increasing our product capabilities for continuous-duty and prime rated applications, by leveraging our deep technical capabilities for gaseous-fueled products, leading position for natural gas standby generators and growing market acceptance for these products. As part of this strategy, we plan to continue to expand our natural gas product offering into larger power nodes to take advantage of the continuing shift from diesel to natural gas generators.

 

Connect with customers, partners and product. We will work to diversify our business model from solely “equipment centric” to a systems and services provider through connectivity solutions and subscription based applications deployed enterprise wide. The first step is increasing connection with our products to unlock opportunities and revenue streams. We will develop tools and programs that add value to dealers and end-users that will result in recurring revenue from subscriptions and parts. We will leverage data obtained from connected devices  by developing predictive analytics that result in continuously improving product quality, sales processes and tools, energy optimization, aftermarket penetration, customer experience and alignment with dealers. Finally, we will build or acquire energy management capabilities to monetize an ecosystem of devices that relate to energy use, storage, generation, control and optimization.

 

While expansion globally is no longer one of the four key objectives in the Powering Our Future strategic plan, it becomes a core piece to the success of each of the objectives. The recent acquisitions that now comprise our International segment have significantly increased our global presence by adding product, manufacturing and distribution capabilities that serve local markets around the world, and have resulted in us becoming a leading global player in the markets for backup power and mobile power equipment. As we look forward, we intend to leverage our increased international footprint attained from these acquisitions to serve the over $13 billion annual market for power generation equipment outside the U.S. and Canada through each of the key objectives discussed above.

 

See “Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations – Business Drivers and Trends” for additional drivers that influence demand for our products and other trends affecting the markets that we serve.

 

Manufacturing

 

We operate numerous manufacturing plants, distribution facilities and inventory warehouses located throughout the world. We store finished goods at third-party logistics providers in the United States that accommodate material storage and rapid response requirements of our customers. See “Item 2 – Properties” for additional details regarding the locations and activities of our principal operations.

 

In recent years, we have added manufacturing capacity through investments in automation, improved utilization and the expansion of our manufacturing footprint through organic means as well as through acquisitions. We believe we have sufficient capacity to achieve our business goals for the near-to-intermediate term.

 

Research and Development

 

Our primary focus on power generation equipment and other power products drives technological innovation, specialized engineering and manufacturing competencies. Research and development (R&D) is a core competency and includes a staff of over 400 engineers working on numerous projects at various facilities worldwide. These activities are focused on developing new technologies and product enhancements as well as maintaining product competitiveness by improving manufacturing costs, safety characteristics, reliability and performance while ensuring compliance with regulatory standards. We have over 35 years of experience using natural gas engines and have developed specific expertise with fuel systems and emissions technology. In the residential and light commercial markets, we have developed proprietary engines, cooling packages, controls, fuel systems and emissions systems. We believe that our expertise in power equipment gives us the capability to develop new products that will allow continued diversification in our end markets.

 

 

Intellectual Property

 

We are committed to research and development, and we rely on a combination of patents and trademarks to establish and protect our proprietary rights. Our patents protect certain features and technologies we have developed for use in our products including fuel systems, air flow, electronics and controls, noise reduction and air-cooled engines. We believe the existence of these patents and trademarks, along with our ongoing processes to register additional patents and trademarks, protect our intellectual property rights and enhance our competitive position. We also use proprietary manufacturing processes that require customized equipment. With our continuous focus on research and development, we expect to develop new intellectual property on an ongoing basis.

 

Suppliers of Raw Materials

 

Our primary raw material inputs are steel, copper and aluminum, all of which are purchased from third parties and, in many cases, as part of machined or manufactured components. We have developed an extensive network of reliable suppliers in the United States and internationally. Our Strategic Global Sourcing function continuously evaluates the quality and cost structure of our purchased components and assesses the capabilities of our supply chain. Components are sourced accordingly based on this evaluation. Our supplier quality engineers conduct on-site audits of major supply chain partners and help to maintain the reliability of critical sourced components.

 

Competition

 

The market for power generation equipment and other engine powered products is competitive. We face competition from a variety of large diversified industrial companies as well as smaller generator manufacturers, along with mobile equipment and engine powered tools providers, both domestic and internationally. However, specifically in the generator market, most of the traditional participants compete on a more specialized basis, focused on specific applications within their larger diversified product mix. We are the only significant market participant with a primary focus on power equipment with a core emphasis on standby, portable and mobile generators with broad capabilities across the residential, light-commercial and industrial markets. We believe that our engineering capabilities and core focus on generators provide us with manufacturing flexibility and enables us to maintain a first-mover advantage over our competition for product innovation. We also believe our broad product offering, diverse omni-channel distribution model and strong factory support provide additional advantages as well.

 

A summary of the primary competitors across our main product classes are as follows:

 

Residential productsKohler, Briggs & Stratton, Cummins, Honda, Champion, Techtronics International, Husqvarna and Ariens, along with a number of smaller domestic and foreign competitors; certain of which also have broad operations in other manufacturing businesses.

 

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

 

In a continuously evolving market, we believe our scale and broad capabilities make us well positioned to remain competitive. We compete primarily on the basis of brand reputation, quality, reliability, pricing, innovative features, breadth of product offering, product availability and factory support.

 

Employees

 

As of December 31, 2018, we had 5,664 employees (5,046 full time and 618 part-time and temporary employees). Of those, 3,154 employees were directly involved in manufacturing at our manufacturing facilities.

 

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

 

Regulation, including Environmental Matters

 

As a manufacturing company, our operations are subject to a variety of federal, state, local and foreign laws and regulations covering environmental, health and safety matters. Applicable laws and regulations include those governing, among other things, emissions to air, discharges to water, noise and employee safety, as well as the generation, handling, storage, transportation, treatment, and disposal of waste and other materials. In addition, our products are subject to various laws and regulations relating to, among other things, emissions and fuel requirements, as well as labeling and marketing.

 

 

Our products sold in the United States are regulated by the U.S. Environmental Protection Agency (EPA), California Air Resources Board (CARB) and various other state and local air quality management districts. These governing bodies continue to pass regulations that require us to meet more stringent emission standards, and all of our engines and engine-driven products are regulated within the United States and its territories. In addition, certain products in the United States are subject to safety standards as established by various other standards and rule making bodies, or state and local agencies, including the U.S. Consumer Product Safety Commission (CPSC).

 

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

 

Available Information

 

The Company’s principal executive offices are located at S45 W29290 Highway 59, Waukesha, Wisconsin, 53189 and the Company’s telephone number is (262) 544-4811. The Company’s website is www.generac.com. The Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports are available free of charge through the “Investor Relations” portion of the Company’s web site, www.generac.com, as soon as reasonably practical after they are filed with the Securities and Exchange Commission (SEC). The information provided on these websites is not part of this report and is therefore not incorporated herein by reference.

 

Executive Officers

 

The following table sets forth information regarding our executive officers:

 

Name   Age   Position

Aaron P. Jagdfeld

 

47

 

President, Chief Executive Officer and Chairman

York A. Ragen

 

47

 

Chief Financial Officer

Russell S. Minick

 

58

 

Chief Marketing Officer

Jeffrey Mueller

 

50

 

President / General Manager – Consumer Power

Erik Wilde

 

44

 

Executive Vice President, Industrial, Americas

Roger F. Pascavis

 

58

 

Executive Vice President, Strategic Global Sourcing

Patrick Forsythe

 

51

 

Executive Vice President, Global Engineering

 

Aaron P. Jagdfeld has served as our Chief Executive Officer since September 2008, as a director since November 2006 and was named Chairman in February 2016. Prior to becoming Chief Executive Officer, Mr. Jagdfeld worked for Generac for 15 years. He began his career in the finance department in 1994 and became our Chief Financial Officer in 2002. In 2007, he was appointed President and was responsible for sales, marketing, engineering and product development. Prior to joining Generac, Mr. Jagdfeld worked in the audit practice of the Milwaukee, Wisconsin office of Deloitte and Touche. Mr. Jagdfeld holds a Bachelor of Business Administration in Accounting from the University of Wisconsin-Whitewater.

 

York A. Ragen has served as our Chief Financial Officer since September 2008. Prior to becoming Chief Financial Officer, Mr. Ragen held Director of Finance and Vice President of Finance positions at Generac. Prior to joining Generac in 2005, Mr. Ragen was Vice President, Corporate Controller at APW Ltd., a spin-off from Applied Power Inc., now known as Actuant Corporation. Mr. Ragen began his career in the audit practice of Arthur Andersen's Milwaukee, Wisconsin office. Mr. Ragen holds a Bachelor of Business Administration in Accounting from the University of Wisconsin-Whitewater.

 

Russell S. Minick began serving as our Chief Marketing Officer in August 2016. Prior to his appointment, he served as our Executive Vice President, Residential Products since October 2011, with this responsibility being expanded in January 2014 to Executive Vice President, Global Residential Products and to Executive Vice President, North America in September 2014. Prior to joining Generac, Mr. Minick was President & CEO of Home Care Products for Electrolux from 2006 to 2011, President of The Gunlocke Company at HNI Corporation from 2003 to 2006, Senior Vice President of Sales, Marketing and Product Development at True Temper Sports from 2002 to 2003, and General Manager of Extended Warranty Operations for Ford Motor Company from 1998 to 2002. Mr. Minick is a graduate of the University of Northern Iowa, and holds a degree in marketing.

 

Jeffrey Mueller joined Generac as our President / General Manager – Consumer Power in November 2017. Mr. Mueller was Group President for Broan-Nutone, a producer of residential ventilation and air quality products, from 2014 prior to joining Generac. Prior to his time at Broan, Mr. Mueller was at Kohler Company, a manufacturer of bath and kitchen equipment, from 1991 where he held various U.S. and international executive-level positions in the Kitchen & Bath & Interiors Group, including President of Kohler’s faucet business globally. He is a Marquette University alumnus where he earned an Executive MBA with an international focus and a Bachelor of Science degree in Mechanical Engineering.

 

Erik Wilde began serving as our Executive Vice President, Industrial, Americas in July 2016. Mr. Wilde was Vice President and General Manager of the Mining Division for Komatsu America Corp., a manufacturer of construction, mining, and compact construction equipment, from 2013 until he joined Generac. Prior to that role, he held leadership positions as Vice President of the ICT Business Division and Product Marketing at Komatsu America Corp. beginning in 2005. Mr. Wilde holds a Bachelor of Business Administration in Management from Boise State University and an M.B.A. from Keller Graduate School of Management.

 

 

Roger Pascavis has served as our Executive Vice President, Strategic Global Sourcing since March 2013. Prior to becoming Executive Vice President of Strategic Global Sourcing, he served as the Senior Vice President of Operations since January 2008. Mr. Pascavis joined Generac in 1995 and has served as Director of Materials and Vice President of Operations. Prior to joining Generac, Mr. Pascavis was a Plant Manager for MTI Electronics in Waukesha, Wisconsin. Mr. Pascavis holds a B.S. in Industrial Technology from the University of Wisconsin-Stout and an M.B.A. from Lake Forest Graduate School of Management.

 

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

 

Item 1A. Risk Factors

 

You should carefully consider the following risks. These risks could materially affect our business, results of operations or financial condition, cause the trading price of our common stock to decline materially or cause our actual results to differ materially from those expected or those expressed in any forward-looking statements made by us. These risks are not exclusive, and additional risks to which we are subject include, but are not limited to, the factors mentioned under “Forward-Looking Statements” and the risks of our businesses described elsewhere in this Annual Report.

 

Risk factors related to our business and industry

 

Demand for the majority of our products is significantly affected by unpredictable power-outage activity that can lead to substantial variations in, and uncertainties regarding, our financial results from period to period.

 

Sales of our products are subject to consumer buying patterns, and demand for the majority of our products is affected by power outage events caused by thunderstorms, hurricanes, ice storms, blackouts and other power grid reliability issues. The impact of these outage events on our sales can vary depending on the location, frequency and severity of the outages. Sustained periods without major power disruptions can lead to reduced consumer awareness of the benefits of standby and portable generator products and can result in reduced sales growth rates and excess inventory. There are smaller, more localized power outages that occur frequently that drive a baseline level of demand for back-up power solutions. The lack of major power-outage events and fluctuations to the baseline levels of power-outage activity are part of managing our business, and these fluctuations could have an adverse effect on our net sales and profits. Despite their unpredictable nature, we believe power disruptions create awareness and accelerate adoption for our home standby products.

 

Demand for our products is significantly affected by durable goods spending by consumers and businesses, and other macroeconomic conditions.

 

Our business is affected by general economic conditions, and uncertainty or adverse changes such as the prolonged downturn in U.S. residential investment and the impact of more stringent credit standards could lead to a decline in demand for our products and pressure to reduce our prices. Our sales of light-commercial and industrial generators are affected by conditions in the non-residential construction sector and by the capital investment trends for small and large businesses and municipalities. If these businesses and municipalities cannot access credit markets or do not utilize discretionary funds to purchase our products as a result of the economy or other factors, our business could suffer and our ability to realize benefits from our strategy of increasing sales in the light-commercial and industrial sectors through, among other things, our focus on innovation and product development, including natural gas engine and modular technology, could be adversely affected. In addition, consumer confidence and home remodeling expenditures have a significant impact on sales of our residential products, and prolonged periods of weakness in consumer durable goods spending could have a material impact on our business. Typically, we do not have contracts with our customers which call for committed volume, and we cannot guarantee that our current customers will continue to purchase our products at the same level, if at all. If general economic conditions or consumer confidence were to worsen, or if the non-residential construction sector or rate of capital investments were to decline, our net sales and profits would likely be adversely affected. Additionally, timing of capital spending by our national account customers can vary from quarter-to-quarter based on capital availability and internal capital spending budgets.

 

 

Decreases in the availability and quality, or increases in the cost, of raw materials, key components and labor we use could materially reduce our earnings.

 

The principal raw materials that we use to produce our products are steel, copper and aluminum. We also source a significant number of component parts from third parties that we utilize to manufacture our products. The prices of those raw materials and components are susceptible to significant fluctuations due to trends in supply and demand, commodity prices, currencies, transportation costs, government regulations and tariffs, price controls, economic conditions and other unforeseen circumstances beyond our control. We do not have long-term supply contracts in place to ensure the raw materials and components we use are available in necessary amounts or at fixed prices. If we are unable to mitigate raw material or component price increases through product design improvements, price increases to our customers, manufacturing productivity improvements, or hedging transactions, our profitability could be adversely affected. Also, our ability to continue to obtain quality materials and components is subject to the continued reliability and viability of our suppliers, including in some cases, suppliers who are the sole source of certain important components. If we are unable to obtain adequate, cost efficient or timely deliveries of required raw materials and components, or sufficient labor resources, we may be unable to manufacture sufficient quantities of products on a timely basis. This could cause us to lose sales, incur additional costs, delay new product introductions or suffer harm to our reputation.

 

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

 

We operate in markets that are highly competitive. Some of our competitors have established brands and are larger in size or are divisions of large diversified companies which have substantially greater financial resources than we do. Some of our competitors may be willing to reduce prices and accept lower margins in order to compete with us. In addition, we could face new competition from large international or domestic companies with established industrial brands that enter our end markets. Demand for our products may also be affected by our ability to respond to changes in design and functionality, to respond to downward pricing pressure, and to provide shorter lead times for our products than our competitors. If we are unable to respond successfully to these competitive pressures, we could lose market share, which could have an adverse impact on our results. For further information, see “Item 1—Business—Competition”.

 

Our industry is subject to technological change, and our failure to continue developing new and improved products and to bring these products rapidly to market could have an adverse impact on our business.

 

New products, or refinements and improvements of existing products, may have technical failures, delayed introductions, higher than expected production costs or may not be well accepted by our customers. If we are not able to anticipate, identify, develop and market high quality products in line with technological advancements that respond to changes in customer preferences, demand for our products could decline and our operating results could be adversely affected.

 

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

 

In addition to our direct sales force and manufacturer sales representatives, we depend on the services of independent distributors and dealers to sell our products and provide service and aftermarket support to our end customers. We also rely upon our distribution channels to drive awareness for our product categories and our brands. In addition, we sell our products to end users through private label arrangements with leading home equipment, electrical equipment and construction machinery companies; arrangements with top retailers and equipment rental companies; and our direct national accounts with telecommunications and industrial customers. Our distribution agreements and any contracts we have with large national, retail and other customers are typically not exclusive, and many of the distributors with whom we do business offer competitors’ products and services. Impairment of our relationships with our distributors, dealers or large customers, loss of a substantial number of these distributors or dealers or of one or more large customers, or an increase in our distributors' or dealers' sales of our competitors' products to our customers or of our large customers' purchases of our competitors' products could materially reduce our sales and profits. Also, our ability to successfully realize our growth strategy is dependent in part on our ability to identify, attract and retain new distributors at all layers of our distribution platform, and we cannot be certain that we will be successful in these efforts. For further information, see “Item 1—Business—Distribution Channels and Customers”.

 

 

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

 

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

 

In addition, we cannot be certain that we do not or will not infringe third parties' intellectual property rights. Any such claim, even if it is without merit, may be expensive and time-consuming to defend, subject us to damages, cause us to cease making, using or selling certain products that incorporate the disputed intellectual property, require us to redesign our products, divert management time and attention, and/or require us to enter into costly royalty or licensing arrangements.

 

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

 

Our operations are subject to a variety of foreign, federal, state and local environmental, health and safety laws and regulations including those governing, among other things, emissions to air; discharges to water; noise; and the generation, handling, storage, transportation, treatment and disposal of waste and other materials. In addition, under federal and state environmental laws, we could be required to investigate, remediate and/or monitor the effects of the release or disposal of materials both at sites associated with past and present operations and at third-party sites where wastes generated by our operations were disposed. This liability may be imposed retroactively and whether or not we caused, or had any knowledge of, the existence of these materials and may result in our paying more than our fair share of the related costs. We could also be subject to a recall action by regulatory authorities. Violations of or liabilities under such laws and regulations could result in substantial costs, fines and civil or criminal proceedings or personal injury and workers' compensation claims.

 

Our products are subject to substantial government regulation.

 

Our products are subject to extensive statutory and regulatory requirements governing, among other things, emissions, noise, and product content, including standards imposed by the EPA, CARB and other regulatory agencies around the world. These laws are constantly evolving and many are becoming increasingly stringent. Changes in applicable laws or regulations, or in the enforcement thereof, could require us to redesign our products and could adversely affect our business or financial condition in the future. Developing and marketing products to meet such new requirements could result in substantial additional costs that may be difficult to recover in some markets. In some cases, we may be required to modify our products or develop new products to comply with new regulations, particularly those relating to air emissions and carbon monoxide. Typically, additional costs associated with significant compliance modifications are passed on to the market. While we have been able to meet previous deadlines and requirements, failure to comply with other existing and future regulatory standards could adversely affect our position in the markets we serve.

 

We may incur costs and liabilities as a result of product liability claims.

 

We face a risk of exposure to product liability claims in the event that the use of our products is alleged to have resulted in injury or other damage. Although we currently maintain product liability insurance coverage, we may not be able to obtain such insurance on acceptable terms in the future, if at all, or obtain insurance that will provide adequate coverage against potential claims. Product liability claims can be expensive to defend and can divert the attention of management and other personnel for long periods of time, regardless of the ultimate outcome. A significant unsuccessful product liability defense could have a material adverse effect on our financial condition and results of operations. In addition, we believe our business depends on the strong brand reputation we have developed. If our reputation is damaged, we may face difficulty in maintaining our market share and pricing with respect to some of our products, which could reduce our sales and profitability.

 

 

The loss of any key members of our senior management team or key employees could disrupt our operations and harm our business.

 

Our success depends, in part, on the efforts of certain key individuals, including the members of our senior management team, who have significant experience in the power products industry. If, for any reason, our senior executives do not continue to be active in management, or if our key employees leave our company, our business, financial condition or results of operations could be adversely affected. Failure to continue to attract these individuals at reasonable compensation levels could have a material adverse effect on our business, liquidity and results of operations. Although we do not anticipate that we will have to replace any of these individuals in the near future, the loss of the services of any of our key employees could disrupt our operations and have a material adverse effect on our business.

 

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

 

We may from time to time experience union organizing activities in our non-union facilities. Disputes with the current labor union or new union organizing activities could lead to work slowdowns or stoppages and make it difficult or impossible for us to meet scheduled delivery times for product shipments to our customers, which could result in loss of business. In addition, union activity could result in higher labor costs, which could harm our financial condition, results of operations and competitive position. A work stoppage or limitations on production at our facilities for any reason could have an adverse effect on our business, results of operations and financial condition. In addition, many of our suppliers have unionized work forces. Strikes or work stoppages experienced by our customers or suppliers could have an adverse effect on our business, results of operations and financial condition.

 

We may experience material disruptions to our manufacturing operations.

 

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

 

 

equipment or information technology infrastructure failure; 

 

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

 

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

 

other operational problems.

 

In addition, a significant portion of our manufacturing and production facilities are located in Wisconsin within a 100-mile radius of each other. We could experience prolonged periods of reduced production due to unforeseen events occurring in or around our manufacturing facilities in Wisconsin. In the event of a business interruption at our facilities, in particular our Wisconsin facilities, we may be unable to shift manufacturing capabilities to alternate locations, accept materials from suppliers or meet customer shipment needs, among other severe consequences. Such an event could have a material and adverse impact on our financial condition and results of our operations.

 

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

 

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

 

 

inflation or changes in political and economic conditions; 

 

unstable regulatory environments; 

 

changes in import and export duties; 

 

domestic and foreign customs and tariffs; 

 

currency rate fluctuations;

 

trade restrictions; 

 

labor unrest; 

 

logistical challenges, including extended container port congestion, and higher logistics costs;

 

communications challenges; and 

 

other restraints and burdensome taxes.

 

These factors may have an adverse effect on our ability to efficiently and cost effectively source our purchased components overseas. In particular, if the U.S. dollar were to depreciate significantly against the currencies in which we purchase raw materials from foreign suppliers, our cost of goods sold could increase materially, which would adversely affect our results of operations.

 

 

We are vulnerable to supply disruptions from single-sourced suppliers.

 

We single-source certain types of parts in our product designs. Any delay in our suppliers’ deliveries may impair our ability to deliver products to our customers. A wide variety of factors could cause such delays including, but not limited to, lack of capacity, economic downturns, availability of credit, logistical challenges, weather events or natural disasters.

 

As a U.S. corporation that conducts business in a variety of foreign countries, we are subject to the Foreign Corrupt Practices Act and a variety of anti-corruption laws worldwide. A determination that we violated any of these laws may affect our business and operations adversely.

 

The U.S. Foreign Corrupt Practices Act (FCPA) generally prohibits U.S. companies and their intermediaries from making improper payments to foreign officials for the purpose of obtaining or keeping business. The United Kingdom Bribery Act (UKBA) prohibits domestic and foreign bribery of the private sector as well as public officials. Any determination that we have violated any anti-corruption laws could have a material adverse effect on our financial position, operating results and cash flows.

 

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

 

Changes in government policies on foreign trade and investment can affect the demand for our products, impact the competitive position of our products or prevent us from being able to sell products in certain countries. Our business benefits from free trade agreements, and efforts to withdraw from, or substantially modify such agreements, in addition to the implementation of more restrictive trade policies, such as more detailed inspections, higher tariffs, import or export licensing requirements, exchange controls or new barriers to entry, could have a material adverse effect on our results of operations, financial condition or cash flows.

 

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

 

Our total assets include goodwill and other indefinite-lived intangibles. If we determine these have become impaired, net income could be materially adversely affected.

 

Goodwill represents the excess of cost over the fair market value of net assets acquired in business combinations. Indefinite-lived intangibles are comprised of certain tradenames. At December 31, 2018, goodwill and other indefinite-lived intangibles totaled $891.8 million. We review goodwill and other intangibles at least annually for impairment and any excess in carrying value over the estimated fair value is charged to the statement of comprehensive income. Future impairment may result from, among other things, deterioration in the performance of an acquired business or product line, adverse market conditions and changes in the competitive landscape, adverse changes in applicable laws or regulations, including changes that restrict the activities of an acquired business or product line, and a variety of other circumstances. A reduction in net income resulting from the write-down or impairment of goodwill or indefinite-lived intangibles could have a material adverse effect on our financial statements.

 

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

 

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

 

We may not realize all of the anticipated benefits of our acquisitions or those benefits may take longer to realize than expected. We may also encounter significant unexpected difficulties in integrating acquired businesses.

 

Our ability to realize the anticipated benefits of our acquisitions will depend, to a large extent, on our ability to integrate the acquired businesses with our business. The integration of independent businesses is a complex, costly and time-consuming process. Further, integrating and managing businesses with international operations may pose challenges not previously experienced by our management. As a result, we may be required to devote significant management attention and resources to integrating the business practices and operations of any acquired businesses with ours. The integration process may disrupt our business and, if implemented ineffectively, could preclude realization of the full benefits expected by us. Our failure to meet the challenges involved in integrating an acquired business into our existing operations or otherwise to realize the anticipated benefits of the transaction could cause an interruption of, or a loss of momentum in, our activities and could adversely affect our results of operations.

 

 

In addition, the overall integration of our acquired businesses may result in material unanticipated problems, expenses, liabilities, competitive responses, loss of customer relationships, and diversion of management's attention, and may cause our stock price to decline. The difficulties of combining the operations of acquired businesses with ours include, among others:

 

 

managing a larger company;

 

maintaining employee morale and retaining key management and other employees;

 

complying with newly applicable foreign regulations;

 

integrating two business cultures, which may prove to be incompatible;

 

the possibility of faulty assumptions underlying expectations regarding the integration process;

 

retaining existing customers and attracting new customers;

 

consolidating corporate and administrative infrastructures and eliminating duplicative operations;

 

the diversion of management's attention from ongoing business concerns and performance shortfalls as a result of the diversion of management's attention to the acquisition;

 

unanticipated issues in integrating information technology, communications and other systems;

 

unanticipated changes in applicable laws and regulations;

 

managing tax costs or inefficiencies associated with integrating the operations of the combined company;

 

unforeseen expenses or delays associated with the acquisition;

 

difficulty comparing financial reports due to differing financial and/or internal reporting systems; and

 

making any necessary modifications to internal financial control standards to comply with the Sarbanes-Oxley Act of 2002 and the rules and regulations promulgated thereunder.

 

Many of these factors will be outside of our control and any one of them could result in increased costs, decreases in the amount of expected revenues and diversion of management's time and energy, which could materially impact our business, financial condition and results of operations. In addition, even if the operations of our acquired businesses are integrated successfully with our operations, we may not realize the full benefits of the transaction, including the synergies, cost savings or sales or growth opportunities that we expect. These benefits may not be achieved within the anticipated time frame, or at all. Or, additional unanticipated costs may be incurred in the integration of our businesses. All of these factors could cause dilution to our earnings per share, decrease or delay the expected accretive effect of the acquisition, and cause a decrease in the price of our common stock. As a result, we cannot assure you that the combination of our acquisitions with our business will result in the realization of the full benefits anticipated from the transaction.

 

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

 

Over the past three years, we have implemented a new ERP system for a majority of our business as part of our ongoing efforts to improve and strengthen our operational and financial processes and our reporting systems. We expect to implement the new ERP system at our other locations in future years. The ERP system may not provide the benefits anticipated, could add costs and complications to ongoing operations, and may impact our ability to process transactions efficiently, all of which may have a material adverse effect on the Company’s business and results of operations.

 

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

 

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

 

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

 

 

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

 

Risks related to our common stock

 

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

 

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

 

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

 

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

 

 

permit our Board of Directors to issue preferred stock with such terms as they determine, without stockholder approval; 

 

provide that only one-third of the members of the Board of Directors are elected at each stockholders meeting and prohibit removal without cause; 

 

require advance notice for stockholder proposals and director nominations; and

 

contain limitations on convening stockholder meetings.

 

These provisions make it more difficult for stockholders or potential acquirers to acquire us without negotiation and could discourage potential takeover attempts and could adversely affect the market price of our common stock.

 

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

 

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

 

Risks related to our capital structure

 

We have indebtedness which could adversely affect our cash flow and our ability to make payments on our indebtedness.

 

As of December 31, 2018 we had total indebtedness of $924.0 million. Our level of indebtedness increases the possibility that we may be unable to generate cash sufficient to pay, when due, the principal of, interest on or other amounts due in respect of our indebtedness. While we maintain interest rate swaps covering a portion of our outstanding debt, our interest expense could increase if interest rates increase because debt under our credit facilities bears interest at a variable rate once above a certain LIBOR floor. If we do not have sufficient earnings to service our debt, we may be required to refinance all or part of our existing debt, sell assets, borrow more money or sell securities, none of which we can guarantee we will be able to do.

 

 

The terms of our credit facilities restrict our current and future operations, particularly our ability to respond to changes in our business or to take certain actions.

 

Our credit facilities contain, and any future indebtedness of ours or our subsidiaries would likely contain, a number of restrictive covenants that impose significant operating and financial restrictions on us and our subsidiaries, including restrictions on our ability to engage in acts that may be in our best long-term interests. These restrictions include, among other things, our ability to:

 

 

incur liens;

 

incur or assume additional debt or guarantees or issue preferred stock;

 

pay dividends, or make redemptions and repurchases, with respect to capital stock;

 

prepay, or make redemptions and repurchases of, subordinated debt;

 

make loans and investments;

 

make capital expenditures;

 

engage in mergers, acquisitions, asset sales, sale/leaseback transactions and transactions with affiliates;

 

change the business conducted by us or our subsidiaries; and

 

amend the terms of subordinated debt.

 

The operating and financial restrictions in our credit facilities and any future financing agreements may adversely affect our ability to finance future operations or capital needs or to engage in other business activities. A breach of any of the restrictive covenants in our credit facilities would result in a default. If any such default occurs, the lenders under our credit facilities may elect to declare all outstanding borrowings, together with accrued interest and other fees, to be immediately due and payable, or enforce their security interest, any of which would result in an event of default. The lenders will also have the right in these circumstances to terminate any commitments they have to provide further borrowings. Our existing credit facilities do not contain any financial maintenance covenants.

 

We may need additional capital to finance our growth strategy or to refinance our existing credit facilities, and we may not be able to obtain it on acceptable terms, or at all, which may limit our ability to grow.

 

We may require additional financing to expand our business. Financing may not be available to us or may be available to us only on terms that are not favorable. The terms of our senior secured credit facilities limit our ability to incur additional debt. In addition, economic conditions, including a downturn in the credit markets, could impact our ability to finance our growth on acceptable terms or at all. If we are unable to raise additional funds or obtain capital on acceptable terms, we may have to delay, modify or abandon some or all of our growth strategies. In the future, if we are unable to refinance our credit facilities on acceptable terms, our liquidity could be adversely affected.

 

Item 1B. Unresolved Staff Comments

 

None.

 

 

Item 2. Properties

 

We own or lease manufacturing, distribution and office facilities globally totaling over five million square feet. We also have inventory warehouses that accommodate material storage and rapid response requirements of our customers. The following table provides information about our principal facilities exceeding 20,000 square feet:

 

Location

 

Owned/

Leased

 

Activities

 

 

Segment

Waukesha, WI

 

Owned

 

Corporate headquarters, R&D

 

Domestic

Eagle, WI

 

Owned

 

Manufacturing, office, training

 

Domestic

Whitewater, WI

 

Owned

 

Manufacturing, office, distribution

 

Domestic

Oshkosh, WI

 

Owned

 

Manufacturing, office, warehouse, R&D 

 

Domestic

Berlin, WI 

  Owned   Manufacturing, office, warehouse, R&D   Domestic

Jefferson, WI

 

Owned

 

Manufacturing, distribution, R&D

 

Domestic

Janesville, WI   Leased   Distribution   Domestic
Various WI   Leased   Warehouse   Domestic

Maquoketa, IA

 

Owned

 

Storage, rental property

 

Domestic

South Burlington, VT

 

Leased

 

Office

 

Domestic

Vergennes, VT

 

Leased

 

Office

 

Domestic

Winooski, VT

 

Leased

 

Distribution, storage

 

Domestic

Charlotte, VT

 

Leased

 

Distribution, storage

 

Domestic

Mexico City, Mexico

 

Owned

 

Manufacturing, sales, distribution, warehouse, office, R&D

 

International

Mexico City, Mexico

 

Leased

 

Office, manufacturing, warehouse 

 

International

Guadalajara, Mexico

 

Owned

 

Sales, office

 

International

Milan, Italy

 

Leased

 

Manufacturing, sales, distribution, warehouse, office, R&D

 

International

Casole d’Elsa, Italy

 

Leased

 

Manufacturing, office, warehouse, R&D

 

International

Balsicas, Spain

 

Leased

 

Manufacturing, office, warehouse, R&D

 

International

Foshan, China

 

Owned

 

Manufacturing, office, warehouse, R&D

 

International

Changzhou, China

 

Leased

 

Manufacturing, office, warehouse, R&D

 

International

Saint-Nizier-sous-Charlieu, France

 

Leased

 

Sales, office, warehouse

 

International

Ribeirao Preto, Brazil

 

Leased

 

Manufacturing, office, warehouse

 

International

Stoke-on-Trent, United Kingdom

 

Leased

 

Sales, office, warehouse

 

International

Sydney, Australia

 

Leased

 

Sales, office, warehouse

 

International

Celle, Germany

 

Owned

 

Manufacturing, office, warehouse, R&D

 

International

Charzyno, Poland

 

Owned

 

Manufacturing

 

International

 

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

 

As of December 31, 2018, substantially all of our domestically-owned and a portion of our internationally-owned properties are subject to collateral provisions under our senior secured credit facilities.

 

Item 3. Legal Proceedings

 

From time to time, we are involved in legal proceedings primarily involving product liability, employment matters and general commercial disputes arising in the ordinary course of our business. As of December 31, 2018, we believe that there is no litigation pending that would have a material effect on our results of operations or financial condition.

 

Item 4. Mine Safety Disclosures

 

Not Applicable.

 

PART II

 

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

 

Shares of our common stock are traded on the New York Stock Exchange (NYSE) under the symbol “GNRC.”

 

 

Purchases of Equity Securities By the Issuer and Affiliated Purchasers

 

The following table summarizes the stock repurchase activity for the three months ended December 31, 2018, 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

 
                                 

10/01/18 - 10/31/18

    -       -       -     $ 144,453,228  

11/01/18 - 11/30/18

    1,213     $ 55.05       -     $ 250,000,000  

12/01/18 - 12/31/18

    170       52.79       -     $ 250,000,000  

Total

    1,383     $ 54.77                  

 

For equity compensation plan information, refer to Note 15, “Share Plans,” to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K. For information on the Company’s stock repurchase plans, refer to Note 11, “Stock Repurchase Program,” to the consolidated financial statements.

 

Stock Performance Graph

 

The line graph below compares the cumulative total stockholder return on our common stock with the cumulative total return of the Standard & Poor’s S&P 500 Index, the S&P 500 Industrials Index and the Russell 2000 Index for the five-year period ended December 31, 2018. The graph and table assume that $100 was invested on December 31, 2013 in each of our common stock, the S&P 500 Index, the S&P 500 Industrials Index and the Russell 2000 Index, and that all dividends were reinvested. Cumulative total stockholder returns for our common stock, the S&P 500 Index, the S&P 500 Industrials Index and the Russell 2000 Index are based on our fiscal year.

 

 

 

Company / Market / Peer Group

 

12/31/2013

   

12/31/2014

   

12/31/2015

   

12/31/2016

   

12/31/2017

   

12/31/2018

 
                                                 

Generac Holdings Inc.

  $ 100.00     $ 82.56     $ 52.56     $ 71.93     $ 87.43     $ 87.75  

S&P 500 Index - Total Returns

    100.00       113.69       115.26       129.05       157.22       150.33  

S&P 500 Industrials Index

    100.00       109.83       107.04       127.23       153.99       133.53  

Russell 2000 Index

    100.00       104.89       100.26       121.63       139.44       124.09  

 

Holders

 

As of February 19, 2019, there were 194 registered holders of record of Generac’s common stock. A substantially greater number of holders of Generac common stock are “street name” or beneficial holders, whose shares are held of record by banks, brokers and other financial institutions.

 

Dividends

 

We do not have plans to pay dividends on our common stock in the foreseeable future. However, in the future, subject to factors such as general economic and business conditions, our financial condition and results of operations, our capital requirements, our future liquidity and capitalization, and other such factors that our Board of Directors may deem relevant, we may change this policy and choose to pay dividends. Our ability to pay dividends on our common stock is currently limited by the terms of our senior secured credit facilities and may be further restricted by any future indebtedness we incur. Dividends from, and cash generated by our subsidiaries will be our principal sources of cash to repay indebtedness, fund operations, repurchase shares of common stock and pay dividends. Accordingly, our ability to pay dividends to our stockholders is dependent on the earnings and distributions of funds from our subsidiaries.

 

Securities Authorized for Issuance Under Equity Compensation Plans

 

For information on securities authorized for issuance under our equity compensation plans, refer to “Item 12 - Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters,” which is incorporated herein by reference.

 

Recent Sales of Unregistered Securities

 

None.

 

Use of Proceeds from Registered Securities

 

Not applicable.

 

Item 6. Selected Financial Data

 

The following table sets forth our selected historical consolidated financial data for the periods and at the dates indicated. The selected historical consolidated financial data for the years ended December 31, 2018, 2017 and 2016 are derived from our audited consolidated financial statements included elsewhere in this annual report. The selected historical consolidated financial data for the years ended December 31, 2015 and 2014 is derived from our audited historical consolidated financial statements not included in this annual report.

 

 

The results indicated below and elsewhere in this annual report are not necessarily indicative of our future performance. This information should be read together with “Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes thereto in Item 8 of this Annual Report on Form 10-K.

 

   

Year Ended December 31,

 

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

 

2018

   

2017

   

2016

   

2015

   

2014

 

Statement of Operations Data:

                                       

Net sales

  $ 2,023,464     $ 1,679,373     $ 1,447,743     $ 1,317,299     $ 1,460,919  

Costs of goods sold

    1,298,424       1,094,587       935,322       857,349       944,700  

Gross profit

    725,040       584,786       512,421       459,950       516,219  

Operating expenses:

                                       

Selling and service

    191,887       174,841       164,860       130,242       120,408  

Research and development

    50,019       42,869       37,163       32,922       31,494  

General and administrative

    103,841       87,581       74,693       52,947       54,795  

Amortization of intangibles (1)

    22,112       28,861       32,953       23,591       21,024  

Tradename and goodwill impairment (2)

    -       -       -       40,687       -  

Gain on remeasurement of contingent consideration (3)

    -       -       -       -       (4,877 )

Total operating expenses

    367,859       334,152       309,669       280,389       222,844  

Income from operations

    357,181       250,634       202,752       179,561       293,375  

Other (expense) income:

                                       

Interest expense

    (40,956 )     (42,667 )     (44,568 )     (42,843 )     (47,215 )

Investment income

    1,893       298       44       123       130  

Loss on extinguishment of debt (4)

    (1,332 )     -       (574 )     (4,795 )     (2,084 )

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

    -       -       (2,957 )     (2,381 )     16,014  

Other, net

    (5,710 )     (4,566 )     (1,000 )     (6,682 )     (1,858 )

Total other expense, net

    (46,105 )     (46,935 )     (49,055 )     (56,578 )     (35,013 )

Income before provision for income taxes

    311,076       203,699       153,697       122,983       258,362  

Provision for income taxes (6)

    69,856       44,142       56,519       45,236       83,749  

Net income

    241,220       159,557       97,178       77,747       174,613  

Net income attributable to noncontrolling interests

    2,963       1,749       24       -       -  

Net income attributable to Generac Holdings Inc.

  $ 238,257     $ 157,808     $ 97,154     $ 77,747     $ 174,613  
                                         

Net income attributable to common shareholders per common share - diluted:

  $ 3.54     $ 2.53     $ 1.47     $ 1.12     $ 2.49  
                                         

Statement of Cash Flows data:

                                       

Depreciation

  $ 25,296     $ 23,127     $ 21,465     $ 16,742     $ 13,706  

Amortization of intangible assets

    22,112       28,861       32,953       23,591       21,024  

Expenditures for property and equipment

    (47,601 )     (33,261 )     (30,467 )     (30,651 )     (34,689 )
                                         

Other Financial Data:

                                       

Adjusted EBITDA attributable to Generac Holdings Inc. (7)

  $ 416,793     $ 311,225     $ 272,738     $ 270,816     $ 337,283  

Adjusted net income attributable to Generac Holdings Inc. (8)

    292,213       211,869       195,572       198,436       234,165  

 

   

As of December 31,

 

(U.S. Dollars in thousands)

 

2018

   

2017

   

2016

   

2015

   

2014

 

Balance Sheet Data:

                                       

Current assets

  $ 1,120,769     $ 824,557     $ 687,794     $ 632,017     $ 707,637  

Property and equipment, net

    278,929       230,380       212,793       184,213       168,821  

Goodwill

    764,655       721,523       704,640       669,719       635,565  

Other intangibles and other assets

    261,961       249,505       260,742       292,686       352,396  

Total assets

  $ 2,426,314     $ 2,025,965     $ 1,865,969     $ 1,778,635     $ 1,864,419  
                                         

Total current liabilities

  $ 560,706     $ 396,423     $ 347,926     $ 213,224     $ 240,522  

Long-term borrowings, less current portion

    876,396       906,548       1,006,758       1,037,132       1,065,858  

Other long-term liabilities

    166,947       124,745       80,968       62,408       68,240  

Redeemable noncontrolling interests

    61,004       43,929       33,138       -       -  

Total stockholders' equity

    761,261       554,320       397,179       465,871       489,799  

Total liabilities and stockholders' equity

  $ 2,426,314     $ 2,025,965     $ 1,865,969     $ 1,778,635     $ 1,864,419  

 

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

 

 

(2) During the fourth quarter of 2015, our Board of Directors approved a plan to strategically transition and consolidate certain of our brands acquired through acquisitions to the Generac® tradename. This brand strategy change resulted in a reclassification to a two year remaining useful life and a $36.1 million non-cash charge to write-down the impacted tradenames to net realizable value. Additionally, during the fourth quarter of 2015, a $4.6 million goodwill impairment charge was recorded related to the write-down of the Ottomotores reporting unit goodwill.

 

(3) During the second quarter of 2014, we recorded a gain of $4.9 million related to an adjustment to a certain earn-out obligation in connection with the Tower Light acquisition.

 

(4) Represents the non-cash write-off of original issue discount and deferred financing costs due to voluntary debt prepayments. Refer to Note 10, “Credit Agreements,” to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K for further information on the losses on extinguishment of debt.

 

(5) For the year ended December 31, 2016, represents a non-cash loss in the third quarter 2016 relating to the continued 25 basis point increase in borrowing costs as a result of the credit agreement leverage ratio remaining above 3.0 times based on projections at that time. For the year ended December 31, 2015, represents a non-cash loss relating to a 25 basis point increase in borrowing costs as a result of the credit agreement leverage ratio rising above 3.0 times effective in the third quarter 2015 and expected to remain above 3.0 times based on projections at that time. For the year ended December 31, 2014, represents a non-cash gain relating to a 25 basis point reduction in borrowing costs as a result of the credit agreement leverage ratio falling below 3.0 times effective in the second quarter 2014 and expected to remain below 3.0 times based on projections at that time. Following the May 2017 Term Loan amendment, which removed the pricing grid based on leverage ratio achieved, gains or losses on changes in contractual interest rate will no longer be recorded in the statements of comprehensive income. Refer to Note 10, “Credit Agreements,” to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K for further information on the gains and losses on changes in the contractual interest rate.

 

(6) On December 22, 2017, the U.S. Government enacted a comprehensive tax reform bill commonly referred to as the Tax Cuts and Jobs Act (the Tax Act, or Tax Reform). As a result of the Tax Act, we recognized a one-time, non-cash benefit of $28.4 million in the fourth quarter of 2017 primarily from the impact of the revaluation of the Company's net deferred tax liabilities. Refer to Note 13, “Income Taxes,” to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K for further information on the Tax Act and its impact.

 

(7) Adjusted EBITDA represents net income before noncontrolling interests, interest expense, taxes, depreciation and amortization, as further adjusted for the other items reflected in the reconciliation table set forth below. The computation of adjusted EBITDA is based on the definition of EBITDA contained in the Term Loan and ABL Facility (terms defined in Note 10, “Credit Agreements,” to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K).

 

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 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. generally accepted accounting principles (U.S. GAAP) and the reconciliation to U.S. GAAP results, provides a more complete understanding of our results of operations and the factors and trends affecting our business. We believe Adjusted EBITDA is useful to investors for the following reasons:

 

 

Adjusted EBITDA and similar non-GAAP measures are widely used by investors to measure a company's operating performance without regard to items that can vary substantially from company to company depending upon financing and accounting methods, book values of assets, tax jurisdictions, capital structures and the methods by which assets were acquired;

 

investors can use Adjusted EBITDA 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 expense.

 

 

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

 

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

 

 

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

 

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

 

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

 

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

 

several of the adjustments that we use in calculating Adjusted EBITDA, such as non-cash write-downs and other charges, while not involving cash expense, do have a negative impact on the value 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 financial statements). While many of the adjustments (for example, transaction costs and credit facility fees), involve mathematical application of items reflected in our financial statements, others involve a degree of judgment and discretion. While we believe all of these adjustments are appropriate, and while the calculations are subject to review by our Board of Directors in the context of the Board's review of our financial statements, and certification by our Chief Financial Officer in a compliance certificate provided to the lenders under our Term Loan and ABL Facility, this discretion may be viewed as an additional limitation on the use of Adjusted EBITDA as an analytical tool.

 

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

 

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

 

   

Year Ended December 31,

 

(U.S. Dollars in thousands)

 

2018

   

2017

   

2016

   

2015

   

2014

 

Net income attributable to Generac Holdings Inc.

  $ 238,257     $ 157,808     $ 97,154     $ 77,747     $ 174,613  

Net income attributable to noncontrolling interests (a)

    2,963       1,749       24       -       -  

Net income

    241,220       159,557       97,178       77,747       174,613  

Interest expense

    40,956       42,667       44,568       42,843       47,215  

Depreciation and amortization

    47,408       51,988       54,418       40,333       34,730  

Provision for income taxes

    69,856       44,142       56,519       45,236       83,749  

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

    3,532       2,923       357       3,892       (3,853 )

Non-cash share-based compensation expense (c)

    14,563       10,205       9,493       8,241       12,612  

Tradename and goodwill impairment (d)

    -       -       -       40,687       -  

Loss on extinguishment of debt (e)

    1,332       -       574       4,795       2,084  

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

    -       -       2,957       2,381       (16,014 )

Transaction costs and credit facility fees (g)

    3,883       2,145       2,442       2,249       1,851  

Business optimization expenses (h)

    952       2,912       7,316       1,947       -  

Other

    850       761       700       465       296  

Adjusted EBITDA

    424,552       317,300       276,522       270,816       337,283  

Adjusted EBITDA attributable to noncontrolling interests

    7,759       6,075       3,784       -       -  

Adjusted EBITDA attributable to Generac Holdings Inc.

  $ 416,793     $ 311,225     $ 272,738     $ 270,816     $ 337,283  

 

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

 

(b) Represents the following non-cash charges: gains/losses on disposal of assets, unrealized mark-to-market adjustments on commodity contracts, transactional foreign currency gains/losses and certain purchase accounting related adjustments. Additionally, the year ended December 31, 2014 includes a gain of $4.9 million related to an adjustment to an earn-out obligation in connection with the Tower Light acquisition. We believe that adjusting net income for these non-cash charges is useful for the following reasons:

 

 

The gains/losses on disposals of assets result from the sale of assets that are no longer useful in our business and therefore represent gains or losses that are not from our core operations;

 

 

 

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

 

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

 

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

 

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

 

(d) During the fourth quarter of 2015, our Board of Directors approved a plan to strategically transition and consolidate certain of our brands acquired through acquisitions to the Generac® tradename. This brand strategy change resulted in a reclassification to a two year remaining useful life and a $36.1 million non-cash charge to write-down the impacted tradenames to net realizable value. Additionally, during the fourth quarter of 2015, a $4.6 million goodwill impairment charge was recorded related to the write-down of the Ottomotores reporting unit goodwill.

 

(e) Represents the non-cash write-off of original issue discount and deferred financing costs due to voluntary prepayments of Term Loan debt. Refer to Note 10, “Credit Agreements,” to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K for further information on the losses on extinguishment of debt.

 

(f) For the year ended December 31, 2016, represents a non-cash loss relating to the continued 25 basis point increase in borrowing costs as a result of the credit agreement leverage ratio remaining above 3.0 times based on projections at that time. For the year ended December 31, 2015, represents a non-cash loss relating to a 25 basis point increase in borrowing costs as a result of the credit agreement leverage ratio rising above 3.0 times and expected to remain above 3.0 times based on projections at that time. For the year ended December 31, 2014, represents a non-cash gain relating to a 25 basis point reduction in borrowing costs as a result of the credit agreement leverage ratio falling below 3.0 times and expected to remain below 3.0 times based on projections at that time. Following the May 2017 Term Loan amendment, which removed the pricing grid based on leverage ratio achieved, gains or losses on changes in contractual interest rate will no longer be recorded in the statements of comprehensive income. Refer to Note 10, “Credit Agreements,” to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K for further information on the gains and losses on changes in the contractual interest rate.

 

(g) 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, and transaction costs relating to the acquisition of businesses.

 

(h) Represents severance and non-recurring plant consolidation costs. Additionally, the year ended December 31, 2016 primarily represents charges relating to business optimization and restructuring costs to address the significant and extended downturn for capital spending within the oil & gas industry. These charges represent expenses that are not from our core operations and do not reflect our ongoing operations.

 

(8) Adjusted Net Income is defined as net income before noncontrolling interests and provision for income taxes adjusted for the following items: cash income tax expense, amortization of intangible assets, amortization of deferred financing costs and original issue discount related to our debt, intangible impairment charges, certain transaction costs and other purchase accounting adjustments, losses on extinguishment of debt, business optimization expenses, certain other non-cash gains and losses, and adjusted net income attributable to noncontrolling interests, 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, causing our cash tax rate to be lower than our U.S GAAP tax rate.

 

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

 

 

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

 

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

 

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

 

 

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

 

   

Year Ended December 31,

 

(U.S. Dollars in thousands)

 

2018

   

2017

   

2016

   

2015

   

2014

 

Net income attributable to Generac Holdings Inc.

  $ 238,257     $ 157,808     $ 97,154     $ 77,747     $ 174,613  

Net income attributable to noncontrolling interests

    2,963       1,749       24       -       -  

Net income

    241,220       159,557       97,178       77,747       174,613  

Provision for income taxes

    69,856       44,142       56,519       45,236       83,749  

Income before provision for income taxes

    311,076       203,699       153,697       122,983       258,362  

Amortization of intangible assets

    22,112       28,861       32,953       23,591       21,024  

Amortization of deferred finance costs and original issue discount

    4,749       3,516       3,940       5,429       6,615  

Tradename and goodwill impairment

    -       -       -       40,687       -  

Loss on extinguishment of debt

    1,332       -       574       4,795       2,084  

(Gain) loss on change in contractual interest rate

    -       -       2,957       2,381       (16,014 )

Transaction costs and other purchase accounting adjustments (a)

    2,578       1,706       5,653       2,710       (3,623 )

Business optimization expenses

    952       2,912       7,316       1,947       -  

Adjusted net income before provision for income taxes

    342,799       240,694       207,090       204,523       268,448  

Cash income tax expense (b)

    (47,064 )     (25,624 )     (9,299 )     (6,087 )     (34,283 )

Adjusted net income

    295,735       215,070       197,791       198,436       234,165  

Adjusted net income attributable to noncontrolling interests

    3,522       3,201       2,219       -       -  

Adjusted net income attributable to Generac Holdings Inc.

  $ 292,213     $ 211,869     $ 195,572     $ 198,436     $ 234,165  

 

(a) Represents transaction costs incurred directly in connection with any investment, as defined in our credit agreement, equity issuance or debt issuance or refinancing, and certain purchase accounting adjustments. Additionally, the year ended December 31, 2014 includes a gain of $4.9 million related to an adjustment to an earn-out obligation in connection with the Tower Light acquisition.

 

(b) For the years ended December 31, 2018, 2017 and 2016, the amount is based on a cash income tax rate of 15.1%, 12.5% and 5.9%, respectively. Cash income tax expense for 2018, 2017 and 2016 is based on the projected taxable income and corresponding cash taxes payable for the full year after considering the effects of current and deferred income tax items, and is calculated by applying the derived cash tax rate to the period’s pretax income. For the years ended December 31, 2015 and 2014, amounts are based on actual cash income taxes paid each year.                                                                  

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis of our financial condition and results of operations should be read together with “Item 1 – Business,” “Item 6 - Selected Financial Data” and the consolidated financial statements and the related notes thereto in Item 8 of this Annual Report on Form 10-K. This discussion contains forward-looking statements, based on current expectations and related to future events and our future financial performance, that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those set forth under “Item 1A - Risk Factors.”

 

Overview

 

We are a leading global designer and manufacturer of a wide range of power generation equipment and other power products serving the residential, light commercial and industrial markets. Power generation is 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 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. 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. 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.

 

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. We believe the passage of the Tax Act in 2017 will continue to have a favorable impact on future demand within many of the end markets that we serve, as the improved cash flow, liquidity and business sentiment may lead to further investments in equipment, facilities and infrastructure in the United States.

 

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 during 2018 compared to 2017, primarily due to lower interest rate spreads resulting from Term Loan and ABL Facility amendments, new interest rate swaps beginning in 2018, and the repayments of Term Loan and ABL Facility borrowings. These factors are partially offset by an increase in the market LIBOR rate. Refer to Note 10, “Credit Agreements,” to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K for further information.

 

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

 

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

 

As of December 31, 2018, we had approximately $347 million of tax-deductible goodwill and intangible asset amortization remaining from our acquisition by CCMP Capital Advisors, LLC in 2006 that we expect to generate aggregate cash tax savings of approximately $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 consolidated financial statements.

 

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

 

Components of Net Sales and Expenses

 

Net Sales

 

Our net sales primarily consist of product sales to our customers. This includes sales of our power generation equipment and other power products to the residential, light commercial and industrial markets, as well as service parts to our dealer network. Net sales also include shipping and handling charges billed to customers, with the related freight costs included in cost of goods sold. Additionally, we offer other services, including extended warranties, remote monitoring, installation and maintenance services. However, these services accounted for less than two percent of our net sales for the year ended December 31, 2018. Refer to Note 2, “Significant Accounting Policies - Revenue Recognition,” to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K for further information on our revenue streams and related revenue recognition accounting policies.

 

 

We are not dependent on any one channel or customer for our net sales, with no single customer representing more than 6% of our sales, and our top ten customers representing less than 22% of our net sales for the year ended December 31, 2018.

 

Costs of Goods Sold

 

The principal elements of costs of goods sold in our manufacturing operations are component parts, raw materials, factory overhead and labor. Component parts and raw materials comprised approximately 77% of costs of goods sold for the year ended December 31, 2018. The principal component parts are engines and alternators. We design and manufacture air-cooled engines for certain of our generators up to 22kW, along with certain liquid-cooled engines. We source engines for certain of our smaller products and all of our diesel products. For certain natural gas engines, we source the base engine block, and then add a significant amount of value engineering, sub-systems and other content to the point that we are recognized as the OEM of those engines. We design many of the alternators for our units and either manufacture or source alternators for certain of our units. We also manufacture other generator components where we believe we have a design and cost advantage. We source component parts from an extensive global network of reliable, high quality suppliers. In some cases, these relationships are proprietary.

 

The principal raw materials used in the manufacturing process that are sourced are steel, copper and aluminum. We are susceptible to fluctuations in the cost of these commodities, impacting our costs of goods sold. We seek to mitigate the impact of commodity prices on our business through a continued focus on global sourcing, product design improvements, manufacturing efficiencies, price increases and select hedging transactions. We are also impacted by foreign currency fluctuations. There is typically a lag between raw material price fluctuations and their effect on our costs of goods sold.

 

Other sources of costs include our manufacturing and warehousing facilities, factory overhead, labor and shipping costs. Factory overhead includes utilities, support personnel, depreciation, general supplies, support and maintenance. Although we attempt to maintain a flexible manufacturing cost structure, our margins can be impacted when we cannot timely adjust labor and manufacturing costs to match fluctuations in net sales.

 

Operating Expenses

 

Our operating expenses consist of costs incurred to support our sales, marketing, distribution, service parts, engineering, information systems, human resources, accounting, finance, risk management, legal and tax functions, among others. These expenses include personnel costs such as salaries, bonuses, employee benefit costs and taxes, and are classified into three categories: selling and service, research and development, and general and administrative. Additionally, the amortization expense related to our finite-lived intangible assets is included within operating expenses.

 

Selling and service.    Our selling and service expenses consist primarily of personnel expense, marketing expense, standard warranty expense and other sales expenses. Our personnel expense recorded in selling and services expenses includes the expense of our sales force responsible for our broad customer base and other personnel involved in the marketing, sales and service of our products. Standard warranty expense, which is recorded at the time of sale, is estimated based on historical trends. Our marketing expenses include direct mail costs, printed material costs, product display costs, market research expenses, trade show expenses, media advertising, promotional expenses and co-op advertising costs. Marketing expenses are generally related to the launch of new product offerings, participation in trade shows and other events, and opportunities to create market awareness for home standby generators in areas impacted by heightened power outage activity.

 

Research and development.    Our research and development expenses support numerous projects covering all of our product lines. We operate engineering facilities with extensive capabilities at many locations globally and employ over 400 personnel with focus on new product development, existing product improvement and cost containment. We are committed to research and development, and rely on a combination of patents and trademarks to establish and protect our proprietary rights. Our research and development costs are expensed as incurred.

 

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

 

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

 

 

Other (Expense) Income

 

Other (expense) income includes the interest expense on our outstanding borrowings, amortization of debt financing costs and original issue discount, and cash flows related to interest rate swap agreements. Other (expense) income also includes other financial items such as losses on extinguishment of debt, gains (losses) on changes in contractual interest rate, and interest income earned on our cash and cash equivalents.

 

Results of Operations

 

Year ended December 31, 2018 compared to year ended December 31, 2017

 

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

 

   

Year Ended December 31,

                 

(U.S. Dollars in thousands)

 

2018

   

2017

   

$ Change

   

% Change

 

Net sales

  $ 2,023,464     $ 1,679,373       344,091       20.5 %

Cost of goods sold

    1,298,424       1,094,587       203,837       18.6 %

Gross profit

    725,040       584,786       140,254       24.0 %

Operating expenses:

                               

Selling and service

    191,887       174,841       17,046       9.7 %

Research and development

    50,019       42,869       7,150       16.7 %

General and administrative

    103,841       87,581       16,260       18.6 %

Amortization of intangible assets

    22,112       28,861       (6,749 )     -23.4 %

Total operating expenses

    367,859       334,152       33,707       10.1 %

Income from operations

    357,181       250,634       106,547       42.5 %

Total other expense, net

    (46,105 )     (46,935 )     830       -1.8 %

Income before provision for income taxes

    311,076       203,699       107,377       52.7 %

Provision for income taxes

    69,856       44,142       25,714       58.3 %

Net income

    241,220       159,557       81,663       51.2 %

Net income attributable to noncontrolling interests

    2,963       1,749       1,214       N/A  

Net income attributable to Generac Holdings Inc.

  $ 238,257     $ 157,808       80,449       51.0 %

 

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

 

   

Net Sales

                 
   

Year Ended December 31,

                 

(U.S. Dollars in thousands)

 

2018

   

2017

   

$ Change

   

% Change

 

Domestic

  $ 1,580,325     $ 1,303,506       276,819       21.2 %

International

    443,139       375,867       67,272       17.9 %

Total net sales

  $ 2,023,464     $ 1,679,373       344,091       20.5 %

 

   

Adjusted EBITDA

                 
   

Year Ended December 31,

                 
   

2018

   

2017

   

$ Change

   

% Change

 

Domestic

  $ 388,685     $ 290,290       98,395       33.9 %

International

    35,867       27,010       8,857       32.8 %

Total Adjusted EBITDA

  $ 424,552     $ 317,300       107,252       33.8 %

 

 

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

 

   

Year Ended December 31,

                 

(U.S. Dollars in thousands)

 

2018

   

2017

   

$ Change

   

% Change

 

Residential products

  $ 1,042,739     $ 870,491       172,248       19.8 %

Commercial & industrial products

    820,270       684,352       135,918       19.9 %

Other

    160,455       124,530       35,925       28.8 %

Total net sales

  $ 2,023,464     $ 1,679,373       344,091       20.5 %

 

 

Net sales.    The increase in Domestic sales for the year ended December 31, 2018 was primarily due to strong broad-based growth in shipments of home standby generators, portable generators, outdoor power equipment and service parts. Shipments of residential products were particularly strong with demand climbing from the recent elevated outage environment which continued to drive awareness around the home standby category and the need for homeowners to have back-up power. Sales of our C&I mobile and stationary products were also strong during the year with rental, telecom, and healthcare market verticals experiencing growth.

 

The increase in International sales for the year ended December 31, 2018 was primarily due to the $30.7 million contribution from the Selmec acquisition, and broad-based core growth from the Pramac, Ottomotores and Motortech businesses as we continue to drive market penetration across the globe.

 

Gross profit.    Gross profit margin for the year ended December 31, 2018 was 35.8% compared to 34.8% for the year ended December 31, 2017. The increase reflected a favorable mix of home standby generators, better leverage of fixed manufacturing costs on the increase in sales, a favorable pricing environment, and focused initiatives to improve margins. These items were partially offset by general inflationary pressures from higher commodities, currencies, wages and logistics costs.

 

Operating expenses.    The increase in operating expenses was primarily driven by an increase in employee and incentive compensation costs, higher selling-related variable operating expenses given the higher sales volumes, and the recurring operating expenses from the Selmec acquisition. These items were partially offset by lower promotion, marketing and intangible amortization expenses.

 

Other expense.   The decrease in other expense, net was primarily due to lower interest expense and higher investment income, partially offset by the $1.3 million loss on extinguishment of debt resulting from a $50.0 million voluntary prepayment of Term Loan debt.

 

Provision for income taxes.    The effective income tax rates for the years ended December 31, 2018 and 2017 were 22.5% and 21.3%, respectively. The reduction of the U.S. federal statutory tax rate from 35% to 21% as a result of the Tax Act was more than offset by the prior year one-time, non-cash benefit of $28.4 million that was recorded primarily to revalue our net deferred tax liabilities in accordance with the Tax Act.

 

Net income attributable to Generac Holdings Inc.    The increase in net income attributable to Generac Holdings Inc. was primarily due to the factors outlined above, partially offset by an increase in net income attributable to noncontrolling interests.

 

Adjusted EBITDA.    Adjusted EBITDA margins for the Domestic segment for the year ended December 31, 2018 were 24.6% of net sales as compared to 22.3% of net sales for the year ended December 31, 2017. Adjusted EBITDA margin in the current year benefitted from improved operating leverage, favorable sales mix from higher shipments of home standby generators, a favorable pricing environment, lower promotional costs, and focused margin improvement initiatives. These benefits were partially offset by an increase in employee costs and general inflationary pressures.

 

Adjusted EBITDA margins for the International segment, before deducting for non-controlling interests, for the year ended December 31, 2018 were 8.1% of net sales as compared to 7.2% of net sales for the year ended December 31, 2017. The improvement was primarily due to increased leverage of fixed operating costs on the higher organic sales, and favorable mix.

 

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

 

 

Year ended December 31, 2017 compared to year ended December 31, 2016

 

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

 

   

Year Ended December 31,

                 

(U.S. Dollars in thousands)

 

2017

   

2016

   

$ Change

   

% Change

 

Net sales

  $ 1,679,373     $ 1,447,743       231,630       16.0 %

Cost of goods sold

    1,094,587       935,322       159,265       17.0 %

Gross profit

    584,786       512,421       72,365       14.1 %

Operating expenses:

                               

Selling and service

    174,841       164,860       9,981       6.1 %

Research and development

    42,869       37,163       5,706       15.4 %

General and administrative

    87,581       74,693       12,888       17.3 %

Amortization of intangible assets

    28,861       32,953       (4,092 )     -12.4 %

Total operating expenses

    334,152       309,669       24,483       7.9 %

Income from operations

    250,634       202,752       47,882       23.6 %

Total other expense, net

    (46,935 )     (49,055 )     2,120       -4.3 %

Income before provision for income taxes

    203,699       153,697       50,002       32.5 %

Provision for income taxes

    44,142       56,519       (12,377 )     -21.9 %

Net income

    159,557       97,178       62,379       64.2 %

Net income attributable to noncontrolling interests

    1,749       24       1,725       N/A  

Net income attributable to Generac Holdings Inc.

  $ 157,808     $ 97,154       60,654       62.4 %

 

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

 

   

Net Sales

                 
   

Year Ended December 31,

                 

(U.S. Dollars in thousands)

 

2017

   

2016

   

$ Change

   

% Change

 

Domestic

  $ 1,303,506     $ 1,176,849       126,657       10.8 %

International

    375,867       270,894       104,973       38.8 %

Total net sales

  $ 1,679,373     $ 1,447,743       231,630       16.0 %
                                 

 

   

Adjusted EBITDA

                 
   

Year Ended December 31,

                 
   

2017

   

2016

   

$ Change

   

% Change

 

Domestic

  $ 290,290     $ 259,563       30,727       11.8 %

International

    27,010       16,959       10,051       59.3 %

Total Adjusted EBITDA

  $ 317,300     $ 276,522       40,778       14.7 %

 

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

 

   

Year Ended December 31,

                 

(U.S. Dollars in thousands)

 

2017

   

2016

   

$ Change

   

% Change

 

Residential products

  $ 870,491     $ 769,176       101,315       13.2 %

Commercial & industrial products

    684,352       558,468       125,884       22.5 %

Other

    124,530       120,099       4,431       3.7 %

Total net sales

  $ 1,679,373     $ 1,447,743       231,630       16.0 %

 

Net sales. The increase in Domestic sales for the year ended December 31, 2017 was primarily due to strong growth in shipments of home standby and portable generators driven by increased power outage activity, along with strong growth for mobile products due to recovery in the general rental and oil & gas markets given the continued replacement cycle by our rental customers.

 

The increase in International sales for the year ended December 31, 2017 was due to the contribution from the recent acquisitions of Pramac and Motortech. The growth was also due to increased organic shipments of both C&I and residential products within the European and Latin America regions.

 

The total contribution from non-annualized recent acquisitions for the year ended December 31, 2017 was $69.7 million.

 

 

Gross profit.    Gross profit margin for the year ended December 31, 2017 was 34.8% compared to 35.4% for the year ended December 31, 2016, which included $2.7 million of business optimization and restructuring costs classified within cost of goods sold to address the significant and extended downturn for capital spending within the oil & gas industry, as well as $4.2 million of expense relating to the purchase accounting adjustment for the step-up in value of inventories relating to the Pramac acquisition. The year ended December 31, 2017 included $2.0 million of business optimization and non-recurring plant consolidation costs. Excluding the impact of these charges, pro-forma gross margins were 34.9% and 35.9% in 2017 and 2016, respectively. The pro-forma decrease in gross margins was primarily due to unfavorable sales mix attributable to higher organic sales within the International segment and of mobile products relative to 2016, which carry lower gross margins relative to the consolidated average. Additionally, the mix impact from the Pramac and Motortech acquisitions, and higher commodity prices negatively impacted gross margin. These impacts were partially offset by improved leverage of fixed manufacturing costs on the higher organic sales volumes and net favorable pricing impacts.

 

Operating expenses.    The 2016 operating expenses included $4.4 million of business optimization and restructuring costs classified within operating expenses to address the downturn for capital spending within the oil & gas industry. Excluding the impact of these charges, operating expenses increased $28.9 million, or 9.5%, as compared to 2016. The increase was primarily due to the addition of recurring operating expenses associated with the Pramac and Motortech acquisitions, and an increase in personnel costs including higher incentive compensation accrued during 2017, partially offset by a decline in amortization of intangibles.

 

Other expense. The decrease in other expense was primarily due to a 2016 $3.0 million non-cash loss on change in contractual interest rate not repeating in 2017 and a 2016 $0.6 million loss on extinguishment of debt resulting from a $25.0 million voluntary prepayment of Term Loan debt. Additionally, interest expense decreased in 2017 due to the $25.0 million Term Loan prepayment in November 2016, Term Loan repricings in May and December 2017, and decreased borrowings at other subsidiaries. These impacts were partially offset by an increase in LIBOR rates and foreign currency transactional losses.

 

Provision for income taxes. The effective income tax rates for the years ended December 31, 2017 and 2016 were 21.7% and 36.8%, respectively. The decrease in the effective income tax rate is primarily due to the provisional favorable effect of the Tax Act, including a one-time, non-cash benefit of $28.4 million recorded in the fourth quarter of 2017, as well as excess tax benefits from share-based compensation.

 

Net income attributable to Generac Holdings Inc.    The increase in net income attributable to Generac Holdings Inc. was primarily due to the factors outlined above partially offset by an increase in net income attributable to noncontrolling interests.

 

Adjusted EBITDA.   Adjusted EBITDA margins for the Domestic segment for the year ended December 31, 2017 were 22.3% of net sales as compared to 22.1% of net sales for the year ended December 31, 2016. This increase was primarily due to improved overall leverage of fixed operating expenses on the organic increase in sales, and the net favorable impact of pricing. These impacts were partially offset by higher commodity prices and an increase in personnel costs including higher incentive compensation accrued during 2017.

 

Adjusted EBITDA margins for the International segment for the year ended December 31, 2017 were 7.2% of net sales as compared to 6.3% of net sales for the year ended December 31, 2016. The increase was primarily due to improved overall leverage of fixed manufacturing and operating expenses on the organic increase in sales, the addition of the Motortech acquisition and cost reduction actions. These impacts were partially offset by higher commodity prices and increased operating expenses associated with the expansion of certain branch operations.

 

Adjusted net income. Adjusted Net Income of $211.9 million for the year ended December 31, 2017 increased 8.3% from $195.6 million for the year ended December 31, 2016, due to the factors outlined above, partially offset by an increase in cash income tax expense.

 

Liquidity and Financial Position

 

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

 

Our credit agreements originally provided for a $1.2 billion term loan B credit facility (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 our secured leverage ratio is maintained below 3.75 to 1.00 times. As of December 31, 2018, our secured leverage ratio was 1.66 to 1.00 times, and we were in compliance with all covenants of the Term Loan. There are no financial maintenance covenants on the Term Loan.

 

 

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 December 31, 2018, there were $18.5 million of borrowings outstanding and $276.6 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 December 31, 2018.

 

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 year ended December 31, 2018, we repurchased 560,000 shares of our common stock for $25.7 million. 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.

 

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 may use a portion of our cash flow to pay interest and principal on our outstanding debt as well as repurchase shares of our common stock, impacting the amount available for working capital, capital expenditures and other general corporate purposes. As we continue to expand our business, we may require additional capital to fund working capital, capital expenditures or acquisitions.

 

Cash Flow

 

Year ended December 31, 2018 compared to year ended December 31, 2017

 

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

 

   

Year Ended December 31,

                 

(U.S. Dollars in thousands)

 

2018

   

2017

   

Change

   

% Change

 

Net cash provided by operating activities

  $ 247,227     $ 257,322     $ (10,095 )     -3.9 %

Net cash used in investing activities

    (108,894 )     (28,128 )     (80,766 )     287.1 %

Net cash used in financing activities

    (52,034 )     (160,143 )     108,109       -67.5 %

 

The decrease in net cash provided by operating activities was primarily driven by increased working capital investment due to strong organic growth and incremental inventory purchases ahead of expected tariff changes, which was partially offset by an increase in operating earnings.

 

Net cash used in investing activities for the year ended December 31, 2018 primarily represents cash payments of $65.4 million related to the acquisition of businesses and $47.6 million for the purchase of property and equipment. Net cash used in investing activities for the year ended December 31, 2017 primarily consisted of cash payments for the purchase of property and equipment.

 

Net cash used in financing activities for the year ended December 31, 2018 primarily consisted of $129.7 million of debt repayments ($101.8 million of long-term borrowings and $27.9 million of short-term borrowings), $25.7 million for the repurchase of the Company’s common stock, and $5.7 million of taxes paid related to equity awards. These payments were partially offset by $105.4 million cash proceeds from borrowings ($54.0 million for short-term borrowings and $51.4 million for long-term borrowings) and $5.6 million of proceeds from the exercise of stock options.

 

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

 

 

Year ended December 31, 2017 compared to year ended December 31, 2016

 

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

 

   

Year Ended December 31,

                 

(U.S. Dollars in thousands)

 

2017

   

2016

   

Change

   

% Change

 

Net cash provided by operating activities

  $ 257,322     $ 241,122     $ 16,200       6.7 %

Net cash used in investing activities

    (28,128 )     (93,535 )     65,407       -69.9 %

Net cash used in financing activities

    (160,143 )     (195,705 )     35,562       -18.2 %

 

The 6.7% increase in net cash provided by operating activities was primarily driven by an overall increase in operating earnings, partially offset by a lesser benefit from working capital reductions during 2017, which was primarily due to replenishing inventory levels in the first quarter of 2017 following Hurricane Matthew, and ramping up production in the second half of 2017 in response to Hurricanes Harvey, Irma and Maria.

 

Net cash used in investing activities for the year ended December 31, 2017 primarily consisted of cash payments for the purchase of property and equipment. Net cash used in investing activities for the year ended December 31, 2016 primarily represents cash payments of $76.7 million related to the acquisition of businesses and $30.5 million for the purchase of property and equipment.

 

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

 

Net cash used in financing activities for the year ended December 31, 2016 primarily consisted of $149.9 million for the repurchase of the Company’s common stock, $65.4 million of debt repayments ($37.6 million of long-term borrowings and $27.8 million of short-term borrowings) and $14.0 million of taxes paid related to equity awards. These payments were partially offset by $28.7 million cash proceeds from short-term borrowings and $7.9 million of excess tax benefits from equity awards.

 

Senior Secured Credit Facilities

 

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

 

Covenant Compliance

 

The Term Loan contains restrictions on the Company’s ability to pay distributions and dividends. Payments can be made to the Company or other parent companies for certain expenses such as operating expenses in the ordinary course, fees and expenses related to any debt or equity offering and to pay franchise or similar taxes. Dividends can be used to repurchase equity interests, subject to limitations in certain circumstances. Additionally, the Term Loan restricts the aggregate amount of dividends and distributions that can be paid and, in certain circumstances, requires pro forma compliance with certain fixed charge coverage ratios or gross leverage ratios, as applicable, in order to pay certain dividends and distributions. The Term Loan also contains other affirmative and negative covenants that, among other things, limit the incurrence of additional indebtedness, liens on property, sale and leaseback transactions, investments, loans and advances, mergers or consolidations, asset sales, acquisitions, transactions with affiliates, prepayments of certain other indebtedness and modifications of our organizational documents. The Term Loan does not contain any financial maintenance covenants.

 

The Term Loan contains customary events of default, including, among others, nonpayment of principal, interest or other amounts, failure to perform covenants, inaccuracy of representations or warranties in any material respect, cross-defaults with other material indebtedness, certain undischarged judgments, the occurrence of certain ERISA, bankruptcy or insolvency events, or the occurrence of a change in control (as defined in the Term Loan). A bankruptcy or insolvency event of default will cause the obligations under the Term Loan to automatically become immediately due and payable.

 

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

 

 

Contractual Obligations

 

The following table summarizes our expected payments for significant contractual obligations as of December 31, 2018, using the interest rates in effect as of that date:

 

(U.S. Dollars in thousands)

 

Total

   

Less than 1 Year

   

2 - 3 Years

   

4 - 5 Years

   

After 5 Years

 

Long-term debt, including current portion (1)

  $ 880,642     $ 1,075     $ 567     $ -     $ 879,000  

Capital lease obligations, including current portion

    20,171       852       2,470       2,974       13,875  

Interest on long-term debt and capital lease obligations

    167,652       37,046       73,968       52,476       4,162  

Operating leases

    50,919       8,914       13,954       9,437       18,614  

Total contractual cash obligations (2)

  $ 1,119,384     $ 47,887     $ 90,959     $ 64,887     $ 915,651  

 

(1) The Term Loan originally provided for a $1.2 billion credit facility and includes a $300.0 million uncommitted incremental term loan facility. The Term Loan matures on May 31, 2023. The ABL Facility provides for a $300.0 million senior secured ABL revolving credit facility, which matures on June 12, 2023. There was no outstanding balance on the ABL Facility classified as long-term as of December 31, 2018.

 

(2) Pension obligations are excluded from this table as we are unable to estimate the timing of payment due to the inherent assumptions underlying the obligation. However, there are no minimum required contributions due to our pension plan in 2019.

 

Capital Expenditures

 

Our operations require capital expenditures for technology, tooling, equipment, capacity expansion, systems and upgrades. Capital expenditures were $47.6 million, $33.3 million and $30.5 million for the years ended December 31, 2018, 2017 and 2016, respectively, and were funded through cash from operations.

 

Off-Balance Sheet Arrangements

 

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

 

Total inventory financed under this arrangement accounted for approximately 10% and 9% of net sales for the years ended December 31, 2018 and 2017, respectively. The amount financed by dealers which remained outstanding was $47.2 million and $36.5 million as of December 31, 2018 and 2017, respectively.

 

Critical Accounting Policies

 

In preparing the financial statements in accordance with U.S. GAAP, management is required to make estimates and assumptions that have an impact on the asset, liability, revenue and expense amounts reported. These estimates can also affect our supplemental information disclosures, including information about contingencies, risk and financial condition. We believe, given current facts and circumstances, that our 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. We make 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 our 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.

 

Goodwill and Other Indefinite-Lived Intangible Assets

 

Refer to Note 2, “Significant Accounting Policies – Goodwill and Other Indefinite-Lived Intangible Assets,” to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K for further information on the Company’s policy regarding the accounting for goodwill and other intangible assets.

 

The Company performed the required annual impairment tests for goodwill and other indefinite-lived intangible assets for the fiscal years 2018, 2017 and 2016, and found no impairment. There were no reporting units with a carrying value at-risk of exceeding fair value as of the October 31, 2018 impairment test date.

 

 

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

 

As noted above, a considerable amount of management judgment and assumptions are required in performing the goodwill and indefinite-lived intangible asset impairment tests. While we believe our judgments and assumptions are reasonable, different assumptions could change the estimated fair values. A number of factors, many of which we have no ability to control, could cause actual results to differ from the estimates and assumptions we employed. These factors include:

 

 

a prolonged global or regional economic downturn;

 

a significant decrease in the demand for our products;

 

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

 

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

 

an adverse action or assessment by a regulator;

 

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

 

disruptions to the Company’s business;

 

inability to effectively integrate acquired businesses;

 

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

 

business divestitures.

 

If management's estimates of future operating results change or if there are changes to other assumptions due to these factors, the estimate of the fair values may change significantly. Such change could result in impairment charges in future periods, which could have a significant impact on our operating results and financial condition.

 

Business Combinations and Purchase Accounting

 

We account for business combinations using the acquisition method of accounting, and accordingly, the assets and liabilities of the acquired business are recorded at their respective fair values. The excess of the purchase price over the estimated fair value of assets and liabilities is recorded as goodwill. Assigning fair market values to the assets acquired and liabilities assumed at the date of an acquisition requires knowledge of current market values, the values of assets in use, and often requires the application of judgment regarding estimates and assumptions. While the ultimate responsibility resides with management, for material acquisitions we retain the services of certified valuation specialists to assist with assigning estimated values to certain acquired assets and assumed liabilities, including intangible assets and tangible long-lived assets. Acquired intangible assets, excluding goodwill, are valued using certain discounted cash flow methodologies based on future cash flows specific to the type of intangible asset purchased. This methodology incorporates various estimates and assumptions, the most significant being projected revenue growth rates, earnings margins, and forecasted cash flows based on the discount rate and terminal growth rate. Refer to Note 1, “Description of Business,” to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K for further information on the Company’s business acquisitions.

 

Defined Benefit Pension Obligations

 

The Company’s pension benefit obligation and related pension expense or income are calculated in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 715-30, Defined Benefit Plans—Pension, and are impacted by certain actuarial assumptions, including the discount rate and the expected rate of return on plan assets. Such rates are evaluated on an annual basis considering factors including market interest rates and historical asset performance. Actuarial valuations for fiscal year 2018 used a discount rate of 4.24%. Our discount rate was selected using a methodology that matches plan cash flows with a selection of “Aa” or higher rated bonds, resulting in a discount rate that better matches a bond yield curve with comparable cash flows. In estimating the expected return on plan assets, we study historical markets and preserve the long-term historical relationships between equities and fixed-income securities. We evaluate current market factors such as inflation and interest rates before we determine long-term capital market assumptions and review peer data and historical returns to check for reasonableness and appropriateness. Changes in the discount rate and return on assets can have a significant effect on the funded status of our pension plans, stockholders' equity and related expense. We cannot predict these changes in discount rates or investment returns and, therefore, cannot reasonably estimate whether the impact in subsequent years will be significant.

 

The funded status of our pension plans is the difference between the projected benefit obligation and the fair value of its plan assets. The projected benefit obligation is the actuarial present value of all benefits expected to be earned by the employees' service. No compensation increase is assumed in the calculation of the projected benefit obligation, as the plans were frozen effective December 31, 2008. Further information regarding the funded status of our pension plans can be found in Note 14, “Benefit Plans,” to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K.

 

 

Our funding policy for our pension plans is to contribute amounts at least equal to the minimum annual amount required by applicable regulations. There is no minimum required contribution due to our pension plan in 2019.

 

Income Taxes

 

We account for income taxes in accordance with ASC 740, Income Taxes. Our estimate of income taxes payable, deferred income taxes and the effective tax rate is based on an analysis of many factors including interpretations of federal, state and international income tax laws; the difference between tax and financial reporting bases of assets and liabilities; estimates of amounts currently due or owed in various jurisdictions; and current accounting standards. We review and update our estimates on a quarterly basis as facts and circumstances change and actual results are known.

 

In assessing the realizability of the deferred tax assets on our balance sheet, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the years in which those temporary differences become deductible. We consider the taxable income in prior carryback years, scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment.

 

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

 

New Accounting Standards

 

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

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

 

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

 

Foreign Currency

 

We are exposed to foreign currency exchange risk as a result of transactions denominated in currencies other than the U.S. Dollar, as well as operating businesses in foreign countries. Periodically, we utilize foreign currency forward purchase and sales contracts to manage the volatility associated with certain foreign currency purchases and sales in the normal course of business. Contracts typically have maturities of twelve months or less. Realized gains and losses on transactions denominated in foreign currency are recorded as a component of cost of goods sold on the statements of comprehensive income.

 

The following is a summary of the forty foreign currency contracts outstanding as of December 31, 2018 (notional amount in thousands):

 

Currency

Denomination

 

Trade Dates

 

Effective Dates

 

Notional Amount

 

Expiration Date

GBP

 

11/12/18 - 12/17/18

 

11/12/18 - 12/17/18

    4,066  

1/16/19 - 6/19/19

USD

 

11/12/18 - 12/14/18

 

11/12/18 - 12/14/18

    10,165  

1/16/19 - 3/6/19

AUD

 

11/12/18 - 11/19/18

 

11/12/18 - 11/19/18

    1,900  

1/16/19 - 1/23/19

 

Commodity Prices

 

We are a purchaser of commodities and components manufactured from commodities including steel, aluminum, copper and others. As a result, we are exposed to fluctuating market prices for those commodities. While such materials are typically available from numerous suppliers, commodity raw materials are subject to price fluctuations. We generally buy these commodities and components based upon market prices that are established with the supplier as part of the purchase process. Depending on the supplier, these market prices may reset on a periodic basis based on negotiated lags and calculations. To the extent that commodity prices increase and we do not have firm pricing from our suppliers, or our suppliers are not able to honor such prices, we may experience a decline in our gross margins to the extent we are not able to increase selling prices of our products or obtain manufacturing efficiencies or supply chain savings to offset increases in commodity costs.

 

 

Periodically, we engage in certain commodity risk management activities to mitigate the impact of potential price fluctuations on our financial results. These derivatives typically have maturities of less than eighteen months. As of December 31, 2018, we had the following commodity forward contracts outstanding (notional amount in thousands):

 

Hedged Item

 

Contract Date

 

Effective Date

 

Notional Amount

   

Fixed Price

 

Expiration Date

Copper

 

February 12, 2018

 

February 1, 2018

  $ 3,776       $3.114 per LB  

December 31, 2018

Copper

 

March 8, 2018

 

March 9, 2018

  $ 3,427       $3.109 per LB  

December 31, 2018

Copper

 

March 20, 2018

 

March 21, 2018

  $ 3,418       $3.101 per LB  

December 31, 2018

Copper

 

March 20, 2018

 

March 21, 2018

  $ 1,697       $3.079 per LB  

December 31, 2018

Copper

 

March 26, 2018

 

April 1, 2018

  $ 3,003       $3.027 per LB  

December 31, 2018

 

Interest Rates

 

As of December 31, 2018, all of the outstanding debt under our Term Loan and ABL Facility was subject to floating interest rate risk. As of December 31, 2018, we had the following interest rate swap contracts outstanding (notional amount in thousands):

 

Hedged Item

 

Contract Date

 

Effective Date

 

Notional Amount

   

Fixed LIBOR Rate

 

Expiration Date

Interest Rate

 

June 19, 2017

 

July 2, 2018

    125,000       1.6543%  

July 1, 2019

Interest Rate

 

June 19, 2017

 

July 1, 2019

    125,000       1.9053%  

July 1, 2020

Interest Rate

 

June 19, 2017

 

July 1, 2020

    125,000       2.1328%  

July 1, 2021

Interest Rate

 

June 19, 2017

 

July 1, 2021

    125,000       2.3453%  

July 1, 2022

Interest Rate

 

June 19, 2017

 

July 1, 2022

    125,000       2.4828%  

May 31, 2023

Interest Rate

 

June 30, 2017

 

July 1, 2018

    125,000       1.7090%  

July 1, 2019

Interest Rate

 

June 30, 2017

 

July 1, 2019

    125,000       1.9750%  

July 1, 2020

Interest Rate

 

June 30, 2017

 

July 1, 2020

    125,000       2.2170%  

July 1, 2021

Interest Rate

 

June 30, 2017

 

July 1, 2021

    125,000       2.4360%  

July 1, 2022

Interest Rate

 

June 30, 2017

 

July 1, 2022

    125,000       2.5910%  

May 31, 2023

Interest Rate

 

August 9, 2017

 

July 1, 2018

    125,000       1.6298%  

July 1, 2019

Interest Rate

 

August 9, 2017

 

July 1, 2019

    125,000       1.8598%  

July 1, 2020

Interest Rate

 

August 9, 2017

 

July 1, 2020

    125,000       2.0848%  

July 1, 2021

Interest Rate

 

August 9, 2017

 

July 1, 2021

    125,000       2.3010%  

July 1, 2022

Interest Rate

 

August 9, 2017

 

July 1, 2022

    125,000       2.4848%  

May 31, 2023

Interest Rate

 

August 30, 2017

 

July 1, 2018

    125,000       1.5503%  

July 1, 2019

Interest Rate

 

August 30, 2017

 

July 1, 2019

    125,000       1.7553%  

July 1, 2020

Interest Rate

 

August 30, 2017

 

July 1, 2020

    125,000       1.9803%  

July 1, 2021

Interest Rate

 

August 30, 2017

 

July 1, 2021

    125,000       2.2228%  

July 1, 2022

Interest Rate

 

August 30, 2017

 

July 1, 2022

    125,000       2.4153%  

May 31, 2023

 

At December 31, 2018, the fair value of these interest rate swaps was an asset of $8.4 million. Even after giving effect to these swaps, we are exposed to risks due to changes in interest rates with respect to the portion of our Term Loan and ABL Facility that is not covered by the swaps. A hypothetical change in the LIBOR interest rate of 100 basis points would have changed annual cash interest expense by approximately $3.8 million (or, without the swaps in place, $8.8 million) in 2018.

 

For additional information on the Company’s foreign currency and commodity forward contracts, and interest rate swaps, including amounts charged to the statement of comprehensive income during 2018, 2017, and 2016, refer to Note 4, “Derivative Instruments and Hedging Activities,” and Note 5, “Accumulated Other Comprehensive Loss,” to our consolidated financial statements in Item 8 of this Annual Report on Form 10-K.

 

 

Item 8. Financial Statements and Supplementary Data

 

Report of Independent Registered Public Accounting Firm

 

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

Waukesha, Wisconsin

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of Generac Holdings Inc. and subsidiaries (the “Company”) as of December 31, 2018 and 2017, the related consolidated statements of comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2018, and the related notes, collectively referred to as the “financial statements”. In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.

 

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 26, 2019, expressed an unqualified opinion on the Company's internal control over financial reporting.

 

Basis for Opinion

 

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

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ Deloitte & Touche LLP

 

Milwaukee, Wisconsin

February 26, 2019

 

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

 

 

Report of Independent Registered Public Accounting Firm

 

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

Waukesha, Wisconsin

 

Opinion on Internal Control over Financial Reporting

 

We have audited the internal control over financial reporting of Generac Holdings Inc. and its subsidiaries (the "Company") as of December 31, 2018, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.

 

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2018, of the Company and our report dated February 26, 2019, expressed an unqualified opinion on those financial statements.

 

As described in Management’s Report on Internal Control over Financial Reporting, management excluded from its assessment the internal control over financial reporting at the Selmec Equipos Industriales, S.A. de C.V. (“Selmec”), which was acquired on June 1, 2018 and whose financial statements constitute 11.1% and 5.3% of net and total assets, respectively, 1.5% of net sales, and 0.04% of net income of the consolidated financial statement amounts as of and for the year ended December 31, 2018. Accordingly, our audit did not include the internal control over financial reporting at Selmec.

 

Basis for Opinion

 

The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

Definition and Limitations of Internal Control over Financial Reporting

 

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

/s/ Deloitte & Touche LLP

 

Milwaukee, Wisconsin

February 26, 2019

 

 

 

Generac Holdings Inc.

Consolidated Balance Sheets

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

 

   

December 31,

 
   

2018

   

2017

 

Assets

               

Current assets:

               

Cash and cash equivalents

  $ 224,482     $ 138,472  

Accounts receivable, less allowance for doubtful accounts of $4,873 and $4,805 at December 31, 2018 and 2017, respectively

    326,133       279,295  

Inventories

    544,750       387,049  

Prepaid expenses and other assets

    25,404       19,741  

Total current assets

    1,120,769       824,557  
                 

Property and equipment, net

    278,929       230,380  
                 

Customer lists, net

    61,194       41,064  

Patents, net

    29,970       39,617  

Other intangible assets, net

    3,043       2,401  

Tradenames, net

    152,283       152,683  

Goodwill

    764,655       721,523  

Deferred income taxes

    163       3,238  

Other assets

    15,308       10,502  

Total assets

  $ 2,426,314     $ 2,025,965  
                 

Liabilities and stockholders’ equity

               

Current liabilities:

               

Short-term borrowings

  $ 45,583     $ 20,602  

Accounts payable

    328,091       233,639  

Accrued wages and employee benefits

    40,819       27,992  

Other accrued liabilities

    144,236       112,618  

Current portion of long-term borrowings and capital lease obligations

    1,977       1,572  

Total current liabilities

    560,706       396,423  
                 

Long-term borrowings and capital lease obligations

    876,396       906,548  

Deferred income taxes

    71,300       41,852  

Other long-term liabilities

    95,647       82,893  

Total liabilities

    1,604,049       1,427,716  
                 

Redeemable noncontrolling interest

    61,004       43,929  
                 

Stockholders’ equity:

               

Common stock, par value $0.01, 500,000,000 shares authorized, 71,186,418 and 70,820,173 shares issued at December 31, 2018 and 2017, respectively

    712       708  

Additional paid-in capital

    476,116       459,816  

Treasury stock, at cost, 9,047,060 and 8,448,874 shares at December 31, 2018 and 2017, respectively

    (321,473 )     (294,005 )

Excess purchase price over predecessor basis

    (202,116 )     (202,116 )

Retained earnings

    831,123       610,836  

Accumulated other comprehensive loss

    (23,813 )     (21,198 )

Stockholders’ equity attributable to Generac Holdings Inc.

    760,549       554,041  

Noncontrolling interests

    712       279  

Total stockholders’ equity

    761,261       554,320  

Total liabilities and stockholders’ equity

  $ 2,426,314     $ 2,025,965  

 

See notes to consolidated financial statements.

 

 

 

Generac Holdings Inc.

Consolidated Statements of Comprehensive Income

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

 

   

Year Ended December 31,

 
   

2018

   

2017

   

2016

 
                         

Net sales

  $ 2,023,464     $ 1,679,373     $ 1,447,743  

Costs of goods sold

    1,298,424       1,094,587       935,322  

Gross profit

    725,040       584,786       512,421  
                         

Operating expenses:

                       

Selling and service

    191,887       174,841       164,860  

Research and development

    50,019       42,869       37,163  

General and administrative

    103,841       87,581       74,693  

Amortization of intangibles

    22,112       28,861       32,953  

Total operating expenses

    367,859       334,152       309,669  

Income from operations

    357,181       250,634       202,752  
                         

Other (expense) income:

                       

Interest expense

    (40,956 )     (42,667 )     (44,568 )

Investment income

    1,893       298       44  

Loss on extinguishment of debt

    (1,332 )           (574 )

Loss on change in contractual interest rate

                (2,957 )

Other, net

    (5,710 )     (4,566 )     (1,000 )

Total other expense, net

    (46,105 )     (46,935 )     (49,055 )
                         

Income before provision for income taxes

    311,076       203,699       153,697  

Provision for income taxes

    69,856       44,142       56,519  

Net income

    241,220       159,557       97,178  

Net income attributable to noncontrolling interests

    2,963       1,749       24  

Net income attributable to Generac Holdings Inc.

  $ 238,257     $ 157,808     $ 97,154  
                         

Net income attributable to common shareholders per common share - basic:

  $ 3.57     $ 2.56     $ 1.48  

Weighted average common shares outstanding - basic:

    61,662,031       62,040,704       64,905,793  
                         

Net income attributable to common shareholders per common share - diluted:

  $ 3.54     $ 2.53     $ 1.47  

Weighted average common shares outstanding - diluted:

    62,233,225       62,642,872       65,382,774  
                         

Other comprehensive income (loss):

                       

Foreign currency translation adjustment

  $ (5,976 )   $ 15,191     $ (18,545 )

Net unrealized gain on derivatives

    2,924       3,712       535  

Pension liability adjustment

    437       62       322  

Other comprehensive income (loss)

    (2,615 )     18,965       (17,688 )

Total comprehensive income

    238,605       178,522       79,490  

Comprehensive income (loss) attributable to noncontrolling interests

    1,647       5,549       (973 )

Comprehensive income attributable to Generac Holdings Inc.

  $ 236,958     $ 172,973     $ 80,463  

 

See notes to consolidated financial statements.

 

 

 

Generac Holdings Inc.

Consolidated Statements of Stockholders' Equity

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

 

   

Generac Holdings Inc.

                 
   

Common Stock

   

Additional

Paid-In

   

Treasury Stock

   

Excess

Purchase Price

Over Predecessor

   

Retained

   

Accumulated

Other

Comprehensive

   

Total

Stockholders'

   

Noncontrolling

         
   

Shares

   

Amount

   

Capital

   

Shares

   

Amount

   

Basis

   

Earnings

   

Income (Loss)

   

Equity

   

Interest

   

Total

 

Balance at December 31, 2015 (previously reported)

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

Impact of adoption of certain accounting standards (Note 2)

                                        (2,299 )           (2,299 )           (2,299 )

Balance at December 31, 2015 (as adjusted)

    69,582,669     $ 696     $ 443,109       (3,567,575 )   $ (111,516 )   $ (202,116 )   $ 355,874     $ (22,475 )   $ 463,572     $ -     $ 463,572  

Acquisition of business

                                                          53       53  

Unrealized gain on interest rate swaps, net of tax of $341

                                              535       535             535  

Foreign currency translation adjustment

                                              (18,545 )     (18,545 )     13       (18,532 )

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

    678,812       6       (11,473 )                                   (11,467 )           (11,467 )

Net share settlement of restricted stock awards

                      (28,593 )     (949 )                       (949 )           (949 )

Stock repurchases

                      (3,968,706 )     (149,937 )                       (149,937 )           (149,937 )

Excess tax benefits from equity awards

                7,920                                     7,920             7,920  

Share-based compensation

                9,493                                     9,493             9,493  

Pension liability adjustment, net of tax of $207

                                              322       322             322  

Redemption value adjustment

                                        (909 )           (909 )           (909 )

Net income

                                        97,154             97,154       (76 )     97,078  
                                                                                         

Balance at December 31, 2016

    70,261,481     $ 702     $ 449,049       (7,564,874 )   $ (262,402 )   $ (202,116 )   $ 452,119     $ (40,163 )   $ 397,189     $ (10 )   $ 397,179  

Change in noncontrolling interest share

                (2,124 )                                   (2,124 )     184       (1,940 )

Unrealized gain on interest rate swaps, net of tax of $2,384

                                              3,712       3,712             3,712  

Foreign currency translation adjustment

                                              15,191       15,191       (14 )     15,177  

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

    558,692       6       2,686                                     2,692             2,692  

Net share settlement of restricted stock awards

                      (39,500 )     (1,591 )                       (1,591 )           (1,591 )

Stock repurchases

                      (844,500 )     (30,012 )                       (30,012 )           (30,012 )

Share-based compensation

                10,205                                     10,205             10,205  

Pension liability adjustment, net of tax of $21

                                              62       62             62  

Redemption value adjustment

                                        909             909             909  

Net income

                                        157,808             157,808       119       157,927  
                                                                                         

Balance at December 31, 2017

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

Unrealized gain on interest rate swaps, net of tax of $1,027

                                              2,924       2,924             2,924  

Foreign currency translation adjustment

                                              (5,976 )     (5,976 )     (2 )     (5,978 )

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

    366,245       4       1,737                                     1,741             1,741  

Net share settlement of restricted stock awards

                      (38,186 )     (1,812 )                       (1,812 )           (1,812 )

Stock repurchases

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

Cash dividends paid to noncontrolling interest of subsidiary

                                                          (314 )     (314 )

Share-based compensation

                14,563                                     14,563             14,563  

Pension liability adjustment, net of tax of $154

                                              437       437             437  

Redemption value adjustment

                                        (17,970 )           (17,970 )           (17,970 )

Net income

                                        238,257             238,257       749       239,006  
                                                                                         

Balance at December 31, 2018

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

 

See notes to consolidated financial statements.

 

 

 

Generac Holdings Inc.

Consolidated Statements of Cash Flows

(U.S. Dollars in Thousands)

 

   

Year Ended December 31,

 
   

2018

   

2017

   

2016

 
                         

Operating activities

                       

Net income

  $ 241,220     $ 159,557     $ 97,178  

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

                       

Depreciation

    25,296       23,127       21,465  

Amortization of intangible assets

    22,112       28,861       32,953  

Amortization of original issue discount and deferred financing costs

    4,749       3,516       3,940  

Loss on extinguishment of debt

    1,332             574  

Loss on change in contractual interest rate

                2,957  

Deferred income taxes

    23,600       19,502       38,297  

Share-based compensation expense

    14,563       10,205       9,493  

Other

    2,474       410       127  

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

                       

Accounts receivable

    (43,243 )     (32,857 )     (21,223 )

Inventories

    (152,594 )     (22,986 )     14,680  

Other assets

    (6,362 )     (14,783 )     406  

Accounts payable

    86,359       42,788       32,908  

Accrued wages and employee benefits

    12,626       6,105       5,196  

Other accrued liabilities

    16,972       37,029       10,091  

Excess tax benefits from equity awards

    (1,877 )     (3,152 )     (7,920 )

Net cash provided by operating activities

    247,227       257,322       241,122  
                         

Investing activities

                       

Proceeds from sale of property and equipment

    214       82       1,360  

Proceeds from beneficial interest in securitization transactions

    3,933       3,794       12,287  

Expenditures for property and equipment

    (47,601 )     (33,261 )     (30,467 )

Acquisition of business, net of cash acquired

    (65,440 )     1,257       (61,386 )

Deposit paid related to acquisition

                (15,329 )

Net cash used in investing activities

    (108,894 )     (28,128 )     (93,535 )
                         

Financing activities

                       

Proceeds from short-term borrowings

    53,965       101,991       28,712  

Proceeds from long-term borrowings

    51,425       3,069        

Repayments of short-term borrowings

    (27,880 )     (114,874 )     (27,755 )

Repayments of long-term borrowings and capital lease obligations

    (101,827 )     (117,475 )     (37,627 )

Stock repurchases

    (25,656 )     (30,012 )     (149,937 )

Payment of debt issuance costs

    (1,702 )     (3,901 )     (4,557 )

Cash dividends paid

                (76 )

Cash dividends paid to noncontrolling interest of subsidiary

    (314 )            

Taxes paid related to equity awards

    (5,659 )     (5,892 )     (14,008 )

Proceeds from the exercise of stock options

    5,614       6,951       1,623  

Excess tax benefits from equity awards

                7,920  

Net cash used in financing activities

    (52,034 )     (160,143 )     (195,705 )
                         

Effect of exchange rate changes on cash and cash equivalents

    (289 )     2,149       (467 )
                         

Net increase (decrease) in cash and cash equivalents

    86,010       71,200       (48,585 )

Cash and cash equivalents at beginning of period

    138,472       67,272       115,857  

Cash and cash equivalents at end of period

  $ 224,482     $ 138,472     $ 67,272  
                         

Supplemental disclosure of cash flow information

                       

Cash paid during the period

                       

Interest

  $ 41,007     $ 41,105     $ 42,456  

Income taxes

    41,044       23,836       8,889  

 

See notes to consolidated financial statements.

 

 

Generac Holdings Inc.
Notes to Consolidated Financial Statements

Years Ended December 31, 2018, 2017, and 2016

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

 

 

1.

Description of Business

 

Founded in 1959, Generac Holdings Inc. (the Company) is a leading global designer and manufacturer of a wide range of power generation equipment and other power products serving the residential, light-commercial and industrial markets. Generac’s power products are available globally through a broad network of independent dealers, distributors, retailers, wholesalers, equipment rental companies, and e-commerce partners, 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 (refer to Item 1 in this Annual Report on Form 10-K for discussion of our Powering Our Future strategic plan). A summary of acquisitions affecting the reporting periods presented include:

 

 

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

 

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

 

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

 

In March 2016, the Company acquired a majority ownership interest in PR Industrial S.r.l and its subsidiaries (Pramac). Headquartered in Siena, Italy, Pramac is a leading global manufacturer of stationary, mobile and portable generators primarily sold under the Pramac® brand. Pramac products are sold in over 150 countries through a broad distribution network.

 

In January 2017, the Company acquired Motortech GmbH (Motortech), headquartered in Celle, Germany. Motortech is a leading manufacturer of gaseous-engine control systems and accessories, which are sold primarily to European gas-engine manufacturers and to aftermarket customers. While the Motortech acquisition was completed in January 2017, it was funded in the fourth quarter of 2016.

 

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.

 

 

2.

Summary of Accounting Policies

 

Principles of Consolidation

 

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

 

Cash and Cash Equivalents

 

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

 

Concentration of Credit Risk

 

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

 

 

One customer accounted for approximately 11% and 7% of accounts receivable at December 31, 2018 and 2017, respectively. No one customer accounted for greater than 6%, 6% and 7%, of net sales during the years ended December 31, 2018, 2017, or 2016, respectively.

 

Accounts Receivable

 

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

 

Inventories

 

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

 

Property and Equipment

 

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

 

Land improvements

   8 20  

Buildings and improvements

   10 40  

Machinery and equipment

   3 15  

Dies and tools

   3 10  

Vehicles

   3 6  

Office equipment and systems

   3 15  

Leasehold improvements

   2 20  

 

Total depreciation expense was $25,296, $23,127, and $21,465 for the years ended December 31, 2018, 2017, and 2016, respectively.

 

Goodwill and Other Indefinite-Lived Intangible Assets

 

Goodwill represents the excess of the purchase price over fair value of identifiable net assets acquired from business acquisitions. Goodwill is not amortized, but is reviewed for impairment on an annual basis and between annual tests if indicators of impairment are present. The Company evaluates goodwill for impairment annually as of October 31 or more frequently when an event occurs or circumstances change that indicates the carrying value may not be recoverable. The Company has the option to assess goodwill for impairment by performing either a qualitative assessment or quantitative test. The qualitative assessment determines whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the Company determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then the quantitative test is not required to be performed. If the Company determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company is required to perform the quantitative test. In the quantitative test, the calculated fair value of the reporting unit is compared to its book value including goodwill. If the fair value of the reporting unit is in excess of its book value, the related goodwill is not impaired. If the fair value of the reporting unit is less than its book value, an impairment loss is recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit.

 

Other indefinite-lived intangible assets consist of certain tradenames. The Company tests the carrying value of these tradenames annually as of October 31 or more frequently when an event occurs or circumstances change that indicates the carrying value may not be recoverable by comparing the assets’ fair value to its carrying value. Fair value is measured using a relief-from-royalty approach, which assumes the fair value of the tradename is the discounted cash flows of the amount that would be paid had the Company not owned the tradename and instead licensed the tradename from another company.

 

The Company performed the required annual impairment tests for goodwill and other indefinite-lived intangible assets for the fiscal years 2018, 2017 and 2016, and found no impairment. There were no reporting units with a carrying value at-risk of exceeding fair value as of the October 31, 2018 impairment test date.

 

 

Impairment of Long-Lived Assets

 

The Company periodically evaluates the carrying value of long-lived assets (excluding goodwill and indefinite-lived tradenames). Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the sum of the expected future undiscounted cash flows is less than the carrying amount of an asset, a loss is recognized for the difference between the fair value and carrying value of the asset.

 

Debt Issuance Costs

 

Debt discounts and direct costs incurred in connection with the issuance of long-term debt are deferred and recorded as a reduction of outstanding debt and amortized to interest expense using the effective interest method over the terms of the related credit agreements. $4,749, $3,516, and $3,939 of deferred financing costs and original issue discount were amortized to interest expense during fiscal years 2018, 2017 and 2016, respectively. Excluding the impact of any future long-term debt issuances or prepayments, estimated amortization to interest expense for the next five years is as follows: 2019 - $4,828; 2020 - $4,985; 2021 - $5,120; 2022 - $5,272; 2023 - $2,236.

 

Income Taxes

 

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

 

Revenue Recognition


The Company’s revenues primarily consist of product sales to its customers. The Company considers the purchase orders, which in some cases are governed by master sales agreements, to be the contracts with the customers. For each contract, the Company considers the commitment to transfer products, each of which is distinct, to be the identified performance obligations. Revenue is measured as the amount of consideration the Company expects to be entitled in exchange for the transfer of product, which is generally the price stated in the contract specific for each item sold, adjusted for the value of expected returns, discounts, rebates, or other promotional incentives or allowances offered to our customers. Expected returns for damaged or defective product are estimated using the expected value method based upon historical product return experience. Discounts and rebates offered to customers are typically defined in the master sales agreements with customers and, therefore, are recorded using the most likely amount method based on the terms of the contract. Promotional incentives are defined programs offered for short, specific periods of time and are estimated using the expected value method based upon historical experience. The Company does not expect the transaction price for revenue recognized will be subject to a significant revenue reversal. As the Company’s product sale contracts and standard payment terms have a duration of less than one year, it uses the practical expedient applicable to such contracts and does not consider the time value of money. Sales, use, value add and other similar taxes assessed by governmental authorities and collected concurrent with revenue-producing activities are excluded from revenue. The Company has elected to recognize the cost for freight activities when control of the product has transferred to the customer as an expense within cost of goods sold in the consolidated statements of comprehensive income. Product revenues are recognized at the point in time when control of the product is transferred to the customer, which typically occurs upon shipment or delivery to the customer. To determine when control has transferred, the Company considers if there is a present right to payment and if legal title, physical possession, and the significant risks and rewards of ownership of the asset has transferred to the customer. As substantially all of the Company’s product revenues are recognized at a point in time, the amount of unsatisfied performance obligations at each period end is not material. The Company’s contracts have an original expected duration of one year or less. As a result, the Company has elected to use the practical expedient to not disclose its remaining performance obligations.

 

At the request of certain customers, the Company will warehouse inventory billed to the customer but not delivered. Unless all revenue recognition criteria have been met, the Company does not recognize revenue on these transactions until the customer takes possession of the product.

 

While the Company’s standard payment terms are less than one year, the specific payment terms and conditions in its customer contracts vary. In some cases, customers prepay for their goods; in other cases, after appropriate credit evaluation, an open credit line is granted and payment is due in arrears. Contracts with payment in arrears are recognized in the consolidated balance sheets as accounts receivable upon revenue recognition, while contracts where customers pay in advance are recognized as customer deposits and recorded in other accrued liabilities in the consolidated balance sheets until revenue is recognized. The balance of customer deposits (contract liabilities) was $14,174 and $4,594 at December 31, 2018 and December 31, 2017, respectively. During the year ended December 31, 2018, the Company recognized revenue of $4,592 related to amounts included in the December 31, 2017 customer deposit balance. The Company typically recognizes revenue within one year of the receipt of the customer deposit.

 

 

The Company offers standard warranty coverage on substantially all products that it sells and accounts for this standard warranty coverage as an assurance warranty. As such, no transaction price is allocated to the standard warranty, and the Company records a liability for product warranty obligations at the time of sale to a customer based upon historical warranty experience. Refer to Note 9, “Product Warranty Obligations,” to the consolidated financial statements for further information regarding the Company’s standard warranties.

 

The Company also sells extended warranty coverage for certain products, which it accounts for as service warranties. In most cases, the extended warranty is sold as a separate contract. As such, extended warranty sales are considered a separate performance obligation, and the extended warranty transaction price is separate and distinct from the product. The extended warranty transaction price is initially recorded as deferred revenue in the consolidated balance sheets and amortized on a straight-line basis to net sales in the consolidated statements of comprehensive income over the life of the contracts following the standard warranty period. For extended warranty contracts that the Company sells under a third-party marketing agreement, it is required to pay fees to the third-party service provider and classifies these fees as costs to obtain a contract. The contract costs are deferred and recorded as other assets in the consolidated balance sheets. The deferred contract costs are amortized to net sales in the consolidated statements of comprehensive income consistent with how the related deferred revenue is recognized. Refer to Note 9, “Product Warranty Obligations,” to the consolidated financial statements for further information regarding the Company’s extended warranties.

 

In addition to extended warranties, the Company offers other services, including remote monitoring, installation and maintenance services in limited circumstances. Total service revenues account for less than two percent of revenue during the year ended December 31, 2018.

 

Refer to Note 6, “Segment Reporting,” to the consolidated financial statements for the Company’s disaggregated revenue disclosure. The information discussed above is applicable to each of the Company’s product classes.

 

Advertising and Co-Op Advertising

 

Expenditures for advertising, included in selling and service expenses in the consolidated statements of comprehensive income, are expensed as incurred. Total expenditures for advertising were $34,792, $45,926, and $45,488 for the years ended December 31, 2018, 2017, and 2016, respectively.

 

Research and Development

 

The Company expenses research and development costs as incurred. Total expenditures incurred for research and development were $50,019, $42,869, and $37,163 for the years ended December 31, 2018, 2017, and 2016, respectively.

 

Foreign Currency Translation and Transactions

 

Balance sheet amounts for non-U.S. Dollar functional currency businesses are translated into U.S. Dollars at the rates of exchange in effect at the end of the fiscal year. Income and expenses incurred in a foreign currency are translated at the average rates of exchange in effect during the year. The related translation adjustments are made directly to accumulated other comprehensive loss, a component of stockholders’ equity, in the consolidated balance sheets. Gains and losses from foreign currency transactions are recognized as incurred in the consolidated statements of comprehensive income.

 

Fair Value of Financial Instruments

 

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 the quoted prices in active markets, that are observable either directly or indirectly; and (Level 3) unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

 

 

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 $857,851, was approximately $849,809 (Level 2) at December 31, 2018, as calculated based on independent valuations whose inputs and significant value drivers are observable.

 

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

 

Use of Estimates

 

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

 

Derivative Instruments and Hedging Activities

 

The Company records all derivatives in accordance with ASC 815, Derivatives and Hedging, which requires derivative instruments be reported in the consolidated balance sheets at fair value and establishes criteria for designation and effectiveness of hedging relationships. The Company is exposed to market risk such as changes in commodity prices, foreign currencies and interest rates. The Company does not hold or issue derivative financial instruments for trading purposes. Refer to Item 7A of this Annual Report on Form 10-K for further information on the Company’s derivatives.

 

Share-Based Compensation

 

Share-based compensation expense, including stock options and restricted stock awards, is generally recognized on a straight-line basis over the vesting period based on the fair value of awards which are expected to vest. The fair value of all share-based awards is estimated on the date of grant. Refer to Note 15, “Share Plans,” to the consolidated financial statements for further information on the Company’s share-based compensation plans and accounting.

 

New Accounting Pronouncements

 

New Accounting Standards Not Yet Adopted

 

In February 2016, the FASB issued 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 developed a comprehensive project plan and established a cross-functional implementation team to evaluate the impact of the standard, which included evaluating the Company’s lease portfolio, analyzing the standard’s impact on the Company’s various types of lease contracts, and identifying the reporting requirements of the standard. The Company has completed its assessment of the impacts the standard will have on its financial statements, and determined that the impact to the statement of comprehensive income is not material. However, the Company is anticipating to record a right of use asset and lease liability of approximately $65,000 to $75,000 in its balance sheet. which represents both finance and operating lease assets and liabilities. The Company adopted the standard January 1, 2019 using the modified retrospective approach as of the adoption date, elected the package of practical expedients (lease classification, embedded leases, and initial direct costs for existing leases need not be reassessed), and determined it would combine lease and nonlease components. However, the Company did not elect to apply the recognition exception for short-term leases.

 

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging – Targeted Improvements to Accounting for Hedging Activities. This guidance was issued to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements and to make certain targeted improvements to simplify the application of the hedge accounting guidance. The standard is effective for the Company in 2019. The Company does not believe that the adoption of this guidance will have a significant impact on its consolidated financial statements or its derivative and hedging strategies.

 

 

In August 2018, the FASB issued 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 guidance can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption, and is effective for the Company in 2020. The Company is currently assessing the impact the adoption of this guidance will have on the Company’s results of operations and financial position.

 

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

 

Recently Adopted Accounting Standards

 

On January 1, 2018, the Company adopted ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The new standard requires presentation of certain components of net periodic pension cost as non-operating expense. The adoption of this new standard did not have a significant impact on the Company’s financial statements. The changes in presentation of the components of net periodic pension cost were applied retrospectively to all periods presented.

 

On January 1, 2018, the Company adopted ASU 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments. The changes in presentation of the proceeds from beneficial interests in securitization transactions were applied retrospectively to all periods presented.

 

On January 1, 2018, the Company adopted ASU 2014-09, Revenue from Contracts with Customers, and all related amendments (the “new revenue recognition standard”) using the full retrospective method, which requires application to all periods presented.

 

The impact of adopting the above standards on the Company’s previously reported consolidated financial statements is as follows:

 

Consolidated Balance Sheets

 

December 31, 2017

 
   

As Reported

   

Impact of Adoption

   

As Adjusted

 
                         

Accounts receivable

  $ 280,002     $ (707 )   $ 279,295  

Inventories

    380,341       6,708       387,049  

Other accrued liabilities

    105,067       7,551       112,618  

Deferred income taxes

    43,789       (1,937 )     41,852  

Other long-term liabilities

    76,995       5,898       82,893  

Retained earnings

  $ 616,347     $ (5,511 )   $ 610,836  

 

 

Consolidated Statements of Comprehensive Income

 

Year Ended December 31, 2017

 
   

As Reported

   

Impact of Adoption

   

As Adjusted

 
                         

Net sales

  $ 1,672,445     $ 6,928     $ 1,679,373  

Cost of goods sold

    1,090,328       4,259       1,094,587  

Selling and service expenses

    171,755       3,086       174,841  

Research and development expenses

    42,925       (56 )     42,869  

General and administrative expenses

    87,512       69       87,581  

Other, net

    (4,007 )     (559 )     (4,566 )

Provision for income taxes

    43,553       589       44,142  

Net income attributable to Generac Holdings Inc.

  $ 159,386     $ (1,578 )   $ 157,808  
                         

Earnings per share

                       

Basic

  $ 2.58     $ (0.02 )   $ 2.56  

Diluted

  $ 2.56     $ (0.03 )   $ 2.53  
                         

Comprehensive income attributable to Generac Holdings Inc.

  $ 174,551     $ (1,578 )   $ 172,973  

 

   

Year Ended December 31, 2016

 
   

As Reported

   

Impact of Adoption

   

As Adjusted

 
                         

Net sales

  $ 1,444,453     $ 3,290     $ 1,447,743  

Cost of goods sold

    930,347       4,975       935,322  

Selling and service expenses

    164,607       253       164,860  

Research and development expenses

    37,229       (66 )     37,163  

General and administrative expenses

    74,700       (7 )     74,693  

Other, net

    (180 )     (820 )     (1,000 )

Provision for income taxes

    57,570       (1,051 )     56,519  

Net income attributable to Generac Holdings Inc.

  $ 98,788     $ (1,634 )   $ 97,154  
                         

Earnings per share

                       

Basic

  $ 1.51     $ (0.03 )   $ 1.48  

Diluted

  $ 1.50     $ (0.03 )   $ 1.47  
                         

Comprehensive income attributable to Generac Holdings Inc.

  $ 82,097     $ (1,634 )   $ 80,463  

 

Consolidated Statement of Stock holders' Equity

 

Year Ended December 31, 2017

 
   

As Reported

   

Impact of Adoption

   

As Adjusted

 
                         

Retained earnings at December 31, 2016

  $ 456,052     $ (3,933 )   $ 452,119  

Net income attributable to Generac Holdings Inc.

    159,386       (1,578 )     157,808  

Retained earnings at December 31, 2017

  $ 616,347     $ (5,511 )   $ 610,836  

 

   

Year Ended December 31, 2016

 
   

As Reported

   

Impact of Adoption

   

As Adjusted

 
                         

Retained earnings at December 31, 2015

  $ 358,173     $ (2,299 )   $ 355,874  

Net income attributable to Generac Holdings Inc.

    98,788       (1,634 )     97,154  

Retained earnings at December 31, 2016

  $ 456,052     $ (3,933 )   $ 452,119  

 

 

Consolidated Statement of Cash Flows

 

Year Ended December 31, 2017

 
   

As Reported

   

Impact of Adoption

   

As Adjusted

 
                         

Net income

  $ 161,135     $ (1,578 )   $ 159,557  

Deferred income taxes

    21,439       (1,937 )     19,502  

Accounts receivable

    (29,771 )     (3,086 )     (32,857 )

Inventories

    (16,278 )     (6,708 )     (22,986 )

Other accrued liabilities

    27,514       9,515       37,029  

Net cash provided by operating activities

  $ 261,116     $ (3,794 )   $ 257,322  
                         

Proceeds from beneficial interests in securitization transactions

  $ -     $ 3,794     $ 3,794  

Net cash used in investing activities

  $ (31,922 )   $ 3,794     $ (28,128 )

 

 

   

Year Ended December 31, 2016

 
   

As Reported

   

Impact of Adoption

   

As Adjusted

 
                         

Net income

  $ 98,812     $ (1,634 )   $ 97,178  

Deferred income taxes

    39,347       (1,050 )     38,297  

Accounts receivable

    (9,082 )     (12,141 )     (21,223 )

Inventories

    15,514       (834 )     14,680  

Other accrued liabilities

    6,719       3,372       10,091  

Net cash provided by operating activities

  $ 253,409     $ (12,287 )   $ 241,122  
                         

Proceeds from beneficial interests in securitization transactions

  $ -     $ 12,287     $ 12,287  

Net cash used in investing activities

  $ (105,822 )   $ 12,287     $ (93,535 )

  

 

3.

Acquisitions

 

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. To date, the acquisition purchase price was funded solely through cash on hand.

 

The Company recorded a preliminary purchase price allocation during 2018 based upon its estimates of the fair value of the acquired assets and assumed liabilities. As a result, the Company recorded approximately $80,418 of intangible assets, including approximately $46,788 of goodwill recorded in the International segment, as of the acquisition date. The goodwill ascribed to the acquisition is not deductible for tax purposes. The accompanying consolidated financial statements include the results of Selmec from the date of acquisition through December 31, 2018.

 

Acquisition of Pramac

 

On March 1, 2016, the Company acquired a 65% ownership interest in Pramac for a purchase price, net of cash acquired, of $60,250. The acquisition purchase price was funded solely through cash on hand. The 35% noncontrolling interest in Pramac had an acquisition date fair value of $34,253, and was recorded as a redeemable noncontrolling interest in the consolidated balance sheet, as the noncontrolling interest holder had within its control the right to require the Company to redeem its interest in Pramac. The noncontrolling interest holder had a put option to sell his interest to the Company any time within five years from the date of acquisition. Within the first two years from the date of acquisition, the put option price was based on a fixed amount if voluntarily exercised. Subsequently, the put option price is based on the greater of the fixed amount or a multiple of earnings, subject to the terms of the acquisition. Additionally, the Company held a call option that it may redeem commencing five years from the date of acquisition, or earlier upon the occurrence of certain circumstances. The call option price is based on a multiple of earnings that is subject to the terms of the acquisition.

 

The redeemable noncontrolling interest is recorded at the greater of the initial fair value, increased or decreased for the noncontrolling interests’ share of comprehensive net income (loss), or the estimated redemption value, with any adjustment to the redemption value impacting retained earnings, but not net income. However, the redemption value adjustments are reflected in the earnings per share calculation, as detailed in Note 12, “Earnings Per Share,” to the consolidated financial statements. The following table presents the changes in the redeemable noncontrolling interest:

 

   

Year Ended December 31,

 
   

2018

   

2017

   

2016

 

Balance at beginning of period

  $ 43,929     $ 33,138     $ -  

Noncontrolling interest of Pramac

    -       1,540 (1)     34,253  

Net income

    2,214       1,631       100  

Foreign currency translation

    (3,109 )     8,529       (2,124 )

Redemption value adjustment

    17,970       (909 )     909  

Balance at end of period

  $ 61,004     $ 43,929     $ 33,138  

 

 

(1)

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

 

 

On February 7, 2019, the Company amended its Quotaholders’ Agreement with the noncontrolling interest holder of Pramac. As of the date of signing, the noncontrolling interest holder no longer holds the right to put its shares to the Company until April 1, 2021. As a result, the noncontrolling interest will no longer be considered redeemable until the put option right returns on April 1, 2021. Additionally, the Company still holds a call option right that it may redeem; however, it may only call a portion of the remaining 35% interest each year from 2021 through 2026.

 

The Company finalized the Pramac purchase price allocation during the first quarter of 2017. The final purchase price allocation as of the March 1, 2016 opening balance sheet date was as follows:

 

   

March 1, 2016

 

Accounts receivable

  $ 50,716  

Inventories

    39,889  

Property and equipment

    19,138  

Intangible assets

    34,471  

Goodwill

    46,775  

Other assets

    7,698  

Total assets acquired

    198,687  
         

Short-term borrowings

    21,741  

Accounts payable

    40,270  

Long-term debt and capital lease obligations (including current portion)

    18,599  

Other liabilities

    23,521  

Redeemable noncontrolling interest

    34,253  

Noncontrolling interest

    53  

Net assets acquired

  $ 60,250  

 

The goodwill ascribed to this acquisition is not deductible for tax purposes. The accompanying consolidated financial statements include the results of Pramac from the date of acquisition through December 31, 2018.

 

Pro Forma Information

 

The following unaudited pro forma information of the Company gives effect to all acquisitions as though the transactions had occurred on January 1, 2016.

 

   

Year Ended December 31,

 
   

2018

   

2017

   

2016

 

Net Sales:

                       

As reported

  $ 2,023,464     $ 1,679,373     $ 1,447,743  

Pro forma

    2,038,739       1,742,453       1,581,699  
                         

Net income attributable to Generac Holdings Inc.:

                       

As reported

  $ 238,257     $ 157,808     $ 97,154  

Pro forma

    238,362       161,854       103,193  
                         

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

                       

As reported

  $ 3.54     $ 2.53     $ 1.47  

Pro forma

    3.54       2.60       1.56  

 

This unaudited pro forma information is presented for informational purposes only and is not necessarily indicative of the results of operations that actually would have been achieved had the acquisitions been consummated on January 1, 2016.

 

 

4.

Derivative Instruments and Hedging Activities

 

Commodities

 

The Company is exposed to price fluctuations in commodities it uses as raw materials; primarily steel, copper and aluminum; and periodically utilizes commodity derivatives to mitigate the impact of these potential price fluctuations on its financial results. These derivatives typically have maturities of less than eighteen months. At December 31, 2018 and 2017, the Company had five and one commodity contracts outstanding, respectively, covering the purchases of copper.

 

 

Because these contracts do not qualify for hedge accounting, the related gains and losses are recorded in cost of goods sold in the Company’s consolidated statements of comprehensive income. Net pre-tax gains (losses) recognized were $(874), $377, and $739 for the years ended December 31, 2018, 2017, and 2016, respectively.

 

Foreign Currencies

 

The Company is exposed to foreign currency exchange risk as a result of transactions denominated in currencies other than the U.S. Dollar. The Company periodically utilizes foreign currency forward purchase and sales contracts to manage the volatility associated with certain foreign currency purchases and sales in the normal course of business. Contracts typically have maturities of twelve months or less. As of December 31, 2018 and 2017, the Company had forty and twenty-eight foreign currency contracts outstanding, respectively.

 

Because these contracts do not qualify for hedge accounting, the related gains and losses are recorded in other, net in the Company’s consolidated statements of comprehensive income. Net pre-tax gains (losses) recognized for the years ended December 31, 2018, 2017, and 2016 were $(653), $697, and $(385), respectively.

 

Interest Rate Swaps

 

In October 2013, the Company entered into two interest rate swap agreements. In May 2014, the Company entered into one interest rate swap agreement. In 2017, the Company entered into twenty additional interest rate swap agreements. 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 these 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 consolidated balance sheets. The amount of gains recognized for the years ended December 31, 2018, 2017, and 2016 were $2,924, $3,712, and $535, respectively. The cash flows of the swaps are recognized as adjustments to interest expense each period. The ineffective portions of the derivatives’ changes in fair value, if any, are immediately recognized in earnings.

 

Fair Value

 

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

 

   

December 31,
201
8

   

December 31,
201
7

 

Commodity contracts

  $ (160 )   $ 107  

Foreign currency contracts

    (117 )     167  

Interest rate swaps

    8,307       4,356  

 

The fair value of the commodity and foreign currency contracts are included in other accrued liabilities, and the fair value of the interest rate swaps are included in other assets in the consolidated balance sheet as of December 31, 2018. The fair value of the commodity and foreign currency contracts are included in prepaid expenses and other assets, and the fair value of the interest rate swaps are included in other assets in the consolidated balance sheet as of December 31, 2017. Excluding the impact of credit risk, the fair value of the derivative contracts as of December 31, 2018 and 2017 is an asset of $8,220 and $4,703, respectively, which represents the amount the Company would receive upon exit of the agreements on those dates.

 

 

5.

Accumulated Other Comprehensive Loss

 

The following presents a tabular disclosure of changes in AOCL during the years ended December 31, 2018 and 2017, net of tax:

 

   

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

    (5,976 )     (156 ) (1)     2,924   (2)     (3,208 )

Amounts reclassified from AOCL

    -       593   (3)     -         593  

Net current-period other comprehensive income (loss)

    (5,976 )     437         2,924         (2,615 )

Ending Balance – December 31, 2018

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

 

 

   

Foreign

Currency

Translation

Adjustments

   

Defined

Benefit

Pension Plan

     

Unrealized

Gain (Loss) on

Cash Flow

Hedges

     

Total

 
                                     

Beginning Balance – January 1, 2017

  $ (28,047 )   $ (11,040 )     $ (1,076 )     $ (40,163 )

Other comprehensive income (loss) before reclassifications

    15,191       (591 ) (4)     3,712   (5)     18,312  

Amounts reclassified from AOCL

    -       653   (6)     -         653  

Net current-period other comprehensive income

    15,191       62         3,712         18,965  

Ending Balance – December 31, 2017

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

 

 

(1)

Represents unrecognized actuarial losses of $(211), net of tax benefit of $55, included in the computation of net periodic pension cost for the year ended December 31, 2018. Refer to Note 14, “Benefit Plans,” to the consolidated financial statements for additional information.

 

(2)

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

 

(3)

Represents actuarial losses of $802, net of tax effect of $(209), amortized to net periodic pension cost for the year ended December 31, 2018. Refer to Note 14, “Benefit Plans,” to the consolidated financial statements for additional information.

 

(4)

Represents unrecognized actuarial losses of $(800), net of tax benefit of $209, included in the computation of net periodic pension cost for the year ended December 31, 2017. Refer to Note 14, “Benefit Plans,” to the consolidated financial statements for additional information.

 

(5)

Represents unrealized gains of $6,096, net of tax effect of $(2,384) for the year ended December 31, 2017.

 

(6)

Represents actuarial losses of $883, net of tax effect of $(230), amortized to net periodic pension cost for the year ended December 31, 2017. Refer to Note 14, “Benefit Plans,” to the consolidated financial statements for additional information.

 

 

6.

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 United States, all of which have revenues that are substantially derived from the U.S. and Canada. The International segment includes the Ottomotores, Tower Light, 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

 
   

Year Ended December 31, 2018

 

Product Classes

 

Domestic

   

International

   

Total

 

Residential products

  $ 990,631     $ 52,108     $ 1,042,739  

Commercial & industrial products

    464,066       356,204       820,270  

Other

    125,628       34,827       160,455  

Total net sales

  $ 1,580,325     $ 443,139     $ 2,023,464  

 

   

Year Ended December 31, 2017

 

Product Classes

 

Domestic

   

International

   

Total

 

Residential products

  $ 815,125     $ 55,365     $ 870,490  

Commercial & industrial products

    385,575       298,778       684,353  

Other

    102,806       21,724       124,530  

Total net sales

  $ 1,303,506     $ 375,867     $ 1,679,373  

 

   

Year Ended December 31, 2016

 

Product Classes

 

Domestic

   

International

   

Total

 

Residential products

  $ 730,288     $ 38,888     $ 769,176  

Commercial & industrial products

    346,094       212,374       558,468  

Other

    100,467       19,632       120,099  

Total net sales

  $ 1,176,849     $ 270,894     $ 1,447,743  

 

Residential products consist primarily of automatic home standby generators ranging in output from 6kW to 60kW, portable generators, 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 C&I applications and fueled by diesel, natural gas, liquid propane and bi-fuel, with power outputs ranging from 10kW up to 3,250kW. Also included in C&I products are mobile generators, light towers, mobile heaters and mobile pumps. These products are sold through industrial distributors and dealers, equipment rental companies and equipment distributors. The C&I products revenue consists of the sale of the product to our distribution partners, which in turn sell or rent the product to the end customer, including installation and maintenance services. In some cases, C&I products are sold direct to the end customer. Substantially all of the C&I products revenues are transferred to the customer at a point in time.

 

Other products consist primarily of aftermarket service parts and product accessories sold to our dealers, 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.

 

Management evaluates the performance of its segments based primarily on Adjusted EBITDA, which is reconciled to Income before provision for income taxes below. The computation of Adjusted EBITDA is based on the definition that is contained in the Company’s credit agreements.

 

   

Adjusted EBITDA

 
   

Year Ended December 31,

 
   

2018

   

2017

   

2016

 

Domestic

  $ 388,685     $ 290,290     $ 259,563  

International

    35,867       27,010       16,959  

Total adjusted EBITDA

  $ 424,552     $ 317,300     $ 276,522  
                         

Interest expense

    (40,956 )     (42,667 )     (44,568 )

Depreciation and amortization

    (47,408 )     (51,988 )     (54,418 )

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

    (3,532 )     (2,923 )     (357 )

Non-cash share-based compensation expense (2)

    (14,563 )     (10,205 )     (9,493 )

Loss on extinguishment of debt (3)

    (1,332 )     -       (574 )

Loss on change in contractual interest rate (4)

    -       -       (2,957 )

Transaction costs and credit facility fees (5)

    (3,883 )     (2,145 )     (2,442 )

Business optimization expenses (6)

    (952 )     (2,912 )     (7,316 )

Other

    (850 )     (761 )     (700 )

Income before provision for income taxes

  $ 311,076     $ 203,699     $ 153,697  

 

 

(1)

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

 

(2)

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

 

(3)

Represents the write-off of original issue discount and capitalized debt issuance costs due to voluntary debt prepayments.

 

(4)

For the year ended December 31, 2016, represents a non-cash loss relating to the continued 25 basis point increase in borrowing costs as a result of the credit agreement leverage ratio remaining above 3.0 times based on projections at that time. Following the May 2017 Term Loan amendment, which removed the pricing grid based on leverage ratio achieved, gains or losses on changes in contractual interest rate will no longer be recorded in the statements of comprehensive income. Refer to Note 10, “Credit Agreements,” to the consolidated financial statements for further information on the gains and losses on changes in the contractual interest rate.

 

(5)

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.

 

(6)

Represents charges relating to business optimization and restructuring costs.

 

 

The following tables summarize additional financial information by reportable segment:

 

   

Assets

 
   

Year Ended December 31,

 
   

2018

   

2017

   

2016

 

Domestic

  $ 1,868,554     $ 1,612,607     $ 1,525,950  

International

    557,760       413,358       340,019  

Total

  $ 2,426,314     $ 2,025,965     $ 1,865,969  

 

   

Depreciation and Amortization

 
   

Year Ended December 31,

 
   

2018

   

2017

   

2016

 

Domestic

  $ 35,586     $ 37,962     $ 42,346  

International

    11,822       14,026       12,072  

Total

  $ 47,408     $ 51,988     $ 54,418  

 

   

Capital Expenditures

 
   

Year Ended December 31,

 
   

2018

   

2017

   

2016

 

Domestic

  $ 38,242     $ 29,258     $ 26,936  

International

    9,359       4,003       3,531  

Total

  $ 47,601     $ 33,261     $ 30,467  

  

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

 

 

7.

Balance Sheet Details

 

Inventories consist of the following:

   

December 31,

 
   

2018

   

2017

 
                 

Raw material

  $ 348,980     $ 242,947  

Work-in-process

    6,971       2,544  

Finished goods

    188,799       141,558  

Total

  $ 544,750     $ 387,049  

 

 

As of December 31, 2018 and 2017, inventories totaling $8,488 and $6,245, respectively, were on consignment at customer locations.

 

Property and equipment consists of the following:

 

   

December 31,

 
   

2018

   

2017

 
                 

Land and improvements

  $ 15,975     $ 13,118  

Buildings and improvements

    163,161       132,072  

Machinery and equipment

    103,726       90,487  

Dies and tools

    28,198       24,504  

Vehicles

    2,070       1,878  

Office equipment and systems

    82,638       73,254  

Leasehold improvements

    2,137       2,436  

Construction in progress

    26,543       18,799  

Gross property and equipment

    424,448       356,548  

Accumulated depreciation

    (145,519 )     (126,168 )

Total

  $ 278,929     $ 230,380  

 

 

Total property and equipment included capital leases of $20,158 and $4,153 at December 31, 2018 and 2017, respectively, primarily made up of buildings and improvements. Amortization of capital leases is recorded within depreciation expense in the consolidated statements of comprehensive income. The initial measurement of new capital leases is accounted for as a non-cash item in the consolidated statement of cash flows.

 

 

8.

Goodwill and Intangible Assets

 

The changes in the carrying amount of goodwill by reportable segment for the years ended December 31, 2018 and 2017 are as follows:

 

   

Domestic

   

International

   

Total

 

Balance at December 31, 2016

  $ 621,451     $ 83,189     $ 704,640  

Acquisitions of businesses, net

    -       5,271       5,271  

Foreign currency translation

    -       11,612       11,612  

Balance at December 31, 2017

    621,451       100,072       721,523  

Acquisitions of businesses, net

    -       46,788       46,788  

Foreign currency translation

    -       (3,656 )     (3,656 )

Balance at December 31, 2018

  $ 621,451     $ 143,204     $ 764,655  

 

The details of the gross goodwill applicable to each reportable segment at December 31, 2018 and 2017 are as follows:

 

   

Year Ended December 31, 2018

   

Year Ended December 31, 2017

 
   

Gross

   

Accumulated

Impairment

   

Net

   

Gross

   

Accumulated

Impairment

   

Net

 

Domestic

  $ 1,124,644     $ (503,193 )   $ 621,451     $ 1,124,644     $ (503,193 )   $ 621,451  

International

    147,815       (4,611 )     143,204       104,683       (4,611 )     100,072  

Total

  $ 1,272,459     $ (507,804 )   $ 764,655     $ 1,229,327     $ (507,804 )   $ 721,523  

 

Refer to Note 3, “Acquisitions,” to the consolidated financial statements for further information regarding the Company’s acquisitions.

 

The following table summarizes intangible assets by major category as of December 31, 2018 and 2017:

 

   

Weighted

Average

   

December 31, 2018

   

December 31, 2017

 
   

Amortization

Years

   

Gross

   

Accumulated Amortization

   

Net Book Value

   

Gross

   

Accumulated Amortization

   

Net Book Value

 

Finite-lived intangible assets:

                                                       

Tradenames

    9     $ 56,378     $ (32,416 )   $ 23,962     $ 52,784     $ (28,422 )   $ 24,362  

Customer lists

    12       368,343       (307,149 )     61,194       340,138       (299,074 )     41,064  

Patents

    14       131,030       (101,060 )     29,970       131,137       (91,520 )     39,617  

Unpatented technology

    15       13,169       (12,058 )     1,111       13,169       (11,915 )     1,254  

Software

    -       1,046       (1,046 )     -       1,046       (1,046 )     -  

Non-compete/other

    7       3,829       (1,897 )     1,932       2,684       (1,537 )     1,147  
Total finite-lived intangible assets           $ 573,795     $ (455,626 )   $ 118,169     $ 540,958     $ (433,514 )   $ 107,444  

Indefinite-lived tradenames

            128,321       -       128,321       128,321       -       128,321  

Total intangible assets

          $ 702,116     $ (455,626 )   $ 246,490     $ 669,279     $ (433,514 )   $ 235,765  

 

Amortization of intangible assets was $22,112, $28,861 and $32,953 in 2018, 2017 and 2016, respectively. Excluding the impact of any future acquisitions, the Company estimates amortization expense for the next five years will be as follows: 2019 - $21,542; 2020 - $21,451; 2021 - $19,653; 2022 - $12,339; 2023 - $9,975.

 

 

 

9.

Product Warranty Obligations

 

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

 

   

Year Ended December 31,

 
   

2018

   

2017

   

2016

 

Balance at beginning of period

  $ 35,422     $ 31,695     $ 30,197  

Product warranty reserve assumed in acquisition

    -       43       840  

Payments

    (20,029 )     (18,861 )     (18,691 )

Provision for warranty issued

    26,910       21,347       19,148  

Changes in estimates for pre-existing warranties

    (518 )     1,198       201  

Balance at end of period

  $ 41,785     $ 35,422     $ 31,695  

 

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

 

   

Year Ended December 31,

 
   

2018

   

2017

   

2016

 

Balance at beginning of period

  $ 57,854     $ 36,139     $ 31,956  

Deferred revenue contracts issued

    21,440       29,262  (1)     9,797  

Amortization of deferred revenue contracts

    (10,954 )     (7,547 )     (5,614 )

Balance at end of period

  $ 68,340     $ 57,854     $ 36,139  

 

 

(1)

The increase in deferred revenue contracts issued during 2017 was largely due to the launch of a post-sale extended warranty marketing program.

 

The timing of recognition of the Company’s deferred revenue balance related to extended warranties at December 31, 2018 is as follows:

 

2019

  $ 13,438  

2020

    13,547  

2021

    12,178  

2022

    9,756  

After 2022

    19,421  

Total

  $ 68,340  

 

In 2017, the Company launched a post-sale extended warranty marketing program with a third party. In the program’s agreement, the Company is required to pay fees to the third-party service provider based on the number of extended warranty contracts that they sell, which it classifies as costs to obtain a contract. The contract costs are deferred and recorded as other assets in the consolidated balance sheets. The deferred contract costs are amortized to net sales in the consolidated statements of comprehensive income over the same period that the underlying deferred revenue is recognized. The balance of deferred contract costs as of December 31, 2018 and 2017 was $4,782 and $3,346, respectively. Amortization of deferred contract costs recorded during the years ended December 31, 2018 and 2017 was $615 and $193, respectively.

 

 

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

 

   

December 31,

 
   

2018

   

2017

 

Product warranty liability

               

Current portion - other accrued liabilities

  $ 25,396     $ 20,576  

Long-term portion - other long-term liabilities

    16,389       14,846  

Total

  $ 41,785     $ 35,422  
                 

Deferred revenue related to extended warranties

               

Current portion - other accrued liabilities

  $ 13,646     $ 11,017  

Long-term portion - other long-term liabilities

    54,694       46,837  

Total

  $ 68,340     $ 57,854  

 

 

10.

Credit Agreements

 

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

 

   

December 31,

 
   

2018

   

2017

 

ABL facility

  $ 18,459     $ -  

Other lines of credit

    27,124       20,602  

Total

  $ 45,583     $ 20,602  

 

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

 

   

December 31,

 
   

2018

   

2017

 

Term loan

  $ 879,000     $ 929,000  

Original issue discount and deferred financing costs

    (22,440 )     (26,937 )

ABL facility

    -       -  

Capital lease obligation

    20,171       4,690  

Other

    1,642       1,367  

Total

    878,373       908,120  

Less: current portion of debt

    1,075       936  

Less: current portion of capital lease obligation

    902       636  

Total

  $ 876,396     $ 906,548  

 

Maturities of long-term borrowings (before considering original issue discount and deferred financing costs) outstanding at December 31, 2018, are as follows:

 

2019

  $ 1,927  

2020

    1,769  

2021

    1,267  

2022

    1,814  

After 2022

    894,036  

Total

  $ 900,813  

 

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%. Beginning in the second quarter of 2014, and measured each quarterly period thereafter, the applicable margin related to base rate loans was reduced to 1.50% and the applicable margin related to LIBOR rate loans is reduced to 2.50%, in each case, if the Company’s net debt leverage ratio, as defined in the Term Loan, falls below 3.00 to 1.00 for that measurement period.

 

 

As the Company’s net debt leverage ratio continued to be above 3.00 to 1.00 on July 1, 2016, the Company recorded a cumulative catch-up loss of $2,957 in the third quarter of 2016, which represented the additional cash interest expected to be paid while the net debt leverage ratio was expected to be above 3.00 to 1.00 using current forecasts at that time. The loss was recorded against original issue discount and deferred financing costs on long-term borrowings in the consolidated balance sheets and as a loss on change in contractual interest rate in the consolidated statements of comprehensive income.

 

In November 2016, the Company amended its Term Loan to extend the maturity date from May 31, 2020 to May 31, 2023. In connection with this amendment and in accordance with ASC 470-50, the Company capitalized $4,242 of fees paid to creditors as original issue discount and deferred financing costs on long-term borrowings and expensed $315 of transaction fees in 2016.

 

In May 2017, the Company amended its Term Loan, modifying the pricing of the facility by reducing the applicable margin rates to base rate plus a fixed applicable margin of 1.25% or adjusted LIBOR rate plus a fixed applicable margin of 2.25%. Further, the amendment removed the pricing grid that would reduce the applicable margin if a net debt leverage ratio of 3.00 to 1.00 was achieved. As a result, the Company does not anticipate any future catch-up gains or losses resulting from changes in contractual interest rates to be recorded in the statements of comprehensive income. The amended Term Loan pricing is still subject to the 0.75% LIBOR floor. In connection with this amendment and in accordance with ASC 470-50, the Company capitalized $1,432 of fees paid to creditors as deferred financing costs on long-term borrowings and expensed $85 of transaction fees in the second quarter of 2017.

 

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

 

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%. In connection with this amendment and in accordance with ASC 470-50, the Company capitalized $829 of fees paid to creditors as deferred financing costs on long-term borrowings and expensed $118 of transaction fees in 2018.

 

As of December 31, 2018, the Company’s net secured leverage ratio was 1.66 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). The maturity date of the ABL Facility is now June 12, 2023. Borrowings under the ABL Facility are guaranteed by all of the Company’s wholly-owned domestic restricted subsidiaries, and are secured by associated collateral agreements which pledge a first priority lien on all cash, trade accounts receivable, inventory, and other current assets and proceeds thereof, and a second priority lien on all other assets, including fixed assets and intangibles of the Company and certain domestic subsidiaries. ABL Facility borrowings initially bore interest at rates based upon either a base rate plus an applicable margin of 1.00% or adjusted LIBOR rate plus an applicable margin of 2.00%, in each case, subject to adjustments based upon average availability under the ABL Facility.

 

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%. In connection with this amendment and in accordance with ASC 470-50, the Company capitalized $755 of new debt issuance costs as deferred financing costs on long-term borrowings and wrote-off $34 of capitalized debt issuance costs as a loss on extinguishment of debt in the second quarter of 2018.

 

 

In June 2018, the Company borrowed $50,000 under the ABL Facility, the proceeds of which were used as a voluntary prepayment of the Term Loan. As a result of the prepayment of the Term Loan, the Company wrote-off $1,298 of original issue discount and capitalized debt issuance costs during the second quarter of 2018 as a loss on extinguishment of debt in the consolidated statements of comprehensive income. In October 2018, the Company repaid the $50,000 outstanding ABL Facility balance with cash on hand.

 

As of December 31, 2018, there was $18,459 outstanding under the ABL Facility, leaving $276,572 of availability, net of outstanding letters of credit.

 

As of December 31, 2018 and December 31, 2017, short-term borrowings consisted of borrowings by the Company’s foreign subsidiaries on local lines of credit and the ABL Facility, which totaled $45,583 and $20,602, respectively.

 

 

11.

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 a $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 years ended December 31, 2018, 2017 and 2016, the Company repurchased 560,000, 844,500 and 3,968,706 shares of its common stock, respectively, for $25,656, $30,012 and $149,937, respectively, all funded with cash on hand. Since the inception of the above noted programs, the Company has repurchased 8,676,706 shares of its common stock for $305,547, all funded with cash on hand.

 

 

12.

Earnings Per Share

 

Basic earnings per share is calculated by dividing net income attributable to the common shareholders of the Company by the weighted average number of common shares outstanding during the period, 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, “Acquisitions,” to the consolidated financial statements 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:

 

   

Year Ended December 31,

 
   

2018

   

2017

   

2016

 

Numerator

                       

Net income attributable to Generac Holdings Inc.

  $ 238,257     $ 157,808     $ 97,154  

Redeemable noncontrolling interest redemption value adjustment

    (17,970 )     909       (909 )

Net income attributable to common shareholders

  $ 220,287     $ 158,717     $ 96,245  
                         

Denominator

                       

Weighted average shares, basic

    61,662,031       62,040,704       64,905,793  

Dilutive effect of stock compensation awards (1)

    571,194       602,168       476,981  

Diluted shares

    62,233,225       62,642,872       65,382,774  
                         

Net income attributable to common shareholders per share

                       

Basic

  $ 3.57     $ 2.56     $ 1.48  

Diluted

  $ 3.54     $ 2.53     $ 1.47  

 

 

(1)

Excludes approximately 26,100, 147,400 and 15,800 stock options for the years ended December 31, 2018, 2017 and 2016, respectively, as the impact of such awards was anti-dilutive.

 

 

 

13.

Income Taxes

 

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

 

   

Year Ended December 31,

 
   

2018

   

2017

   

2016

 

Current:

                       

Federal

  $ 32,072     $ 15,753     $ 11,717  

State

    9,639       1,775       2,047  

Foreign

    4,546       4,585       4,460  
      46,257       22,113       18,224  

Deferred:

                       

Federal

    22,225       18,213       40,213  

State

    1,910       4,139       3,029  

Foreign

    479       (2,777 )     (5,585 )
      24,614       19,575       37,657  

Change in valuation allowance

    (1,015 )     2,454       638  

Provision for income taxes

  $ 69,856     $ 44,142     $ 56,519  

 

The Company files U.S federal, U.S. state and foreign jurisdiction tax returns which are subject to examination up to the expiration of the statute of limitations. We believe the tax positions taken on our returns would be sustained upon an exam, or where a position is uncertain, adequate reserves have been recorded. As of December 31, 2018, the Company is no longer subject to income tax examinations for United States federal income taxes for tax years prior to 2015. Due to the carryforward of net operating losses and research & development credits, the Company’s Wisconsin state income tax returns for tax years 2007 through 2017 remain open. In addition, the Company is subject to audit by various foreign taxing jurisdictions for the tax years 2012 through 2017.

 

The Company is regularly under examination in the various jurisdictions we operate. We are actively managing the examinations and working to address any open matters. While the Company does not believe any material taxes or penalties are due, there is a possibility that the ultimate tax outcome of an examination may result in differences from what was recorded. Such differences may affect the provision for income taxes in the period in which the determination is made, and could impact the Company’s financial results.

 

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to, reducing the U.S. federal corporate tax rate from 35% to 21%, requiring companies to pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries, eliminating certain deductions, introducing new tax regimes, changing how foreign earnings are subject to U.S. tax, and enhancing and extending through 2026 the option to claim accelerated depreciation deductions on qualified property.

 

In December 2017, the SEC staff issued SAB 118, which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, the Company considers the tax expense recorded for the Tax Act to be complete at December 31, 2018.

 

 

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

 

   

December 31,

 
   

2018

   

2017

 

Deferred tax assets:

               

Accrued expenses

  $ 16,745     $ 15,075  

Deferred revenue

    12,418       9,983  

Inventories

    8,500       7,933  

Pension obligations

    1,062       3,795  

Stock-based compensation

    5,960       5,522  

Operating loss and credit carryforwards

    25,585       23,771  

Bad debt

    1,363       1,101  

Other

    2,516       40  

Valuation allowance

    (5,802 )     (6,817 )

Total deferred tax assets

    68,347       60,403  
                 

Deferred tax liabilitites:

               

Goodwill and intangible assets

    108,899       70,556  

Depreciation

    25,429       22,563  

Debt refinancing costs

    4,206       5,189  

Prepaid expenses

    950       709  

Total deferred tax liabilities

    139,484       99,017  
                 

Net deferred tax liabilities

  $ (71,137 )   $ (38,614 )

 

As of December 31, 2018 and 2017, deferred tax assets of $163 and $3,238, and deferred tax liabilities of $71,300 and $41,852, respectively, were reflected on the consolidated balance sheets.

 

The Company maintains a valuation allowance against the deferred tax assets of an entity when it is uncertain the entity will generate sufficient taxable income to utilize the asset. During 2018, the valuation allowance decreased by $1,015 primarily due to an increase in income allowing for a utilization of tax credits, partially offset by current losses in certain foreign subsidiaries.

 

At December 31, 2018, the Company had various state research & development and state manufacturing tax credit carryforwards of approximately $10,349 and $9,254, respectively, which expire between 2019 and 2033. The Company believes it will generate sufficient taxable income in these jurisdictions to fully utilize the credits prior to their expiration.

 

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

 

   

December 31,

 
   

2018

   

2017

 

Unrecognized tax benefit, beginning of period

  $ 7,122     $ 7,943  

Increase in unrecognized tax benefit for positions taken in current period

    580       251  

Statute of limitation expirations

    (1,818 )     (1,072 )

Settlements

    (249 )     -  

Unrecognized tax benefit, end of period

  $ 5,635     $ 7,122  

 

The unrecognized tax benefit as of December 31, 2018 and 2017, if recognized, would favorably impact the effective tax rate.

 

As of December 31, 2018, 2017 and 2016, total accrued interest of approximately $37, $131 and $272, respectively, and accrued penalties of approximately $136, $220 and $425, respectively, associated with net unrecognized tax benefits are included in the consolidated balance sheets. Interest and penalties are recorded as a component of income tax expense.

 

The Company does not expect a significant increase or decrease to the total amounts of unrecognized tax benefits related to continuing operations during the fiscal year ending December 31, 2019.

 

The Tax Act includes a mandatory one-time tax on accumulated earnings of foreign subsidiaries, and as a result, all previously unremitted earnings for which no U.S. deferred tax liability had been accrued have now been subject to U.S. tax. Notwithstanding the U.S. taxation of these amounts, the Company intends to continue to invest these earnings, as well as the capital in these subsidiaries, indefinitely outside of the U.S. and do not expect to incur any significant additional taxes related to such amounts.

 

 

A reconciliation of the statutory tax rates and the effective tax rates for the years ended December 31, 2018, 2017 and 2016 are as follows:

 

   

Year Ended December 31,

 
   

2018

   

2017

   

2016

 

U.S. statutory rate

    21.0 %     35.0 %     35.0 %

State taxes

    4.7       4.1       4.1  

Research and development credits

    (1.3 )     (1.4 )     (1.0 )

State credits

    (1.0 )     (0.2 )     (0.2 )

Share-based compensation (1)

    (0.5 )     (1.4 )     -  

Tax Act impact

    (0.2 )     (13.9 )     -  

Other

    (0.2 )     (0.9 )     (1.1 )

Effective tax rate

    22.5 %     21.3 %     36.8 %

 

 

(1)

With the adoption of ASU 2016-09 in 2017, excess tax benefits from equity awards are reflected within the provision for income taxes rather than within the consolidated balance sheet.

 

 

14.

Benefit Plans

 

Medical and Dental Plan

 

The Company maintains medical and dental benefit plans covering its full-time domestic employees and their dependents. Certain plans are partially or fully self-funded under which participant claims are obligations of the plan. These plans are funded through employer and employee contributions at a level sufficient to pay for the benefits provided by the plan. The Company’s contributions to the plans were $14,660, $14,992, and $15,019 for the years ended December 31, 2018, 2017, and 2016, respectively.

 

The Company’s foreign subsidiaries participate in government sponsored medical benefit plans. In certain cases, the Company purchases supplemental medical coverage for certain employees at these foreign locations. The expenses related to these plans are not material to the Company’s consolidated financial statements.

 

Savings Plan

 

The Company maintains a defined-contribution 401(k) savings plan for eligible domestic employees. Under the plan, employees may defer receipt of a portion of their eligible compensation. The Company may contribute a matching contribution of 50% of the first 6% of eligible compensation of employees. The Company may also contribute a non-elective contribution for eligible employees employed on December 31, 2008 that were impacted by the freezing of the Company’s pension plans. The Company's matching contributions are subject to vesting. Forfeitures may be applied against plan expenses and company contributions. The Company recognized $4,193, $3,600 and $3,400 of expense related to these plans in 2018, 2017 and 2016, respectively.

 

Pension Plans

 

The Company has frozen noncontributory salaried and hourly pension plans (Pension Plans) covering certain domestic employees. The Pension Plans were frozen effective December 31, 2008. Effective December 31, 2018, the Pension Plans were merged into the same plan, resulting in no change to benefits for participants. The benefits under the salaried plan were based upon years of service and the participants’ defined final average monthly compensation. The benefits under the hourly plan were based on a unit amount at the date of termination multiplied by the participant’s years of credited service. The Company’s funding policy for the Pension Plans is to contribute amounts at least equal to the minimum annual amount required by applicable regulations. In the years ended December 31, 2018 and 2017, the Company made voluntary pension prepayments of $9,400 and $4,675, respectively.

 

 

The Company uses a December 31 measurement date for the Pension Plans. The accumulated benefit obligation, reconciliation of the changes in projected benefit obligation, changes in plan assets and the funded status of the Pension Plans are as follows:

 

  Year Ended December 31,  
 

2018

 

2017

 
             

Accumulated benefit obligation at end of period

$ 65,978   $ 72,631  
             

Change in projected benefit obligation

           

Projected benefit obligation at beginning of period

$ 72,631   $ 65,956  

Interest cost

  2,575     2,688  

Net actuarial (gain) loss

  (6,820 )   6,170  

Benefits paid

  (2,408 )   (2,183 )

Projected benefit obligation at end of period

$ 65,978   $ 72,631  
             

Change in plan assets

           

Fair value of plan assets at beginning of period

$ 58,014   $ 46,488  

Actual return on plan assets

  (3,507 )   8,382  

Company contributions

  9,771     5,327  

Benefits paid

  (2,408 )   (2,183 )

Fair value of plan assets at end of period

$ 61,870   $ 58,014  
             

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

$ (4,108 ) $ (14,617 )
             

Amounts recognized in accumulated other comprehensive loss

           

Net actuarial loss, net of tax

$ (10,571 ) $ (10,978 )

 

The actuarial loss for the Pension Plans that was amortized from AOCL into net periodic (benefit) cost during 2018 is $802. The amount in AOCL as of December 31, 2018 that is expected to be recognized as a component of net periodic pension expense during the next fiscal year is $963.

 

The components of net periodic pension cost (benefit) are as follows:

 

    Year Ended December 31,  
   

2018

   

2017

   

2016

 

Interest cost

  $ 2,575     $ 2,688     $ 2,747  

Expected return on plan assets

    (3,525 )     (3,011 )     (2,868 )

Amortization of net loss

    802       883       941  

Net periodic pension cost (benefit)

  $ (148 )   $ 560     $ 820  

 

The weighted-average discount rate used in 2018 to determine the benefit obligations was 4.24%. For 2017, the weighted-average discount rate used for the salaried and hourly pension plans were 3.60% and 3.62%, respectively. There is no compensation increase assumed as the plan was frozen effective December 31, 2008.

 

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

 

   

Year Ended December 31,

 
   

2018

   

2017

   

2016

 

Discount rate

    3.60 %     4.14 %     4.39 %

Expected long-term rate of return on plan assets

    6.19 %     6.58 %     6.62 %

Rate of compensation increase (1)

    n/a       n/a       n/a  

 

 

(1)

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

 

To determine the long-term rate of return assumption for the plans’ assets, the Company studies historical markets and preserves the long-term historical relationships between equities and fixed-income securities consistent with the widely accepted capital market principle that assets with higher volatility generate a greater return over the long run. The Company evaluates current market factors such as inflation and interest rates before it determines long-term capital market assumptions and reviews peer data and historical returns to check for reasonableness and appropriateness.

 

 

The Pension Plans’ weighted-average asset allocation at December 31, 2018 and 2017, by asset category, is as follows:

 

   

Target Allocation

   

December 31, 2018

   

December 31, 2017

 

Asset Category

 

Minimum

   

Maximum

   

Dollars

   

%

   

Dollars

   

%

 

Fixed income

    15.0 %     25.0 %   $ 12,257       20 %   $ 10,637       18 %

Domestic equity

    36.5 %     61.5 %     30,731       50 %     25,151       43 %

International equity

    17.0 %     25.0 %     12,380       20 %     16,093       28 %

Real estate

    7.0 %     15.0 %     6,502       10 %     6,133       11 %

Total

                    61,870       100 %     58,014       100 %

 

The fair values of the Pension Plans’ assets at December 31, 2018 are as follows:

   

 

Total

   

Quoted Prices in

Active Markets

for Identical Asset

(Level 1)

   

Significant

Observable

Inputs

(Level 2)

   

Significant

Unobservable

Inputs

(Level 3)

 

Mutual funds

  $ 51,736     $ 51,736     $     $  

Other investments

    10,134                   10,134  

Total

  $ 61,870     $ 51,736     $     $ 10,134  

 

The fair values of the Pension Plans’ assets at December 31, 2017 are as follows:

 

   

 

 

 

Total

   

Quoted Prices in

Active Markets

for Identical Asset

(Level 1)

   

Significant

Observable

Inputs

(Level 2)

   

Significant

Unobservable

Inputs

(Level 3)

 

Mutual funds

  $ 48,314     $ 48,314     $     $  

Other investments

    9,700                   9,700  

Total

  $ 58,014     $ 58,014     $     $ 9,700  

 

A reconciliation of beginning and ending balances for Level 3 assets for the years ended December 31, 2018 and 2017 is as follows:

 

   

Year Ended December 31,

 
   

2018

   

2017

 

Balance at beginning of period

  $ 9,700     $ 8,628  

Purchases

    3,805       -  

Redemptions

    (3,795 )     -  

Realized gains

    424       1,072  

Balance at end of period

  $ 10,134     $ 9,700  

 

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

 

Other Investments – This category includes investments in limited partnerships and are valued at estimated fair value, as determined with the assistance of each respective limited partnership, based on the net asset value of the investment as of the balance sheet date, which is subject to judgment, and therefore is classified within Level 3 of the fair value hierarchy.

 

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

 

 

There is no minimum required contribution due to the Pension Plan in 2019.

 

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

 

2019

    $ 2,527  

2020

      2,707  

2021

      2,844  

2022

      3,007  

2023

      3,190  
2024– 2028       17,831  

 

Certain of the Company’s foreign subsidiaries participate in local statutory defined benefit or other post-employment benefit plans. These plans provide benefits that are generally based on years of credited service and a percentage of the employee’s eligible compensation earned throughout the applicable service period. Liabilities recorded under these plans are included in accrued wages and employee benefits in the Company’s consolidated balance sheets and are not material.

 

 

15.

Share Plans

 

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

 

Stock Options - Stock options granted in 2018 have an exercise price between $43.88 per share and $45.29 per share; stock options granted in 2017 have an exercise price between $40.12 per share and $48.98 per share; and stock options granted in 2016 have an exercise price between $33.23 per share and $35.37 per share. Stock options vest in equal installments over four years, subject to the grantee’s continued employment or service and expire ten years after the date of grant.

 

Stock option exercises can be net-share settled such that the Company withholds shares with value equivalent to the exercise price of the stock option awards plus the employees’ minimum statutory obligation for the applicable income and other employment taxes. Total shares withheld were 63,817, 9,033 and 473,743 in 2018, 2017 and 2016, respectively, and were based on the value of the stock on the exercise dates. The net-share settlement has the effect of share repurchases by the Company as they reduce the number of shares that would have otherwise been issued.

 

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

 

Total payments made by the Company for the employees’ tax obligations to the taxing authorities were $3,846, $4,301 and $13,056 in 2018, 2017 and 2016, respectively, and are reflected as a financing activity in the consolidated statements of cash flows.

 

The grant-date fair value of each option grant is estimated using the Black-Scholes-Merton option pricing model. The fair value is then amortized on a straight-line basis over the requisite service period of the awards, which is generally the vesting period. Use of a valuation model requires management to make certain assumptions with respect to selected model inputs. Expected volatility is calculated based on an analysis of historic volatility of the Company's stock price. The average expected life is based on the contractual term of the option using the simplified method. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with a remaining term equal to the expected life assumed at the date of grant. The compensation expense recognized is net of estimated forfeitures. Forfeitures are estimated based on actual share option forfeiture history.

 

 

The weighted-average assumptions used in the Black-Scholes-Merton option pricing model for 2018, 2017 and 2016 are as follows:

 

   

2018

   

2017

   

2016

 

Weighted average grant date fair value

  $ 17.86     $ 16.84     $ 13.77  
                         

Assumptions:

                       

Expected stock price volatility

    37 %     40 %     41 %

Risk free interest rate

    2.60 %     1.92 %     1.31 %

Expected annual dividend per share

  $ -     $ -     $ -  

Expected life of options (years)

    6.25       6.25       6.25  

 

A summary of the Company’s stock option activity and related information for the years ended December 31, 2018, 2017 and 2016 is as follows:

 

   

Number of

Options

   

Weighted-

Average

Exercise Price

   

Weighted-

Average

Remaining

Contractual

Term (in years)

   

Aggregate

Intrinsic Value

($ in thousands)

 
                                 

Outstanding as of December 31, 2015A

    2,128,014       15.15       7.7     $ 40,271  

Granted

    398,313       33.24                  

Exercised

    (995,469 )     2.89                  

Forfeited

    (47,894 )     37.41                  

Outstanding as of December 31, 2016

    1,482,964       27.49       7.5     $ 23,840  
                                 

Granted

    346,421       40.13                  

Exercised

    (287,375 )     10.58                  

Forfeited

    (69,880 )     41.12                  

Outstanding as of December 31, 2017

    1,472,130       33.11       7.3     $ 25,281  
                                 

Granted

    366,231       43.88                  

Exercised

    (267,909 )     19.90                  

Forfeited

    (49,285 )     43.34                  

Outstanding as of December 31, 2018

    1,521,167       37.70       7.0     $ 19,212  
                                 

Exercisable as of December 31, 2018

    696,954       34.16       5.6     $ 11,779  

 

As of December 31, 2018, there was $9,538 of total unrecognized compensation cost, net of expected forfeitures, related to unvested options. The cost is expected to be recognized over the remaining service period, having a weighted-average period of 2.5 years. Total share-based compensation cost related to the stock options for 2018, 2017 and 2016 was $4,998, $4,503 and $4,366, respectively, which is recorded in operating expenses in the consolidated statements of comprehensive income.

 

Restricted Stock – Restricted stock awards vest in equal installments over three years, subject to the grantee’s continued employment or service. Certain restricted stock awards also include performance shares, which were awarded in the years 2014 through 2018. The number of performance shares that can be earned are contingent upon Company performance measures over a three-year period. Performance measures are based on a weighting of revenue growth and EBITDA margin, from which grantees may earn from 0% to 200% of their target performance share award. The performance period for the 2016 awards covers the years 2016 through 2018, the performance period for the 2017 awards covers the years 2017 through 2019, and the performance period for the 2018 awards covers the years 2018 through 2020. The Company estimates the number of performance shares that will vest based on projected financial performance. The fair value of restricted awards is determined based on the market value of the Company's shares on the grant date. The fair market value of the restricted awards at the time of the grant is amortized to expense over the period of vesting. The compensation expense recognized for restricted share awards is net of estimated forfeitures.

 

Restricted stock vesting is net-share settled such that, upon vesting, the Company withholds shares with value equivalent to the employees’ minimum statutory tax obligation, and then pays the cash to the taxing authorities on behalf of the employees. In effect, the Company repurchases these shares and classifies them as treasury stock. Total shares withheld were 38,186, 39,500 and 28,593 in 2018, 2017 and 2016, respectively, and were based on the value of the stock on the vesting dates. Total payments made by the Company for the employees’ tax obligations to the taxing authorities were $1,812, $1,591 and $952 in 2018, 2017 and 2016, respectively, and are reflected as a financing activity within the consolidated statements of cash flows.

 

 

A summary of the Company's restricted stock activity for the years ended December 31, 2018, 2017 and 2016 is as follows:

 

   

Shares

   

Weighted-

Average Grant-

Date Fair Value

 
                 

Non-vested as of December 31, 2015

    243,040       44.16  

Granted

    232,295       33.56  

Vested

    (95,858 )     41.93  

Forfeited

    (18,074 )     38.30  

Non-vested as of December 31, 2016

    361,403       38.18  
                 

Granted

    211,769       39.91  

Vested

    (133,796 )     40.60  

Forfeited

    (47,100 )     42.48  

Non-vested as of December 31, 2017

    392,276       37.77  
                 

Granted

    208,803       44.49  

Vested

    (128,433 )     39.03  

Forfeited

    (46,650 )     39.43  

Non-vested as of December 31, 2018

    425,996       40.50  

 

As of December 31, 2018, there was $9,210 of unrecognized compensation cost, net of expected forfeitures, related to non-vested restricted stock awards. That cost is expected to be recognized over the remaining service period, having a weighted-average period of 1.8 years. Total share-based compensation cost related to the restricted stock for 2018, 2017 and 2016, inclusive of performance shares, was $9,565, $5,702 and $5,127, respectively, which is recorded in operating expenses in the consolidated statements of comprehensive income.

 

During 2018, 2017 and 2016, 33,419, 34,095 and 19,326 shares, respectively, of stock were granted to certain members of the Company’s Board of Directors as a component of their compensation for their service on the Board, of which 33,419, 22,762 and 19,326 shares, respectively, were fully vested. Total share-based compensation cost for these share grants in 2018, 2017 and 2016 was $1,718, $1,133 and $670, respectively, which is recorded in operating expenses in the consolidated statements of comprehensive income.

 

 

16.

Commitments and Contingencies

 

The Company leases certain manufacturing, distribution and office facilities, machinery and computer equipment, automobiles and warehouse space under both capital and operating leases. The future minimum capital and operating lease commitments and related present value of capital lease commitments at December 31, 2018, are as follows:

 

   

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          

 

Total rent expense related to operating leases for the years ended December 31, 2018, 2017 and 2016, was approximately $10,739, $10,845 and $9,146, respectively.

 

 

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 December 31, 2018 and 2017 was approximately $47,200 and $36,500, respectively.

 

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

 

 

17.

Quarterly Financial Information (Unaudited)

 

   

Quarters Ended 2018

 
   

Q1

   

Q2

   

Q3

   

Q4

 

Net sales

  $ 400,091     $ 497,581     $ 562,388     $ 563,404  

Gross profit

    141,927       178,473       200,334       204,306  

Operating income

    56,347       85,467       106,519       108,848  

Net income attributable to Generac Holdings Inc.

    33,645       53,261       75,776       75,575  

Net income attributable to common shareholders per common share - basic:

  $ 0.42     $ 0.83     $ 1.12     $ 1.21  

Net income attributable to common shareholders per common share - diluted:

  $ 0.42     $ 0.82     $ 1.11     $ 1.20  

 

   

Quarters Ended 2017

 
   

Q1

   

Q2

   

Q3

   

Q4

 

Net sales

  $ 332,056     $ 396,523     $ 457,747     $ 493,047  

Gross profit

    109,954       134,224       157,680       182,928  

Operating income

    30,890       51,822       72,548       95,374  

Net income attributable to Generac Holdings Inc.

    12,175       25,291       39,435       80,907  

Net income attributable to common shareholders per common share - basic:

  $ 0.21     $ 0.41     $ 0.64     $ 1.31  

Net income attributable to common shareholders per common share - diluted:

  $ 0.20     $ 0.41     $ 0.63     $ 1.30  

 

In accordance with the new revenue recognition standard, extended warranty revenues are reported within net sales in the consolidated statements of comprehensive income. Previously, these amounts were reported net within selling and service expense on the consolidated statements of comprehensive income, in amounts that were not material. The net sales and gross profit amounts shown above for the first three quarters of 2018 and 2017 have been revised from amounts previously reported in the Company’s 2018 quarterly reports on Form 10-Q, pursuant to the full retrospective adoption of the new revenue recognition standard on January 1, 2018. The revisions impacted the Domestic segment and the Other product class, and resulted in an increase to net sales and gross profit, with an equal offset to selling and service expenses. For the first, second and third quarters ended in 2018, net sales increased by $2,457, $2,632, and $2,873, and gross profit by $1,938, $2,217, and $2,449, respectively. For the first, second and third quarters ended in 2017, net sales increased by $1,571, $1,648, and $1,908, and gross profit by $1,154, $1,303, and $1,449, respectively. There was no impact to income from operations, net income or comprehensive income, earnings per share, the consolidated balance sheets, the consolidated statement of stockholders’ equity, or the consolidated statements of cash flows.

 

 

 

18.

Valuation and Qualifying Accounts

 

For the years ended December 31, 2018, 2017 and 2016:

 

   

Balance at

Beginning of

Year

   

Additions

Charged to

Earnings

   

Charges to

Reserve, Net (1)

   

Reserves

Established for

Acquisitions

   

Balance at

End of Year

 

Year ended December 31, 2018

                                       

Allowance for doubtful accounts

  $ 4,805     $ 1,941     $ (2,123 )   $ 250     $ 4,873  

Reserves for inventory

    15,987       10,004       (3,720 )     869       23,140  

Valuation of deferred tax assets

    6,817       478       -       (1,493 )     5,802  
                                         

Year ended December 31, 2017

                                       

Allowance for doubtful accounts

  $ 5,642     $ 346     $ (1,842 )   $ 659     $ 4,805  

Reserves for inventory

    13,031       6,164       (4,036 )     828       15,987  

Valuation of deferred tax assets

    4,362       2,455       -       -       6,817  
                                         

Year ended December 31, 2016

                                       

Allowance for doubtful accounts

  $ 2,494     $ 1,654     $ (1,110 )   $ 2,604     $ 5,642  

Reserves for inventory

    10,582       5,359       (5,357 )     2,447       13,031  

Valuation of deferred tax assets

    1,523       638       -       2,201       4,362  

 

 

(1)

Deductions from the allowance for doubtful accounts equal accounts receivable written off against the allowance. less recoveries. Deductions from the reserves for inventory excess and obsolete items equal inventory written off against the reserve as items were disposed of.

 

 

19.

Subsequent Events

 

On February 1, 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. Captiva has seven sales locations throughout India and has over 100 employees.

 

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

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

 

Item 9A. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by us in reports we file or submit under the Securities Exchange Act of 1934 (Exchange Act), is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure.

 

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, has conducted an evaluation of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act as of the end of the period covered by this report on Form 10-K. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective in providing reasonable assurance that the information required to be disclosed in this report on Form 10-K has been recorded, processed, summarized and reported as of the end of the period covered by this report on Form 10-K.

 

 

Management’s Report on Internal Control Over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed under the supervision of our Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the consolidated financial statements in accordance with U.S. GAAP.

 

Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of the financial statements in accordance with U.S. GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the Company’s financial statements.

 

There are inherent limitations to the effectiveness of any internal control over financial reporting, including the possibility of human error or the circumvention or overriding of the controls. Accordingly, even an effective internal control over financial reporting can provide only reasonable assurance of achieving its objective. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate, because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, our management conducted an assessment of the effectiveness of internal control over financial reporting as of December 31, 2018 based on the criteria established in the 2013 Internal Control – Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, our management has concluded that our internal control over financial reporting was effective as of December 31, 2018. In conducting this assessment, our management excluded the Selmec Equipos Industriales, S.A. de C.V. business, which was acquired on June 1, 2018 and whose financial statements constitute 11.1% and 5.3% of net and total assets, respectively, 1.5% of net sales, and 0.04% of net income of the total consolidated financial statement amounts as of and for the year ended December 31, 2018.

 

Deloitte & Touche LLP, the Company’s independent registered public accounting firm, issued an attestation report on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2018, which is included herein.

 

Changes in Internal Control Over Financial Reporting

 

In January 2019, we implemented ASU 2016-02, Leases. As a result of the adoption, we implemented changes to our controls related to leases. These included the development of new policies related to the capitalization of leases, enhanced lease terms and contract review requirements, and other ongoing monitoring activities. These controls were designed to provide assurance at a reasonable level of the fair presentation of our consolidated financial statements and related disclosures.

 

Other than the implementation of the new leases standard noted above, there have been no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Item 9B. Other Information

 

None.

 

PART III

 

Item 10. Directors, Executive Officers and Corporate Governance

 

The information required by Item 10 not already provided herein under “Item 1 – Business – Executive Officers”, will be included in our 2019 Proxy Statement and is incorporated herein by reference.

 

Item 11. Executive Compensation

 

The information required by this item will be included in our 2019 Proxy Statement and is incorporated herein by reference.

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

The information required by this item, including under the heading “Securities Authorized for Issuance Under Equity Compensation Plans,” will be included in our 2019 Proxy Statement and is incorporated herein by reference.

 

 

Item 13. Certain Relationships and Related Transactions, and Director Independence

 

The information required by this item will be included in our 2019 Proxy Statement and is incorporated herein by reference.

 

Item 14. Principal Accountant Fees and Services

 

The information required by this item will be included in our 2019 Proxy Statement and is incorporated herein by reference.

 

 

PART IV

 

Item 15. Exhibits and Financial Statement Schedules

 

(a)(1) Financial Statements

 

Included in Part II of this report:

 

Page

   

Reports of Independent Registered Public Accounting Firms

37

Consolidated balance sheets as of December 31, 2018 and 2017

39

Consolidated statements of comprehensive income for years ended December 31, 2018, 2017 and 2016

40

Consolidated statements of stockholders’ equity for years ended December 31, 2018, 2017 and 2016

41

Consolidated statements of cash flows for the years ended December 31, 2018, 2017 and 2016

42

Notes to consolidated financial statements

43

 

(a)(2) Financial Statement Schedules

 

All financial statement schedules have been omitted, since the required information is not applicable or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements and notes thereto.

 

(a)(3) Exhibits

 

The below Exhibits Index is the list of the exhibits being filed or furnished with or incorporated by reference into this Annual Report on Form 10-K.

 

EXHIBIT INDEX

 

Exhibits
Number

 

Description

     

  3.1

 

Third Amended and Restated Certificate of Incorporation of Generac Holdings Inc. (incorporated by reference to Exhibit 3.1 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009).

     

  3.2

 

Amended and Restated Bylaws of Generac Holdings Inc. (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed with the SEC on February 16, 2016).

     

  4.1

 

Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 of the Registration Statement on Form S-1 filed with the SEC on January 25, 2010).

     

10.1

 

Credit Agreement, Dated as of February 9, 2012, As Amended and Restated as of May 30, 2012, As Further Amended and Restated as of May 31, 2013, among Generac Power Systems, Inc., Generac Acquisition Corp., the lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent and Bank of America, N.A. and Goldman Sachs Bank USA, as syndication agent (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on June 4, 2013), as amended by the First Amendment dated as of May 18, 2015.

     

10.2

 

Replacement Term Loan Amendment dated as of November 2, 2016, among Generac Power Systems, Inc., Generac Acquisition Corp., the lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, and the other agents named therein (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on November 3, 2016).

     

10.3

 

2017 Replacement Term Loan Amendment dated as of May 11, 2017, among Generac Power Systems, Inc., Generac Acquisition Corp., the lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, and the other agents named therein (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on May 15, 2017).

     

10.4

 

2017-2 Replacement Term Loan Amendment dated as of December 8, 2017, among Generac Power Systems, Inc., Generac Acquisition Corp., the lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, and the other agents named therein (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on December 11, 2017).

     

10.5

 

2018 Replacement Term Loan Amendment, dated as of June 8, 2018, among Generac Power Systems, Inc., Generac Acquisition Corp., the lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, and the other agents named therein (incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed with the SEC on June 14, 2018).

     

10.6

 

Restatement Agreement, dated as of May 31, 2013, to that certain Credit Agreement, dated as of February 9, 2012, as amended and restated as of May 30, 2012, among Generac Power Systems, Inc., Generac Acquisition Corp., the lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, and Bank of America, N.A. and Goldman Sachs Bank USA, as syndication agents (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on June 4, 2013).

 

 

Exhibits
Number
  Description
     

10.7

 

Guarantee and Collateral Agreement, dated as of February 9, 2012, as amended and restated as of May 30, 2012, among Generac Holdings Inc., Generac Acquisition Corp., Generac Power Systems, Inc., certain subsidiaries of Generac Power Systems, Inc. and JPMorgan Chase Bank, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed with the SEC on May 31, 2012).

     

10.8

 

First Amendment to Guarantee and Collateral Agreement dated as of May 31, 2013, among Generac Holdings Inc., Generac Acquisition Corp., Generac Power Systems, Inc., certain subsidiaries of Generac Power Systems, Inc. and JPMorgan Chase Bank, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the SEC on June 4, 2013).

     

10.9

 

Credit Agreement, dated as of May 30, 2012, among Generac Power Systems, Inc., its Domestic Subsidiaries listed as Borrowers on the signature pages thereto, Generac Acquisition Corp., the lenders party thereto, Bank of America, N.A. as Administrative Agent, JPMorgan Chase Bank, N.A. and Goldman Sachs Bank USA, as syndication agents, and Wells Fargo Bank, National Association, as Documentation Agent (incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K filed with the SEC on May 31, 2012).

     

10.10

 

Amendment No. 1 dated as of May 31, 2013, among Generac Power Systems, Inc., its Domestic Subsidiaries listed as Borrowers on the signature pages thereto, Generac Acquisition Corp., the lenders party thereto, Bank of America, N.A. as Administrative Agent, JPMorgan Chase Bank, N.A. and Goldman Sachs Bank USA, as syndication agents, and Wells Fargo Bank, National Association, as Documentation Agent (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the SEC on June 4, 2013).

     

10.11

 

Amendment No. 2 dated as of May 29, 2015, among Generac Power Systems, Inc., its Domestic Subsidiaries listed as Borrowers on the signature pages thereto, Generac Acquisition Corp., the lenders party thereto, Bank of America, N.A. as Administrative Agent, and the other agents named therein (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the SEC on June 1, 2015).

     

10.12

 

Second Amended and Restated Credit Agreement, dated as of June 12, 2018, among Generac Power Systems, Inc., its Subsidiaries listed as Borrowers on the signature pages thereto, Generac Acquisition Corp., the lenders party thereto, Bank of America, N.A. as Administrative Agent, JPMorgan Chase Bank, N.A., as Syndication Agent, and Wells Fargo Bank, National Association, as Documentation Agent (incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K filed with the SEC on June 14, 2018).

     

10.13

 

Guarantee and Collateral Agreement, dated as of May 30, 2012, among Generac Holdings Inc., Generac Acquisition Corp., Generac Power Systems, Inc., certain subsidiaries of Generac Power Systems, Inc. and Bank of America, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.4 of the Company’s Current Report on Form 8-K filed with the SEC on May 31, 2012).

     

10.14

 

First Amendment to Guarantee and Collateral Agreement dated as of May 31, 2013, among Generac Holdings Inc., Generac Acquisition Corp., Generac Power Systems, Inc., certain subsidiaries of Generac Power Systems, Inc. and Bank of America, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed with the SEC on June 4, 2013).

     

10.15+

 

2009 Executive Management Incentive Compensation Program (incorporated by reference to Exhibit 10.46 of the Registration Statement on Form S-1 filed with the SEC on December 17, 2009).

     

10.16+

 

Generac Holdings Inc. Amended and Restated 2010 Equity Incentive Plan (incorporated by reference to Appendix A to the Definitive Proxy Statement on Schedule 14A of the Company filed with the SEC on April 27, 2012)

     

10.17+

 

Generac Holdings Inc. Annual Performance Bonus Plan (incorporated by reference to Exhibit 10.63 of the Registration Statement on Form S-1 filed with the SEC on January 25, 2010).

     

10.18+

 

Amended and Restated Employment Agreement, dated November 5, 2018, between Generac and Aaron Jagdfeld (incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q filed with the SEC on November 6, 2018).

     

10.19

 

Form of Confidentiality, Non-Competition and Intellectual Property Agreement (incorporated by reference to Exhibit 10.40 of the Registration Statement on Form S-1 filed with the SEC on November 24, 2009).

     

10.20+

 

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

     
10.21+   Amended Form of Restricted Stock Award Agreement pursuant to the 2010 Equity Incentive Plan (incorporated by reference to Exhibit 10.3 of the Quarterly Report on Form 10-Q filed with the SEC on May 8, 2012).
     

10.22+

 

Amended Form of Nonqualified Stock Option Award Agreement pursuant to the 2010 Equity Incentive Plan (incorporated by reference to Exhibit 10.4 of the Quarterly Report on Form 10-Q filed with the SEC on May 8, 2012).

 

 

Exhibits
Number
  Description

10.23+

  Amended Form of Restricted Stock Award Agreement with accelerated vesting pursuant to the 2010 Equity Incentive Plan (incorporated by reference to Exhibit 10.5 of the Quarterly Report on Form 10-Q filed with the SEC on May 8, 2012).
     
10.24+*   Amended Form of Nonqualified Stock Option Award Agreement pursuant to the 2010 Equity Incentive Plan.
     

10.25+*

  Amended Form of Restricted Stock Award Agreement pursuant to the 2010 Equity Incentive Plan.
     

10.26

 

Form of Director Indemnification Agreement (incorporated by reference to Exhibit 10.51 of the Registration Statement on Form S-1 filed with the SEC on January 11, 2010).

     

10.27

 

Form of Officer Indemnification Agreement (incorporated by reference to Exhibit 10.52 of the Registration Statement on Form S-1 filed with the SEC on January 11, 2010).

     

10.28+

 

Form of Performance Share Award Agreement (incorporated by reference to Exhibit 10.1 of the Quarterly Report on Form 10-Q filed with the SEC on May 8, 2014).

     
10.29+*   Amended Form of Performance Share Award Agreement pursuant to the 2010 Equity Incentive Plan.
     

10.30+

 

Summary of Employment Arrangement with Jeffrey Mueller, President / General Manager – Consumer Power, as set forth in the Offer of Employment Letter dated November 13, 2017 (incorporated by reference to Exhibit 10.27 of the Annual Report on Form 10-K filed with the SEC on February 26, 2018).

     

10.31+

 

Generac Holdings Inc. Non-Employee Director Compensation Policy (incorporated by reference to Exhibit 10.3 of the Quarterly Report on Form 10-Q filed with the SEC on August 7, 2018).

     

10.32+

 

Generac Power Systems, Inc. Executive Change in Control Policy, effective November 5, 2018 (incorporated by reference to Exhibit 10.2 of the Quarterly Report on Form 10-Q filed with the SEC on November 6, 2018).

     

21.1*

 

List of Subsidiaries of Generac Holdings Inc.

     

23.1*

 

Consent of Deloitte & Touche LLP, Independent Registered Public Accounting Firm.

     

31.1*

 

Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

     

31.2*

 

Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

     

32.1**

 

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

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

101*

 

The following financial information from the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018, filed with the SEC on February 26, 2019, formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets at December 31, 2018 and December 31, 2017; (ii) Consolidated Statements of Comprehensive Income for the Fiscal Years Ended December 31, 2018, December 31, 2017 and December 31, 2016; (iii) Consolidated Statements of Stockholders' Equity for the Fiscal Years Ended December 31, 2018, December 31, 2017 and December 31, 2016; (iv) Consolidated Statements of Cash Flows for the Fiscal Years Ended December 31, 2018, December 31, 2017 and December 31, 2016; (v) Notes to Consolidated Financial Statements.

     
   

___________________

*Filed herewith.
**Furnished herewith.
+Indicates management contract or compensatory plan or arrangement.

 

Item 16. Form 10-K Summary

 

None.

 

 

SIGNATURES

 

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

 

 

Generac Holdings Inc.

   
 

By:

/s/ Aaron Jagdfeld

   

Aaron Jagdfeld

   

 Chairman, President and Chief Executive Officer

 

Dated: February 26, 2019

 

 

 

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

 

Signature Title Date
     

/s/ Aaron Jagdfeld

Chairman, President and Chief Executive

February 26, 2019

Aaron Jagdfeld Officer  
     

/s/ York A. Ragen

Chief Financial Officer and

February 26, 2019

York A. Ragen Chief Accounting Officer  
     

/s/ bennett morgan

Lead Director

February 26, 2019

Bennett Morgan    
     

/s/ TODD A. ADAMS

Director

February 26, 2019

Todd A. Adams    
     

/s/ JOHN D. BOWLIN

Director

February 26, 2019

John D. Bowlin    
     

/s/ Robert D. Dixon

Director

February 26, 2019

Robert D. Dixon    
     

/s/ WILLIAM JENKINS

Director

February 26, 2019

William Jenkins    
     

/s/ Andrew G. Lampereur

Director

February 26, 2019

Andrew G. Lampereur    
     

/s/ David A. Ramon

Director

February 26, 2019

David A. Ramon    
     

/s/ KATHRYN ROEDEL

Director

February 26, 2019

Kathryn Roedel    
     

/s/ DOMINICK ZARCONE

Director

February 26, 2019

Dominick Zarcone

   

 

75

ex_135458.htm

Exhibit 10.24

 

Generac Holdings Inc.
2010 Amended & Restated Equity Incentive Plan

 


NONQUALIFIED STOCK OPTION AWARD AGREEMENT

 

Upon acceptance by you through the online acceptance procedures set forth at www.computershare.com (“Computershare”), this Nonqualified Stock Option Award Agreement (this "Agreement") is made effective as of the date set forth on your online award acceptance page on Computershare (“Grant Date”), which is incorporated by reference herein, between Generac Holdings Inc., a Delaware corporation (the "Company") and you (the "Participant"). Unless otherwise indicated, any capitalized term used but not defined herein shall have the meaning ascribed to such term in the Plan.

 

R E C I T A L S:

 

WHEREAS, the Company has adopted the Generac Holdings Inc. Amended & Restated 2010 Equity Incentive Plan (the “Plan”), which Plan is incorporated herein by reference and made a part of this Award Agreement. Capitalized terms not otherwise defined herein shall have the same meanings as in the Plan; and

 

WHEREAS, the Committee has determined that it would be in the best interests of the Company and its stockholders to grant the option provided for herein to the Participant pursuant to the Plan and the terms set forth herein.

 

NOW THEREFORE, in consideration of the mutual covenants hereinafter set forth, the parties agree as follows:

 

1.     Grant of the Option. The Company hereby grants to the Participant the right and option (the “Option”) to purchase, on the terms and conditions hereinafter set forth, all or any part of an aggregate a certain number of Shares as set forth on the Participant’s online award acceptance page on Computershare. The Option is intended to be a Non-Qualified Stock Option.

 

2.     Option Price. The purchase price of the Shares subject to the Option shall equal the option price as defined and calculated pursuant to Section 6 of the Plan, and which corresponds to the Grant Date set forth on your online award acceptance page on Computershare and denoted as the award price (the “Option Price” or “Award Price”).

 

3.     Option Term. The term of the Option shall be ten (10) years, commencing on the Date of Grant, unless terminated at an earlier time pursuant to Section 6 (the “Option Term”). The Option shall automatically terminate upon the expiration of the Option Term, or at such earlier time specified herein or in the Plan.

 

4.     Vesting of the Option. Subject to the Participant’s continued service to the Company through the applicable vesting date, the Option shall vest in equal installments on each of the first four (4) anniversaries of the Date of Grant, such that twenty-five percent (25%) of the Option vests on each such anniversary. At any time, the portion of the Option which has become vested in accordance with the terms hereof shall be called the “Vested Portion”.

 

 

 

 

5.     Acceleration of Vesting Upon Termination following a Change of Control. Notwithstanding Section 4 hereof, if within the one (1) year period following a Change of Control, the Participant’s service is terminated by the Company or any Affiliate without Cause, the Option shall immediately vest as of the date of such termination of service.

 

6.     Termination of Service.

 

(a)     Termination of Service for Cause. Upon a termination of the Participant’s service by the Company for Cause, the Option, including the Vested Portion, shall immediately terminate and be forfeited without consideration.

 

(b)     Termination of Service Without Cause. Upon a termination of the Participant’s service by the Company without Cause (except as set forth in Section 5 and Section 6(e)), any unvested portion of the Option shall continue to vest during the period beginning on the date of such termination of service and ending on the earlier of (i) one year following such termination of service and (ii) the expiration of the Option Term, and any portion so vested shall remain exercisable until the earlier of (i) ninety days following the end of such one year period and (ii) the expiration of the Option Term. Any Vested Portion as of the date of a termination of service contemplated by this Section 6(b) shall remain exercisable until the earlier of (i) ninety days following such termination of service and (ii) the expiration of the Option Term.

 

(c)     Termination of Service for Normal Retirement. Upon a termination of the Participant’s service by reason of Normal Retirement, any unvested portion of the Option shall continue to vest during the period beginning on the date of such termination of service and ending on the earlier of (i) two years following such termination of service and (ii) the expiration of the Option Term, and any portion so vested shall remain exercisable until the earlier of (i) ninety days following the end of such two year period and (ii) the expiration of the Option Term. Any Vested Portion as of the date of a termination of service contemplated by this Section 6(c) shall remain exercisable until the earlier of (i) one year following such termination of service and (ii) the expiration of the Option Term.

 

(d)     Termination of Service for death or Disability. Upon a termination of the Participant’s service by reason of death or Disability, any unvested portion of the Option shall vest as soon as is reasonably practicable, but in no event later than 60 days, after the date of death or Disability, and the Option shall remain exercisable until the earlier of (i) one year following such termination of service and (ii) the expiration of the Option Term.

 

(e)     Termination of Service following a Change of Control. Upon a termination of the Participant’s service pursuant to Section 5 above, the Option shall remain exercisable until the earlier of (i) one year following such termination of service and (ii) the expiration of the Option Term.

 

(f)     Other Terminations of Service. Upon a termination of the Participant’s service for any reason, other than as contemplated by Sections 6(a), 6(b), 6(c), 6(d) and 6(e) above, any unvested portion of the Option shall immediately terminate and be forfeited without consideration. Any Vested Portion as of the date of a termination of service contemplated by this Section 6(f) shall remain exercisable until the earlier of (i) ninety days following such termination of service and (ii) the expiration of the Option Term.

 

2

 

 

7.     Exercise Procedures.

 

(a)     Notice of Exercise. Except as set forth in Section 6, the Participant or the Participant’s representative may exercise the Vested Portion or any part thereof prior to the expiration of the Option Term by giving written notice to the Company in the form attached hereto as Exhibit A (the “Notice of Exercise”). The Notice of Exercise shall be signed by the person exercising such Option. In the event that such Option is being exercised by the Participant’s representative, the Notice of Exercise shall be accompanied by proof (satisfactory to the Company) of such representative’s right to exercise such Option. In the event the Option is being exercised following the termination of the Participant’s service, exercise shall be subject to the Participant’s execution on or after the termination date of an effective general release and waiver of all claims against the Company, its Affiliates and their respective officers and directors substantially in the form attached hereto as Exhibit B.

 

(b)     Method of Exercise. The Participant or the Participant’s representative shall deliver to the Company, at the time the Notice of Exercise is given, payment in a form permissible under Section 6.5 of the Plan for the full amount of the aggregate Option Price for the exercised Option.

 

(c)     Issuance of Shares. Provided the Company receives a properly completed and executed Notice of Exercise, payment for the full amount of the aggregate Option Price, and, if applicable, an effective release and waiver of all claims as required by this Section 7, the Company shall promptly cause to be issued certificates for the Shares underlying the exercised Option, registered in the name of the Person exercising the applicable Option.

 

8.     Restrictive Covenant Agreement. The Participant and the Company have previously entered into a restrictive covenant agreement. Participant hereby reaffirms his obligations under such restrictive covenant agreement and nothing contained in this Award Agreement shall cancel, change or modify Participant’s obligations thereunder.

 

9.     Non-Disparagement. The Participant, while providing services to the Company and thereafter, shall not make any oral or written communication to any Person that disparages, or has the effect of damaging the reputation of, the Company, the Affiliates or their respective directors, officers, agents, employees, former employees, representatives or stockholders; provided, that, nothing in the foregoing shall preclude the Participant from disclosing any information to Participant’s attorney or in response to a lawful subpoena or court order requiring disclosure of information.

 

10.     Adjustment of Shares. In the event of any corporate event or transaction (as described in Section 12.1 of the Plan), the terms of this Award Agreement (including, without limitation, the number and kind of Shares subject to this Agreement and the Option Price) may be adjusted as set forth in Section 12.1 of the Plan.

 

3

 

 

11.     Definitions.

 

Cause” shall mean, (i) a material breach by the Participant of any of the Participant’s obligations under any written agreement with the Company or any of its Affiliates, (ii) a material violation by the Participant of any of the Company’s policies, procedures, rules and regulations applicable to employees generally or to similarly situated employees, in each case, as they may be amended from time to time in the Company’s sole discretion; (iii) the failure by the Participant to reasonably and substantially perform his or her duties to the Company or its Affiliates (other than as a result of physical or mental illness or injury); (iv) the Participant’s willful misconduct or gross negligence that has caused or is reasonably expected to result in material injury to the business, reputation or prospects of the Company or any of its Affiliates; (v) the Participant’s fraud or misappropriation of funds; or (vi) the commission by the Participant of a felony or other serious crime involving moral turpitude. Notwithstanding the foregoing, if the Participant is a party to an employment agreement with the Company or any Affiliate at the time of his or her termination of employment and such employment agreement contains a different definition of “cause” (or any derivation thereof), the definition in such employment agreement will control for purposes of this Agreement.

 

Disability” shall mean the failure or inability of the Participant to perform duties with the Company or any Affiliate for a period of at least 180 consecutive days (or 180 days during any twelve (12) month period) by reason of any physical or mental condition, as determined reasonably and in good faith by the Committee; provided, that, if the Company’s long term disability plan contains a definition of “disability,” the definition in such plan will control for purposes of this Agreement.

 

Normal Retirement” shall mean a voluntary termination of employment or service as a Director by a Participant who has attained (1) at least sixty-five (65) years of age and has at least twenty (20) years of service to the Company or any of its Affiliates.

 

12.     No Right to Continued Service. The granting of the Option evidenced hereby and this Award Agreement shall impose no obligation on the Company or any Affiliate to continue the Service of the Participant and shall not lessen or affect any right that the Company or any Affiliate may have to terminate the service of such Participant.

 

13.     Securities Laws/Legend on Certificates. The issuance and delivery of Shares shall comply (or be exempt from) all applicable requirements of law, including (without limitation) the Securities Act of 1933, as amended, the rules and regulations promulgated thereunder, state securities laws and regulations, and the regulations of any stock exchange or other securities market on which the Company’s securities may then be traded. The Company shall not be obligated to file any registration statement under any applicable securities laws to permit the purchase or issuance of any Shares under the Plan or Awards, and accordingly any certificates for Shares or documents granting Awards may have an appropriate legend or statement of applicable restrictions endorsed thereon. If the Company deems it necessary to ensure that the issuance of Shares under the Plan is not required to be registered under any applicable securities laws, each Participant to whom such Shares would be issued shall deliver to the Company an agreement or certificate containing such representations, warranties and covenants as the Company may reasonably request which satisfies such requirements.

 

14.     Transferability. Unless otherwise provided by the Committee, the Option may not be assigned, alienated, pledged, attached, sold or otherwise transferred or encumbered by the Participant other than by will or by the laws of descent and distribution, and any such purported assignment, alienation, pledge, attachment, sale, transfer or encumbrance shall be void and unenforceable against the Company or any Affiliate; provided, that, the designation of a beneficiary shall not constitute an assignment, alienation, pledge, attachment, sale, transfer or encumbrance. No such permitted transfer of the Option to heirs or legatees of the Participant shall be effective to bind the Company unless the Committee shall have been furnished with written notice thereof and a copy of such evidence as the Committee may deem necessary to establish the validity of the transfer and the acceptance by the transferee or transferees of the terms and conditions hereof. During the Participant’s lifetime, the Option is exercisable only by the Participant.

 

4

 

 

15.     Withholding. The Participant may be required to pay to the Company or any Affiliate and the Company shall have the right and is hereby authorized to withhold, any applicable withholding taxes in respect of the Option, its exercise or transfer and to take such other action as may be necessary in the opinion of the Committee to satisfy all obligations for the payment of such withholding taxes.

 

16.     Notices. Any notification required by the terms of this Award Agreement shall be given in writing and shall be deemed effective upon personal delivery or within three (3) days of deposit with the United States Postal Service, by registered or certified mail, with postage and fees prepaid. A notice shall be addressed to the Company, Attention: General Counsel, at its principal executive office and to the Participant at the address that he or she most recently provided to the Company.

 

17.     Entire Agreement. This Award Agreement, the details of the award on the Participant’s online award acceptance page on Computershare, and the Plan constitute the entire contract between the parties hereto with regard to the subject matter hereof. They supersede any other agreements, representations or understandings (whether oral or written and whether express or implied) which relate to the subject matter hereof.

 

18.     Waiver. No waiver of any breach or condition of this Award Agreement shall be deemed to be a waiver of any other or subsequent breach or condition whether of like or different nature.

 

19.     Successors and Assigns. The provisions of this Award Agreement shall inure to the benefit of, and be binding upon, the Company and its successors and assigns and upon the Participant, the Participant’s assigns and the legal representatives, heirs and legatees of the Participant’s estate, whether or not any such person shall have become a party to this Award Agreement and have agreed in writing to be joined herein and be bound by the terms hereof.

 

20.     Choice of Law. This Award Agreement shall be governed by the law of the State of Delaware (regardless of the laws that might otherwise govern under applicable Delaware principles of conflicts of law) as to all matters, including but not limited to matters of validity, construction, effect, performance and remedies.

 

21.     Option Subject to Plan. By entering into this Award Agreement the Participant agrees and acknowledges that the Participant has received and read a copy of the Plan. The Option is subject to the Plan. The terms and provisions of the Plan as it may be amended from time to time are hereby incorporated herein by reference. In the event of a conflict between any term or provision contained herein and a term or provision of the Plan, the applicable terms and provisions of the Plan will govern and prevail.

 

22.     No Guarantees Regarding Tax Treatment. The Participant (or their beneficiaries) shall be responsible for all taxes with respect to the Option. The Committee and the Company make no guarantees regarding the tax treatment of the Option. Neither the Committee nor the Company has any obligation to take any action to prevent the assessment of any tax under Section 409A of the Code or Section 457A of the Code or otherwise and none of the Company, any Affiliate, or any of their employees or representatives shall have any liability to the Participant with respect thereto.

 

5

 

 

23.     Amendment. The Committee may amend or alter this Award Agreement and the Option granted hereunder at any time, subject to the terms of the Plan.

 

24.     Severability. The provisions of this Award Agreement are severable and if any one or more provisions are determined to be illegal or otherwise unenforceable, in whole or in part, the remaining provisions shall nevertheless be binding and enforceable.

 

25.     Signature in Counterparts. The grant of Options is subject to Participant’s acceptance of the terms and conditions of this Agreement. By clicking the acknowledgment button, Participant indicates he or she (1) has been provided access to a copy of the Plan, (2) has had the opportunity to obtain independent legal advice prior to accepting the grant, (3) has read this Agreement and (4) agrees fully to the terms of the Agreement. The Participant also acknowledges that all decisions, determinations and interpretations of the Committee in respect of the Plan, this Agreement and the Options shall be final and conclusive.

 

6

 

 

EXHIBIT A

NOTICE OF EXERCISE

 

 

Generac Holdings Inc.  
S45 W29290 Hwy. 59  
Waukesha, Wisconsin 53187  
Attn:____________________ Date of Exercise: _________________

 

Ladies & Gentlemen:

 

1.     Exercise of Option. This constitutes notice to Generac Holdings, Inc. (the “Company”) that pursuant to my Nonqualified Stock Option Award Agreement (the “Award Agreement”) under the Company’s 2010 Amended & Restated Equity Incentive Plan (the “Plan”) I elect to purchase the number of Shares of Company common stock set forth below and for the price set forth below. By signing and delivering this notice to the Company, I hereby acknowledge that I am the holder of the stock option (the “Option”) exercised by this notice and have full power and authority to exercise the same.

 

  Date of Grant:    
       
  Number of Shares as to    
  which the Option is exercised    
  (“Optioned Shares”):    
       
  Certificates to be issued in    
  name of:    
       
  Total exercise price: $  
       
  Cash Exercise    
  Cash payment delivered    
  herewith: $  

 

 

2.     Form of Payment. Forms of payment other than cash or its equivalent (e.g. by cashier’s check) are limited by the Plan and are permissible only to the extent approved by the compensation committee of the Board of Directors of the Company (the “Committee”) or any committee designated thereby, in its sole discretion.

 

3.     Delivery of Payment. With this notice, I hereby deliver to the Company the full purchase price of the Optioned Shares and any and all withholding taxes due in connection with the exercise of my Option.

 

4.     Rights as Stockholder. While the Company will endeavor to process this notice in a timely manner, I acknowledge that until the issuance of the shares underlying the Optioned Shares (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to such shares, notwithstanding the exercise of my option(s). No adjustment shall be made for a dividend or other right for which the record date is prior to the date of issuance of the optioned stock.

 

 

 

 

5.     Interpretation. Any dispute regarding the interpretation of this notice shall be submitted promptly by me or by the Company to the Committee, which shall review such dispute at its next regular meeting. The resolution of such a dispute by such administrator of the Plan shall be final and binding on all parties.

 

6.     Governing Law; Severability. This notice is governed by the internal substantive laws but not the choice of law rules, of Delaware. In the event that any provision hereof becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, this notice will continue in full force and effect without said provision.

 

7.     Entire Agreement. The Plan and the Award Agreement under which the Optioned Shares were granted are incorporated herein by reference, and together with this notice constitute the entire agreement of the parties with respect to the subject matter hereof.

 

 

 

  Very truly yours,
   
   
   
   
   
  (social security number)

 

 

 

 

EXHIBIT B

FORM OF RELEASE

 

A release is required as a condition for receiving the benefits provided pursuant to the Nonqualified Stock Option Award Agreement between GENERAC HOLDINGS INC. (the “Company”) and _____________________ (“Participant”) dated ____________________ (the “Agreement”); thus, by executing this release (“Release”), you have advised us that you hold no claims against the Company, its predecessors, successors or assigns, affiliates, shareholders or members and each of their respective officers, directors, agents and employees (collectively, the “Releasees”), and by execution of this Release you agree to waive and release any such claims, except relating to any compensation, severance pay and benefits described in any written agreement between you and the Company.

 

You understand and agree that this Release will extend to all claims, demands, liabilities and causes of action of every kind, nature and description whatsoever, whether known, unknown or suspected to exist, which you ever had or may now have against the Releasees in your capacity as an employee of the Company, including, without limitation, any claims, demands, liabilities and causes of action arising from your employment with the Releasees and the termination of that employment, including any claims for severance or vacation pay, business expenses, and/or pursuant to any federal, state, county, or local employment laws, regulations, executive orders, or other requirements, including, but not limited to, Title VII of the 1964 Civil Rights Act, the 1866 Civil Rights Act, the Age Discrimination in Employment Act as amended by the Older Workers Benefit Protection Act, the Americans with Disabilities Act, the Civil Rights Act of 1991, the Workers Adjustment and Retraining Notification Act and any other local, state or federal fair employment laws, and any contract or tort claims.

 

You understand and agree that this Release is intended to include all claims by you or on your behalf alleging discrimination on the basis of race, sex, religion, national origin, age, disability, marital status, or any other protected status or involving any contract or tort claims based on your termination from the Company. It is also acknowledged that your termination is not in any way related to any work-related injury.

 

It also is understood and agreed that the remedy at law for breach of the Award Agreement, any restrictive covenant agreements between you and the Company, and/or this Release shall be inadequate, and the Company shall be entitled to injunctive relief in respect thereof.

 

Your ability to receive payments and benefits under the terms of the Award Agreement will remain open for a 21-day period after your Termination Date to give you an opportunity to consider the effect of this Release. At your option, you may elect to execute this Release on an earlier date. Additionally, you have seven days after the date you execute this Release to revoke it. As a result, this Release will not be effective until eight days after you execute it. We also want to advise you of your right to consult with legal counsel prior to executing a copy of this Release.

 

Finally, this is to expressly acknowledge:

 

  You understand that you are not waiving any claims or rights that may arise after the date you execute this Release.
     
 

You understand and agree that the compensation and benefits described in the Award Agreement offer you consideration greater than that to which you would otherwise be entitled.

 

I hereby state that I have carefully read this Release and that I am signing this Release knowingly and voluntarily with the full intent of releasing the Releases from any and all claims, except as set forth herein. Further, if signed prior to the completion of the 21 day review period, this is to acknowledge that I knowingly and voluntarily signed this Release on an earlier date.

 

Date:

 
 

 

 

ex_135459.htm

Exhibit 10.25

 

Generac Holdings Inc.
Amended & Restated 2010 Equity Incentive Plan

 


RESTRICTED STOCK AWARD AGREEMENT

 

Upon acceptance by you through the online acceptance procedures set forth at www.computershare.com (“Computershare”), this Restricted Stock Award Agreement (this "Agreement") is made effective as of the date set forth on your online award acceptance page on Computershare (“Grant Date”), which is incorporated by reference herein, between Generac Holdings Inc., a Delaware corporation (the "Company") and you (the "Participant"). Unless otherwise indicated, any capitalized term used but not defined herein shall have the meaning ascribed to such term in the Plan.

 

R E C I T A L S:

 

WHEREAS, the Company has adopted the Generac Holdings Inc. Amended & Restated 2010 Equity Incentive Plan (the “Plan”), which Plan is incorporated herein by reference and made a part of this Award Agreement. Capitalized terms not otherwise defined herein shall have the same meanings as in the Plan; and

 

WHEREAS, the Committee has determined that it would be in the best interests of the Company and its stockholders to grant the restricted stock provided for herein to the Participant pursuant to the Plan and the terms set forth herein.

 

NOW THEREFORE, in consideration of the mutual covenants hereinafter set forth, the parties agree as follows:

 

1.     Restricted Stock Award. Subject to the terms and conditions of the Plan and this Agreement, the Company hereby grants to the Participant a certain number of Shares of the Common Stock of the Company as set forth on the Participant’s online award acceptance page on Computershare (the “Restricted Shares”), which shall vest and become nonforfeitable in accordance with Section 3 hereof.

 

2.     Certificates. A certificate or certificates representing the Restricted Shares shall be issued by the Company and shall be registered in the name of the Participant on the stock transfer books of the Company promptly following execution of this Award Agreement by the Participant, but shall remain in the physical custody of the Company or its designee at all times prior to the vesting of such Restricted Shares pursuant to Section 3 hereof. As a condition to the receipt of this Award Agreement, the Participant shall deliver to the Company a Stock Power in the form attached hereto as Exhibit A, duly endorsed in blank, relating to the Restricted Shares. Each certificate representing the Restricted Shares shall bear the following legend:

 

The ownership and transferability of this certificate and these shares are subject to the terms and conditions (including forfeiture) of the Generac Holdings Inc. Amended & Restated 2010 Equity Incentive Plan and a Restricted Stock Award Agreement entered into between the registered owner and Generac Holdings Inc. Copies of such Plan and Agreement are on file in the executive offices of Generac Holdings Inc.

 

As soon as administratively practicable, but not later than sixty (60) days, following the vesting of the Restricted Shares (as described in Section 3 hereof), and upon the satisfaction of all other applicable conditions, including, but not limited to, the payment by the Participant of all applicable withholding taxes, the Company shall deliver or cause to be delivered to the Participant, or in the case of Participant’s death, Participant’s beneficiary, a certificate or certificates for the applicable Shares of Restricted Stock which shall not bear the legend described above, but may bear such other legends as the Company deems advisable pursuant to Section 7 below.

 

 

 

 

3.     Vesting of Restricted Stock.

 

(a)     Vesting Schedule. Subject to the Participant’s continued service through the vesting date, the Restricted Shares shall all vest in equal installments on each of the first three (3) anniversaries of the Date of Grant such that thirty-three and one-third percent (33.33%) of the Restricted Shares vest on each such anniversary.

 

(b)     Termination of Service Without Cause. Notwithstanding Section 3(a) hereof, upon a termination of the Participant’s service by the Company without Cause (except as set forth in Section 3(d)), any Restricted Shares, to the extent not then-vested, shall continue to vest during the period beginning on the date of such termination of service and ending on the date that is one (1) year following such termination of service, subject to the Participant’s execution on or after the termination date of an effective general release and waiver of all claims against the Company, its Affiliates and their respective officers and directors, substantially in the form attached hereto as Exhibit B.

 

(c)     Termination of Service for Normal Retirement. Notwithstanding Section 3(a) hereof, upon a termination of the Participant’s service by reason of Normal Retirement, any Restricted Shares, to the extent not then-vested, shall continue to vest during the period beginning on the date of such termination of service and ending on the date that is two (2) years following such termination of service, subject to the Participant’s execution on or after the termination date of an effective general release and waiver of all claims against the Company, its Affiliates and their respective officers and directors, substantially in the form attached hereto as Exhibit B.

 

(d)     Termination of Service following a Change of Control. Notwithstanding Section 3(a) hereof, if within the one (1) year period following a Change of Control the Participant’s service is terminated by the Company or any Affiliate without Cause, the Restricted Shares shall immediately vest as of the date of such termination of service, subject to the Participant’s execution on or after the termination date of an effective general release and waiver of all claims against the Company, its Affiliates and their respective officers and directors, substantially in the form attached hereto as Exhibit B.

 

(e)     Termination of Service for death or Disability. Upon a termination of the Participant’s service by reason of death or Disability, any Restricted Shares, to the extent not then-vested, shall vest as soon as is reasonably practicable, but in no event later than 60 days, after the date of death or Disability.

 

(f)     Other Terminations of Service. Upon a termination of the Participant’s service for any reason, other than as contemplated by Sections 3(b), 3(c) and 3(d) above, the Restricted Shares, to the extent not then-vested, shall immediately be forfeited by the Participant without consideration.

 

(g)     Definitions.

 

(i)     “Cause” shall mean, (i) a material breach by the Participant of any of the Participant’s obligations under any written agreement with the Company or any of its Affiliates, (ii) a material violation by the Participant of any of the Company’s policies, procedures, rules and regulations applicable to employees generally or to similarly situated employees, in each case, as they may be amended from time to time in the Company’s sole discretion; (iii) the failure by the Participant to reasonably and substantially perform his or her duties to the Company or its Affiliates (other than as a result of physical or mental illness or injury); (iv) the Participant’s willful misconduct or gross negligence that has caused or is reasonably expected to result in material injury to the business, reputation or prospects of the Company or any of its Affiliates; (v) the Participant’s fraud or misappropriation of funds; or (vi) the commission by the Participant of a felony or other serious crime involving moral turpitude. Notwithstanding the foregoing, if the Participant is a party to an employment agreement with the Company or any Affiliate at the time of his or her termination of employment and such employment agreement contains a different definition of “cause” (or any derivation thereof), the definition in such employment agreement will control for purposes of this Agreement.

 

 

 

 

(ii)      “Normal Retirement” shall mean a voluntary termination of employment or service as a Director by a Participant who has attained at least sixty-five (65) years of age and has at least twenty (20) years of service to the Company or any of its Affiliates.

 

(iii)     “Disability” shall mean the failure or inability of the Participant to perform duties with the Company or any Affiliate for a period of at least 180 consecutive days (or 180 days during any twelve (12) month period) by reason of any physical or mental condition, as determined reasonably and in good faith by the Committee; provided, that, if the Company’s long term disability plan contains a definition of “disability,” the definition in such plan will control for purposes of this Agreement.

 

4.     Rights as a Stockholder. The Participant shall have none of the rights of a stockholder of the Company until the Restricted Shares vest, provided, that, the Participant shall have the right to receive dividends on the Restricted Shares (the “Dividends”) subject to the remainder of this Section 4. The Dividends, if any, shall be held by the Company and shall be subject to forfeiture until such time that the Restricted Shares on which the Dividends were distributed vest in accordance with Section 3 above. The Dividends shall be released to the Participant as soon as administratively practicable, but not later than the time of delivery to the Participant, in accordance with Section 2 above, of certificates representing the Restricted Shares on which the Dividends were distributed.

 

5.     Restrictive Covenant Agreement. The Participant and the Company have previously entered into a restrictive covenant agreement. Participant hereby reaffirms his obligations under such restrictive covenant agreement and nothing contained in this Award Agreement shall cancel, change or modify Participant’s obligations thereunder.

 

6.     Non-Disparagement. The Participant, while providing services to the Company and thereafter, shall not make any oral or written communication to any Person that disparages, or has the effect of damaging the reputation of, the Company, the Affiliates or their respective directors, officers, agents, employees, former employees, representatives or stockholders; provided, that, nothing in the foregoing shall preclude the Participant from disclosing any information to Participant’s attorney or in response to a lawful subpoena or court order requiring disclosure of information.

 

7.     Adjustment of Shares. In the event of any corporate event or transaction (as described in Section 12.1 of the Plan), the terms of this Award Agreement (including, without limitation, the number and kind of Shares subject to this Agreement) may be adjusted as set forth in Section 12.1 of the Plan.

 

8.     No Right to Continued Service. The granting of the Restricted Stock evidenced hereby and this Award Agreement shall impose no obligation on the Company or any Affiliate to continue the Service of the Participant and shall not lessen or affect any right that the Company or any Affiliate may have to terminate the service of such Participant.

 

9.     Securities Laws/Legend on Certificates. The issuance and delivery of Shares shall comply (or be exempt from) all applicable requirements of law, including (without limitation) the Securities Act of 1933, as amended, the rules and regulations promulgated thereunder, state securities laws and regulations, and the regulations of any stock exchange or other securities market on which the Company’s securities may then be traded. The Company shall not be obligated to file any registration statement under any applicable securities laws to permit the purchase or issuance of any Shares under the Plan or Awards, and accordingly any certificates for Shares or documents granting Awards may have an appropriate legend or statement of applicable restrictions endorsed thereon. If the Company deems it necessary to ensure that the issuance of Shares under the Plan is not required to be registered under any applicable securities laws, each Participant to whom such Shares would be issued shall deliver to the Company an agreement or certificate containing such representations, warranties and covenants as the Company may reasonably request which satisfies such requirements.

 

 

 

 

10.     Transferability. Unless otherwise provided by the Committee, the Restricted Shares may not be assigned, alienated, pledged, attached, sold or otherwise transferred or encumbered by the Participant other than by will or by the laws of descent and distribution, and any such purported assignment, alienation, pledge, attachment, sale, transfer or encumbrance shall be void and unenforceable against the Company or any Affiliate; provided, that, the designation of a beneficiary shall not constitute an assignment, alienation, pledge, attachment, sale, transfer or encumbrance. No such permitted transfer of the Restricted Shares to heirs or legatees of the Participant shall be effective to bind the Company unless the Committee shall have been furnished with written notice thereof and a copy of such evidence as the Committee may deem necessary to establish the validity of the transfer and the acceptance by the transferee or transferees of the terms and conditions hereof.

 

11.     Withholding. The Participant may be required to pay to the Company or any Affiliate and the Company shall have the right and is hereby authorized to withhold, any applicable withholding taxes in respect of the Restricted Shares, their vesting or transfer and to take such other action as may be necessary in the opinion of the Committee to satisfy all obligations for the payment of such withholding taxes.

 

12.     Notices. Any notification required by the terms of this Award Agreement shall be given in writing and shall be deemed effective upon personal delivery or within three (3) days of deposit with the United States Postal Service, by registered or certified mail, with postage and fees prepaid. A notice shall be addressed to the Company, Attention: General Counsel, at its principal executive office and to the Participant at the address that he or she most recently provided to the Company.

 

13.     Entire Agreement. This Award Agreement, the details of the award on the Participant’s online award acceptance page on Computershare, and the Plan constitute the entire contract between the parties hereto with regard to the subject matter hereof. They supersede any other agreements, representations or understandings (whether oral or written and whether express or implied) which relate to the subject matter hereof.

 

14.     Waiver. No waiver of any breach or condition of this Award Agreement shall be deemed to be a waiver of any other or subsequent breach or condition whether of like or different nature.

 

15.     Successors and Assigns. The provisions of this Award Agreement shall inure to the benefit of, and be binding upon, the Company and its successors and assigns and upon the Participant, the Participant’s assigns and the legal representatives, heirs and legatees of the Participant’s estate, whether or not any such person shall have become a party to this Award Agreement and have agreed in writing to be joined herein and be bound by the terms hereof.

 

16.     Choice of Law. This Award Agreement shall be governed by the law of the State of Delaware (regardless of the laws that might otherwise govern under applicable Delaware principles of conflicts of law) as to all matters, including but not limited to matters of validity, construction, effect, performance and remedies.

 

17.     Restricted Shares Subject to Plan. By entering into this Award Agreement the Participant agrees and acknowledges that the Participant has received and read a copy of the Plan. The Restricted Shares are subject to the Plan. The terms and provisions of the Plan as it may be amended from time to time are hereby incorporated herein by reference. In the event of a conflict between any term or provision contained herein and a term or provision of the Plan, the applicable terms and provisions of the Plan will govern and prevail.

 

 

 

 

18.     No Guarantees Regarding Tax Treatment. Participants (or their beneficiaries) shall be responsible for all taxes with respect to the Restricted Shares. The Committee and the Company make no guarantees regarding the tax treatment of the Restricted Shares. Neither the Committee nor the Company has any obligation to take any action to prevent the assessment of any tax under Section 409A of the Code or Section 457A of the Code or otherwise and none of the Company, any Subsidiary or Affiliate, or any of their employees or representatives shall have any liability to a Participant with respect thereto.

 

19.     Amendment. The Committee may amend or alter this Award Agreement and the Restricted Shares granted hereunder at any time, subject to the terms of the Plan.

 

20.     Section 83(b) Election. In the event the Participant determines to make an election with the Internal Revenue Service (the “IRS”) under Section 83(b) of the Code and the regulations promulgated thereunder (the “83(b) Election”), the Participant shall provide a copy of such form to the Company promptly following its filing, which is required under current law to be filed with the IRS no later than thirty (30) days after the Date of Grant of the Restricted Shares. The form for making an 83(b) Election is attached hereto as Exhibit C. The Participant is advised to consult with his or her own tax advisors regarding the purchase and holding of the Restricted Shares, and the Company shall bear no liability for any consequence of the Participant making an 83(b) Election or failing to make an 83(b) Election.

 

21.     Severability. The provisions of this Award Agreement are severable and if any one or more provisions are determined to be illegal or otherwise unenforceable, in whole or in part, the remaining provisions shall nevertheless be binding and enforceable.

 

22.     Signature. The grant of Restricted Shares is subject to Participant’s acceptance of the terms and conditions of this Agreement. By clicking the acknowledgment button, Participant indicates he or she (1) has been provided access to a copy of the Plan, (2) has had the opportunity to obtain independent legal advice prior to accepting the grant, (3) has read this Agreement and (4) agrees fully to the terms of the Agreement. The Participant also acknowledges that all decisions, determinations and interpretations of the Committee in respect of the Plan, this Agreement and the Restricted Shares shall be final and conclusive.

 

 

 

 

EXHIBIT A

STOCK POWER1

 

 

 

FOR VALUE RECEIVED the undersigned hereby sells, assigns and transfers unto Generac Holdings Inc. (the “Company”), _________________ (_____) shares of common stock, par value $0.01 per share, of the Company standing in his/her/their/its name on the books of the Company represented by Certificate No. ________________ herewith and does hereby irrevocably constitute and appoint ________________________ his/her/their/its attorney-in-fact, with full power of substitution, to transfer such shares on the books of the Company.

 

Dated: __________________         Signature: ________________________________

 

 

 

Print Name and Mailing Address

 

__________________________________________

 

__________________________________________

 

__________________________________________

 

 

 

Instructions:

Please do not fill in any blanks other than the signature line and printed name and mailing address. Please print your name exactly as you would like your name to appear on the issued stock certificate(s). The purpose of this assignment is to enable the forfeiture of the shares without requiring additional signatures on your part.

 

 


This stock power is not effective if executed in New York State.

 

 

 

 

EXHIBIT B

FORM OF RELEASE

 

A release is required as a condition for receiving the benefits provided pursuant to the Restricted Stock Award Agreement between GENERAC HOLDINGS INC. (the “Company”) and Participant (“Participant”) dated _______________________________ (the “Agreement”); thus, by executing this release (“Release”), you have advised us that you hold no claims against the Company, its predecessors, successors or assigns, affiliates, shareholders or members and each of their respective officers, directors, agents and employees (collectively, the “Releasees”), and by execution of this Release you agree to waive and release any such claims, except relating to any compensation, severance pay and benefits described in any written agreement between you and the Company.

 

You understand and agree that this Release will extend to all claims, demands, liabilities and causes of action of every kind, nature and description whatsoever, whether known, unknown or suspected to exist, which you ever had or may now have against the Releasees in your capacity as an employee of the Company, including, without limitation, any claims, demands, liabilities and causes of action arising from your employment with the Releasees and the termination of that employment, including any claims for severance or vacation pay, business expenses, and/or pursuant to any federal, state, county, or local employment laws, regulations, executive orders, or other requirements, including, but not limited to, Title VII of the 1964 Civil Rights Act, the 1866 Civil Rights Act, the Age Discrimination in Employment Act as amended by the Older Workers Benefit Protection Act, the Americans with Disabilities Act, the Civil Rights Act of 1991, the Workers Adjustment and Retraining Notification Act and any other local, state or federal fair employment laws, and any contract or tort claims.

 

You understand and agree that this Release is intended to include all claims by you or on your behalf alleging discrimination on the basis of race, sex, religion, national origin, age, disability, marital status, or any other protected status or involving any contract or tort claims based on your termination from the Company. It is also acknowledged that your termination is not in any way related to any work-related injury.

 

It also is understood and agreed that the remedy at law for breach of the Award Agreement, any restrictive covenant agreements between you and the Company, and/or this Release shall be inadequate, and the Company shall be entitled to injunctive relief in respect thereof.

 

Your ability to receive payments and benefits under the terms of the Award Agreement will remain open for a 21-day period after your Termination Date to give you an opportunity to consider the effect of this Release. At your option, you may elect to execute this Release on an earlier date. Additionally, you have seven days after the date you execute this Release to revoke it. As a result, this Release will not be effective until eight days after you execute it. We also want to advise you of your right to consult with legal counsel prior to executing a copy of this Release.

 

Finally, this is to expressly acknowledge:

 

  You understand that you are not waiving any claims or rights that may arise after the date you execute this Release.
     
 

You understand and agree that the compensation and benefits described in the Award Agreement offer you consideration greater than that to which you would otherwise be entitled.

 

I hereby state that I have carefully read this Release and that I am signing this Release knowingly and voluntarily with the full intent of releasing the Releases from any and all claims, except as set forth herein. Further, if signed prior to the completion of the 21 day review period, this is to acknowledge that I knowingly and voluntarily signed this Release on an earlier date.

 

Date:

 
   

 

 

 

 

EXHIBIT C

SECTION 83(b) ELECTION

 

This statement is being made under Section 83(b) of the Internal Revenue Code, pursuant to Treas. Reg. Section 1.83-2.

 

(1)

The taxpayer who performed the services is:

 

Name:                                                                                                                                                                                                  

 

Address:                                                                                                                                                                                           

 

 

Social Security Number:                                                                                                                                                                  

 

(2)

The property with respect to which the election is being made is _________ shares of the common stock, par value $0.01 per share, of Generac Holdings Inc.

   
(3) The transferor of the property is Generac Holdings Inc.
   
(4) The property was transferred on _____________________.
   
(5) The taxable year in which the election is being made is the calendar year ____.

 

(6)

The property will vest upon the third anniversary of the date of transfer, subject to the taxpayer’s continued service to Generac Holdings Inc or its affiliates.

 

(7)

The fair market value at the time of transfer (determined without regard to any restriction other than a restriction which by its terms will never lapse) is $___________ per share.

   
(8) The amount paid for such property is $__________ per share.

 

(9)

A copy of this statement was furnished to Generac Holdings Inc. for whom taxpayer rendered the services underlying the transfer of property.

 

(10)

This statement is executed on ________________.

 

  Signature:
   
  ____________________
  [Taxpayer’s name]

 

 

This election must be filed with the Internal Revenue Service Center with which taxpayer files his Federal income tax returns and must be made within thirty days after the Date of Grant. This filing should be made by registered or certified mail, return receipt requested. The taxpayer shall also provide a copy of such form to the Company promptly following its filing. The taxpayer should retain two (2) additional copies of the completed form for filing with Federal and state tax returns for the taxpayer’s current tax year and an additional copy for the taxpayer’s records.

 

ex_135477.htm

Exhibit 10.29

 

Generac Holdings Inc.
Amended & Restated 2010 Equity Incentive Plan

 


PERFORMANCE SHARE AWARD AGREEMENT

 

Upon acceptance by you through the online acceptance procedures set forth at www.computershare.com (“Computershare”), this Performance Share Award Agreement (this "Agreement") is made effective as of the date set forth on your online award acceptance page on Computershare (“Grant Date”), which is incorporated by reference herein, between Generac Holdings Inc., a Delaware corporation (the "Company") and you (the "Participant"). Unless otherwise indicated, any capitalized term used but not defined herein shall have the meaning ascribed to such term in the Plan.

 

R E C I T A L S:

 

WHEREAS, the Company has adopted the Generac Holdings Inc. Amended & Restated 2010 Equity Incentive Plan (the “Plan”), which Plan is incorporated herein by reference and made a part of this Award Agreement. Capitalized terms not otherwise defined herein shall have the same meanings as in the Plan;

 

WHEREAS, the Company has adopted the Generac Power Systems, Inc. Executive Change in Control Policy (the “CIC Policy”); and

 

WHEREAS, the Compensation Committee has determined that it would be in the best interests of the Company and its stockholders to grant the performance share award provided for herein to the Participant pursuant to the Plan and the terms set forth herein.

 

NOW THEREFORE, in consideration of the mutual covenants hereinafter set forth, the parties agree as follows:

 

1.     Performance Share Award. Subject to the terms and conditions of the Plan and this Agreement, the Company hereby grants to the Participant a certain number of Shares of the Common Stock of the Company as set forth on the Participant’s online award acceptance page on Computershare (the “Performance Shares”), which shall vest and become nonforfeitable in accordance with Section 2 hereof.

 

2.     Vesting of Performance Shares.

 

(a)     Cliff Vesting Schedule. Subject to the Participant’s continued service through the vesting date and, second, Company performance relative to the performance metrics set forth on Exhibit B, anywhere from zero (0%) to two hundred percent (200%) of the Performance Shares shall vest at the conclusion of the performance period set forth on Exhibit B.

 

(b)     Termination of Service. Notwithstanding Section 2(a) hereof, upon a termination of the Participant’s service by the Company for any reason (except as set forth in Section 2(c), Section 2(d) and Section 2(e) ), the Performance Shares, to the extent not then vested, shall immediately be forfeited by the Participant without consideration.

 

(c)     Termination of Service for Normal Retirement. Notwithstanding Section 2(a) hereof, upon a termination of the Participant’s service by reason of Normal Retirement, as defined below, the Participant will receive a pro-rated Performance Share award, adjusted for actual performance, paid out in shares of GNRC common stock within sixty (60) days of the conclusion of the applicable Performance Period, subject to the Participant’s execution on or within the 21-day period after such payment date of an effective general release and waiver of all claims against the Company, its Affiliates and their respective officers and directors, substantially in the form attached hereto as Exhibit A. For purposes of this Section 2(c), “Normal Retirement” shall mean a voluntary termination of employment by a Participant who has attained at least sixty-five (65) years of age and has at least twenty (20) years of service to the Company or any of its Affiliates.

 

 

 

 

(d)     Termination of Service for Death. Notwithstanding Section 2(a) hereof, upon a termination of the Participant’s service by reason of death, any Performance Shares, to the extent not then vested, shall vest on a pro rata basis, assuming target performance, as of the date of Participant’s death and shall be paid to the beneficiary designated by the Participant or, in the absence of any such designation, to the Participant’s estate.

 

(e)     Termination of Service for Total Disability. Notwithstanding Section 2(a) hereof, upon a termination of the Participant’s service by reason of Total Disability, as defined under the terms of the Company’s long-term disability plan, any Performance Shares, to the extent not then vested, shall vest on a pro rata basis, assuming target performance, as of the date of such termination of service, subject to the Participant’s execution on or within the 21-day period after the termination date of an effective general release and waiver of all claims against the Company, its Affiliates and their respective officers and directors, substantially in the form attached hereto as Exhibit A.

 

(f)     Termination of Service following a Change in Control. Notwithstanding Section 2(a) hereof, in the event of the Participant’s Qualifying Termination (as such term is defined in the CIC Policy), any Performance Shares, to the extent not then vested, shall vest on a pro rata basis, assuming target performance, as of the date of Qualifying Termination or, in the event of a Qualifying Termination prior to a Change in Control (as defined in the CIC Policy), upon the Change in Control, subject to the Participant’s execution on or after the termination date of an effective general release and waiver of all claims against the Company, its Affiliates and their respective officers and directors, substantially in the form attached hereto as Exhibit A.

 

(g)     Modifications to Vesting Schedule. In the event that the Participant takes an authorized leave of absence (“LOA”), the Performance Shares awarded by this Agreement that are scheduled to vest shall be modified as follows:

 

(i) if the duration of the Participant’s LOA is sixty (60) days or less, the vesting schedule set forth in Section 2(a) shall not be affected by the Participant’s LOA.

 

(ii) if the duration of the Participant’s LOA is greater than sixty (60) days, the scheduled vesting of any Performance Shares awarded by this Agreement that are not then vested shall be deferred for a period of time equal to the duration of the Participant’s LOA.

 

3.     Delivery of Shares. As soon as administratively practicable, but not later than sixty (60) days (thirty (30) days in the case of vesting pursuant to Section 2(c), Section 2(d) or Section 2(e)) following the vesting of the Performance Shares (as described in Section 2 hereof), and upon the satisfaction of all other applicable conditions, including, but not limited to, the payment by the Participant of all applicable withholding taxes, the Company shall deliver or cause to be delivered to the Participant, or in the case of Participant’s death, Participant’s beneficiary, a certificate or other indicia of ownership for the number of shares of common stock of the Company equal to the number of vested Performance Shares, which may bear such legends as the Company deems advisable pursuant to Section 9 below.

 

4.     Rights as a Stockholder. The Participant shall have none of the rights of a stockholder of the Company until the Performance Shares vest and shares of common stock of the Company are delivered to the Participant pursuant to Section 3 above, provided, that, the Participant shall have the right to receive dividend equivalents with respect to the Performance Shares that become vested in accordance with Section 2 above (the “Dividend Equivalents”). The Dividend Equivalents, if any, shall be paid to the Participant at the same time as delivery to the Participant, in accordance with Section 3 above, of shares of common stock of the Company equal to the number of vested Performance Shares.

 

2

 

 

5.     Restrictive Covenant Agreement. The Participant and the Company have previously entered into a restrictive covenant agreement. Participant hereby reaffirms his obligations under such restrictive covenant agreement and nothing contained in this Award Agreement shall cancel, change or modify Participant’s obligations thereunder.

 

6.     Non-Disparagement. The Participant, while providing services to the Company and thereafter, shall not make any oral or written communication to any Person that disparages, or has the effect of damaging the reputation of, the Company, the Affiliates or their respective directors, officers, agents, employees, former employees, representatives or stockholders; provided, that, nothing in the foregoing shall preclude the Participant from disclosing any information to Participant’s attorney or in response to a lawful subpoena or court order requiring disclosure of information.

 

7.     Adjustment of Shares. In the event of any corporate event or transaction (as described in Section 12.1 of the Plan), the terms of this Award Agreement (including, without limitation, the number and kind of Performance Shares subject to this Agreement and the shares of stock deliverable with respect to such Performance Shares) may be adjusted as set forth in Section 12.1 of the Plan.

 

8.     No Right to Continued Service. The granting of the Performance Shares evidenced hereby and this Award Agreement shall impose no obligation on the Company or any Affiliate to continue the Service of the Participant and shall not lessen or affect any right that the Company or any Affiliate may have to terminate the service of such Participant.

 

9.     Securities Laws/Restrictions. The issuance and delivery of shares of common stock of the Company pursuant to this Award Agreement shall comply (or be exempt from) all applicable requirements of law, including (without limitation) the Securities Act of 1933, as amended, the rules and regulations promulgated thereunder, state securities laws and regulations, and the regulations of any stock exchange or other securities market on which the Company’s securities may then be traded. The Company shall not be obligated to file any registration statement under any applicable securities laws to permit the purchase or issuance of any shares of common stock under the Plan or Awards, and accordingly any certificates or other indicia of ownership for shares of common stock may have an appropriate legend or statement of applicable restrictions endorsed thereon. If the Company deems it necessary to ensure that the issuance of shares of common stock under the Plan is not required to be registered under any applicable securities laws, each Participant to whom such shares of common stock would be issued shall deliver to the Company an agreement or certificate containing such representations, warranties and covenants as the Company may reasonably request which satisfies such requirements.

 

10.     Transferability. Unless otherwise provided by the Committee, the Performance Shares may not be assigned, alienated, pledged, attached, sold or otherwise transferred or encumbered by the Participant other than by will or by the laws of descent and distribution, and any such purported assignment, alienation, pledge, attachment, sale, transfer or encumbrance shall be void and unenforceable against the Company or any Affiliate; provided, that, the designation of a beneficiary shall not constitute an assignment, alienation, pledge, attachment, sale, transfer or encumbrance. No such permitted transfer of the Performance Shares to heirs or legatees of the Participant shall be effective to bind the Company unless the Committee shall have been furnished with written notice thereof and a copy of such evidence as the Committee may deem necessary to establish the validity of the transfer and the acceptance by the transferee or transferees of the terms and conditions hereof.

 

11.     Withholding. The Participant may be required to pay to the Company or any Affiliate and the Company shall have the right and is hereby authorized to withhold, any applicable withholding taxes in respect of the transfer of shares of common stock and Dividend Equivalents with respect to the Performance Shares and to take such other action as may be necessary in the opinion of the Committee to satisfy all obligations for the payment of such withholding taxes.

 

3

 

 

12.     Notices. Any notification required by the terms of this Award Agreement shall be given in writing and shall be deemed effective upon personal delivery or within three (3) days of deposit with the United States Postal Service, by registered or certified mail, with postage and fees prepaid. A notice shall be addressed to the Company, Attention: General Counsel, at its principal executive office and to the Participant at the address that he or she most recently provided to the Company.

 

13.     Entire Agreement. This Award Agreement, including all exhibits and referenced documents, the details of the award on the Participant’s online award acceptance page on Computershare, and the Plan constitute the entire contract between the parties hereto with regard to the subject matter hereof. They supersede any other agreements, representations or understandings (whether oral or written and whether express or implied) which relate to the subject matter hereof.

 

14.     Waiver. No waiver of any breach or condition of this Award Agreement shall be deemed to be a waiver of any other or subsequent breach or condition whether of like or different nature.

 

15.     Successors and Assigns. The provisions of this Award Agreement shall inure to the benefit of, and be binding upon, the Company and its successors and assigns and upon the Participant, the Participant’s assigns and the legal representatives, heirs and legatees of the Participant’s estate, whether or not any such person shall have become a party to this Award Agreement and have agreed in writing to be joined herein and be bound by the terms hereof.

 

16.     Choice of Law. This Award Agreement shall be governed by the law of the State of Delaware (regardless of the laws that might otherwise govern under applicable Delaware principles of conflicts of law) as to all matters, including but not limited to matters of validity, construction, effect, performance and remedies.

 

17.     Performance Shares Subject to Plan. By entering into this Award Agreement the Participant agrees and acknowledges that the Participant has received and read a copy of the Plan. The Performance Shares are subject to the Plan. The terms and provisions of the Plan as it may be amended from time to time are hereby incorporated herein by reference. In the event of a conflict between any term or provision contained herein and a term or provision of the Plan, the applicable terms and provisions of the Plan will govern and prevail.

 

18.     No Guarantees Regarding Tax Treatment. Participants (or their beneficiaries) shall be responsible for all taxes with respect to the Performance Shares. The Committee and the Company make no guarantees regarding the tax treatment of the Performance Shares. Neither the Committee nor the Company has any obligation to take any action to prevent the assessment of any tax under Section 409A of the Code or Section 457A of the Code or otherwise and none of the Company, any Subsidiary or Affiliate, or any of their employees or representatives shall have any liability to a Participant with respect thereto. If the delivery of shares of common stock pursuant to the vesting of the Performance Shares is conditioned upon the execution of a release by the Participant and the combined time period for the execution of the release and the delivery of such shares overlaps the end of a calendar year, the shares of common stock shall be delivered in the second calendar year.

 

19.     Amendment. The Committee may amend or alter this Award Agreement and the Performance Shares granted hereunder at any time, subject to the terms of the Plan.

 

20.     Severability. The provisions of this Award Agreement are severable and if any one or more provisions are determined to be illegal or otherwise unenforceable, in whole or in part, the remaining provisions shall nevertheless be binding and enforceable.

 

21.     Signature. The Agreement is subject to Participant’s acceptance of the terms and conditions of this Agreement. By clicking the acknowledgment button, Participant indicates he or she (1) has been provided access to a copy of the Plan, (2) has had the opportunity to obtain independent legal advice prior to accepting the grant, (3) has read this Agreement and (4) agrees fully to the terms of the Agreement. The Participant also acknowledges that all decisions, determinations and interpretations of the Committee in respect of the Plan, this Agreement and the Restricted Shares shall be final and conclusive.

 

4

 

 

EXHIBIT A

FORM OF RELEASE

 

A release is required as a condition for receiving the benefits provided pursuant to the Performance Share Award Agreement between GENERAC HOLDINGS INC. (the “Company”) and ________________ (“Participant”) dated ________ (the “Agreement”); thus, by executing this release (“Release”), you have advised us that you hold no claims against the Company, its predecessors, successors or assigns, affiliates, shareholders or members and each of their respective officers, directors, agents and employees (collectively, the “Releasees”), and by execution of this Release you agree to waive and release any such claims, except relating to any compensation, severance pay and benefits described in any written agreement between you and the Company.

 

You understand and agree that this Release will extend to all claims, demands, liabilities and causes of action of every kind, nature and description whatsoever, whether known, unknown or suspected to exist, which you ever had or may now have against the Releasees in your capacity as an employee of the Company, including, without limitation, any claims, demands, liabilities and causes of action arising from your employment with the Releasees and the termination of that employment, including any claims for severance or vacation pay, business expenses, and/or pursuant to any federal, state, county, or local employment laws, regulations, executive orders, or other requirements, including, but not limited to, Title VII of the 1964 Civil Rights Act, the 1866 Civil Rights Act, the Age Discrimination in Employment Act as amended by the Older Workers Benefit Protection Act, the Americans with Disabilities Act, the Civil Rights Act of 1991, the Workers Adjustment and Retraining Notification Act and any other local, state or federal fair employment laws, and any contract or tort claims.

 

You understand and agree that this Release is intended to include all claims by you or on your behalf alleging discrimination on the basis of race, sex, religion, national origin, age, disability, marital status, or any other protected status or involving any contract or tort claims based on your termination from the Company. It is also acknowledged that your termination is not in any way related to any work-related injury.

 

It also is understood and agreed that the remedy at law for breach of the Award Agreement, any restrictive covenant agreements between you and the Company, and/or this Release shall be inadequate, and the Company shall be entitled to injunctive relief in respect thereof.

 

Your ability to receive payments and benefits under the terms of the Award Agreement will remain open for a 21-day period after your Termination Date to give you an opportunity to consider the effect of this Release. At your option, you may elect to execute this Release on an earlier date. Additionally, you have seven days after the date you execute this Release to revoke it. As a result, this Release will not be effective until eight days after you execute it. We also want to advise you of your right to consult with legal counsel prior to executing a copy of this Release.

 

Finally, this is to expressly acknowledge:

 

 

You understand that you are not waiving any claims or rights that may arise after the date you execute this Release.

 

 

You understand and agree that the compensation and benefits described in the Award Agreement offer you consideration greater than that to which you would otherwise be entitled.

 

I hereby state that I have carefully read this Release and that I am signing this Release knowingly and voluntarily with the full intent of releasing the Releases from any and all claims, except as set forth herein. Further, if signed prior to the completion of the 21 day review period, this is to acknowledge that I knowingly and voluntarily signed this Release on an earlier date.

 

Date:

 
   

 

 

 

 

EXHIBIT B

 

 

Vesting Schedule

 

 

 

 

 

 

 

 

 

 

 

 

 

Exhibit B shall be provided by separate document and constitutes part of this Agreement.

 

ex_134959.htm

Exhibit 21.1

 

 

LISTING OF SUBSIDIARIES OF GENERAC HOLDINGS INC.

 

 

Subsidiaries of the Registrant   State or Other Jurisdiction of Incorporation
Generac Power Systems, Inc.   Wisconsin, U.S

Generac Mobile Products, LLC

 

Wisconsin, U.S

Warehouse Development Group LLC

 

Wisconsin, U.S.

Generac Acquisition Corp.

 

Delaware, U.S

MAC, Inc.

 

Delaware, U.S

CHP Holdings, Inc.

 

Delaware, U.S.

Country Home Products, Inc.

 

Delaware, U.S.  

Powermate, LLC

 

Delaware, U.S

MAC Holdings, LLC

 

North Dakota, U.S

Route 22A & 1 Main LLC

 

Vermont, U.S.

PR-NA Industries Inc.

 

Georgia, U.S.

Motortech Americas LLC

 

Louisiana, U.S.

Generac Holdings UK Ltd

 

United Kingdom

Generac Global UK Limited

 

United Kingdom

Ottomotores Nominees Ltd.

 

United Kingdom

Generac Mobile Products UK Ltd.

 

United Kingdom

Pramac UK Limited

 

United Kingdom

Pramac Racing Limited

 

United Kingdom

Ottomotores S.A de C.V.

 

Mexico

Ottomotores Comercializadora S.A. de C.V.

 

Mexico

Selmec Equipos Industriales, S.A. de C.V.

 

Mexico

Operadora Selmec, S.A. de C.V.

 

Mexico

Servicios Administrativos Selmec, S.A. de C.V.

 

Mexico

Generac do Brasil Ltda

 

Brazil

GPR Brasil Equipamentos Ltda

 

Brazil

Generac Mobile Products S.r.l

 

Italy

Generac Holdings Italy S.r.l.

 

Italy

PR Industrial S.r.l.

 

Italy

Pramac Europe SAS

 

France

Services & Gestion France Sarl

 

France

Pramac GmbH

 

Germany

Motortech GmbH

 

Germany

Pramac Iberica S.A.U.

 

Spain

Pramac Sp. Z.o.o.

 

Poland

Motortech Polska Sp. Z.o.o.

 

Poland

Pramac Caribe Srl

 

Dominican Republic

Pramac Asia PTE Ltd

 

Singapore

Pramac Fu Lee Foshan Power Equipment Ltd

 

China

Lifter China Ltd Company

 

China

Motortech Shanghai Co., Ltd.

 

China

Suzhou Generac Power Systems Co., Ltd

 

China

SC Pramac Generators S.r.l.

 

Romania

Pramac RUS Ltd

 

Russia

PR Middle East Fze

 

UAE

PR Australia PTY Ltd

 

Australia

Captiva Energy Solutions Private Limited   India

 

ex_134953.htm

Exhibit 23.1

 

Consent of Independent Registered Public Accounting Firm

 

We consent to the incorporation by reference in Registration Statement Nos. 333-164851, 333-183109, and 333-197944 on Form S-8 and No.333-185136 on Form S-3 of our reports dated February 26, 2019, relating to the consolidated financial statements of Generac Holdings, Inc. and subsidiaries and the effectiveness of internal control over financial reporting, appearing in this Annual Report on Form 10-K of Generac Holdings, Inc. for the year ended December 31, 2018.

 

/s/ Deloitte & Touche LLP

 

Milwaukee, Wisconsin

February 26, 2019

 

 

ex_134954.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 annual report on Form 10-K 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: February 26, 2019

 

 

/s/ Aaron Jagdfeld

 

 

 

Name:

 

Aaron Jagdfeld

 

 

 

Title:

 

Chairman, President and Chief Executive Officer

 

ex_134955.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 annual report on Form 10-K 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: February 26, 2019

 

 

/s/ York A. Ragen

 

 

 

Name:

 

York A. Ragen

 

 

 

Title:

 

Chief Financial Officer

 

ex_134956.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 his knowledge:

 

 

1.

the Company's annual report on Form 10-K for the fiscal year ended December 31, 2018 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 annual report on Form 10-K for the fiscal year ended December 31, 2018 fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date: February 26, 2019

 

 

/s/ Aaron Jagdfeld

 

 

 

Name:

 

Aaron Jagdfeld

 

 

 

Title:

 

Chairman, President and Chief Executive Officer

 

ex_134957.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 his knowledge:

 

 

1.

the Company's annual report on Form 10-K for the fiscal year ended December 31, 2018 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 annual report on Form 10-K for the fiscal year ended December 31, 2018 fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date: February 26, 2019

 

 

/s/ York A. Ragen

 

 

 

Name:

 

York A. Ragen

 

 

 

Title:

 

Chief Financial Officer