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 designer and manufacturer of a wide range of power generation equipment and other engine powered products serving the residential, light commercial
and industrial markets. Power generation is our primary focus, which differentiates us from our primary competitors that also have broad operations outside of the power equipment market. As the only significant market participant focused predominantly on these products, we have one of the 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 used in the oil & gas, construction and other industrial markets; and a broad product line of outdoor power equipment for residential and commercial use.
Over the past several years, we have executed a number of acquisitions that support our strategic plan. A summary of these acquisitions
can be found in Note 1, “Description of Business,” to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K.
Business D
rivers
and Operational F
actors
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 T
rends
Our performance is affected by the demand for reliable power
generation products, mobile product solutions and other engine powered products by our customer base. This demand is influenced by several important drivers and trends affecting our industry, including the following:
Increasing penetration opportunity.
Many potential customers are not aware of the costs and benefits of automatic backup power solutions. We estimate that penetration rates for home standby generators are only approximately 4.0% 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 2015 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 in the light-commercial market. In addition, the installed base of backup power for telecommunications infrastructure is 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 and mobile generators for residential, commercial and industrial purposes.
Effect of large scale
and baseline
power disruptions.
Power disruptions are an important driver of customer awareness 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 portable or standby generator during the immediate and subsequent period, which we believe may last for nine to twelve months following a major power outage event for standby generators. 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 cycle
s
.
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, 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 benefit over the long term from a secular shift towards renting versus buying this type of equipment.
F
actors
Affecting Results of O
perations
We are subject to various factors that can affect our results of operations, which we attempt to mitigate through factors we can control, including continued product development, expanded distribution, pricing and cost control.
Certain operational and other factors that affect our business include the following:
Effect of commodity, currency and component price fluctuations.
Industry-wide price fluctuations of key commodities, such as steel, copper and aluminum, along with other components we use in our products, can have a material impact on our results of operations. Also, with the Pramac acquisition in 2016, we have further expanded our commercial and operational presence outside of the United States. This acquisition, along with our existing international presence, exposes us to fluctuations in foreign currency exchange rates that can have a material impact on our results of operations.
We have historically attempted to mitigate the impact of rising commodity, currency and component prices through improved product design
and sourcing, manufacturing efficiencies, price increases and select hedging transactions. Our results are also influenced by changes in fuel prices in the form of freight rates, which in some cases are 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 23% to 27% of our net sales occurred in the first quarter, 20% to 25% in the second quarter, 24% to 27% in the third quarter and 25% 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, credit facility pricing grids, and repayments or borrowings of indebtedness. Cash interest expense increased during 2016 compared to 2015, primarily due additional debt assumed in recent acquisitions, increased borrowings at other foreign subsidiaries and an increase in the 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.
We had approximately $592 million of tax-deductible goodwill and intangible asset amortization remaining as of December 31, 2016 related to our acquisition by CCMP in 2006 that we expect to generate aggregate cash tax savings of approximately $231 million through 2021, assuming continued profitability and a 39% tax rate. The recognition of the tax benefit associated with these assets for tax purposes is expected to be $122 million annually through 2020 and $102 million in 2021, which generates annual cash tax savings of $48 million through 2020 and $40 million in 2021, assuming profitability and a 39% tax rate. As a result of the asset acquisition of the Magnum business in the fourth quarter of 2011, we had approximately $38.0 million of incremental tax deductible goodwill and intangible assets remaining as of December 31, 2016. We expect these assets to generate aggregate cash tax savings of $14.9 million through 2026 assuming continued profitability and a 39% tax rate. The amortization of these assets for tax purposes is expected to be $3.8 million annually through 2025 and $2.8 million in 2026, which generates an additional annual cash tax savings of $1.5 million through 2025 and $1.1 million in 2026, assuming profitability and a 39% tax rate. Based on current business plans, we believe that our cash tax obligations through 2026 will be significantly reduced by these tax attributes. Other domestic acquisitions have resulted in additional tax deductible goodwill and intangible assets that will generate tax savings, but are not material to the Company’s consolidated financial statements.
Components of Net Sales and E
xpenses
Net
S
ales
Substantially all of our net sales are generated through the sale of our
power generator equipment and other engine powered products to the residential, light commercial and industrial markets. We also sell engines to certain customers and service parts to our dealer network. Net sales, which include shipping and handling charges billed to customers, are generally recognized upon shipment of products to our customers. Related freight costs are included in cost of sales.
We are not dependent on any one channel or
customer for our net sales, with no single customer representing more than 7% of our sales, and our top ten customers representing less than 22% of our total sales for the year ended December 31, 2016.
Costs of Goods S
old
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 78% of costs of goods sold for the year ended December 31, 2016. 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. However, there is typically a lag between raw material price fluctuations and their effect on our costs of goods sold.
Other sources of costs include our manufacturing
and warehousing facilities, factory overhead, labor and shipping costs. Factory overhead includes utilities, support personnel, depreciation, general supplies, support and maintenance. Although we attempt to maintain a flexible manufacturing cost structure, our margins can be impacted when we cannot timely adjust labor and manufacturing costs to match fluctuations in net sales.
Operating E
xpenses
Our operating expenses consist of costs incurred to support our
sales, marketing, distribution, service parts, engineering, information systems, human resources, finance, risk management, legal and tax functions, 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, 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. 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 at many locations globally and employ over 300 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 Income (E
xpense)
Other income (expense) includes the interest expense on our outstanding borrowings, amortization of debt financing costs and original issue discount
, and expenses related to interest rate swap agreements. Other income (expense) also includes other financial items such as losses on extinguishment of debt, gains (losses) on change in contractual interest rate, interest income earned on our cash and cash equivalents, and costs related to acquisitions.
Costs related to acquisition
s
.
In 2016, the other expenses include transaction expenses related to the acquisitions of Pramac and Motortech. In 2015, the other expenses include transaction expenses related to the acquisitions of CHP and Pramac. In 2014, the other expenses include transaction expenses related to the acquisitions of Powermate and MAC. Refer to
Note 3, “Acquisitions” and Note 19, “Subsequent Events” to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K for additional information on the Company’s recent acquisitions.
Results of O
perations
Year ended December 31, 201
6
compared
to year ended December 3
1, 2015
The following table sets forth our consolidated statement of operations data for the periods indicated:
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
(U.S. Dollars in thousands)
|
|
2016
|
|
|
2015
|
|
|
$ Change
|
|
|
% Change
|
|
Net sales
|
|
$
|
1,444,453
|
|
|
$
|
1,317,299
|
|
|
|
127,154
|
|
|
|
9.7
|
%
|
Cost of goods sold
|
|
|
930,347
|
|
|
|
857,349
|
|
|
|
72,998
|
|
|
|
8.5
|
%
|
Gross profit
|
|
|
514,106
|
|
|
|
459,950
|
|
|
|
54,156
|
|
|
|
11.8
|
%
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and service
|
|
|
164,607
|
|
|
|
130,242
|
|
|
|
34,365
|
|
|
|
26.4
|
%
|
Research and development
|
|
|
37,229
|
|
|
|
32,922
|
|
|
|
4,307
|
|
|
|
13.1
|
%
|
General and administrative
|
|
|
74,700
|
|
|
|
52,947
|
|
|
|
21,753
|
|
|
|
41.1
|
%
|
Amortization of intangible assets
|
|
|
32,953
|
|
|
|
23,591
|
|
|
|
9,362
|
|
|
|
39.7
|
%
|
Tradename and goodwill impairment
|
|
|
-
|
|
|
|
40,687
|
|
|
|
(40,687
|
)
|
|
|
-100.0
|
%
|
Total operating expenses
|
|
|
309,489
|
|
|
|
280,389
|
|
|
|
29,100
|
|
|
|
10.4
|
%
|
Income from operations
|
|
|
204,617
|
|
|
|
179,561
|
|
|
|
25,056
|
|
|
|
14.0
|
%
|
Total other expense, net
|
|
|
(48,235
|
)
|
|
|
(56,578
|
)
|
|
|
8,343
|
|
|
|
-14.7
|
%
|
Income before provision for income taxes
|
|
|
156,382
|
|
|
|
122,983
|
|
|
|
33,399
|
|
|
|
27.2
|
%
|
Provision for income taxes
|
|
|
57,570
|
|
|
|
45,236
|
|
|
|
12,334
|
|
|
|
27.3
|
%
|
Net income
|
|
|
98,812
|
|
|
|
77,747
|
|
|
|
21,065
|
|
|
|
27.1
|
%
|
Net income attributable to noncontrolling interests
|
|
|
24
|
|
|
|
-
|
|
|
|
24
|
|
|
|
N/A
|
|
Net income attributable to Generac Holdings Inc.
|
|
$
|
98,788
|
|
|
$
|
77,747
|
|
|
|
21,041
|
|
|
|
27.1
|
%
|
The following sets forth our reportable segment information for the periods indicated:
|
|
Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
(U.S. Dollars in thousands)
|
|
2016
|
|
|
2015
|
|
|
$ Change
|
|
|
% Change
|
|
Domestic
|
|
$
|
1,173,559
|
|
|
$
|
1,204,589
|
|
|
|
(31,030
|
)
|
|
|
-2.6
|
%
|
International
|
|
|
270,894
|
|
|
|
112,710
|
|
|
|
158,184
|
|
|
|
140.3
|
%
|
Total net sales
|
|
$
|
1,444,453
|
|
|
$
|
1,317,299
|
|
|
|
127,154
|
|
|
|
9.7
|
%
|
|
|
Adjusted EBITDA
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
$ Change
|
|
|
% Change
|
|
Domestic
|
|
$
|
261,428
|
|
|
$
|
254,882
|
|
|
|
6,546
|
|
|
|
2.6
|
%
|
International
|
|
|
16,959
|
|
|
|
15,934
|
|
|
|
1,025
|
|
|
|
6.4
|
%
|
Total Adjusted EBITDA
|
|
$
|
278,387
|
|
|
$
|
270,816
|
|
|
|
7,571
|
|
|
|
2.8
|
%
|
The following table sets forth our product class information for the periods indicated:
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
(U.S. Dollars in thousands)
|
|
2016
|
|
|
2015
|
|
|
$ Change
|
|
|
% Change
|
|
Residential products
|
|
$
|
772,436
|
|
|
$
|
673,764
|
|
|
|
98,672
|
|
|
|
14.6
|
%
|
Commercial & industrial products
|
|
|
557,532
|
|
|
|
548,440
|
|
|
|
9,092
|
|
|
|
1.7
|
%
|
Other
|
|
|
114,485
|
|
|
|
95,095
|
|
|
|
19,390
|
|
|
|
20.4
|
%
|
Total net sales
|
|
$
|
1,444,453
|
|
|
$
|
1,317,299
|
|
|
|
127,154
|
|
|
|
9.7
|
%
|
Net sales
.
The decrease in Domestic sales for the year ended December 31, 2016 was primarily due to significant declines in shipments of mobile products into oil & gas and general rental markets. Partially offsetting these impacts was the contribution from the CHP acquisition, along with increased shipments of portable and home standby generators.
The increase in International sales for the y
ear ended December 31, 2016 was due to the contribution from the Pramac acquisition. Partially offsetting this impact were declines in organic shipments of mobile products into the European region.
The total contribution from non-annualized recent acquisitions
for the year ended December 31, 2016 was $236.6 million.
Net income
attributable to Generac Holdings Inc
.
Net income attributable to Generac Holdings Inc. for the year ended December 31, 2016 includes the impact of $7.1 million of non-recurring, pre-tax charges relating to business optimization and restructuring costs to address the impact of the significant and extended downturn for capital spending within the oil & gas industry. The cost-reduction actions taken include the consolidation of production facilities, headcount reductions, certain non-cash asset write-downs and other non-recurring product-related charges. The charges consist of $2.7 million classified within cost of goods sold and $4.4 million classified within operating expenses. The increase in net income attributable to Generac Holdings Inc. was primarily due to a prior year $40.7 million pre-tax, non-cash charge for the impairment of certain intangible assets, partially offset by the business optimization charge discussed above and the other factors outlined in this section.
Gross profit.
Gross profit margin for the year ended December 31, 2016 was 35.6% compared to 34.9% for the year ended December 31, 2015, which includes the impact of the aforementioned $2.7 million of business optimization charges classified within cost of goods sold, as well as $4.2 million of expense relating to the purchase accounting adjustment for the step-up in value of inventories relating to the Pramac acquisition. Excluding the impact of these adjustments, gross profit margin was 36.1%, an improvement of 120 basis points over the prior year. The increase was primarily due to the favorable impacts from lower commodity costs and overseas sourcing benefits from a stronger U.S. Dollar, along with an overall favorable organic product mix. In addition, gross margin in the prior year was negatively impacted by temporary increases in certain costs associated with the west coast port congestion as well as other overhead-related costs that did not repeat in the current year. These factors were partially offset by the mix impact from the Pramac acquisition.
Operating expenses.
Excluding the impact of the aforementioned current year $4.4 million of business optimization charges and prior year $40.7 million of intangible impairment charges classified within operating expenses, operating expenses increased $65.4 million, or 27.3%, to $305.1 million for the year ended December 31, 2016 from $239.7 million for the year ended December 31, 2015. The increase was primarily due to the addition of recurring operating expenses associated with recent acquisitions and increased amortization expense.
Other expense.
Other expense in the prior year included a non-cash $4.8 million loss on extinguishment of debt resulting from $150.0 million of voluntary prepayments of Term Loan debt, and a $2.4 million non-cash loss resulting from an increase in our Term Loan interest rate spread of 25 basis points. In the current year, other expense included a $3.0 million non-cash loss resulting from a continuation of the 25 basis point spread increase, and a $0.6 million loss on extinguishment of debt resulting from a $25.0 million voluntary prepayment of Term Loan debt.
Income tax expense.
The effective income tax rates for the years ended December 31, 2016 and 2015 were 36.8%.
Adjusted EBITDA.
Adjusted EBITDA margins for the Domestic segment for the year ended December 31, 2016 were 22.3% of net sales as compared to 21.2% of net sales for the year ended December 31, 2015. This increase was primarily due to overall favorable product mix; lower commodity costs and overseas sourcing benefits from a stronger U.S. Dollar; and the benefit of cost-reduction actions within domestic mobile products, partially offset by increased promotional activities.
Adjusted EBITDA margins for the International segment for the
year ended December 31, 2016 were 6.3% of net sales as compared to 14.1% of net sales for the year ended December 31, 2015. This decrease was primarily due to
a large decline in mobile products margins given the reduced operating leverage on lower organic sales volume, unfavorable sales mix, foreign currency impacts with the weakness in the British Pound, and, to a lesser extent, the Pramac acquisition sales mix.
Adjusted net income.
Adjusted Net Income of $198.3 million for the year ended December 31, 2016 decreased 0.1% from $198.4 million for the year ended December 31, 2015.
The increased earnings outlined above were offset by an increase in cash income tax expense and adjusted net income attributable to noncontrolling interests.
Year ended December 31, 201
5
compared
to year ended December 31, 201
4
The following table sets forth our consolidated statement of operations data for the periods indicated:
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
(U.S. Dollars in thousands)
|
|
2015
|
|
|
2014
|
|
|
$ Change
|
|
|
% Change
|
|
Net sales
|
|
$
|
1,317,299
|
|
|
$
|
1,460,919
|
|
|
|
(143,620
|
)
|
|
|
-9.8
|
%
|
Cost of goods sold
|
|
|
857,349
|
|
|
|
944,700
|
|
|
|
(87,351
|
)
|
|
|
-9.2
|
%
|
Gross profit
|
|
|
459,950
|
|
|
|
516,219
|
|
|
|
(56,269
|
)
|
|
|
-10.9
|
%
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and service
|
|
|
130,242
|
|
|
|
120,408
|
|
|
|
9,834
|
|
|
|
8.2
|
%
|
Research and development
|
|
|
32,922
|
|
|
|
31,494
|
|
|
|
1,428
|
|
|
|
4.5
|
%
|
General and administrative
|
|
|
52,947
|
|
|
|
54,795
|
|
|
|
(1,848
|
)
|
|
|
-3.4
|
%
|
Amortization of intangible assets
|
|
|
23,591
|
|
|
|
21,024
|
|
|
|
2,567
|
|
|
|
12.2
|
%
|
Tradename and goodwill impairment
|
|
|
40,687
|
|
|
|
-
|
|
|
|
40,687
|
|
|
|
N/A
|
|
Gain on remeasurement of contingent consideration
|
|
|
-
|
|
|
|
(4,877
|
)
|
|
|
4,877
|
|
|
|
-100.0
|
%
|
Total operating expenses
|
|
|
280,389
|
|
|
|
222,844
|
|
|
|
57,545
|
|
|
|
25.8
|
%
|
Income from operations
|
|
|
179,561
|
|
|
|
293,375
|
|
|
|
(113,814
|
)
|
|
|
-38.8
|
%
|
Total other expense, net
|
|
|
(56,578
|
)
|
|
|
(35,013
|
)
|
|
|
(21,565
|
)
|
|
|
61.6
|
%
|
Income before provision for income taxes
|
|
|
122,983
|
|
|
|
258,362
|
|
|
|
(135,379
|
)
|
|
|
-52.4
|
%
|
Provision for income taxes
|
|
|
45,236
|
|
|
|
83,749
|
|
|
|
(38,513
|
)
|
|
|
-46.0
|
%
|
Net income
|
|
$
|
77,747
|
|
|
$
|
174,613
|
|
|
|
(96,866
|
)
|
|
|
-55.5
|
%
|
The following table sets forth our reportable segment information for the periods indicated:
|
|
Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
(U.S. Dollars in thousands)
|
|
2015
|
|
|
2014
|
|
|
$ Change
|
|
|
% Change
|
|
Domestic
|
|
$
|
1,204,589
|
|
|
$
|
1,343,367
|
|
|
|
(138,778
|
)
|
|
|
-10.3
|
%
|
International
|
|
|
112,710
|
|
|
|
117,552
|
|
|
|
(4,842
|
)
|
|
|
-4.1
|
%
|
Total net sales
|
|
$
|
1,317,299
|
|
|
$
|
1,460,919
|
|
|
|
(143,619
|
)
|
|
|
-9.8
|
%
|
|
|
Adjusted EBITDA
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
2014
|
|
|
$ Change
|
|
|
% Change
|
|
Domestic
|
|
$
|
254,882
|
|
|
$
|
322,769
|
|
|
|
(67,887
|
)
|
|
|
-21.0
|
%
|
International
|
|
|
15,934
|
|
|
|
14,514
|
|
|
|
1,420
|
|
|
|
9.8
|
%
|
Total Adjusted EBITDA
|
|
$
|
270,816
|
|
|
$
|
337,283
|
|
|
|
(66,467
|
)
|
|
|
-19.7
|
%
|
The following table sets forth our product class information for the periods indicated:
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
(U.S. Dollars in thousands)
|
|
2015
|
|
|
2014
|
|
|
$ Change
|
|
|
% Change
|
|
Residential products
|
|
$
|
673,764
|
|
|
$
|
722,206
|
|
|
|
(48,442
|
)
|
|
|
-6.7
|
%
|
Commercial & industrial products
|
|
|
548,440
|
|
|
|
652,216
|
|
|
|
(103,776
|
)
|
|
|
-15.9
|
%
|
Other
|
|
|
95,095
|
|
|
|
86,497
|
|
|
|
8,598
|
|
|
|
9.9
|
%
|
Total net sales
|
|
$
|
1,317,299
|
|
|
$
|
1,460,919
|
|
|
|
(143,620
|
)
|
|
|
-9.8
|
%
|
Net sales.
The decrease in Domestic sales for the year ended December 31, 2015 was primarily due to lower demand of home standby generators as a result of the significant decline in the power outage severity environment during 2015, and a reduction in shipments into oil & gas and general rental markets and, to a lesser extent, reduced shipments to telecom national account customers. Partially offsetting these impacts was the
contribution from the CHP acquisition.
The decrease in International sales for the year ended December 31, 2015 was primarily due to
the negative impact of foreign currency translation.
The contribution from
non-annualized recent acquisitions to the year ended December 31, 2015 was $62.8 million.
Gross profit.
Gross profit margin for the year ended December 31, 2015 decreased to 34.9% from 35.3% for the year ended December 31, 2014. The decline in gross margin was primarily due to unfavorable absorption of manufacturing overhead-related costs, partially offset by the favorable impact of lower commodity costs and overseas sourcing benefits from a stronger U.S. dollar.
Operating expenses.
Operating expenses for the year ended December 31, 2015 include a non-cash $36.1 million impairment charge relating to tradenames as a result of a new brand strategy to transition and consolidate various brands to the Generac® tradename, and a non-cash $4.6 million impairment charge relating to the write-down of the goodwill of the Ottomotores reporting unit. Additionally, operating expenses for the year ended December 31, 2014 include a $4.9 million gain relating to a remeasurement of a contingent earn-out obligation from the Tower Light acquisition. Excluding the impact of these items, operating expenses increased $12.0 million primarily due to the addition of recurring operating expenses associated with the CHP acquisition, increased marketing and advertising expenses, and a $2.6 million increase in the amortization of intangible assets. This was partially offset by reductions in variable operating expenses on lower sales volumes.
Other expense.
The increase in other expense was primarily due to a $16.0 million non-cash gain recorded in the year ended December 31, 2014 relating to a 25 basis point reduction in borrowing costs as a result of the credit agreement leverage ratio falling below 3.0 times effective second quarter 2014 and remaining below 3.0 times based on projections at that time, and a $2.4 million non-cash loss recorded in the year ended December 31, 2015 relating to a 25 basis point increase in borrowing costs as a result of our credit agreement leverage ratio rising above 3.0 times effective third quarter 2015 and remaining above 3.0 times based on projections at the time. Additionally, $150.0 million of voluntary prepayments of Term Loan debt were made in the year ended December 31, 2015, resulting in a non-cash $4.8 million loss on extinguishment of debt compared to voluntary prepayments of Term Loan debt of $87.0 million in the year ended December 31, 2014, which resulted in a non-cash $2.1 million loss on extinguishment of debt. The debt repayments resulted in a year-over-year decrease in interest expense of $4.4 million.
Income tax expense.
The effective tax rate for 2015 was 36.8% as compared to 32.4% for 2014. The increase in income tax rate was primarily attributable to a decrease in the Company’s federal domestic production activity deduction due to lower pre-tax income.
Net income.
As a result of the factors identified above, we generated net income of $77.7 million for the year ended December 31, 2015 compared to $174.6 million for the year ended December 31, 2014.
Adjusted EBITDA.
Adjusted EBITDA margins for the Domestic segment for the year ended December 31, 2015 were 21.2% of net sales as compared to 24.0% of net sales for the year ended December 31, 2014. This decrease was primarily due to increased marketing and advertising expenses, and reduced overall leverage of fixed operating expenses, partially offset by the favorable impact of lower commodity costs and overseas sourcing benefits from a stronger U.S. Dollar.
Adjusted EBITDA margins for the International segment for the
year ended December 31, 2015 were 14.1% of net sales as compared to 12.3% of net sales for the year ended December 31, 2014. This increase was primarily due to lower operating expenses.
Adjusted net income.
Adjusted Net Income of $198.4 million for the year ended December 31, 2015 decreased 15.3% from $234.2 million for the year ended December 31, 2014, due to the factors outlined above, partially offset by a decrease in cash income tax expense.
Liquidity and Financial P
osition
Our primary cash requirements include payment for our raw material and component supplies, salaries & benefits, operating expenses, interest and principal payments on our debt and capital expenditures. We finance our operations primarily through cash flow generated from operations and, if necessary, borrowings
under our Amended ABL Facility.
The
Company’s credit agreements provided for a $1.2 billion Term Loan and include a $300.0 million uncommitted incremental term loan facility. The Term Loan matures on May 31, 2023. The Term Loan initially bore interest at rates based upon either a base rate plus an applicable margin of 1.75% or adjusted LIBOR rate plus an applicable margin of 2.75%, subject to a LIBOR floor of 0.75%. Beginning in the second quarter of 2014, and measured each subsequent quarter thereafter, the applicable margin related to base rate loans is reduced to 1.50% and the applicable margin related to LIBOR rate loans is reduced to 2.50%, to the extent that the Company’s net debt leverage ratio, as defined in the Term Loan, is below 3.00 to 1.00 for that measurement period. The Company’s net debt leverage ratio as of December 31, 2016 was above 3.00 to 1.00. As of December 31, 2016, the Company is in compliance with all covenants of the Term Loan. There are no financial maintenance covenants on the Term Loan.
The Company
’s credit agreements also provide for the $250.0 million Amended ABL Facility. The maturity date of the Amended ABL Facility is May 29, 2020. In May 2015, the Company borrowed $100.0 million under the Amended ABL Facility, the proceeds of which were used as a voluntary prepayment of Term Loan borrowings. As of December 31, 2016, there was $100.0 million outstanding under the Amended ABL Facility, and the Company is in compliance with all of its covenants.
At December 31,
2016, we had cash and cash equivalents of $67.3 million and $145.6 million of availability under our revolving ABL credit facility, net of outstanding letters of credit.
In
August 2015, our Board of Directors approved a $200.0 million stock repurchase program, which we completed with stock repurchases in the third quarter of 2016. In October 2016, our Board of Directors approved a $250.0 million stock repurchase program, under which we may repurchase an additional $250.0 million of common stock over 24 months from time to time; in amounts and at prices we deem appropriate, subject to market conditions and other considerations. The repurchases may be executed using open market purchases, privately negotiated agreements or other transactions. The actual timing, number and value of shares repurchased under the program will be determined by management at its discretion and will depend on a number of factors, including the market price of our shares of common stock and general market and economic conditions, applicable legal requirements, and compliance with the terms of the Company’s outstanding indebtedness. The repurchases may be funded from cash on hand, available borrowings, or proceeds from potential debt or other capital market sources. The stock repurchase program may be suspended or discontinued at any time without prior notice. For the year ended December 31, 2016, we repurchased 3,968,706 shares of our common stock for $149.9 million, and for the year ended December 31, 2015, the Company repurchased 3,303,500 shares of its common stock for $99.9 million, all funded with cash on hand.
Refer
to Note 10, “Credit Agreements,” to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K for additional information.
Long-term L
iquidity
We believe that our c
ash flow from operations and availability under our Amended ABL Facility, combined with relatively low ongoing capital expenditure requirements and favorable tax attributes (which result in a lower cash tax rate as compared to the U.S. statutory tax rate
) provide us with sufficient capital to continue to grow our business in the future. We will use a portion of our cash flow to pay interest and principal on our outstanding debt as well as repurchase shares of our common stock, impacting the amount available for working capital, capital expenditures and other general corporate purposes. As we continue to expand our business, we may require additional capital to fund working capital, capital expenditures or acquisitions.
Cash F
low
Year ended December 31, 201
6
compared
to year ended December 31, 2015
The following table summarizes our cash flows by category for the periods presented:
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
(U.S. Dollars in thousands)
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
% Change
|
|
Net cash provided by operating activities
|
|
$
|
253,409
|
|
|
$
|
188,619
|
|
|
$
|
64,790
|
|
|
|
34.3
|
%
|
Net cash used in investing activities
|
|
|
(105,822
|
)
|
|
|
(104,328
|
)
|
|
|
(1,494
|
)
|
|
|
1.4
|
%
|
Net cash used in financing activities
|
|
|
(195,705
|
)
|
|
|
(154,483
|
)
|
|
|
(41,222
|
)
|
|
|
26.7
|
%
|
The
34.3% increase in net cash provided by operating activities was primarily driven by a reduction in working capital investment during the current year as compared to the larger investment that was incurred in the prior year, and an overall increase in operating earnings.
Net cash used in
investing activities for the year ended December 31, 2016 primarily represents cash payments of $76.7 million related to the acquisitions of businesses and $30.5 million for the purchase of property and equipment. Net cash used in investing activities for the year ended December 31, 2015 primarily represents cash payments of $74.6 million related to the acquisition of CHP and $30.7 million for the purchase of property and equipment.
Net cash used in
financing activities for the year ended December 31, 2016 primarily represents $149.9 million payments 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 $12.4 million related to the net settlement of equity awards. These payments were partially offset by $28.7 million cash proceeds from short-term borrowings and $7.9 million of excess tax benefits from equity awards.
Net cash used in
financing activities for the year ended December 31, 2015 primarily represents $174.0 million of debt repayments ($150.8 million of long-term borrowings and $23.2 million of short-term borrowings), partially offset by $126.4 million cash proceeds from borrowings ($100.0 million from long-term borrowings under the Amended ABL facility and $26.4 million from short-term borrowings). In addition, the Company paid $99.9 million for the repurchase of its common stock and $13.0 million for the net share settlement of equity awards, which was partially offset by $9.6 million of excess tax benefits from equity awards.
Year ended December 31, 2015
compared
to year ended December 31, 2014
The following table summarizes our cash flows by category for the periods presented:
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
(U.S. Dollars in thousands)
|
|
2015
|
|
|
2014
|
|
|
Change
|
|
|
% Change
|
|
Net cash provided by operating activities
|
|
$
|
188,619
|
|
|
$
|
252,986
|
|
|
$
|
(64,367
|
)
|
|
|
-25.4
|
%
|
Net cash used in investing activities
|
|
|
(104,328
|
)
|
|
|
(95,491
|
)
|
|
|
(8,837
|
)
|
|
|
9.3
|
%
|
Net cash used in financing activities
|
|
|
(154,483
|
)
|
|
|
(116,023
|
)
|
|
|
(38,460
|
)
|
|
|
33.1
|
%
|
The 25.4% decrease in n
et cash provided by operating activities was primarily attributable to lower operating earnings during the year ended December 31, 2015, along with higher working capital investment primarily due to a decrease in accounts payable, partially offset by lower cash tax payments.
Net cash used in
investing activities for the year ended December 31, 2015 was primarily related to cash payments of $74.6 million related to the acquisition of CHP and $30.7 million for the purchase of property and equipment. Net cash used in investing activities for the year ended December 31, 2014 was primarily attributable to cash payments of $61.2 million related to the acquisition of businesses and $34.7 million for the purchase of property and equipment.
Net cash used in
financing activities for the year ended December 31, 2015 primarily represents $174.0 million of debt repayments ($150.8 million of long-term borrowings and $23.2 million of short-term borrowings), partially offset by $126.4 million cash proceeds from borrowings ($100.0 million from long-term borrowings under the Amended ABL facility and $26.4 million from short-term borrowings). In addition, the Company paid $99.9 million for the repurchase of its common stock and $13.0 million for the net share settlement of equity awards, which was partially offset by $9.6 million of excess tax benefits from equity awards.
Net cash used
in financing activities for the year ended December 31, 2014 primarily represents $120.4 million of debt repayments ($94.0 million of long-term borrowings and $26.4 million of short-term borrowings); partially offset by $6.6 million cash proceeds from short-term borrowings. In addition, the Company paid $12.2 million for the net share settlement of equity awards, which was partially offset by $11.0 million of excess tax benefits from equity awards.
Senior Secured Credit F
acilities
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 C
ompliance
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, th
e 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
Amended ABL Facility also contains covenants and events of default substantially similar to those in the Term Loan, as described above.
Contractual O
bligations
The following table summarizes our expected pa
yments for significant contractual obligations as of December 31, 2016:
(U.S. Dollars in thousands)
|
|
Total
|
|
|
Less than 1 Year
|
|
|
2 - 3 Years
|
|
|
4 - 5 Years
|
|
|
After 5 Years
|
|
Long-term debt, including curent portion (1)
|
|
$
|
1,043,753
|
|
|
$
|
14,399
|
|
|
$
|
320
|
|
|
$
|
100,034
|
|
|
$
|
929,000
|
|
Capital lease obligations, including current portion
|
|
|
4,647
|
|
|
|
566
|
|
|
|
1,064
|
|
|
|
1,034
|
|
|
|
1,983
|
|
Interest on long-term debt
|
|
|
212,971
|
|
|
|
36,369
|
|
|
|
67,782
|
|
|
|
64,176
|
|
|
|
44,644
|
|
Operating leases
|
|
|
36,839
|
|
|
|
7,922
|
|
|
|
13,682
|
|
|
|
9,506
|
|
|
|
5,730
|
|
Total contractual cash obligations (2)
|
|
$
|
1,298,210
|
|
|
$
|
59,256
|
|
|
$
|
82,848
|
|
|
$
|
174,750
|
|
|
$
|
981,357
|
|
(1)
The Term Loan provides for a $1.2 billion term loan B credit facility and includes a $300.0 million uncommitted incremental term loan facility. The Term Loan matures on May 31, 2023.
The Amended ABL Facility provides for a $250.0 million senior secured ABL revolving credit facility, which matures on May 29, 2020. There was $100.0 million outstanding on the Amended ABL Facility as of December 31, 2016.
(2
) Pension obligations are excluded from this table as we are unable to estimate the timing of payment due to the inherent assumptions underlying the obligation. However, the Company estimates we will contribute $0.6 million to our pension plans in 2017.
Capital E
xpenditures
Our operations require capital expenditures for technology, tooling, equipment, capacity expansion
, systems and upgrades. Capital expenditures were $30.5 million and $30.7 million for the years ended December 31, 2016 and 2015, respectively, and were funded through cash from operations.
Off-Balance Sheet A
rrangements
We have an arrangement with a finance company to provide floor plan financing for selected dealers. This arrangement provides liquidity for our dealers by financing dealer purchases of products with credit availability from the finance company. We receive payment from the finance company after shipment of product to the dealer and our dealers are given a longer period of time to pay the finance provider. If our dealers do not pay the finance company, we may be required to repurchase the applicable inventory held by the dealer.
We do not indemnify the finance company for any credit losses they may incur.
Total inventory financed
under this arrangement accounted for approximately 8% and 9% of net sales for the years ended December 31, 2016 and 2015, respectively. The amount financed by dealers which remained outstanding was $33.9 million and $32.4 million as of December 31, 2016 and 2015, respectively.
Critical Accounting P
olicies
In preparing the financial statements in accordance with
U.S. GAAP, management is required to make estimates and assumptions that have an impact on the asset, liability, revenue and expense amounts reported. These estimates can also affect supplemental information disclosures of the Company, including information about contingencies, risk and financial condition. The Company believes, given current facts and circumstances, that its estimates and assumptions are reasonable, adhere to U.S. GAAP, and are consistently applied. Inherent in the nature of an estimate or assumption is the fact that actual results may differ from estimates and estimates may vary as new facts and circumstances arise. The Company makes routine estimates and judgments in determining net realizable value of accounts receivable, inventories, property and equipment, and prepaid expenses. Management believes the Company’s most critical accounting estimates and assumptions are in the following areas: goodwill and other indefinite-lived intangible asset impairment assessment; business combinations and purchase accounting; defined benefit pension obligations; estimates of product warranty and other contingencies; income taxes and share based compensation.
Goodwill and Other
Indefinite-Lived
I
ntangible
A
ssets
Refer to
Note 2, “Significant Accounting Policies – Goodwill and Other Indefinite-Lived Intangible Assets,” to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K for further information on the Company’s policy regarding the accounting for goodwill and other intangible assets.
The Company performed
the required annual impairment tests for goodwill and other indefinite-lived intangible assets for the fiscal years 2016, 2015 and 2014, and found no impairment following the 2016 and 2014 tests. There were no reporting units with a carrying value at-risk of exceeding fair value as of the October 31, 2016 impairment test date.
After
performing the impairment tests for fiscal year 2015, the Company determined that the fair value of the Ottomotores reporting unit was less than its carrying value, resulting in a non-cash goodwill impairment charge of $4.6 million in the fourth quarter of 2015. The fair value was determined using a discounted cash flow analysis, which utilizes key estimates and assumptions as discussed below. Additionally, in the fourth quarter of 2015, the Company’s Board of Directors approved a plan to strategically transition and consolidate certain of the Company’s brands acquired through acquisitions over the past several years to the Generac® tradename. This brand strategy change resulted in a reclassification to a two year remaining useful life for the impacted tradenames, causing the fair value to be less than the carrying value using the relief-from-royalty approach in a discounted cash flow analysis. As such, a $36.1 million non-cash impairment charge was recorded in the fourth quarter of 2015 to write-down the impacted tradenames to net realizable value. See Note 2, “Significant Accounting Policies – Goodwill and Other Indefinite-Lived Intangible Assets,” to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K for further information on the impairment charges recorded in 2015.
When preparing
a discounted cash flow analysis for purposes of our annual impairment test, we make a number of key estimates and assumptions. We estimate the future cash flows of the business based on historical and forecasted revenues and operating costs. This, in turn, involves further estimates, such as estimates of future growth rates and inflation rates. In addition, we apply a discount rate to the estimated future cash flows for the purpose of the valuation. This discount rate is based on the estimated weighted average cost of capital for the business and may change from year to year. Weighted average cost of capital includes certain assumptions such as market capital structures, market betas, risk-free rate of return and estimated costs of borrowing.
As noted above, a considerable amount of management judgment and assumptions are required in performing the goodwill
and indefinite-lived intangible asset impairment tests. While we believe our judgments and assumptions are reasonable, different assumptions could change the estimated fair values. A number of factors, many of which we have no ability to control, could cause actual results to differ from the estimates and assumptions we employed. These factors include:
|
●
|
a
prolonged global or regional economic downturn;
|
|
●
|
a significant decrease in the demand for our products;
|
|
●
|
the inability to develop new and enhanced products and services in a timely manner;
|
|
●
|
a significant adverse change in legal factors or in the business climate;
|
|
●
|
an adverse action or assessment by a regulator;
|
|
●
|
successful efforts by our competitors to gain market share in our markets
;
|
|
●
|
disruptions to the Company
’s business;
|
|
●
|
inability to effectively integrate acquired businesses;
|
|
●
|
unexpected or planned changes in the use of assets or entity structure; and
|
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
C
ombinations and
P
urchase
A
ccounting
We account for business combinations using the acquisition method of accounting, and accordingly, the assets and liabilities of the acquired business are recorded at their respective fair values. The excess of the purchase price over the estimated fair value
of assets and liabilities is recorded as goodwill. Assigning fair market values to the assets acquired and liabilities assumed at the date of an acquisition requires knowledge of current market values, and the values of assets in use, and often requires the application of judgment regarding estimates and assumptions. While the ultimate responsibility resides with management, for material acquisitions we retain the services of certified valuation specialists to assist with assigning estimated values to certain acquired assets and assumed liabilities, including intangible assets and tangible long-lived assets. Acquired intangible assets, excluding goodwill, are valued using certain discounted cash flow methodologies based on future cash flows specific to the type of intangible asset purchased. This methodology incorporates various estimates and assumptions, the most significant being projected revenue growth rates, earnings margins, and forecasted cash flows based on the discount rate and terminal growth rate. See Note 1, “Description of Business,” to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K for further information on the Company’s business acquisitions.
Defined Benefit P
ension
O
bligations
T
he Company’s pension benefit obligation and related pension expense or income are calculated in accordance with the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 715-30,
Defined Benefit Plans—Pension
, and are impacted by certain actuarial assumptions, including the discount rate and the expected rate of return on plan assets. Such rates are evaluated on an annual basis considering factors including market interest rates and historical asset performance. Actuarial valuations for fiscal year 2016 used a discount rate of 4.14% for the salaried pension plan and 4.16% for the hourly pension plan. Our discount rate was selected using a methodology that matches plan cash flows with a selection of “Aa” or higher rated bonds, resulting in a discount rate that better matches a bond yield curve with comparable cash flows. In estimating the expected return on plan assets, we study historical markets and preserve the long-term historical relationships between equities and fixed-income securities. We evaluate current market factors such as inflation and interest rates before we determine long-term capital market assumptions and review peer data and historical returns to check for reasonableness and appropriateness. Changes in the discount rate and return on assets can have a significant effect on the funded status of our pension plans, stockholders' equity and related expense. We cannot predict these changes in discount rates or investment returns and, therefore, cannot reasonably estimate whether the impact in subsequent years will be significant.
The funded status of our pension plans is the difference between the projected benefit obligation and the fair value of its plan assets. The projected benefit obligation is the actuarial present value of all benefits expected to be earned by the employees' service
. No compensation increase is assumed in the calculation of the projected benefit obligation, as the plans were frozen effective December 31, 2008. Further information regarding the funded status of our pension plans can be found in Note 14, “Benefit Plans,” to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K.
Our funding policy for our pension plans is to contribute amounts at least equal to the minimum annual amount required by applicable regulations. Given this policy, we
expect to make $0.6 million in contributions to our pension plans in 2017.
Product Warranty Reserves and Other C
ontingencies
The reserves, if any, for product warranty
, product liability, litigation and customer rebates are fact-specific and take into account such factors as specific customer situations, historical experience, and current and expected economic conditions. Further information on these reserves are reflected under Notes 2, 9, and 16 to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K.
Income T
axes
We account for income taxes in accordance with ASC 740
,
Income Taxes
. Our estimate of income taxes payable, deferred income taxes and the effective tax rate is based on an analysis of many factors including interpretations of federal, state and international income tax laws; the difference between tax and financial reporting bases of assets and liabilities; estimates of amounts currently due or owed in various jurisdictions; and current accounting standards. We review and update our estimates on a quarterly basis as facts and circumstances change and actual results are known.
In assessing the realizability of the deferred tax assets
on our balance sheet, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the years in which those temporary differences become deductible. We consider the taxable income in prior carryback years, scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment.
Refer to
Note 13, “Income Taxes” to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K for further information on the Company’s income taxes.
Share Based C
ompensation
Under the fair value recognition provisions of ASC 718
,
Compensation – Stock Compensation
, share based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period. Determining the fair value of share based awards at the grant date requires judgment, including estimating expected dividends and market volatility of our stock. In addition, judgment is also required in estimating the amount of share based awards that are expected to be forfeited. If actual results differ significantly from these estimates, share based compensation expense and our results of operations could be impacted. See Note 15, “Share Plans” to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K for further information on the Company’s share based compensation.
New Accounting Standards
For information with respect to new accounting pronouncements and the impact of these pronouncements on our consolidated financial statements,
see Note 2, “Significant Accounting Policies - New Accounting Pronouncements,” to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K
.
Item
8. Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Generac Holdings Inc.
Waukesha, Wisconsin
We have audited the accompanying consolidated balance sheet of Generac Holdings Inc. and subsidiaries (the "
Company") as of December 31, 2016, and the related consolidated statements of comprehensive income, stockholders' equity and cash flows for the year ended December 31, 2016. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit
in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated
financial position of Generac Holdings Inc. and subsidiaries as of December 31, 2016, and the consolidated results of their operations and their cash flows for the year ended December 31, 2016, in conformity accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company'
s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013) and our report dated February 24, 2017 expressed an unqualified opinion thereon.
/s/ Deloitte & Touche LLP
Milwaukee, WI
Fe
bruary 24, 2017
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Generac Holdings Inc.
Waukesha, Wisconsin
We have audited the accompanying consolidated balance sheet of Generac Holdings Inc. (the Company) as of December 31, 2015, and the related consolidated statements of comprehensive income, stockholders'
equity and cash flows for each of the two years in the period ended December 31, 2015. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accorda
nce with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of G
enerac Holdings Inc. at December 31, 2015, and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
Milwaukee, WI
Fe
bruary 26, 2016 (except for Note 6,
Segment Reporting
, and Note 2,
New Accounting Pronouncements
, as to which the date is February 24, 2017)
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Generac Holdings Inc.
Waukesha, Wisconsin
We have
audited the internal control over financial reporting of Generac Holdings Inc. and its subsidiaries (the "Company") as of December 31, 2016, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. As described in Management’s Report on Internal Control Over Financial Reporting, management excluded from its assessment the internal control over financial reporting at the PR Industrial business ("Pramac"), which was acquired on March 1, 2016 and whose financial statements constitute 22.5% and 11.1% of net and total assets, respectively, 12.6% of revenues, and 0.7% of net income of the total consolidated financial statement amounts as of and for the year ended December 31, 2016. Accordingly, our audit did not include the internal control over financial reporting at Pramac. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our
audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our
opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also
audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2016 and the related consolidated statement of comprehensive income, stockholders’ equity and cash flows for the year ended December 31, 2016 of Generac Holdings Inc. and our report dated February 24, 2017 expressed an unqualified opinion on those financial statements.
/s/
Deloitte & Touche LLP
Milwaukee, WI
February 24, 2017
Generac Holdings Inc.
|
Consolidated Balance Sheets
|
(U.S. Dollars in Thousands, Except Share and Per Share Data)
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
67,272
|
|
|
$
|
115,857
|
|
Accounts receivable, less allowance for doubtful accounts of $5,642 and $2,494 at December 31, 2016 and 2015, respectively
|
|
|
241,857
|
|
|
|
182,185
|
|
Inventories
|
|
|
349,731
|
|
|
|
325,375
|
|
Prepaid expenses and other assets
|
|
|
24,649
|
|
|
|
8,600
|
|
Total current assets
|
|
|
683,509
|
|
|
|
632,017
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
212,793
|
|
|
|
184,213
|
|
|
|
|
|
|
|
|
|
|
Customer lists, net
|
|
|
45,312
|
|
|
|
39,313
|
|
Patents, net
|
|
|
48,061
|
|
|
|
53,772
|
|
Other intangible assets, net
|
|
|
2,925
|
|
|
|
2,768
|
|
Tradenames, net
|
|
|
158,874
|
|
|
|
161,057
|
|
Goodwill
|
|
|
704,640
|
|
|
|
669,719
|
|
Deferred income taxes
|
|
|
3,337
|
|
|
|
34,812
|
|
Other assets
|
|
|
2,233
|
|
|
|
964
|
|
Total assets
|
|
$
|
1,861,684
|
|
|
$
|
1,778,635
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders
’ equity
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
$
|
31,198
|
|
|
$
|
8,594
|
|
Accounts payable
|
|
|
181,519
|
|
|
|
108,332
|
|
Accrued wages and employee benefits
|
|
|
21,189
|
|
|
|
13,101
|
|
Other accrued liabilities
|
|
|
93,068
|
|
|
|
82,540
|
|
Current portion of long-term borrowings and capital lease obligations
|
|
|
14,965
|
|
|
|
657
|
|
Total current liabilities
|
|
|
341,939
|
|
|
|
213,224
|
|
|
|
|
|
|
|
|
|
|
Long-term borrowings and capital lease obligations
|
|
|
1,006,758
|
|
|
|
1,037,132
|
|
Deferred income taxes
|
|
|
17,278
|
|
|
|
4,950
|
|
Other long-term liabilities
|
|
|
61,459
|
|
|
|
57,458
|
|
Total liabilities
|
|
|
1,427,434
|
|
|
|
1,312,764
|
|
|
|
|
|
|
|
|
|
|
Redeemable noncontrolling interest
|
|
|
33,138
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Stockholders
’ equity:
|
|
|
|
|
|
|
|
|
Common stock, par value $0.01, 500,000,000 shares authorized, 70,261,481 and 69,582,669 shares issued at December 31, 2016 and 2015, respectively
|
|
|
702
|
|
|
|
696
|
|
Additional paid-in capital
|
|
|
449,049
|
|
|
|
443,109
|
|
Treasury stock, at cost, 7,564,874 and 3,567,575 shares at December 31, 2016 and 2015, respectively
|
|
|
(262,402
|
)
|
|
|
(111,516
|
)
|
Excess purchase price over predecessor basis
|
|
|
(202,116
|
)
|
|
|
(202,116
|
)
|
Retained earnings
|
|
|
456,052
|
|
|
|
358,173
|
|
Accumulated other comprehensive loss
|
|
|
(40,163
|
)
|
|
|
(22,475
|
)
|
Stockholders
’ equity attributable to Generac Holdings Inc.
|
|
|
401,122
|
|
|
|
465,871
|
|
Noncontrolling interests
|
|
|
(10
|
)
|
|
|
–
|
|
Total stockholders
’ equity
|
|
|
401,112
|
|
|
|
465,871
|
|
Total liabilities and stockholders
’ equity
|
|
$
|
1,861,684
|
|
|
$
|
1,778,635
|
|
See notes to consolidated financial statements.
|
|
|
|
Generac Holdings Inc.
|
Consolidated Statements of Comprehensive Income
|
(U.S. Dollars in Thousands, Except Share and Per Share Data)
|
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,444,453
|
|
|
$
|
1,317,299
|
|
|
$
|
1,460,919
|
|
Costs of goods sold
|
|
|
930,347
|
|
|
|
857,349
|
|
|
|
944,700
|
|
Gross profit
|
|
|
514,106
|
|
|
|
459,950
|
|
|
|
516,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and service
|
|
|
164,607
|
|
|
|
130,242
|
|
|
|
120,408
|
|
Research and development
|
|
|
37,229
|
|
|
|
32,922
|
|
|
|
31,494
|
|
General and administrative
|
|
|
74,700
|
|
|
|
52,947
|
|
|
|
54,795
|
|
Amortization of intangibles
|
|
|
32,953
|
|
|
|
23,591
|
|
|
|
21,024
|
|
Tradename and goodwill impairment
|
|
|
–
|
|
|
|
40,687
|
|
|
|
–
|
|
Gain on remeasurement of contingent consideration
|
|
|
–
|
|
|
|
–
|
|
|
|
(4,877
|
)
|
Total operating expenses
|
|
|
309,489
|
|
|
|
280,389
|
|
|
|
222,844
|
|
Income from operations
|
|
|
204,617
|
|
|
|
179,561
|
|
|
|
293,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (expense) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(44,568
|
)
|
|
|
(42,843
|
)
|
|
|
(47,215
|
)
|
Investment income
|
|
|
44
|
|
|
|
123
|
|
|
|
130
|
|
Loss on extinguishment of debt
|
|
|
(574
|
)
|
|
|
(4,795
|
)
|
|
|
(2,084
|
)
|
Gain (loss) on change in contractual interest rate
|
|
|
(2,957
|
)
|
|
|
(2,381
|
)
|
|
|
16,014
|
|
Costs related to acquisition
|
|
|
(1,082
|
)
|
|
|
(1,195
|
)
|
|
|
(396
|
)
|
Other, net
|
|
|
902
|
|
|
|
(5,487
|
)
|
|
|
(1,462
|
)
|
Total other expense, net
|
|
|
(48,235
|
)
|
|
|
(56,578
|
)
|
|
|
(35,013
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
156,382
|
|
|
|
122,983
|
|
|
|
258,362
|
|
Provision for income taxes
|
|
|
57,570
|
|
|
|
45,236
|
|
|
|
83,749
|
|
Net income
|
|
|
98,812
|
|
|
|
77,747
|
|
|
|
174,613
|
|
Net income attributable to noncontrolling interests
|
|
|
24
|
|
|
|
-
|
|
|
|
-
|
|
Net income attributable to Generac Holdings Inc.
|
|
$
|
98,788
|
|
|
$
|
77,747
|
|
|
$
|
174,613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common shareholders per common share - basic:
|
|
$
|
1.51
|
|
|
$
|
1.14
|
|
|
$
|
2.55
|
|
Weighted average common shares outstanding - basic:
|
|
|
64,905,793
|
|
|
|
68,096,051
|
|
|
|
68,538,248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common shareholders per common share - diluted:
|
|
$
|
1.50
|
|
|
$
|
1.12
|
|
|
$
|
2.49
|
|
Weighted average common shares outstanding - diluted:
|
|
|
65,382,774
|
|
|
|
69,200,297
|
|
|
|
70,171,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
$
|
(18,545
|
)
|
|
$
|
(7,624
|
)
|
|
$
|
(3,082
|
)
|
Net unrealized gain (loss) on derivatives
|
|
|
535
|
|
|
|
(965
|
)
|
|
|
(1,420
|
)
|
Pension liability adjustment
|
|
|
322
|
|
|
|
1,881
|
|
|
|
(8,850
|
)
|
Other comprehensive loss
|
|
|
(17,688
|
)
|
|
|
(6,708
|
)
|
|
|
(13,352
|
)
|
Total comprehensive income
|
|
|
81,124
|
|
|
|
71,039
|
|
|
|
161,261
|
|
Comprehensive loss attributable to noncontrolling interests
|
|
|
(973
|
)
|
|
|
–
|
|
|
|
–
|
|
Comprehensive income attributable to Generac Holdings Inc.
|
|
$
|
82,097
|
|
|
$
|
71,039
|
|
|
$
|
161,261
|
|
See notes to consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
Generac Holdings Inc.
|
Consolidated Statements of Stockholders' Equity
|
(U.S. Dollars in Thousands, Except Share Data)
|
|
|
Generac Holdings Inc.
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Additional
Paid-In
|
|
|
Treasury Stock
|
|
|
Excess Purchase Price
Over
Predecessor
|
|
|
Retained
|
|
|
Accumulated
Other
Comprehensive
|
|
|
Total
Stockholders'
|
|
|
Noncontrolling
|
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Shares
|
|
|
Amount
|
|
|
Basis
|
|
|
Earnings
|
|
|
Income (Loss)
|
|
|
Equity
|
|
|
Interest
|
|
|
Total
|
|
Balance at December 31, 2013
|
|
|
68,767,367
|
|
|
$
|
688
|
|
|
$
|
421,672
|
|
|
|
(163,458
|
)
|
|
$
|
(6,571
|
)
|
|
$
|
(202,116
|
)
|
|
$
|
105,813
|
|
|
$
|
(2,415
|
)
|
|
$
|
317,071
|
|
|
$
|
–
|
|
|
$
|
317,071
|
|
Unrealized loss on interest rate swaps, net of tax of $(860)
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(1,420
|
)
|
|
|
(1,420
|
)
|
|
|
–
|
|
|
|
(1,420
|
)
|
Foreign currency translation adjustment
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(3,082
|
)
|
|
|
(3,082
|
)
|
|
|
–
|
|
|
|
(3,082
|
)
|
Common stock issued under equity incentive plans, net of shares withheld for employee taxes and strike price
|
|
|
354,904
|
|
|
|
3
|
|
|
|
(10,378
|
)
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(10,375
|
)
|
|
|
–
|
|
|
|
(10,375
|
)
|
Net share settlement of restricted stock awards
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(34,854
|
)
|
|
|
(1,770
|
)
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(1,770
|
)
|
|
|
–
|
|
|
|
(1,770
|
)
|
Excess tax benefits from equity awards
|
|
|
–
|
|
|
|
–
|
|
|
|
10,972
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
10,972
|
|
|
|
–
|
|
|
|
10,972
|
|
Share-based compensation
|
|
|
–
|
|
|
|
–
|
|
|
|
12,612
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
12,612
|
|
|
|
–
|
|
|
|
12,612
|
|
Dividends declared
|
|
|
–
|
|
|
|
–
|
|
|
|
28
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
–
|
|
|
|
28
|
|
|
|
–
|
|
|
|
28
|
|
Pension liability adjustment, net of tax of $(5,658)
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(8,850
|
)
|
|
|
(8,850
|
)
|
|
|
–
|
|
|
|
(8,850
|
)
|
Net income
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
174,613
|
|
|
|
–
|
|
|
|
174,613
|
|
|
|
–
|
|
|
|
174,613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2014
|
|
|
69,122,271
|
|
|
$
|
691
|
|
|
$
|
434,906
|
|
|
|
(198,312
|
)
|
|
$
|
(8,341
|
)
|
|
$
|
(202,116
|
)
|
|
$
|
280,426
|
|
|
$
|
(15,767
|
)
|
|
$
|
489,799
|
|
|
$
|
-
|
|
|
$
|
489,799
|
|
Unrealized loss on interest rate swaps, net of tax of $(609)
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(965
|
)
|
|
|
(965
|
)
|
|
|
–
|
|
|
|
(965
|
)
|
Foreign currency translation adjustment
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(7,624
|
)
|
|
|
(7,624
|
)
|
|
|
–
|
|
|
|
(7,624
|
)
|
Common stock issued under equity incentive plans, net of shares withheld for employee taxes and strike price
|
|
|
460,398
|
|
|
|
5
|
|
|
|
(9,626
|
)
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(9,621
|
)
|
|
|
–
|
|
|
|
(9,621
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net share settlement of restricted stock awards
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(65,763
|
)
|
|
|
(3,233
|
)
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(3,233
|
)
|
|
|
–
|
|
|
|
(3,233
|
)
|
Stock repurchases
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(3,303,500
|
)
|
|
|
(99,942
|
)
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(99,942
|
)
|
|
|
–
|
|
|
|
(99,942
|
)
|
Excess tax benefits from equity awards
|
|
|
–
|
|
|
|
–
|
|
|
|
9,559
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
9,559
|
|
|
|
–
|
|
|
|
9,559
|
|
Share-based compensation
|
|
|
–
|
|
|
|
–
|
|
|
|
8,241
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
8,241
|
|
|
|
–
|
|
|
|
8,241
|
|
Dividends declared
|
|
|
–
|
|
|
|
–
|
|
|
|
29
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
–
|
|
|
|
29
|
|
|
|
–
|
|
|
|
29
|
|
Pension liability adjustment, net of tax of $1,176
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
1,881
|
|
|
|
1,881
|
|
|
|
–
|
|
|
|
1,881
|
|
Net income
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
77,747
|
|
|
|
–
|
|
|
|
77,747
|
|
|
|
–
|
|
|
|
77,747
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2015
|
|
|
69,582,669
|
|
|
$
|
696
|
|
|
$
|
443,109
|
|
|
|
(3,567,575
|
)
|
|
$
|
(111,516
|
)
|
|
$
|
(202,116
|
)
|
|
$
|
358,173
|
|
|
$
|
(22,475
|
)
|
|
$
|
465,871
|
|
|
$
|
-
|
|
|
$
|
465,871
|
|
Acquisition of business
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
53
|
|
|
|
53
|
|
Unrealized gain on interest rate swaps, net of tax of $341
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
535
|
|
|
|
535
|
|
|
|
–
|
|
|
|
535
|
|
Foreign currency translation adjustment
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(18,545
|
)
|
|
|
(18,545
|
)
|
|
|
13
|
|
|
|
(18,532
|
)
|
Common stock issued under equity incentive plans, net of shares withheld for employee taxes and strike price
|
|
|
678,812
|
|
|
|
6
|
|
|
|
(11,473
|
)
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(11,467
|
)
|
|
|
–
|
|
|
|
(11,467
|
)
|
Net share settlement of restricted stock awards
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(28,593
|
)
|
|
|
(949
|
)
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(949
|
)
|
|
|
–
|
|
|
|
(949
|
)
|
Stock repurchases
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(3,968,706
|
)
|
|
|
(149,937
|
)
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(149,937
|
)
|
|
|
–
|
|
|
|
(149,937
|
)
|
Excess tax benefits from equity awards
|
|
|
–
|
|
|
|
–
|
|
|
|
7,920
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
7,920
|
|
|
|
–
|
|
|
|
7,920
|
|
Share-based compensation
|
|
|
–
|
|
|
|
–
|
|
|
|
9,493
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
9,493
|
|
|
|
–
|
|
|
|
9,493
|
|
Pension liability adjustment, net of tax of $207
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
322
|
|
|
|
322
|
|
|
|
–
|
|
|
|
322
|
|
Redemption value adjustment
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(909
|
)
|
|
|
–
|
|
|
|
(909
|
)
|
|
|
–
|
|
|
|
(909
|
)
|
Net income
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
98,788
|
|
|
|
–
|
|
|
|
98,788
|
|
|
|
(76
|
)
|
|
|
98,712
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2016
|
|
|
70,261,481
|
|
|
$
|
702
|
|
|
$
|
449,049
|
|
|
|
(7,564,874
|
)
|
|
$
|
(262,402
|
)
|
|
$
|
(202,116
|
)
|
|
$
|
456,052
|
|
|
$
|
(40,163
|
)
|
|
$
|
401,122
|
|
|
$
|
(10
|
)
|
|
$
|
401,112
|
|
See notes to consolidated financial statements.
|
Generac Holdings Inc.
|
Consolidated Statements of Cash Flows
|
(U.S. Dollars in Thousands)
|
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
98,812
|
|
|
$
|
77,747
|
|
|
$
|
174,613
|
|
Adjustment to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
21,465
|
|
|
|
16,742
|
|
|
|
13,706
|
|
Amortization of intangible assets
|
|
|
32,953
|
|
|
|
23,591
|
|
|
|
21,024
|
|
Amortization of original issue discount and deferred financing costs
|
|
|
3,940
|
|
|
|
5,429
|
|
|
|
6,615
|
|
Tradename and goodwill impairment
|
|
|
–
|
|
|
|
40,687
|
|
|
|
–
|
|
Loss on extinguishment of debt
|
|
|
574
|
|
|
|
4,795
|
|
|
|
2,084
|
|
(Gain) loss on change in contractual interest rate
|
|
|
2,957
|
|
|
|
2,381
|
|
|
|
(16,014
|
)
|
Gain on remeasurement of contingent consideration
|
|
|
–
|
|
|
|
–
|
|
|
|
(4,877
|
)
|
Deferred income taxes
|
|
|
39,347
|
|
|
|
26,955
|
|
|
|
37,878
|
|
Share-based compensation expense
|
|
|
9,493
|
|
|
|
8,241
|
|
|
|
12,612
|
|
Other
|
|
|
127
|
|
|
|
540
|
|
|
|
1,248
|
|
Net changes in operating assets and liabilities, net of acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(9,082
|
)
|
|
|
9,610
|
|
|
|
(2,988
|
)
|
Inventories
|
|
|
15,514
|
|
|
|
9,084
|
|
|
|
3,508
|
|
Other assets
|
|
|
406
|
|
|
|
5,063
|
|
|
|
2,456
|
|
Accounts payable
|
|
|
32,908
|
|
|
|
(27,771
|
)
|
|
|
15,269
|
|
Accrued wages and employee benefits
|
|
|
5,196
|
|
|
|
(5,361
|
)
|
|
|
(9,405
|
)
|
Other accrued liabilities
|
|
|
6,719
|
|
|
|
445
|
|
|
|
6,229
|
|
Excess tax benefits from equity awards
|
|
|
(7,920
|
)
|
|
|
(9,559
|
)
|
|
|
(10,972
|
)
|
Net cash provided by operating activities
|
|
|
253,409
|
|
|
|
188,619
|
|
|
|
252,986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of property and equipment
|
|
|
1,360
|
|
|
|
105
|
|
|
|
394
|
|
Expenditures for property and equipment
|
|
|
(30,467
|
)
|
|
|
(30,651
|
)
|
|
|
(34,689
|
)
|
Acquisition of business, net of cash acquired
|
|
|
(61,386
|
)
|
|
|
(73,782
|
)
|
|
|
(61,196
|
)
|
Deposit paid related to acquisition
|
|
|
(15,329
|
)
|
|
|
–
|
|
|
|
–
|
|
Net cash used in investing activities
|
|
|
(105,822
|
)
|
|
|
(104,328
|
)
|
|
|
(95,491
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from short-term borrowings
|
|
|
28,712
|
|
|
|
26,384
|
|
|
|
6,550
|
|
Proceeds from long-term borrowings
|
|
|
–
|
|
|
|
100,000
|
|
|
|
–
|
|
Repayments of short-term borrowings
|
|
|
(27,755
|
)
|
|
|
(23,149
|
)
|
|
|
(26,444
|
)
|
Repayments of long-term borrowings and capital lease obligations
|
|
|
(37,627
|
)
|
|
|
(150,826
|
)
|
|
|
(94,035
|
)
|
Stock repurchases
|
|
|
(149,937
|
)
|
|
|
(99,942
|
)
|
|
|
–
|
|
Payment of debt issuance costs
|
|
|
(4,557
|
)
|
|
|
(2,117
|
)
|
|
|
(4
|
)
|
Cash dividends paid
|
|
|
(76
|
)
|
|
|
(1,436
|
)
|
|
|
(902
|
)
|
Taxes paid related to the net share settlement of equity awards
|
|
|
(14,008
|
)
|
|
|
(12,956
|
)
|
|
|
(12,160
|
)
|
Proceeds from the exercise of stock options
|
|
|
1,623
|
|
|
|
–
|
|
|
|
–
|
|
Excess tax benefits from equity awards
|
|
|
7,920
|
|
|
|
9,559
|
|
|
|
10,972
|
|
Net cash used in financing activities
|
|
|
(195,705
|
)
|
|
|
(154,483
|
)
|
|
|
(116,023
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(467
|
)
|
|
|
(3,712
|
)
|
|
|
(1,858
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(48,585
|
)
|
|
|
(73,904
|
)
|
|
|
39,614
|
|
Cash and cash equivalents at beginning of period
|
|
|
115,857
|
|
|
|
189,761
|
|
|
|
150,147
|
|
Cash and cash equivalents at end of period
|
|
$
|
67,272
|
|
|
$
|
115,857
|
|
|
$
|
189,761
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
42,456
|
|
|
$
|
39,524
|
|
|
$
|
42,592
|
|
Income taxes
|
|
|
8,889
|
|
|
|
6,087
|
|
|
|
34,283
|
|
See notes to consolidated financial statements.
|
|
|
|
|
|
Generac Holdings Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 201
6
, 201
5
, and
201
4
(
U.S.
Dollars in Thousands, Except Share and Per Share Data)
1.
|
Description of Business
|
Founded in 1959, Generac Holdings Inc. (the Company) is a leading designer and manufacturer of a wide range of
power generation equipment and other engine powered products serving the residential, light-commercial and industrial markets. Generac’s power products are available globally through a broad network of independent dealers, distributors, retailers, wholesalers and equipment rental companies, as well as sold direct to certain end user customers.
Over the years, the Company
has executed a number of acquisitions that support our strategic plan (refer to Item 1 in this Annual Report on Form 10-K for discussion of our Powering Ahead strategic plan). A summary of these acquisitions include the following:
|
●
|
I
n October 2011, the Company acquired substantially all the assets of Magnum Products (Magnum), a supplier of generator powered light towers and mobile generators for a variety of industrial applications. The Magnum business is a strategic fit for the Company as it provides diversification through the introduction of new engine powered products, distribution channels and end markets.
|
|
●
|
I
n December 2012, the Company acquired the equity of Ottomotores UK and its affiliates (Ottomotores), with operations in Mexico City, Mexico and Curitiba, Brazil. Ottomotores is a leading manufacturer in the Mexican market for industrial diesel gensets and is a market participant throughout all of Latin America.
|
|
●
|
I
n August 2013, the Company acquired the equity of Tower Light SRL and its wholly-owned subsidiaries (Tower Light). Headquartered outside Milan, Italy, Tower Light is a leading developer and supplier of mobile light towers throughout Europe, the Middle East and Africa.
|
|
●
|
I
n November 2013, the Company purchased the assets of Baldor Electric Company’s generator division (Baldor Generators). Baldor Generators offers a complete line of power generation equipment throughout North America with power output up to 2.5MW, which expands the Company’s commercial and industrial product lines.
|
|
●
|
In September
2014, the Company acquired the equity of Pramac America LLC (Powermate), resulting in the ownership of the Powermate trade name and the right to license the DeWalt brand name for certain residential engine powered tools. This acquisition expands Generac’s residential product portfolio in the portable generator category.
|
|
●
|
I
n October 2014, the Company acquired MAC, Inc. (MAC). MAC is a leading manufacturer of premium-grade commercial and industrial mobile heaters for the United States and Canadian markets. The acquisition expands the Company’s portfolio of mobile power products and provides increased access to the oil & gas market.
|
|
●
|
I
n August 2015, the Company acquired Country Home Products and its subsidiaries (CHP). CHP is a leading manufacturer of high-quality, innovative, professional-grade engine powered equipment used in a wide variety of property maintenance applications, which are primarily sold in North America under the DR® Power Equipment brand. The acquisition provides an expanded product lineup and additional scale to the Company’s residential engine powered products.
|
|
●
|
In March 2016, the
Company acquired a majority ownership interest in PR Industrial S.r.l and its subsidiaries (Pramac). Headquartered in Siena, Italy, Pramac is a leading global manufacturer of stationary, mobile and portable generators primarily sold under the Pramac® brand. Pramac products are sold in over 150 countries through a broad distribution network.
|
|
●
|
In January 2017, the Company acquired Motortech GmbH & affiliates (Motortech), headquartered in Celle, Germany. Motortech is a leading manufacturer
of gaseous-engine control systems and accessories, which are sold primarily to European gas-engine manufacturers and to aftermarket customers.
|
2.
|
Significant Accounting Policies
|
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its subsidiaries
that are consolidated in conformity with U.S. generally accepted accounting principles (U.S. GAAP). All intercompany amounts and transactions have been eliminated in consolidation.
Cash
and Cash
Equivalents
The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
Concentration of Credit Risk
The Company maintains the majority of its
domestic cash in one commercial bank in multiple operating and investment accounts. Balances on deposit are insured by the Federal Deposit Insurance Corporation (FDIC) up to specified limits. Balances in excess of FDIC limits are uninsured.
One customer accounted for
approximately 9% and 11% of accounts receivable at December 31, 2016 and 2015, respectively. No one customer accounted for greater than 7%, 7% and 8%, of net sales during the years ended December 31, 2016, 2015, or 2014, respectively.
Accounts Receivable
Receivables are recorded at their face value amount less an allowance for doubtful accounts. The Company estimates and records an allowance for doubtful accounts based on specific identification and historical experience. The Company writes off uncollectible accounts against the allowance for doubtful accounts after all collection efforts have been exhausted. Sales are generally made on an unsecured basis.
Inventories
Inventories are stated at the lower of cost or
market, with cost determined generally using the first-in, first-out method.
Property and Equipment
Property and equipment are recorded at cost and are being depreciated using the straight-line method over the estimated useful lives of the assets, which are summarized below (in years). Costs of leasehold improvements are amortized over the lesser of the term of the lease (including renewal option periods) or the estimated useful lives of the improvements.
Land improvements
|
|
|
15
|
–
|
20
|
|
Buildings and improvements
|
|
|
10
|
–
|
40
|
|
Machinery and equipment
|
|
|
3
|
–
|
10
|
|
Dies and tools
|
|
|
3
|
–
|
10
|
|
Vehicles
|
|
|
3
|
–
|
6
|
|
Office equipment
and systems
|
|
|
3
|
–
|
15
|
|
Leasehold improvements
|
|
|
2
|
–
|
20
|
|
Total depreciation expense was $21,465, $16,742, and $13,706 for the years ended December 31, 2016, 2015, and 2014, respectively.
Goodwill and Other Indefinite-Lived Intangible Assets
Goodwill represents the excess of the purchase price over fair value of identifiable net assets acquired from business acquisitions. Goodwill is not amortized, but is reviewed for impairment on an annual basis and between annual tests
if indicators of impairment are present. The Company evaluates goodwill for impairment annually as of October 31 or more frequently when an event occurs or circumstances change that indicates the carrying value may not be recoverable. The Company has the option to assess goodwill for impairment by first performing a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the Company determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then further goodwill impairment testing is not required to be performed. If the Company determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company is required to perform a two-step goodwill impairment test. In the first step, the fair value of the reporting unit is compared to its book value including goodwill. If the fair value of the reporting unit is in excess of its book value, the related goodwill is not impaired and no further analysis is necessary. If the fair value of the reporting unit is less than its book value, there is an indication of potential impairment and a second step is performed. When required, the second step of testing involves calculating the implied fair value of goodwill for the reporting unit. The implied fair value of goodwill is determined in the same manner as goodwill recognized in a business combination, which is the excess of the fair value of the reporting unit determined in step one over the fair value of its net assets and identifiable intangible assets as if the reporting unit had been acquired. If the carrying value of the reporting unit's goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. For reporting units with a negative book value (i.e., excess of liabilities over assets), qualitative factors are evaluated to determine whether it is necessary to perform the second step of the goodwill impairment test.
The Company performed the required annual impairment tests for goodwill and other indefinite-lived intangible assets for the fiscal years 2016, 2015 and 2014, and found no impairment following the 2016 and 2014 tests.
There were no reporting units with a carrying value at-risk of exceeding fair value as of the October 31, 2016 impairment test date.
After performing the impairment tests for fiscal year 2015, t
he Company determined that the fair value of the Ottomotores reporting unit was less than its carrying value, resulting in a non-cash goodwill impairment charge in the fourth quarter of 2015 of $4,611 to write-down the balance of the Ottomotores goodwill. The decrease in fair value of the Ottomotores reporting unit was due to several factors in the second half of 2015: the continued challenges of the Latin American economies, devaluation of the Peso against the U.S. Dollar, the slow development of Mexican energy reform as a result of decreasing oil prices; combining to cause 2015 results to fall short of prior expectations and future forecasts to decrease. The fair value was determined using a discounted cash flow analysis, which utilized key financial assumptions including the sales growth factors discussed above, a 3% terminal growth rate and a 15.7% discount rate.
Other indefinite-lived intangible assets consist of
certain tradenames. The Company tests the carrying value of these tradenames by comparing the assets’ fair value to its carrying value. Fair value is measured using a relief-from-royalty approach, which assumes the fair value of the tradename is the discounted cash flows of the amount that would be paid had the Company not owned the tradename and instead licensed the tradename from another company. The Company conducts its annual impairment test for indefinite-lived intangible assets as of October 31 of each year.
In the fourth quarter of 2015, the Company
’s Board of Directors approved a plan to strategically transition and consolidate certain of the Company’s brands acquired in acquisitions over the past several years to the Generac® tradename. This brand strategy change resulted in a reclassification to a two year remaining useful life for the impacted tradenames, causing the fair value to be less than the carrying value using the relief-from-royalty approach in a discounted cash flow analysis. As such, a $36,076 non-cash impairment charge was recorded to write-down the impacted tradenames to net realizable value.
Other than the impairment charges discussed above, the Company found no other impairment when performing the required annual
impairment tests for goodwill and other indefinite-lived intangible assets for fiscal year 2015. There can be no assurance that future impairment tests will not result in a charge to earnings.
Impairment of
Long-Lived Assets
The Company periodically evaluates the carrying value of long-lived asset
s (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 d
irect and incremental 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. Approximately $3,939, $5,429, and $6,615 of deferred financing costs and original issue discount were amortized to interest expense during fiscal years 2016, 2015 and 2014, respectively. Excluding the impact of any future long-term debt issuances or prepayments, estimated amortization expense for the next five years is as follows: 2017 - $2,516; 2018 - $4,314; 2019 - $4,466; 2020 - $4,420; 2021 - $4,419.
Income Taxes
The Company is
a C Corporation and therefore accounts for income taxes pursuant to the liability method. Accordingly, the current or deferred tax consequences of a transaction are measured by applying the provision of enacted tax laws to determine the amount of taxes payable currently or in future years. Deferred income taxes are provided for temporary differences between the income tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the years in which those temporary differences become deductible. The Company considers taxable income in prior carryback years, the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies, as appropriate, in making this assessment.
Revenue Recognition
Sales, net of estimated returns and allowances, are recognized upon shipment of product to the customer, which is generally when title passes, the Company has no further obligations, and the customer is required to pay subject to agreed upon payment terms. The Company, at the request of certain customers, will warehouse inventory billed to the customer but not delivered. Unless all revenue recognition criteria have been met, the Company does not recognize revenue on these transactions until the customers take possession of the product. In these cases, the funds collected on product warehoused for these customers are recorded as a customer advance until the customer takes possession of the product and the Company’s obligation to deliver the goods is completed. Customer advances are included in accrued liabilities in the consolidated balance sheets.
The Company provides for certain estimated sales
programs, discounts and incentive expenses which are recognized as a reduction of sales.
Shipping and Handling Costs
Shipping and handling costs billed to customers are included in net sales, and the related costs are included in cost of goods sold in the consolidated statements of comprehensive income.
Advertising and Co-Op Advertising
Expenditures for advertising, included in selling and service expenses in the consolidated statements of comprehensive income, are expensed as incurred. Total
expenditures for advertising were $45,488, $39,258, and $32,352 for the years ended December 31, 2016, 2015, and 2014, respectively.
Research and Development
The Company expenses research and development costs as incurred. Total expenditures incurred for research and development
were $37,229, $32,922, and $31,494 for the years ended December 31, 2016, 2015 and 2014, 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 fiscal year-end. Income and expenses incurred in a foreign currency are translated at the average rates of exchange in effect during the year. The related translation adjustments are made directly to accumulated other comprehensive loss, a 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
The Financial Accounting Standards Board (FASB) Accounting Standards Update (
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 $903,673, was approximately $904,780 (Level 2) at December 31, 2016, as calculated based on independent valuations whose inputs and significant value drivers are observable.
For the fair value of the assets and liabilities measured on a recurring basis, see 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 on the consolidated balance sheets at fair value and establishes criteria for designation and effectiveness of hedging relationships. The Company is exposed to market risk such as changes in commodity prices, foreign currencies and interest rates. The Company does not hold or issue derivative financial instruments for trading purposes.
Stock-Based Compensation
Stock-based compensation expense, including stock options and restricted stock awards, is generally recognized on a straight-line basis over the vesting period based on the fair value of awards which are expected to vest. The fair value of all share-based awards is estimated on the date of grant.
New Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers
. This guidance is the culmination of the FASB’s joint project with the International Accounting Standards Board to clarify the principles for recognizing revenue. The core principal of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides a five-step process that entities should follow in order to achieve that core principal. ASU 2014-09, as amended by ASU 2015-14,
Revenue from Contracts with Customers (Topic
606): D
eferral of the Effective Date
, ASU 2016-08,
Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations
, ASU 2016-10,
Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing
,
ASU 2016-12,
Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients
, and ASU 2016-20,
Technical
Corrections and Improvements to Topic 606, Revenue from Contracts with Customers
, becomes effective for the Company in 2018. The guidance can be applied either on a full retrospective basis or on a modified retrospective basis in which the cumulative effect of initially applying the standard is recognized at the date of initial application. While the Company is continuing to assess all potential impacts the standard may have on its financial statements, it believes that the adoption will not have a significant impact on its revenue related to equipment and parts sales, which represent substantially all of the revenue for the Company. The Company has not yet determined its method of adoption.
In February 2016, the FASB issued ASU 2016-02,
Leases
. This guidance is being issued to increase transparency and comparability among organizations by requiring the recognition of lease assets and lease liabilities on the statement of financial position and by disclosing key information about leasing arrangements. The guidance should be applied using a modified retrospective approach and is effective for the Company in 2019, with early adoption permitted. The Company is currently assessing the impact the adoption of this guidance will have on its results of operations and financial position.
In March 2016, the FASB issued ASU 2016-09,
Compensation – Stock Compensation: Improvements to Employee Share-Based Payment Accounting
. This guidance is a part of the FASB’s initiative to reduce complexity in accounting standards, and includes simplification involving several aspects of the accounting for share-based payment transactions, including excess tax benefits. The guidance should be applied on a modified retrospective basis and is effective for the Company in 2017, with early adoption permitted. While the Company is still currently assessing all impacts of the guidance, the primary impact of adoption will be the recognition of excess tax benefits within the provision for income taxes on the statement of comprehensive income rather than within additional paid-in capital on the balance sheet. Additionally, this change will result in excess tax benefits from stock compensation to be reflected in net cash from operating activities on the statement of cash flows.
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments
. This guidance is being issued to decrease diversity in practice for how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This guidance should be applied on a retrospective basis and is effective for the Company in 2018, with early adoption permitted. The Company does not believe that this guidance will have a significant impact on its presentation of the statement of cash flows.
In January 2017, the FASB issued ASU 2017-04,
Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment
. This guidance is being issued to simplify the subsequent measurement of goodwill by eliminating Step 2 of the goodwill impairment test. Under the new guidance, the recognition of a goodwill impairment charge is calculated based on the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. This guidance should be applied on a prospective basis and is effective for the Company in 2020. Early adoption is permitted for goodwill impairment tests performed after January 1, 2017. The Company is currently assessing the impact the adoption will have on its results of operations and financial position.
In the first quarter of 2016, the Company adopted ASU 2015-03,
Interest – Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs
. As a result, the Company adjusted the impacted line items in the December 31, 2015 consolidated balance sheet to conform to the current period’s presentation; decreasing both the Deferred financing costs, net and Long-term borrowings and capital lease obligations line items by $12,965. Also in the first quarter of 2016, the Company adopted ASU 2015-17,
Income Taxes: Balance Sheet Classification of Deferred Taxes
. As a result, the Company adjusted the impacted line items in the December 31, 2015 consolidated balance sheet to conform to the current period’s presentation; decreasing the Deferred income taxes line item within current assets by $29,355, increasing the Deferred income taxes line item within noncurrent assets by $28,139, and decreasing the Deferred income taxes line within noncurrent liabilities by $1,216.
There are several other new accounting pronouncements issued by the FASB. Each of these pronouncements, as applicable, has been or will be adopted by the Company. Management does not believe any of these accounting pronouncements has had or will have a material impact on the Company
’s consolidated financial statements.
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 $60,886. 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. 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 t
he noncontrolling interest holder has within its control the right to require the Company to redeem its interest in Pramac. The noncontrolling interest holder has a put option to sell their interests to the Company any time within five years from the date of acquisition. The put option price is either (i) a fixed amount if voluntarily exercised within the first two years after the acquisition, or (ii) based on a multiple of earnings, subject to the terms of the acquisition. Additionally, the Company holds a call option that it may redeem commencing five years from the date of acquisition, or earlier upon the occurrence of certain circumstances. The call option price is based on a multiple of earnings that is subject to the terms of the acquisition. Both the put and call option only provide for the complete transfer of the noncontrolling interest, with no partial transfers of interest permitted.
The redeemable noncontrolling interest is recorded at the greater of the initial fair value, increased or decreased for the noncontrolling interests
’ share of comprehensive net income (loss), or the estimated redemption value, with any adjustment to the redemption value impacting retained earnings, but not net income. However, the redemption value adjustments are reflected in the earnings per share calculation, as detailed in Note 12, "Earnings Per Share," to the consolidated financial statements. The following table presents the changes in the redeemable noncontrolling interest:
|
|
Year Ended
|
|
|
|
December 31, 2016
|
|
Beginning Balance - January 1
|
|
$
|
-
|
|
Noncontrolling interest of Pramac
|
|
|
34,253
|
|
Net income
|
|
|
100
|
|
Foreign currency translation
|
|
|
(2,124
|
)
|
Redemption value adjustment
|
|
|
909
|
|
Ending Balance - December 31
|
|
$
|
33,138
|
|
The Company recorded a preliminary purchase price allocation during the first quarter of 2016, which
was updated in the fourth quarter of 2016, based upon its estimates of the fair value of the acquired assets and assumed liabilities. The preliminary purchase price allocation as of the balance sheet date was as follows:
|
|
March 1, 2016
|
|
Accounts receivable
|
|
$
|
51,289
|
|
Inventories
|
|
|
39,889
|
|
Property and equipment
|
|
|
19,138
|
|
Intangible assets
|
|
|
34,471
|
|
Goodwill
|
|
|
46,202
|
|
Other assets
|
|
|
7,698
|
|
Total assets acquired
|
|
|
198,687
|
|
|
|
|
|
|
Short-term borrowings
|
|
|
21,105
|
|
Accounts payable
|
|
|
40,270
|
|
Long-term debt and capital lease obligations (including current portion)
|
|
|
18,599
|
|
Other liabilities
|
|
|
23,521
|
|
Redeemable noncontrolling interest
|
|
|
34,253
|
|
Noncontrolling interest
|
|
|
53
|
|
Net assets acquired
|
|
$
|
60,886
|
|
The goodwill ascribed to this acquisition is not deductible for tax purposes. The accompanying consolidated financial statements include the results of Pramac from the date of acquisition through
December 31, 2016.
Acquisition of CHP
On August 1, 2015,
the Company acquired CHP for a purchase price, net of cash acquired, of $74,570. Headquartered in Vergennes, Vermont, CHP is a leading manufacturer of high-quality, innovative, professional-grade engine powered equipment used in a wide variety of property maintenance applications, with sales primarily in North America. The acquisition purchase price was funded solely through cash on hand.
The Company recorded a preliminary purchase pric
e allocation during the third quarter of 2015 based upon its estimates of the fair value of the acquired assets and assumed liabilities. As a result, the Company recorded approximately $81,726 of intangible assets, including approximately $30,076 of goodwill, as of the acquisition date. The purchase price allocation was finalized in the fourth quarter of 2015, resulting in a $6,552 decrease to total intangible assets, including an increase of $6,208 in goodwill. The goodwill ascribed to this acquisition is not deductible for tax purposes. In addition, the Company assumed $12,000 of debt along with this acquisition. The accompanying consolidated financial statements include the results of CHP from the date of acquisition through December 31, 2016.
Acquisition of MAC
On October 1, 2014, the Company acquired MAC for a purchase price, net of cash
acquired, of $53,747. MAC is a leading manufacturer of premium-grade commercial and industrial mobile heaters within the United States and Canada. The acquisition was funded solely through cash on hand.
The Company recorded a preliminary purchase price allocation during the fourth quarter of 2014 based upon its estimates of the fair value of the acquired assets and assumed liabilities. As a result, the Company recorded approximately $49,378 of intangible assets, including
approximately $25,898 of goodwill, as of the acquisition date. The purchase price allocation was finalized during the third quarter of 2015, resulting in a $4,229 decrease to total intangible assets, including an increase of $2,481 to goodwill. The goodwill ascribed to this acquisition is not deductible for tax purposes. The accompanying consolidated financial statements include the results of MAC from the date of acquisition through December 31, 2016.
Pro Forma Information
The following unaudited pro forma information of the Company gives effect to these acquisitions as though the transactions had occurred on January 1, 2014:
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Net Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
1,444,453
|
|
|
$
|
1,317,299
|
|
|
$
|
1,460,919
|
|
Pro forma
|
|
|
1,473,799
|
|
|
|
1,556,459
|
|
|
|
1,776,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Generac Holdings Inc.:
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
98,788
|
|
|
$
|
77,747
|
|
|
$
|
174,613
|
|
Pro forma
|
|
|
100,907
|
|
|
|
78,618
|
|
|
|
174,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Generac Holdings Inc. per common share - diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
1.50
|
|
|
$
|
1.12
|
|
|
$
|
2.49
|
|
Pro forma
|
|
|
1.53
|
|
|
|
1.14
|
|
|
|
2.49
|
|
This 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 bee
n consummated on January 1, 2014.
4.
|
Derivative Instruments and Hedging Activities
|
Commodities
The
Company is exposed to significant price fluctuations in commodities it uses as raw materials, and periodically utilizes commodity derivatives to mitigate the impact of these potential price fluctuations on its financial results and its economic well-being. These derivatives typically have maturities of less than eighteen months. At both December 31, 2016 and 2015, the Company had one commodity contract outstanding, covering the purchases of copper.
Because these contracts do not qualify for hedge accounting,
the related gains and losses are recorded in cost of goods sold in the Company’s consolidated statements of comprehensive income. Net gains (losses) recognized were $739, $(1,909) and $(629) for the years ended December 31, 2016, 2015, and 2014, 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, 2016 and 2015, the Company had thirty-eight and six foreign currency contracts outstanding, respectively.
Because these contracts do not qualify for hedge accounting,
the related gains and losses are recorded in cost of goods sold in the Company’s consolidated statements of comprehensive income. Net losses recognized for the years ended December 31, 2016, 2015 and 2014 were $385, $624 and $149, respectively.
Interest Rate Swaps
I
n October 2013, the Company entered into two interest rate swap agreements, and in May 2014, the Company entered into an additional interest rate swap agreement. The Company formally documented all relationships between interest rate hedging instruments and the related hedged items, as well as its risk-management objectives and strategies for undertaking various hedge transactions. These interest rate swap agreements qualify as cash flow hedges, and accordingly, the effective portions of the gains or losses are reported as a component of accumulated other comprehensive loss (AOCL). The cash flows of the swaps are recognized as adjustments to interest expense each period. The ineffective portions of the derivatives’ changes in fair value, if any, are immediately recognized in earnings.
Fair Value
The following table presents the fair value of the Company
’s derivatives:
|
|
December 31
,
201
6
|
|
|
December
31,
201
5
|
|
Commodity contracts
|
|
$
|
623
|
|
|
$
|
(400
|
)
|
Foreign currency contracts
|
|
|
(150
|
)
|
|
|
(171
|
)
|
Interest rate swaps
|
|
|
(1,739
|
)
|
|
|
(2,618
|
)
|
The fair value of the commodity
contract is included in other assets, the fair value of the foreign currency contracts are included in other accrued liabilities, and the fair value of the interest rate swaps are included in other long-term liabilities in the consolidated balance sheet as of December 31, 2016. 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 long-term liabilities in the consolidated balance sheet as of December 31, 2015. Excluding the impact of credit risk, the fair value of the derivative contracts as of December 31, 2016 and 2015 is a liability of $1,295 and $3,248, respectively, which represents the amount the Company would need to pay to exit the agreements on those dates.
The amount of
gains (losses) recognized in AOCL in the consolidated balance sheets on the effective portion of interest rate swaps designated as hedging instruments for the years ended December 31, 2016, 2015 and 2014 were $535, $(965) and $(1,420), respectively. The amount of gains (losses) recognized in cost of goods sold in the consolidated statements of comprehensive income for commodity and foreign currency contracts not designated as hedging instruments for the years ended December 31, 2016, 2015 and 2014 were $354, $(2,533) and $(778), respectively.
5.
|
Accumulated Other Comprehensive Loss
|
The following presents a tabular disclosure of changes in
AOCL during the years ended December 31, 2016 and 2015, net of tax:
|
|
Foreign
Currency
Translation
Adjustments
|
|
|
Defined
Benefit
Pension Plan
|
|
|
Unrealized
Gain (Loss) on
Cash Flow
Hedges
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Balance
– January 1, 2016
|
|
$
|
(9,502
|
)
|
|
$
|
(11,362
|
)
|
|
$
|
(1,611
|
)
|
|
$
|
(22,475
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
|
(18,545
|
)
|
|
|
(273
|
)
|
|
|
535
|
|
|
|
(18,283
|
)
|
Amounts reclassified from AOCL
|
|
|
-
|
|
|
|
595
|
|
|
|
-
|
|
|
|
595
|
|
Net current-period other comprehensive income (loss)
|
|
|
(18,545
|
)
|
|
|
322
|
|
|
|
535
|
|
|
|
(17,688
|
)
|
Ending Balance
– December 31, 2016
|
|
$
|
(28,047
|
)
|
|
$
|
(11,040
|
)
|
|
$
|
(1,076
|
)
|
|
$
|
(40,163
|
)
|
|
|
Foreign
Currency
Translation
Adjustments
|
|
|
Defined
Benefit
Pension Plan
|
|
|
Unrealized
Loss on Cash
Flow Hedges
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Balance
– January 1, 2015
|
|
$
|
(1,878
|
)
|
|
$
|
(13,243
|
)
|
|
$
|
(646
|
)
|
|
$
|
(15,767
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
|
(7,624
|
)
|
|
|
1,105
|
|
|
|
(965
|
)
|
|
|
(7,484
|
)
|
Amounts reclassified from AOCL
|
|
|
-
|
|
|
|
776
|
|
|
|
-
|
|
|
|
776
|
|
Net current-period other comprehensive income (loss)
|
|
|
(7,624
|
)
|
|
|
1,881
|
|
|
|
(965
|
)
|
|
|
(6,708
|
)
|
Ending Balance
– December 31, 2015
|
|
$
|
(9,502
|
)
|
|
$
|
(11,362
|
)
|
|
$
|
(1,611
|
)
|
|
$
|
(22,475
|
)
|
|
(1)
|
Represents
unrecognized actuarial losses of $(412), net of tax benefit of $139, included in the computation of net periodic pension cost for the year ended December 31, 2016. See Note 14, “Benefit Plans,” to the consolidated financial statements for additional information.
|
|
(2)
|
Represents unrealized
gains of $876, net of tax effect of $(341) for the year ended December 31, 2016.
|
|
(3)
|
Represents
actuarial losses of $941, net of tax effect of $(346), amortized to net periodic pension cost for the year ended December 31, 2016. See Note 14, “Benefit Plans,” to the consolidated financial statements for additional information.
|
|
(4)
|
Represents
unrecognized actuarial gains of $1,829, net of tax effect of $(724), included in the computation of net periodic pension cost for the year ended December 31, 2015. See Note 14, “Benefit Plans,” to the consolidated financial statements for additional information.
|
|
(5)
|
Represents unrealized losses of
$(1,574), net of tax benefit of $609 for the year ended December 31, 2015.
|
|
(6)
|
Represents actuarial losses of $
1,228, net of tax effect of $(452), amortized to net periodic pension cost for the year ended December 31, 2015. See Note 14, “Benefit Plans,” to the consolidated financial statements for additional information.
|
Effective
in the second quarter of 2016, the Company changed its segment reporting from one reportable segment to two reportable segments – Domestic and International – as a result of the recent Pramac acquisition and the ongoing strategy to expand the business internationally. The Domestic segment includes the legacy Generac business and the impact of acquisitions that are based in the United States, all of which have revenues that are substantially derived from the U.S. and Canada. The International segment includes the Ottomotores, Tower Light and Pramac acquisitions, all of which have revenues that are substantially derived from outside of the U.S and Canada. Both reportable segments design and manufacture a wide range of power generation equipment and other engine powered products. The Company has multiple operating segments, which it aggregates into the two reportable segments, based on materially similar economic characteristics, products, production processes, classes of customers and distribution methods.
All segment information has been retrospectively applied to all periods presented to reflect the new reportable segment structure.
|
|
Net Sales
|
|
|
|
Year Ended December 31,
|
|
Reportable Segments
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Domestic
|
|
$
|
1,173,559
|
|
|
$
|
1,204,589
|
|
|
$
|
1,343,367
|
|
International
|
|
|
270,894
|
|
|
|
112,710
|
|
|
|
117,552
|
|
Total
|
|
$
|
1,444,453
|
|
|
$
|
1,317,299
|
|
|
$
|
1,460,919
|
|
The Company's product offerings consist primarily of power
generation equipment and other engine powered products geared for varying end customer uses. Residential products and commercial & industrial products are each a similar class of products based on similar power output and end customer. The breakout of net sales between residential, commercial & industrial, and other products by product class is as follows:
|
|
Net Sales
|
|
|
|
Year Ended December 31,
|
|
Product Classes
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Residential products
|
|
$
|
772,436
|
|
|
$
|
673,764
|
|
|
$
|
722,206
|
|
Commercial & industrial products
|
|
|
557,532
|
|
|
|
548,440
|
|
|
|
652,216
|
|
Other
|
|
|
114,485
|
|
|
|
95,095
|
|
|
|
86,497
|
|
Total
|
|
$
|
1,444,453
|
|
|
$
|
1,317,299
|
|
|
$
|
1,460,919
|
|
Management evaluates the performance of its segments based primarily on Adjusted EBITDA,
which is reconciled to Income before provision for income taxes below. The computation of Adjusted EBITDA is based on the definition that is contained in the Company’s credit agreements.
|
|
Adjusted EBITDA
|
|
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Domestic
|
|
$
|
261,428
|
|
|
$
|
254,882
|
|
|
$
|
322,769
|
|
International
|
|
|
16,959
|
|
|
|
15,934
|
|
|
|
14,514
|
|
Total adjusted EBITDA
|
|
$
|
278,387
|
|
|
$
|
270,816
|
|
|
$
|
337,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(44,568
|
)
|
|
|
(42,843
|
)
|
|
|
(47,215
|
)
|
Depreciation and amortization
|
|
|
(54,418
|
)
|
|
|
(40,333
|
)
|
|
|
(34,730
|
)
|
Non-cash write-down and other adjustments (1)
|
|
|
(357
|
)
|
|
|
(3,892
|
)
|
|
|
3,853
|
|
Non-cash share-based compensation expense (2)
|
|
|
(9,493
|
)
|
|
|
(8,241
|
)
|
|
|
(12,612
|
)
|
Tradename and goodwill impairment (3)
|
|
|
-
|
|
|
|
(40,687
|
)
|
|
|
-
|
|
Loss on extinguishment of debt (4)
|
|
|
(574
|
)
|
|
|
(4,795
|
)
|
|
|
(2,084
|
)
|
Gain (loss) on change in contractual interest rate (5)
|
|
|
(2,957
|
)
|
|
|
(2,381
|
)
|
|
|
16,014
|
|
Transaction costs and credit facility fees (6)
|
|
|
(2,442
|
)
|
|
|
(2,249
|
)
|
|
|
(1,851
|
)
|
Business optimization expenses (7)
|
|
|
(7,316
|
)
|
|
|
(1,947
|
)
|
|
|
-
|
|
Other
|
|
|
120
|
|
|
|
(465
|
)
|
|
|
(296
|
)
|
Income before provision for income taxes
|
|
$
|
156,382
|
|
|
$
|
122,983
|
|
|
$
|
258,362
|
|
|
(1)
|
Includes gains/losses on disposal of assets, unrealized mark-to-market adjustments on commodity contracts,
and certain foreign currency and purchase accounting related adjustments.
|
|
(2)
|
Represents share-based compensation expense to account for stock options, restricted stock and other stock awards over their respective vesting periods.
|
|
(3)
|
Represents the 2015
impairment of certain tradenames due to a change in brand strategy to transition and consolidate various brands to the Generac® tradename ($36,076) and the impairment of goodwill related to the Ottomotores reporting unit ($4,611).
|
|
(4)
|
Represents the write-off of original issue discount and capitalized debt issuance costs due to voluntary debt prepayments.
|
|
(5)
|
For the year ended December 31, 2016, represents a non-cash loss
in the third quarter 2016 relating to the continued 25 basis point increase in borrowing costs as a result of the credit agreement leverage ratio remaining above 3.0 times and expected to remain above 3.0 based on current projections. For the year ended December 31, 2015, represents a non-cash loss relating to a 25 basis point increase in borrowing costs as a result of the credit agreement leverage ratio rising above 3.0 times effective third quarter 2015 and expected to remain above 3.0 times based on projections at the time. For the year ended December 31, 2014 represents a non-cash gain relating to a 25 basis point reduction in borrowing costs as a result of the credit agreement leverage ratio falling below 3.0 times effective second quarter 2014 and expected to remain below 3.0 times based on projections at the time.
|
|
(6)
|
Represents transaction costs incurred directly in connection with any investment, as defined in our credit agreement; equity issuance, debt issuance or refinancing; together with certain fees relating to our senior secured credit facilities.
|
|
(7)
|
Represents charges relating to business optimization and restructuring costs.
|
The following tables summarize additional financial information by reportable segment:
|
|
Assets
|
|
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Domestic
|
|
$
|
1,521,665
|
|
|
$
|
1,605,043
|
|
|
$
|
1,672,336
|
|
International
|
|
|
340,019
|
|
|
|
173,592
|
|
|
|
192,083
|
|
Total
|
|
$
|
1,861,684
|
|
|
$
|
1,778,635
|
|
|
$
|
1,864,419
|
|
|
|
Depreciation and Amortization
|
|
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Domestic
|
|
$
|
42,346
|
|
|
$
|
35,327
|
|
|
$
|
29,410
|
|
International
|
|
|
12,072
|
|
|
|
5,006
|
|
|
|
5,320
|
|
Total
|
|
$
|
54,418
|
|
|
$
|
40,333
|
|
|
$
|
34,730
|
|
|
|
Capital Expenditures
|
|
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Domestic
|
|
$
|
26,936
|
|
|
$
|
29,368
|
|
|
$
|
33,976
|
|
International
|
|
|
3,531
|
|
|
|
1,283
|
|
|
|
713
|
|
Total
|
|
$
|
30,467
|
|
|
$
|
30,651
|
|
|
$
|
34,689
|
|
The Company
’s sales in the United States represent approximately 77%, 85%, and 84% of total sales for the years ended December 31, 2016, 2015 and 2014, respectively. Approximately 87% and 93% of the Company’s identifiable long-lived assets are located in the United States as of December 31, 2016 and 2015, respectively.
Inventories consist of the following:
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Raw material
|
|
$
|
218,911
|
|
|
$
|
179,769
|
|
Work-in-process
|
|
|
2,950
|
|
|
|
2,567
|
|
Finished goods
|
|
|
127,870
|
|
|
|
143,039
|
|
Total
|
|
$
|
349,731
|
|
|
$
|
325,375
|
|
As of
December 31, 2016
and 2015
, inventories totaling $10,598
and $11,253
, respectively, were on consignment at customer locations.
Property and equipment consists of the following:
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Land and improvements
|
|
$
|
12,079
|
|
|
$
|
8,553
|
|
Buildings and improvements
|
|
|
122,747
|
|
|
|
104,774
|
|
Machinery and equipment
|
|
|
81,687
|
|
|
|
72,280
|
|
Dies and tools
|
|
|
23,269
|
|
|
|
20,066
|
|
Vehicles
|
|
|
1,474
|
|
|
|
1,244
|
|
Office equipment and systems
|
|
|
66,929
|
|
|
|
29,395
|
|
Leasehold improvements
|
|
|
2,319
|
|
|
|
3,338
|
|
Construction in progress
|
|
|
8,654
|
|
|
|
30,482
|
|
Gross property and equipment
|
|
|
319,158
|
|
|
|
270,132
|
|
Accumulated depreciation
|
|
|
(106,365
|
)
|
|
|
(85,919
|
)
|
Total
|
|
$
|
212,793
|
|
|
$
|
184,213
|
|
8.
|
Goodwill and Intangible Assets
|
The changes in the carrying amount of goodwill
by reportable segment for the years ended December 31, 2016 and 2015 are as follows:
|
|
Domestic
|
|
|
International
|
|
|
Total
|
|
Balance at December 31, 2014
|
|
$
|
582,686
|
|
|
$
|
52,879
|
|
|
$
|
635,565
|
|
Acquisitions of businesses, net
|
|
|
38,765
|
|
|
|
-
|
|
|
|
38,765
|
|
Impairment
|
|
|
-
|
|
|
|
(4,611
|
)
|
|
|
(4,611
|
)
|
Balance at December 31, 2015
|
|
|
621,451
|
|
|
|
48,268
|
|
|
|
669,719
|
|
Acquisitions of businesses, net
|
|
|
-
|
|
|
|
46,202
|
|
|
|
46,202
|
|
Foreign currency translation
|
|
|
-
|
|
|
|
(11,281
|
)
|
|
|
(11,281
|
)
|
Balance at December 31, 2016
|
|
$
|
621,451
|
|
|
$
|
83,189
|
|
|
$
|
704,640
|
|
The detail
s of the gross goodwill allocated to each reportable segment at December 31, 2016 and 2015 are as follows:
|
|
Year Ended December 31, 2016
|
|
|
Year Ended December 31, 2015
|
|
|
|
Gross
|
|
|
Accumulated
Impairment
|
|
|
Net
|
|
|
Gross
|
|
|
Accumulated
Impairment
|
|
|
Net
|
|
Domestic
|
|
$
|
1,124,644
|
|
|
$
|
(503,193
|
)
|
|
$
|
621,451
|
|
|
$
|
1,124,644
|
|
|
$
|
(503,193
|
)
|
|
$
|
621,451
|
|
International
|
|
|
87,800
|
|
|
|
(4,611
|
)
|
|
|
83,189
|
|
|
|
52,879
|
|
|
|
(4,611
|
)
|
|
|
48,268
|
|
Total
|
|
$
|
1,212,444
|
|
|
$
|
(507,804
|
)
|
|
$
|
704,640
|
|
|
$
|
1,177,523
|
|
|
$
|
(507,804
|
)
|
|
$
|
669,719
|
|
See Note 3, “Acquisitions
,” to the consolidated financial statements for further information regarding the Company’s acquisitions and Note 2, “Significant Accounting Policies – Goodwill and Other Indefinite-Lived Intangible Assets,” to the consolidated financial statements for further information regarding the Company’s 2015 goodwill impairment charge.
The following table summarizes intangible assets by major category as of Decembe
r 31, 2016 and 2015:
|
|
Weighted
Average
|
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
|
Amortization
Years
|
|
|
Gross
|
|
|
Accumulated Amortization
|
|
|
Net Book
Value
|
|
|
Gross
|
|
|
Accumulated Amortization
|
|
|
Net Book
Value
|
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tradenames
|
|
|
8
|
|
|
$
|
50,742
|
|
|
$
|
(20,189
|
)
|
|
$
|
30,553
|
|
|
$
|
43,252
|
|
|
$
|
(10,516
|
)
|
|
$
|
32,736
|
|
Customer lists
|
|
|
9
|
|
|
|
333,935
|
|
|
|
(288,623
|
)
|
|
|
45,312
|
|
|
|
314,600
|
|
|
|
(275,287
|
)
|
|
|
39,313
|
|
Patents
|
|
|
14
|
|
|
|
130,099
|
|
|
|
(82,038
|
)
|
|
|
48,061
|
|
|
|
126,491
|
|
|
|
(72,719
|
)
|
|
|
53,772
|
|
Unpatented technology
|
|
|
15
|
|
|
|
13,169
|
|
|
|
(11,771
|
)
|
|
|
1,398
|
|
|
|
13,169
|
|
|
|
(11,628
|
)
|
|
|
1,541
|
|
Software
|
|
|
-
|
|
|
|
1,046
|
|
|
|
(1,046
|
)
|
|
|
-
|
|
|
|
1,046
|
|
|
|
(1,042
|
)
|
|
|
4
|
|
Non-compete/other
|
|
|
7
|
|
|
|
2,513
|
|
|
|
(986
|
)
|
|
|
1,527
|
|
|
|
1,731
|
|
|
|
(508
|
)
|
|
|
1,223
|
|
Total finite-lived intangible assets
|
|
|
|
|
$
|
531,504
|
|
|
$
|
(404,653
|
)
|
|
$
|
126,851
|
|
|
$
|
500,289
|
|
|
$
|
(371,700
|
)
|
|
$
|
128,589
|
|
Indefinite-lived tradenames
|
|
|
|
|
|
|
128,321
|
|
|
|
-
|
|
|
|
128,321
|
|
|
|
128,321
|
|
|
|
-
|
|
|
|
128,321
|
|
Total intangible assets
|
|
|
|
|
|
$
|
659,825
|
|
|
$
|
(404,653
|
)
|
|
$
|
255,172
|
|
|
$
|
628,610
|
|
|
$
|
(371,700
|
)
|
|
$
|
256,910
|
|
See
Note 2, “Significant Accounting Policies – Goodwill and Other Indefinite-Lived Intangible Assets,” to the consolidated financial statements for further information regarding the Company’s 2015 brand strategy change and resulting tradename impairment charge, which was netted against the gross intangible asset balance at December 31, 2015.
Amortization of intangible
assets was $32,953, $23,591 and $21,024 in 2016, 2015 and 2014, respectively. Excluding the impact of any future acquisitions, the Company estimates amortization expense for the next five years will be as follows: 2017 - $27,856; 2018 - $19,511; 2019 - $17,816; 2020 - $17,743; 2021 - $15,958.
9.
|
Product Warranty Obligations
|
The Company records a liability for product warranty obligations at the time of sale to a customer based upon historical warranty experience. The Company also records a liability for specific warranty matters when they become known and are reasonably estimable.
Additionally, the Company sells extended warranty coverage for certain products. The sales of extended warranties are recorded as deferred revenue, which is recognized over the life of the contracts.
The following is a tabular reconciliation of the product warranty liability,
excluding the deferred revenue related to our extended warranty coverage:
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Balance at beginning of period
|
|
$
|
30,197
|
|
|
$
|
30,909
|
|
|
$
|
33,734
|
|
Product warranty reserve assumed in acquisition
|
|
|
840
|
|
|
|
351
|
|
|
|
360
|
|
Payments
|
|
|
(18,691
|
)
|
|
|
(21,686
|
)
|
|
|
(20,975
|
)
|
Provision for warranty issued
|
|
|
19,148
|
|
|
|
20,823
|
|
|
|
22,890
|
|
Changes in estimates for pre-existing warranties
|
|
|
201
|
|
|
|
(200
|
)
|
|
|
(5,100
|
)
|
Balance at end of period
|
|
$
|
31,695
|
|
|
$
|
30,197
|
|
|
$
|
30,909
|
|
The following is a tabular reconciliation of the deferred revenue related to extended warranty coverage
:
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Balance at beginning of period
|
|
$
|
28,961
|
|
|
$
|
27,193
|
|
|
$
|
23,092
|
|
Deferred revenue contracts assumed in acquisition
|
|
|
-
|
|
|
|
291
|
|
|
|
-
|
|
Deferred revenue contracts issued
|
|
|
7,733
|
|
|
|
5,978
|
|
|
|
7,343
|
|
Amortization of deferred revenue contracts
|
|
|
(5,614
|
)
|
|
|
(4,501
|
)
|
|
|
(3,242
|
)
|
Balance at end of period
|
|
$
|
31,080
|
|
|
$
|
28,961
|
|
|
$
|
27,193
|
|
Product warranty obligations and warranty
related deferred revenues are included in the balance sheets as follows:
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Product warranty liability
|
|
|
|
|
|
|
|
|
Current portion - other accrued liabilities
|
|
$
|
20,763
|
|
|
$
|
21,726
|
|
Long-term portion - other long-term liabilities
|
|
|
10,932
|
|
|
|
8,471
|
|
Total
|
|
$
|
31,695
|
|
|
$
|
30,197
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue related to extended warranties
|
|
|
|
|
|
|
|
|
Current portion - other accrued liabilities
|
|
$
|
6,728
|
|
|
$
|
6,026
|
|
Long-term portion - other long-term liabilities
|
|
|
24,352
|
|
|
|
22,935
|
|
Total
|
|
$
|
31,080
|
|
|
$
|
28,961
|
|
Short-term
borrowings are included in the consolidated balance sheets as follows:
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
ABL facility
|
|
$
|
-
|
|
|
$
|
-
|
|
Other lines of credit
|
|
|
31,198
|
|
|
|
8,594
|
|
Total
|
|
$
|
31,198
|
|
|
$
|
8,594
|
|
Long-term borrowi
ngs are included in the consolidated balance sheets as follows:
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Term loan
|
|
$
|
929,000
|
|
|
$
|
954,000
|
|
Original issue discount and deferred financing costs
|
|
|
(26,677
|
)
|
|
|
(29,905
|
)
|
ABL facility
|
|
|
100,000
|
|
|
|
100,000
|
|
Capital lease obligation
|
|
|
4,647
|
|
|
|
1,694
|
|
Other
|
|
|
14,753
|
|
|
|
12,000
|
|
Total
|
|
|
1,021,723
|
|
|
|
1,037,789
|
|
Less: current portion of debt
|
|
|
14,399
|
|
|
|
500
|
|
Less: current portion of capital lease obligation
|
|
|
566
|
|
|
|
157
|
|
Total
|
|
$
|
1,006,758
|
|
|
$
|
1,037,132
|
|
Maturities of long-term borrowings outstanding at December 31,
2016, are as follows:
201
7
|
|
$
|
14,965
|
|
201
8
|
|
|
745
|
|
201
9
|
|
|
639
|
|
20
20
|
|
|
100,547
|
|
After 20
20
|
|
|
931,504
|
|
Total
|
|
$
|
1,048,400
|
|
The
Company’s credit agreements provided for a $1,200,000 term loan B credit facility (Term Loan) and include a $300,000 uncommitted incremental term loan facility. In November 2016, the Company amended its Term Loan to extend the maturity date from May 31, 2020 to 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 is 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.
Because the Company
’s net debt leverage ratio was below 3.00 to 1.00 on April 1, 2014, it realized a 25 basis point reduction in borrowing costs in the second quarter of 2014. As a result, the Company recorded a cumulative catch-up gain of $16,014 in the second quarter of 2014, which represents the total cash interest savings over the remaining term of the loan, as the Company projected the net debt leverage ratio to remain below 3.00 to 1.00 using current forecasts at that time. The gain was recorded as original issue discount on long-term borrowings in the consolidated balance sheets and as a gain on change in contractual interest rate in the consolidated statements of comprehensive income.
Because the Company
’s net debt leverage ratio was above 3.00 to 1.00 on July 1, 2015, it realized a 25 basis point increase in borrowing costs in the third quarter of 2015. As a result, the Company recorded a cumulative catch-up loss of $2,381 in the third quarter of 2015, which represents the additional cash interest expected to be paid while the net debt leverage ratio is expected to be above 3.00 to 1.00 using current forecasts at that time. The loss was recorded against original issue discount on long-term borrowings in the consolidated balance sheets and as a loss on change in contractual interest rate in the consolidated statements of comprehensive income.
As the Company
’s net debt leverage ratio continued to be above 3.00 to 1.00 on July 1, 2016, the Company recorded a cumulative catch-up loss of $2,957 in the third quarter of 2016, which represents the additional cash interest expected to be paid while the net debt leverage ratio is expected to be above 3.00 to 1.00 using current forecasts at that time. The loss was recorded against original issue discount on long-term borrowings in the consolidated balance sheets and as a loss on change in contractual interest rate in the consolidated statements of comprehensive income. The Company’s net debt leverage ratio as of December 31, 2016 was above 3.00 to 1.00.
I
n May 2015, the Company amended certain provisions and covenants of the Term Loan. In connection with this amendment and in accordance with ASC 470-50,
Debt Modifications and Extinguishments
, the Company capitalized $1,528 of fees paid to creditors as original issue discount on long-term borrowings and expensed $49 of transaction fees in the second quarter of 2015.
In November 2016, the Company amended its Term Loan 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,
Debt Modifications and Extinguishments
, the Company capitalized $4,242 of fees paid to creditors as original issue discount on long-term borrowings and expensed $315 of transaction fees in the fourth quarter of 2016. As of December 31, 2016, the Company is in compliance with all covenants of the Term Loan. There are no financial maintenance covenants on the Term Loan.
T
he Company’s credit agreements also originally provided for a $150,000 senior secured ABL revolving credit facility (ABL Facility). The maturity date of the ABL Facility originally was May 31, 2018. 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.
I
n May 2015, the Company amended its ABL Facility. The amendment (i) increased the ABL Facility from $150,000 to $250,000 (Amended ABL Facility), (ii) extended the maturity date from May 31, 2018 to May 29, 2020, (iii) increased the uncommitted incremental facility from $50,000 to $100,000, (iv) reduced the interest rate spread by 50 basis points and (v) reduced the unused line fee by 12.5 basis points across all tiers. Additionally, the amendment relaxes certain restrictions on the Company’s ability to, among other things, (i) make additional investments and acquisitions (including foreign acquisitions), (ii) make restricted payments and (iii) incur additional secured and unsecured debt (including foreign subsidiary debt). In connection with this amendment and in accordance with ASC 470-50, the Company capitalized $540 of new debt issuance costs in 2015.
I
n May 2015, the Company borrowed $100,000 under the Amended ABL Facility, the proceeds of which were used as a voluntary prepayment towards the Term Loan. As of December 31, 2016, there was $100,000 outstanding under the Amended ABL Facility, leaving $145,593 of availability, net of outstanding letters of credit.
I
n April, September and December 2014, the Company made voluntary prepayments of the Term Loan of $12,000, $50,000 and $25,000, respectively, with available cash on hand that was applied to future principal amortizations and the Excess Cash Flow payment requirement in the Term Loan. As a result of the prepayments, the Company wrote off $2,084 of original issue discount and capitalized debt issuance costs during the year ended December 31, 2014 as a loss on extinguishment of debt in the consolidated statement of comprehensive income.
I
n March and May 2015, the Company made voluntary prepayments of the Term Loan of $50,000 and $100,000, respectively, which were applied to the Excess Cash Flow payment requirement in the Term Loan. As a result of the prepayments, the Company wrote off $4,795 of original issue discount and capitalized debt issuance costs during the year ended December 31, 2015 as a loss on extinguishment of debt in the consolidated statement of comprehensive income.
In November 2016, the Company made a voluntary prepayment of the Term Loan of $25,000, which will be applied to the Excess Cash Flow payment requirement in the Term Loan. As a result of the prepay
ment, the Company wrote off $574 of original issue discount and capitalized debt issuance costs during the year ended December 31, 2016 as a loss on extinguishment of debt in the consolidated statement of comprehensive income.
As of December 31, 201
6 and December 31, 2015, short-term borrowings consisted primarily of borrowings by our foreign subsidiaries on local lines of credit, which totaled $31,198 and $8,594, respectively.
11.
|
Stock Repurchase Program
|
I
n August 2015, the Company’s Board of Directors approved a $200,000 stock repurchase program. Under the program, the Company may repurchase up to $200,000 of its common stock over the following 24 months, in amounts and at prices the Company deems appropriate, subject to market conditions and other considerations. The Company completed the program in the third quarter of 2016.
I
n October 2016, the Company’s Board of Directors approved a $250,000 stock repurchase program. Under the program, the Company may repurchase an additional $250,000 of its common stock over the following 24 months. The Company may repurchase its common stock from time to time, in amounts and at prices the Company deems appropriate, subject to market conditions and other considerations. The repurchase may be executed using open market purchases, privately negotiated agreements or other transactions. The actual timing, number and value of shares repurchased under the program will be determined by management at its discretion and will depend on a number of factors, including the market price of the Company’s shares of common stock and general market and economic conditions, applicable legal requirements, and compliance with the terms of the Company’s outstanding indebtedness. The repurchases may be funded with cash on hand, available borrowings or proceeds from potential debt or other capital markets sources. The stock repurchase program may be suspended or discontinued at any time without prior notice. For the year ended December 31, 2016, the Company repurchased 3,968,706 shares of its common stock for $149,937. Since the inception of the programs, the Company has repurchased 7,272,206 shares of its common stock for $249,879, all funded with cash on hand.
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, as well as their related income tax benefits. The following table reconciles the numerator and the denominator used to calculate basic and diluted earnings per share:
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Generac Holdings Inc.
|
|
$
|
98,788
|
|
|
$
|
77,747
|
|
|
$
|
174,613
|
|
Redeemable noncontrolling interest redemption value adjustment
|
|
|
(909
|
)
|
|
|
-
|
|
|
|
-
|
|
Net income attributable to common shareholders
|
|
$
|
97,879
|
|
|
$
|
77,747
|
|
|
$
|
174,613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares, basic
|
|
|
64,905,793
|
|
|
|
68,096,051
|
|
|
|
68,538,248
|
|
Dilutive effect of stock compensation awards (1)
|
|
|
476,981
|
|
|
|
1,104,246
|
|
|
|
1,632,796
|
|
Diluted shares
|
|
|
65,382,774
|
|
|
|
69,200,297
|
|
|
|
70,171,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common shareholders per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.51
|
|
|
$
|
1.14
|
|
|
$
|
2.55
|
|
Diluted
|
|
$
|
1.50
|
|
|
$
|
1.12
|
|
|
$
|
2.49
|
|
(1) Excludes
approximately 15,800, 161,400 and 81,600 stock options for the years ended December 31, 2016, 2015 and 2014, respectively, as the impact of such awards was anti-dilutive. Excludes approximately 1,000 shares of restricted stock for the year ended December 31, 2015, as the impact of such awards was anti-dilutive.
The Company
’s provision for income taxes consists of the following:
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
11,717
|
|
|
$
|
13,614
|
|
|
$
|
38,161
|
|
State
|
|
|
2,047
|
|
|
|
1,966
|
|
|
|
1,645
|
|
Foreign
|
|
|
4,460
|
|
|
|
3,588
|
|
|
|
5,701
|
|
|
|
|
18,224
|
|
|
|
19,168
|
|
|
|
45,507
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
41,264
|
|
|
|
31,869
|
|
|
|
42,474
|
|
State
|
|
|
3,029
|
|
|
|
1,387
|
|
|
|
(3,134
|
)
|
Foreign
|
|
|
(5,585
|
)
|
|
|
(7,326
|
)
|
|
|
(1,462
|
)
|
|
|
|
38,708
|
|
|
|
25,930
|
|
|
|
37,878
|
|
Change in valuation allowance
|
|
|
638
|
|
|
|
138
|
|
|
|
364
|
|
Provision for income taxes
|
|
$
|
57,570
|
|
|
$
|
45,236
|
|
|
$
|
83,749
|
|
As of Dece
mber 31, 2016, due to the carryforward of net operating losses, and research and development credits, the Company is open to U.S. federal and state income tax examinations for the tax years 2006 through 2015. In addition, the Company is subject to audit by various foreign taxing jurisdictions for the tax years 2011 through 2015.
During 2015, the Internal Revenue Service completed field work on income tax audits for the 2012 and 2013 tax years. A final audit report was issued and resulted in no change to the Company’s provision for income taxes.
Significant components of deferred tax assets and liabilities are as follows:
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Accrued expenses
|
|
$
|
22,758
|
|
|
$
|
18,982
|
|
Deferred revenue
|
|
|
10,645
|
|
|
|
9,389
|
|
Inventories
|
|
|
10,159
|
|
|
|
9,772
|
|
Pension obligations
|
|
|
7,512
|
|
|
|
7,684
|
|
Stock-based compensation
|
|
|
7,291
|
|
|
|
7,974
|
|
Operating loss and credit carryforwards
|
|
|
20,927
|
|
|
|
15,677
|
|
Other
|
|
|
2,822
|
|
|
|
2,842
|
|
Valuation allowance
|
|
|
(4,362
|
)
|
|
|
(1,523
|
)
|
Total deferred tax assets
|
|
|
77,752
|
|
|
|
70,797
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilitites:
|
|
|
|
|
|
|
|
|
Goodwill and intangible assets
|
|
|
58,133
|
|
|
|
12,455
|
|
Depreciation
|
|
|
25,194
|
|
|
|
19,507
|
|
Debt refinancing costs
|
|
|
7,193
|
|
|
|
7,732
|
|
Prepaid expenses
|
|
|
1,173
|
|
|
|
1,241
|
|
Total deferred tax liabilities
|
|
|
91,693
|
|
|
|
40,935
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets (liabilities)
|
|
$
|
(13,941
|
)
|
|
$
|
29,862
|
|
As of December 31, 2016 and 2015, deferred tax assets of $3,337 and $34,812, and deferred tax liabilities of $17,278 and $4,950, respectively, were reflected on the consolidated balance sheets.
The Company had approximately $592,000 of tax-deductible goodwill and intangible asset amortization remaining as of December 31, 2016 related to our acquisition by CCMP in 2006 that is expected to generate aggregate cash tax savings of approximately $
231,000 through 2021, assuming continued profitability and a 39% tax rate. The recognition of the tax benefit associated with these assets for tax purposes is expected to be approximately $122,000 annually through 2020 and approximately $102,000 in 2021, which generates annual cash tax savings of approximately $48,000 through 2020 and approximately $40,000 in 2021, assuming profitability and a 39% tax rate.
Generac Brazil, a
cquired as part of the Ottomotores acquisition, has generated net operating losses for multiple years as part of the start-up of the business. The realizability of the deferred tax assets associated with these net operating losses is uncertain so a valuation allowance was recorded in the opening balance sheet as of December 8, 2012 and continued through December 31, 2016.
In addition, the Company recorded a valuation allowance in the opening balance sheet and as of December 31, 2016 rel
ated to the Pramac acquisition. The valuation allowance represents a reserve for deferred tax assets, including loss carryforwards, of Pramac subsidiaries, for which utilization is uncertain.
At December 31, 201
6, the Company had state research and development credits, and state manufacturing credit carryforwards of approximately $17,498 and $3,736, respectively, which expire between 2017 and 2031.
Changes in the Company
’s gross liability for unrecognized tax benefits, excluding interest and penalties, were as follows:
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Unrecognized tax benefit, beginning of period
|
|
$
|
7,239
|
|
|
$
|
6,394
|
|
Increase in unrecognized tax benefit for positions taken in current period
|
|
|
704
|
|
|
|
845
|
|
Unrecognized tax benefit, end of period
|
|
$
|
7,943
|
|
|
$
|
7,239
|
|
The unrecognized tax
benefit as of December 31, 2016 and 2015, if recognized, would impact the effective tax rate.
Interest and penalties are recorded as a component of income tax expense.
As of December 31, 2016, 2015 and 2014, total interest of approximately $272, $174 and $86, respectively, and penalties of approximately $425, $363 and $263, respectively, associated with net unrecognized tax benefits are included in the Company’s consolidated balance sheets.
The Company does not expect a significant increase or decrease to the total amounts of unrecognized tax benefits related to continuing operations during the fiscal year ending December
31, 2017.
The Company considers the earnings of certain non-U.S. subsidiaries to be indefinitely invested outside the United States on the basis of estimates that future domestic cash generation will be sufficient to meet future domestic cash
needs and the Company’s specific plans for reinvestment of those subsidiary earnings. The Company has not provided for additional U.S. income taxes on approximately $7,551 of undistributed earnings of consolidated non-U.S. subsidiaries. It is not practicable to estimate the amount of unrecognized withholding taxes and deferred tax liability on such earnings.
A reconciliation of the statutory tax rates and the effective tax rates for t
he years ended December 31, 2016, 2015 and 2014 are as follows:
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
U.S. statutory rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State taxes
|
|
|
4.1
|
|
|
|
4.1
|
|
|
|
3.1
|
|
Research and development credits
|
|
|
(1.0
|
)
|
|
|
(2.3
|
)
|
|
|
(5.0
|
)
|
Other
|
|
|
(1.3
|
)
|
|
|
-
|
|
|
|
(0.7
|
)
|
Effective tax rate
|
|
|
36.8
|
%
|
|
|
36.8
|
%
|
|
|
32.4
|
%
|
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 plans under which participant claims are obligations of the plan. These plans are funded through employer and employee contributions at a level sufficient to pay for the benefits provided by the plan. The Company’s contributions to the plans were $15,019, $14,352, and $11,701 for the years ended December 31, 2016, 2015, and 2014, 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.
S
avings Plan
The Company maintains
defined-contribution 401(k) savings plans for eligible domestic employees. Under the plans, employees may defer receipt of a portion of their eligible compensation. The Company amended the 401(k) savings plans effective January 1, 2009, to add Company matching and non-elective contributions. The Company may contribute a matching contribution of 50% of the first 6% of eligible compensation of employees. The Company may also contribute a non-elective contribution for eligible employees employed on December 31, 2008. Both Company matching contributions and non-elective contributions are subject to vesting. Forfeitures may be applied against plan expenses and company contributions. The Company recognized $3,400, $3,000 and $3,400 of expense related to this plan in 2016, 2015 and 2014, respectively.
Pension Plans
The Company has
frozen noncontributory salaried and hourly pension plans (Pension Plans) covering certain domestic employees. The benefits under the salaried plan are based upon years of service and the participants’ defined final average monthly compensation. The benefits under the hourly plan are based on a unit amount at the date of termination multiplied by the participant’s years of credited service. The Company’s funding policy for the Pension Plans is to contribute amounts at least equal to the minimum annual amount required by applicable regulations.
The Company uses a December 31 measurement date for the Pension Plans.
The table that includes the accumulated benefit obligation and reconciliation of the changes in projected benefit obligation, changes in plan assets and the funded status of the Pension Plans is as follows:
|
|
Year Ended December 31,
|
|
|
|
201
6
|
|
|
201
5
|
|
|
|
|
|
|
|
|
|
|
Accumulated benefit obligation at end of period
|
|
$
|
65,956
|
|
|
$
|
63,894
|
|
|
|
|
|
|
|
|
|
|
Change in projected benefit obligation
|
|
|
|
|
|
|
|
|
Projected benefit obligation at beginning of period
|
|
$
|
63,894
|
|
|
$
|
68,376
|
|
Interest cost
|
|
|
2,747
|
|
|
|
2,681
|
|
Net actuarial
loss (gain)
|
|
|
1,363
|
|
|
|
(5,254
|
)
|
Benefits paid
|
|
|
(2,048
|
)
|
|
|
(1,909
|
)
|
Projected benefit obligation at end of period
|
|
$
|
65,956
|
|
|
$
|
63,894
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of period
|
|
$
|
43,985
|
|
|
$
|
45,452
|
|
Actual return
(loss) on plan assets
|
|
|
3,820
|
|
|
|
(384
|
)
|
Company contributions
|
|
|
731
|
|
|
|
826
|
|
Benefits paid
|
|
|
(2,048
|
)
|
|
|
(1,909
|
)
|
Fair value of plan assets at end of period
|
|
$
|
46,488
|
|
|
$
|
43,985
|
|
|
|
|
|
|
|
|
|
|
Funded status: accrued pension liability included in other long-term liabilities
|
|
$
|
(19,468
|
)
|
|
$
|
(19,909
|
)
|
|
|
|
|
|
|
|
|
|
Amounts recognized in accumulated other comprehensive
loss
|
|
|
|
|
|
|
|
|
Net actuarial loss, net of tax
|
|
$
|
(11,040
|
)
|
|
$
|
(11,362
|
)
|
The
actuarial loss for the Pension Plans that was amortized from AOCL into net periodic (benefit) cost during 2016 is $941. The amount in AOCL as of December 31, 2016 that is expected to be recognized as a component of net periodic pension expense during the next fiscal year is $883.
The
components of net periodic pension (benefit) cost are as follows:
|
|
Year E
nded December 31,
|
|
|
|
201
6
|
|
|
201
5
|
|
|
201
4
|
|
Interest cost
|
|
$
|
2,747
|
|
|
$
|
2,681
|
|
|
$
|
2,591
|
|
Expected return on plan assets
|
|
|
(2,868
|
)
|
|
|
(3,041
|
)
|
|
|
(2,933
|
)
|
Amortization of net loss
|
|
|
941
|
|
|
|
1,228
|
|
|
|
106
|
|
Net periodic pension
(benefit) cost
|
|
$
|
820
|
|
|
$
|
868
|
|
|
$
|
(236
|
)
|
Weighted-average assumptions used to determine
the benefit obligations are as follows:
|
|
December 31,
|
|
|
|
201
6
|
|
|
201
5
|
|
Discount rate
– salaried pension plan
|
|
|
4.14
|
%
|
|
|
4.36
|
%
|
Discount rate
– hourly pension plan
|
|
|
4.16
|
%
|
|
|
4.39
|
%
|
Rate of compensation increase (1)
|
|
|
n/a
|
|
|
|
n/a
|
|
|
(1)
|
No compensation increase was assumed as the plans were frozen effective December 31, 2008.
|
Weighted-average assumptions used to
determine net periodic pension (benefit) cost are as follows:
|
|
Y
ear E
nded December 31,
|
|
|
|
201
6
|
|
|
201
5
|
|
|
201
4
|
|
Discount rate
|
|
|
4.39
|
%
|
|
|
3.99
|
%
|
|
|
5.01
|
%
|
Expected long-term rate of return on plan assets
|
|
|
6.62
|
%
|
|
|
6.75
|
%
|
|
|
6.88
|
%
|
Rate of compensation increase (1)
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
(1)
|
No compensation increase was assumed as the plans were frozen effective December 31, 2008
.
|
To determine the long-term rate of return assumption for plan assets, the Company studies historical markets and preserves the long-term historical relationships between equities and fixed-income securities consistent with the widely accepted capital market principle that assets with higher volatility generate a greater return over the long run. The Company evaluates current market factors such as inflation and interest rates before it determines long-term capital market assumptions and reviews peer data and historical returns to check for reasonableness and
appropriateness.
The Pension Plans
’ weighted-average asset allocation at December 31, 2016 and 2015, by asset category, is as follows:
|
|
|
|
|
|
December 31, 201
6
|
|
|
December 31, 201
5
|
|
Asset Category
|
|
Target
|
|
|
Dollars
|
|
|
%
|
|
|
Dollars
|
|
|
%
|
|
Fixed Income
|
|
|
20
|
%
|
|
$
|
7,812
|
|
|
|
17
|
%
|
|
$
|
8,571
|
|
|
|
19
|
%
|
Domestic equity
|
|
|
49
|
%
|
|
|
19,615
|
|
|
|
42
|
%
|
|
|
20,479
|
|
|
|
47
|
%
|
International equity
|
|
|
21
|
%
|
|
|
13,466
|
|
|
|
29
|
%
|
|
|
9,687
|
|
|
|
22
|
%
|
Real estate
|
|
|
10
|
%
|
|
|
5,595
|
|
|
|
12
|
%
|
|
|
5,248
|
|
|
|
12
|
%
|
Total
|
|
|
100
|
%
|
|
$
|
46,488
|
|
|
|
100
|
%
|
|
$
|
43,985
|
|
|
|
100
|
%
|
The fair values of the Pension Plans
’ assets at December 31, 2016 are as follows:
|
|
Total
|
|
|
Quoted Prices in
Active Markets
for Identical A
sset
(L
evel 1)
|
|
|
Significant
Observable
I
nputs
(L
evel 2)
|
|
|
Significant
U
nobservable
I
nputs
(L
evel 3)
|
|
Mutual fund
s
|
|
$
|
37,860
|
|
|
$
|
37,860
|
|
|
$
|
–
|
|
|
$
|
–
|
|
Other investments
|
|
|
8,628
|
|
|
|
–
|
|
|
|
–
|
|
|
|
8,628
|
|
Total
|
|
$
|
46,488
|
|
|
$
|
37,860
|
|
|
$
|
–
|
|
|
$
|
8,628
|
|
The fair values of the Pension Pl
an's assets at December 31, 2015 are as follows:
|
|
Total
|
|
|
Quoted Prices in
Active Markets
for Identical A
sset
(L
evel 1)
|
|
|
Significant
O
b
servable
I
nputs
(L
evel 2)
|
|
|
Significant
Unobservable I
nputs
(L
evel 3)
|
|
Mutual fund
s
|
|
$
|
40,310
|
|
|
$
|
40,310
|
|
|
$
|
–
|
|
|
$
|
–
|
|
Other investment
s
|
|
|
3,675
|
|
|
|
–
|
|
|
|
–
|
|
|
|
3,675
|
|
Total
|
|
$
|
43,985
|
|
|
$
|
40,310
|
|
|
$
|
–
|
|
|
$
|
3,675
|
|
A reconciliation of beg
inning and ending balances for Level 3 assets for the years ended December 31, 2016 and 2015 is as follows:
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Balance at beginning of period
|
|
$
|
3,675
|
|
|
$
|
3,185
|
|
Purchases
|
|
|
4,400
|
|
|
|
408
|
|
Realized gains
|
|
|
553
|
|
|
|
82
|
|
Balance at end of period
|
|
$
|
8,628
|
|
|
$
|
3,675
|
|
Mutual Funds
– This category includes investments in mutual funds that encompass both equity and fixed income securities that are designed to provide a diverse portfolio. The plan’s mutual funds are designed to track exchange indices, and invest in diverse industries. Some mutual funds are classified as regulated investment companies. Investment managers have the ability to shift investments from value to growth strategies, from small to large capitalization funds, and from U.S. to international investments. These investments are valued at the closing price reported on the active market on which the individual securities are traded. These investments are classified within Level 1 of the fair value hierarchy.
Other Investments
– This category includes 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 65% - 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.
The Company expects to make estimated
contributions of $568 to the Pension Plans in 2017.
The following benefit payments are expected to be paid from the Pension Plans:
201
7
|
|
$
|
2,258
|
|
201
8
|
|
|
2,354
|
|
201
9
|
|
|
2,430
|
|
20
20
|
|
|
2,556
|
|
202
1
|
|
|
2,692
|
|
2022
–
2026
|
|
|
16,021
|
|
Certain of the Company
’s foreign subsidiaries participate in local defined benefit or other post-employment benefit plans. These plans provide benefits that are generally based on years of credited service and a percentage of the employee’s eligible compensation earned throughout the applicable service period. Liabilities recorded under these plans are included in accrued wages and employee benefits in the Company’s consolidated balance sheets and are not material.
The Company adopted an equity incentive plan
(Plan) on February 10, 2010 in connection with its initial public offering. The Plan, as amended, allows for granting of up to 9.1 million stock-based awards to executives, directors and employees. Awards available for grant under the Plan include stock options, stock appreciation rights, restricted stock, other stock-based awards and performance-based compensation awards. Total share-based compensation expense related to the Plan was $9,493, $8,241 and $12,612 for the years ended December 31, 2016, 2015 and 2014, respectively, net of estimated forfeitures, which is recorded in operating expenses in the consolidated statements of comprehensive income.
Stock Options
- Stock options granted in 2016 have an exercise price between $33.23 per share and $35.37 per share; stock options granted in 2015 have an exercise price between $28.36 per share and $49.70 per share, and the stock options granted in 2014 have an exercise price between $42.20 per share and $59.01 per share.
Stock options issued in
2012 - 2016 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 options issued in 2011 and 2010 vest in equal installments over five years, subject to the grantee’s continued employment or service and expire ten years after the date of grant.
S
tock 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 473,743, 272,296 and 235,644 in 2016, 2015 and 2014, respectively, and were based on the value of the stock on the exercise dates as determined based upon an average of the Company’s high and low stock sales price on the exercise dates. The net-share settlement has the effect of share repurchases by the Company as they reduce the number of shares that would have otherwise been issued.
Total payments for the employees' tax obligations to the taxing authorities were $13,056, $9,768 and $10,411 in 2016, 2015 and 2014, respectively, and are reflected as a financing activity within the consolidated statements of cash flows.
Employees can also utilize a cashless for cash exercise of stock options, such that all exercised shares will be sold in the market immediately. Cash equivalent to the exercise price of the awards plus the employees’ minimum statutory tax obligations is retained by the Company, with the remaining cash being transferred to the employee. Total proceeds from the cashless for cash exercise of stock options were $1,623 in 2016, and are reflected as a financing activity in the consolidated statement 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 and implied volatility measures for a set of peer companies. The average expected life is based on the contractual term of the option using the simplified method. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with a remaining term equal to the expected life assumed at the date of grant. The compensation expense recognized is net of estimated forfeitures. Forfeitures are estimated based on actual share option forfeiture history. The weighted-average assumptions used in the Black-Scholes-Merton option pricing model for 2016, 2015 and 2014 are as follows:
|
|
201
6
|
|
|
201
5
|
|
|
201
4
|
|
Weighted average grant date fair value
|
|
$
|
13.77
|
|
|
$
|
19.07
|
|
|
$
|
26.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected stock price volatility
|
|
|
41
|
%
|
|
|
41
|
%
|
|
|
45
|
%
|
Risk free interest rate
|
|
|
1.31
|
%
|
|
|
1.72
|
%
|
|
|
1.90
|
%
|
Expected annual dividend per share
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Expected life of options (years)
|
|
|
6.25
|
|
|
|
6.25
|
|
|
|
6.25
|
|
The Company periodically evaluates its forfeiture rates and updates the rates it uses in the determination of its stock-based compensation expense.
The impact of the change to the forfeiture rates on non-cash compensation expense was immaterial for the years ended December 31, 2016, 2015 and 2014.
A summary of the Company
’s stock option activity and related information for the years ended December 31, 2016, 2015 and 2014 is as follows:
|
|
Number of
Options
|
|
|
Weighted-
Average
Exercise Price
|
|
|
Weighted-
Average
Remaining
Contractual
Term (in years)
|
|
|
Aggregate
Intrinsic Value
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2013
|
|
|
2,937,301
|
|
|
$
|
5.74
|
|
|
|
9.5
|
|
|
$
|
148,369
|
|
Granted
|
|
|
187,189
|
|
|
|
57.21
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(549,282
|
)
|
|
|
3.44
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(259
|
)
|
|
|
15.94
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(32,810
|
)
|
|
|
12.68
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2014
|
|
|
2,542,139
|
|
|
|
9.94
|
|
|
|
8.5
|
|
|
$
|
96,518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
287,165
|
|
|
|
45.18
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(604,088
|
)
|
|
|
3.79
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(6,409
|
)
|
|
|
50.11
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(90,793
|
)
|
|
|
37.27
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2015
|
|
|
2,128,014
|
|
|
|
15.15
|
|
|
|
7.7
|
|
|
$
|
40,271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
398,313
|
|
|
|
33.24
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(995,469
|
)
|
|
|
2.89
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(47,894
|
)
|
|
|
37.41
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2016
|
|
|
1,482,964
|
|
|
|
27.49
|
|
|
|
7.5
|
|
|
$
|
23,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of December 31, 2016
|
|
|
787,654
|
|
|
|
17.64
|
|
|
|
6.7
|
|
|
$
|
19,897
|
|
As of December 31, 2016, there was $8,051 of total unrecognized compensation cost, net of expected forfeitures, related to unvested options. The cost is expected to be recognized over the remaining service period, having a weighted-average period of 2.7
years. Total share-based compensation cost related to the stock options for 2016, 2015 and 2014 was $4,366, $4,198 and $8,509, respectively, which is recorded in operating expenses in the consolidated statements of comprehensive income.
Restricted Stock
– Restricted stock awards issued in 2012 and after, vest in equal installments over three years, subject to the grantee’s continued employment or service. Certain restricted stock awards also include performance shares, which were awarded in the years 2014 through 2016. The number of performance shares that can be earned are contingent upon Company performance measures over a three-year period. Performance measures are based on a weighting of revenue growth and EBITDA margin, from which grantees may earn from 0% to 200% of their target performance share award. The performance period for the 2014 awards covers the years 2014 through 2016, the performance period for the 2015 awards covers the years 2015 through 2017, and the performance period for the 2016 awards covers the years 2016 through 2018. The Company estimates the number of performance shares that will vest based on projected financial performance. The fair market value of the restricted awards at the time of the grant is amortized to expense over the period of vesting. The fair value of restricted awards is determined based on the market value of the Company's shares on the grant date. The compensation expense recognized for restricted share awards is net of estimated forfeitures.
Restricted stock
vesting is net-share settled such that, upon vesting, the Company withholds shares with value equivalent to the employees’ minimum statutory obligation for the applicable income and other employment taxes, and then pays those taxes on behalf of the employee. In effect, the Company repurchases these shares and classifies as treasury stock, and pays the cash to the taxing authorities on behalf of the employees to satisfy the tax withholding requirements. Total shares withheld were 28,593, 65,763 and 34,854 in 2016, 2015 and 2014, respectively, and were based on the value of the stock on the vesting dates as determined based upon an average of the Company’s high and low stock sales price on the vesting dates. Total payments for the employees’ tax obligations to the taxing authorities were $952, $3,233 and $1,770 in 2016, 2015 and 2014, 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 end
ed December 31, 2016, 2015 and 2014 is as follows:
|
|
Shares
|
|
|
Weighted-
Average Grant-
Date Fair Value
|
|
|
|
|
|
|
|
|
|
|
Non-vested as of December 31, 2013
|
|
|
304,406
|
|
|
$
|
29.68
|
|
Granted
|
|
|
115,473
|
|
|
|
54.35
|
|
Vested
|
|
|
(105,123
|
)
|
|
|
28.31
|
|
Forfeited
|
|
|
(47,472
|
)
|
|
|
42.31
|
|
Non-vested as of December 31, 2014
|
|
|
267,284
|
|
|
|
38.72
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
193,117
|
|
|
|
41.31
|
|
Vested
|
|
|
(183,362
|
)
|
|
|
32.56
|
|
Forfeited
|
|
|
(33,999
|
)
|
|
|
47.77
|
|
Non-vested as of December 31, 2015
|
|
|
243,040
|
|
|
|
44.16
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
232,295
|
|
|
|
33.56
|
|
Vested
|
|
|
(95,858
|
)
|
|
|
41.93
|
|
Forfeited
|
|
|
(18,074
|
)
|
|
|
38.30
|
|
Non-vested as of December 31, 2016
|
|
|
361,403
|
|
|
|
38.18
|
|
As of December 31,
2016, there was $7,192 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 1.9 years.
Total share-based compensation cost related to the restricted stock for 2016, 2015 and 2014 was $5,127, $4,043 and $4,103, respectively, which is recorded in operating expenses in the consolidated statements of comprehensive income.
During 201
6, 2015 and 2014, 19,326, 16,260 and 8,869 shares, respectively, of fully vested stock were granted to certain members of the Company’s Board of Directors as a component of their compensation for their service on the Board. Total compensation cost for these share grants in 2016, 2015 and 2014 was $670, $615 and $509, respectively, which is recorded in operating expenses in the consolidated statements of comprehensive income.
16.
|
Commitments and Contingencies
|
The Company leases certain
manufacturing and office facilities, machinery and computer equipment, automobiles and warehouse space under operating leases. The approximate aggregate minimum rental commitments at December 31, 2016, are as follows:
201
7
|
|
$
|
7,922
|
|
201
8
|
|
|
7,314
|
|
201
9
|
|
|
6,368
|
|
20
20
|
|
|
5,559
|
|
202
1
|
|
|
3,946
|
|
After 202
1
|
|
|
5,730
|
|
Total
|
|
$
|
36,839
|
|
Total rent expense for t
he years ended December 31, 2016, 2015 and 2014, was approximately $9,146, $4,796, and $4,102, respectively.
The Company has an arrangement with a finance company to provide f
loor 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, 2016 and 2015 was approximately $33,900 and $32,400, respectively.
In the normal course of business, the Company is named as a defendant in various lawsuits in which claims are asserted against the Company. In the opinion of management, the liabilities, if any, which may result from such lawsuits are not expected to have a material adverse effect on the financial position, results of operations, or cash flows of the Company.
17.
|
Quarterly Financial Information (Unaudited)
|
|
|
|
|
Quarters Ended 201
6
|
|
|
|
|
|
Q1
|
|
|
Q2
|
|
|
Q3
|
|
|
Q4
|
|
Net sales
|
|
$
|
286,535
|
|
|
$
|
367,376
|
|
|
$
|
373,121
|
|
|
$
|
417,421
|
|
Gross profit
|
|
|
98,060
|
|
|
|
124,147
|
|
|
|
137,772
|
|
|
|
154,127
|
|
Operating income
|
|
|
26,964
|
|
|
|
44,082
|
|
|
|
56,340
|
|
|
|
77,231
|
|
Net income
attributable to Generac Holdings Inc.
|
|
|
10,208
|
|
|
|
20,888
|
|
|
|
26,183
|
|
|
|
41,509
|
|
Net income attributable to common shareholders per common share - basic:
|
|
$
|
0.15
|
|
|
$
|
0.32
|
|
|
$
|
0.41
|
|
|
$
|
0.64
|
|
Net income attributable to common shareholders per common share - diluted:
|
|
$
|
0.15
|
|
|
$
|
0.31
|
|
|
$
|
0.40
|
|
|
$
|
0.64
|
|
|
|
Quarters Ended 201
5
|
|
|
|
Q1
|
|
|
Q2
|
|
|
Q3
|
|
|
Q4
|
|
Net sales
|
|
$
|
311,818
|
|
|
$
|
288,360
|
|
|
$
|
359,291
|
|
|
$
|
357,830
|
|
Gross profit
|
|
|
102,603
|
|
|
|
95,897
|
|
|
|
130,326
|
|
|
|
131,124
|
|
Operating income
|
|
|
44,911
|
|
|
|
39,467
|
|
|
|
67,867
|
|
|
|
27,316
|
|
Net income
attributable to Generac Holdings Inc.
|
|
|
19,685
|
|
|
|
14,844
|
|
|
|
34,036
|
|
|
|
9,182
|
|
Net income
attributable to common shareholders per common share - basic:
|
|
$
|
0.29
|
|
|
$
|
0.22
|
|
|
$
|
0.50
|
|
|
$
|
0.14
|
|
Net income
attributable to common shareholders per common share - diluted:
|
|
$
|
0.28
|
|
|
$
|
0.21
|
|
|
$
|
0.49
|
|
|
$
|
0.14
|
|
18.
|
Valuation and Qualifying Accounts
|
For t
he years ended December 31, 2016, 2015 and 2014:
|
|
Balance at
Beginning of
Year
|
|
|
Additions
Charged to
Earnings
|
|
|
Charges to
Reserve, Net (1)
|
|
|
Reserves
Established for
Acquisitions
|
|
|
Balance at End
of Year
|
|
Year ended December 31, 201
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
2,494
|
|
|
$
|
1,654
|
|
|
$
|
(1,110
|
)
|
|
$
|
2,604
|
|
|
$
|
5,642
|
|
Reserves for inventory
|
|
|
10,582
|
|
|
|
5,359
|
|
|
|
(5,357
|
)
|
|
|
2,447
|
|
|
|
13,031
|
|
Valuation of deferred tax assets
|
|
|
1,523
|
|
|
|
638
|
|
|
|
–
|
|
|
|
2,201
|
|
|
|
4,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 201
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
2,275
|
|
|
$
|
481
|
|
|
$
|
(325
|
)
|
|
$
|
63
|
|
|
$
|
2,494
|
|
Reserves for inventory
|
|
|
9,387
|
|
|
|
3,739
|
|
|
|
(3,158
|
)
|
|
|
614
|
|
|
|
10,582
|
|
Valuation of deferred tax assets
|
|
|
1,385
|
|
|
|
138
|
|
|
|
–
|
|
|
|
–
|
|
|
|
1,523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 201
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
2,658
|
|
|
$
|
672
|
|
|
$
|
(1,264
|
)
|
|
$
|
209
|
|
|
$
|
2,275
|
|
Reserves for inventory
|
|
|
6,558
|
|
|
|
2,797
|
|
|
|
(2,250
|
)
|
|
|
2,282
|
|
|
|
9,387
|
|
Valuation of deferred tax assets
|
|
|
1,021
|
|
|
|
364
|
|
|
|
–
|
|
|
|
–
|
|
|
|
1,385
|
|
|
(1)
|
Deductions from the allowance for doubtful accounts equal accounts receivable written off, less recoveries, against the allowance. Deductions from the reserves for inventory excess and obsolete items equal inventory written off against the reserve as items were disposed of.
|
O
n January 1, 2017, the Company acquired Motortech GmbH and its affiliates (Motortech), headquartered in Celle, Germany. Motortech is a leading manufacturer of gaseous-engine control systems and accessories, which are sold primarily to European gas-engine manufacturers and to aftermarket customers. Motortech employs over 250 people at its German headquarters, manufacturing plant in Poland, and sales offices located in the United States and China. Prior to December 31, 2016, a cash deposit of $15,329 was paid, which is recorded in other current assets on the consolidated balance sheet as of December 31, 2016.