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For the year ended December 31, 2019, represents severance and other charges related to the consolidation of certain of our facilities. Details of reclassifications from AOCL during 2019 are as follows: Amounts reclassified from AOCL Loss on pension settlement $ 10,920 Amortization of net loss 843 Total before tax 11,763 Income tax impact (2,696 ) Amounts reclassified from AOCL $ 9,067 Represents unrealized losses of $(19,111), net of tax effect of $4,826 for the year ended December 31, 2020. Result of adopting ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. Recorded in the operating lease and other long-term liabilities line Represents unrealized losses of $(18,732), net of tax effect of $4,877 for the year ended December 31, 2019. Represents unrecognized actuarial gains of $1,992 net of tax effect of $(518), included in the computation of net periodic pension cost for the year ended December 31, 2019. Refer to Note 16, “Benefit Plans,” to the consolidated financial statements for additional information. Includes certain foreign currency and purchase accounting related adjustments, gains/losses on disposal of assets and unrealized mark-to-market adjustments on commodity contracts. Deductions from the allowance for doubtful accounts equal accounts receivable written off against the allowance, less recoveries, as well as foreign currency translation adjustments. Deductions from the reserves for inventory excess and obsolete items equal inventory written off against the reserve as items were disposed of as well as foreign currency translation adjustments. Recorded in the current portion of long-term borrowings and finance lease obligations line 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. Excludes approximately 26,100 stock options for the year ended December 31, 2018, as the impact of such awards was anti-dilutive. There were no awards with an anti-dilutive impact for the years ended December 31, 2020 and 2019. Recorded in the operating lease and other assets line within the consolidated balance sheets Recorded in the property and equipment, net line Represents the non-cash write-off of original issue discount and deferred financing costs due to a voluntary prepayment of Term Loan debt. 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Table of Contents

 



UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

FORM 10-K

(Mark One)

 

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

For the fiscal year ended December 31, 2020

Or

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

For the transition period from            to

 

Commission File Number 001-34627


 

GENERAC HOLDINGS INC.

(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of incorporation or organization)

20-5654756
(IRS Employer Identification No.)

   

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

53189
(Zip Code)

 

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

 

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.01 par value

GNRC

New York Stock Exchange

 

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

 


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

 

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

 

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

 

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

 

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

Large accelerated filer ☒ Accelerated filer ☐
Non-accelerated filer ☐ Smaller reporting company ☐
Emerging growth company ☐  

 

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

 

Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒

 

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

 

The aggregate market value of the voting common equity held by non-affiliates of the registrant on June 30, 2020, the last business day of the registrant’s most recently completed second fiscal quarter, was $7,391,323,686 based upon the closing price reported for such date on the New York Stock Exchange.

 

As of February 19, 2021, 62,861,442 shares of registrant's common stock were outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the registrant’s Annual Report to Stockholders for the year ended December 31, 2020 furnished to the Securities and Exchange Commission are incorporated by reference into Part II of this Form 10-K. Portions of the registrant’s Proxy Statement for the 2021 Annual Meeting of Stockholders (the “2021 Proxy Statement”), which will be filed by the registrant on or prior to 120 days following the end of the registrant’s fiscal year ended December 31, 2020, are incorporated by reference into Part III of this Form 10-K.

 



 

 

 

2020 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

 

   

Page

PART I

     

Item 1.

Business

2

Item 1A.

Risk Factors

8

Item 1B.

Unresolved Staff Comments

15

Item 2.

Properties

15

Item 3.

Legal Proceedings

16

Item 4.

Mine Safety Disclosures

16
 

PART II

     

Item 5.

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

16
Item 6. [Reserved] 17

Item 7.

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

18

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

32

Item 8.

Financial Statements and Supplementary Data

33

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

67

Item 9A.

Controls and Procedures

67

Item 9B.

Other Information

68
 

PART III

     

Item 10.

Directors, Executive Officers and Corporate Governance

68

Item 11.

Executive Compensation

68

Item 12.

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

68

Item 13.

Certain Relationships and Related Transactions, and Director Independence

68

Item 14.

Principal Accountant Fees and Services

68
 

PART IV

     

Item 15.

Exhibits and Financial Statement Schedules

68

Item 16.

Form 10-K Summary

72

 

 

 

Forward-Looking Statements

 

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

 

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

 

 

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

 

proposed new product and service offerings; and

 

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

 

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

 

 

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

 

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

 

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

 

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

 

the risk that our acquisitions will not be integrated successfully;

  the duration and impact of the COVID-19 pandemic; 
 

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

 

our dependence on our distribution network;

 

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

 

loss of our key management and employees;

 

increase in product and other liability claims or recalls;

 

failures or security breaches of our networks, information technology systems, or connected products;

 

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

 

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

 

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

 

 

 

PART I

 

Item 1. Business

 

Founded in 1959, Generac Holdings Inc. (the Company or Generac) is a leading global designer and manufacturer of a wide range of energy technology solutions. The Company provides power generation equipment, energy storage systems, grid service solutions, and other power products serving the residential, light commercial and industrial markets.

 

Power generation and storage is a key focus of the Company, which differentiates us from our competitors who also have broad operations outside of the power equipment market. As the only significant market participant with a primary focus on these products, we maintain 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. A key strategic focus for the Company in recent years has been leveraging our leading position in the growing market for cleaner burning, more cost-effective natural gas fueled generators to expand into applications beyond standby power, allowing us to participate in distributed generation projects. The Company in recent years has been evolving its business model to also focus on clean energy products, solutions, and services. In 2019, we began providing energy storage systems as a clean energy solution for residential use that capture and store electricity from solar panels or other power sources and help reduce home energy costs while also protecting homes from shorter-duration power outages. During 2020, we entered the market for grid services involving distributed energy optimization and control software that helps support the operational stability of the world's power grids. We have also been focused on connecting the equipment we manufacture to the users of that equipment, helping to drive additional value to our customers and our distribution partners over the product lifecycle. The strategic focus on expanding the connectivity of our products will broaden our monitoring capabilities and also enable the increasing utilization of this equipment as distributed energy resources as the nascent market for grid-services expands over the next several years. Overall, as the traditional centralized utility model evolves over time, we believe that a cleaner, more decentralized grid infrastructure will build-out, and Generac's energy technology solutions are strategically positioned to participate in this future "Grid 2.0".

 

In addition to power generation and storage solutions, other products that we design and manufacture include light towers which provide temporary lighting for various end markets, and a broad and growing product line of outdoor power equipment for residential and commercial use.

 

We design, manufacture, source and modify engines, alternators, transfer switches and other components necessary for our power generation products, which are increasingly being fueled by cleaner sources of energy such as natural gas, liquid propane, and Bi-Fuel™. We also design, source, modify and integrate batteries, inverters, power electronics, controls, energy monitoring and management devices and other components into our energy storage systems. We also design software that allows utilities and power aggregators to optimize and control distributed energy resources. Our products and solutions are available globally through a broad network of independent dealers, distributors, retailers, ecommerce partners, wholesalers and equipment rental companies under a variety of brand names. We also sell direct to certain national and regional account customers, as well as to individual consumers, that are the end users of our products and solutions.

 

We have a significant market share in the residential and light commercial markets for automatic standby generators, which we believe remain under-penetrated in the marketplace. We also have a leading market position for portable generators used in residential, light construction and recreational applications. We believe that our leading market positions are largely attributable to our strategy of providing a broad product line of high-quality, innovative and affordable products through our extensive and multi-layered distribution network to whom we offer comprehensive support programs, and leads from the factory. In addition, we are a leading provider of light towers, mobile generators, outdoor power equipment and industrial generators ranging in sizes up to 3,250kW. As we have entered the rapidly developing market for clean energy in recent years, we have significantly increased our market presence for energy storage systems currently ranging in configurations up to 36kWh of storage capacity. We expect to continue to gain market share in clean energy by further advancing our growing capabilities for these systems including product development, sourcing, distribution, and marketing, as well as leveraging our significant competencies developed over the past two decades to grow the residential standby generator market.

 

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

 

Products and Solutions

 

We design and manufacture stationary, portable and mobile generators with single-engine outputs ranging between 800W and 3,250kW. We have the ability to expand the power range for certain stationary generator solutions to much larger multi-megawatt systems through an integrated paralleling configuration called Modular Power Systems (MPS). We have developed a line of turn-key energy storage systems along with a growing selection of energy monitoring and management solutions as we further expand into the clean energy markets. We also recently entered the market for grid services involving distributed energy optimization and control software. Other power products and solutions that we provide include light towers, as well as a broad line of outdoor power equipment that we refer to as chore products which includes field and brush mowers, pressure washers, water pumps, and battery-powered zero-turn mowers. We classify our products into three categories based on similar range of power output geared for varying end customer uses: Residential products, Commercial & Industrial (C&I) products and Other products & services. The following summary outlines our portfolio of products, including their key attributes and customer applications.

 

Residential Products

 

Our residential automatic standby generators range in output from 7.5kW to 150kW, operate on natural gas, liquid propane or diesel, and are permanently installed with an automatic transfer switch, which we also manufacture. Air-cooled engine residential standby generators range in outputs from 7.5kW to 24kW and serve as an emergency backup for small to medium-sized homes. Liquid-cooled engine generators serve as emergency backup for larger homes and small businesses and range in output from 22kW to 150kW. We also provide a remote monitoring system with various options for home standby generators called Mobile Link™. This remote monitoring capability is a standard, WiFi-enabled feature on every home standby generator that we offer, and allows our customers to check the status of their generator conveniently online, and also provides the capability to similarly receive maintenance and service alerts. This capability will also give our customers the ability to connect and enroll their generator as a distributed energy resource used in future grid services applications. Our remote monitoring platform also allows our distribution partners to monitor their installed base of customers through a feature that we call “Fleet”, enabling them to offer a more proactive experience to service a customer’s generator.

 

 

During 2020, we introduced the industry's largest air-cooled generator - a 24kW machine that adds to our broad product offering and increases our competitive advantage in the marketplace. The new generator is the first to be bundled with the Company's new PWRview™ Automatic Transfer Switch, equipped with the PWRview™ Home Energy Management System (HEMS). PWRview™ gives the homeowner insights into their daily home energy consumption, enabling power-saving decisions that can reduce electricity bills and help to offset the purchase cost of the generator over the product's lifespan. 

 

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

 

During 2019 we entered the energy storage and monitoring markets through the acquisitions of Neurio Technology Inc. and Pika Energy, Inc. Following these acquisitions and leveraging their technologies, we introduced a line of clean energy products marketed under the Generac brand and using the names PWRcell™ and PWRview™.  This clean energy solution consists of a system of batteries, an inverter, PV optimizers, power electronic controls, energy monitoring and management hardware & software, and other components. These systems capture and store electricity from solar panels or other power sources and help reduce home energy costs while also protecting homes from shorter duration power outages, and range in size from 9kWh up to 36kWh of storage capacity.  We introduced several new products during 2020 and we continue to develop an innovative pipeline of additional clean energy products and solutions that we expect will be coming to market over the next year.  These new products further enhance our competitive position and differentiation in the energy storage, monitoring and management markets, and focus on whole-house storage solutions with load management capabilities that eventually could contribute to energy independence.

 

We provide a broad product line of outdoor power equipment referred to as chore products, which are used for the property maintenance needs of larger-acreage residences, commercial properties, municipalities and farms. These products include trimmers, field and brush mowers, log splitters, stump grinders, chipper shredders, lawn and leaf vacuums, pressure washers and water pumps. During 2020, we further expanded our broad lineup of chore products by entering the commercial battery-powered turf care market through the acquisition of Mean Green Products, LLC. This acquisition also supports our goals to integrate and develop new battery-powered solutions by accelerating the electrification of our higher-powered lineup of chore products. Chore products are largely sold in North America through online catalogs, retail hardware stores and outdoor power equipment dealers primarily under the DR® brand name.

 

Residential products comprised 62.6%, 51.9% and 51.5%, respectively, of total net sales in 2020, 2019 and 2018.

 

Commercial & Industrial Products

 

We offer a full line of C&I generators that are increasingly being fueled by cleaner sources of energy such as natural gas, liquid propane, and Bi-Fuel™, as well as other more traditional fuels such as diesel. We believe we have one of the broadest product offerings in the industry with power outputs ranging from 10kW up to 3,250kW.

 

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

 

We design and manufacture a broad product line of modelized and configured stationary generators and related transfer switches for various industrial standby, continuous-duty and prime rated applications. Our single-engine industrial generators range in output from 10kW up to 3,250kW, include stationary and containerized packages, and include our MPS technology that extends our product range up to much larger multi-megawatt systems through an integrated paralleling configuration. Over the past several years, we have introduced larger and higher-powered gaseous-fueled generators, with the highest output of 750kW for a single-engine set currently to date, with future plans to expand these cleaner-fuel generators into larger applications of 1,000kW and beyond. We offer a variety of fuel options for our industrial generators, including natural gas, liquid propane or Bi-Fuel™. Bi-Fuel™ generators provide our customers the flexibility to operate these generators on multiple fuel sources and extended run times. Our industrial standby generators are primarily used as emergency backup for larger applications in the healthcare, telecom, datacom, commercial office, retail, municipal and manufacturing markets. In recent years, we've had a strategic effort aimed at utilizing our gaseous-fueled generators in "beyond standby" applications including distributed generation and micro-grid projects.

 

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

 

We also offer a full line of industrial transfer switches to meet varying needs from light industrial applications all the way to the most demanding critical installations. Generac’s industry-leading feature set and flexible platforms offer a variety of switching technologies for customized solutions to meet any project needs. During 2020, we introduced the first of our new TX Series transfer switches, which are an ideal solution for an array of applications with its extensive capabilities and ease of installation. This new generation of transfer switches should help us increase our spec rate, which should ultimately help us win more projects. 

 

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

 

C&I products comprised 28.3%, 39.5% and 40.6% respectively, of total net sales in 2020, 2019 and 2018.

 

 

Other Products and Services

 

Our “Other Products and Services” category primarily consists of aftermarket service parts and product accessories sold to our customers, the amortization of extended warranty deferred revenue, and the service offerings in various parts of our business, including integration, project management, remote monitoring services, and energy monitoring services.

 

Also included in this “Other” category are revenues from Enbala Power Networks Inc., which was acquired during the fourth quarter of 2020.  Enbala accelerates our entrance into the market for grid services involving distributed energy optimization and control software used by utilities and energy retailers that enable the connection of distributed energy resources (known as DERs) to help support the operational stability of the world’s power grids.  These DER assets, which can include residential and C&I natural gas generators, PWRcell™ energy storage systems, and load management devices, can be connected to Enbala’s software platform and aggregated into a decentralized and virtual power network to provide flexible capacity to address peaks in electricity demand, variability in supply due to increasing use of renewables, and where resiliency is needed as a result of power outages. 

 

Other products and services comprised 9.1%, 8.6% and 7.9%, respectively, of total net sales in 2020, 2019 and 2018.

 

Distribution Channels and Customers

 

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

 

We believe our global distribution network is a competitive advantage that has strengthened over the years as a result of adding, expanding and developing the various distribution channels through which we sell our products. We offer a broad set of tools, programs, factory support, and sales leads to help our distribution partners be successful. Our network is well balanced with no single customer providing more than 6% of our sales in 2020.

 

At over 7,000 strong, we have the industry's largest network of factory direct independent generator dealers in North America.

 

Our residential/light commercial dealer network sells, installs and services our residential and light commercial products to end users. We have increased our level of investment in recent years by focusing on a variety of initiatives to more effectively market and sell our home standby products and better align our dealer network with Generac. These initiatives have helped to improve lead quality and develop our dealers, thereby increasing close rates and lowering our cost per lead.

 

Beginning in 2020, we have been leveraging these practices to assist in growing our base of solar contractors that install our complete energy storage systems. In addition, we have been developing distribution relationships with national solar providers to offer our storage equipment in their portfolio of products and services. 

 

Our industrial network consists of a combination of primary distributors as well as a support network of dealers serving the global market. Over the past several years, we have been expanding our dealer network globally through acquisitions and organic means, in order to expand our international sales opportunities. The industrial distributors and dealers provide industrial and commercial end users with ongoing sales, installation and product support. Our industrial distributors and dealers help maintain the local relationships with commercial electrical contractors, specifying engineers and national account regional buying offices. We also sell to certain Engineering, Procurement and Construction (EPC) companies that manage more complex power generation projects.

 

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

 

Our wholesaler network distributes our residential and light-commercial generators and energy storage systems. The channel consists of selling branches of both national and local distribution houses for electrical, HVAC and solar products on a wholesale basis, which in turn typically sell to electrical dealers and solar installers who are not in our dealer network.

 

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

 

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

 

We sell direct to certain national and regional account customers that are the end users of our products covering a number of end market verticals, including telecommunication, retail, banking, energy, utilities, healthcare, convenience stores, grocery stores and other light commercial applications. Additionally, our residential products are sold direct to individual consumers, who are the end users of the product. In the grid services space, our Enbala business sells software and power direct to utilities and energy retailers.

 

 

Business Strategy


We have been executing on our strategic plan called "Power Our Future", which serves as the framework for the significant investments we have made to capitalize on the long-term growth prospects of Generac. Our strategic plan centers around a number of key mega-trends that we believe will drive significant secular growth opportunities for our business. "Grid 2.0," climate change, the abundance of natural gas globally, an aging infrastructure, and 5G telecommunications are all major themes that we believe will drive future long-term growth. The onset of the COVID-19 pandemic in early 2020 has led to a new and emerging trend that we refer to as "Home as a Sanctuary," where millions of people are working, learning, shopping, entertaining, and in general, spending more time at home, which has resulted in a significant increased awareness for backup power security and willingness to invest more in home improvement projects. As we continue to move our strategic plan into the future, we are focused on a number of initiatives that are driven by the following four key objectives:

 

Growing the residential power solutions market. This encompasses the still underpenetrated market for home standby generators along with the emerging market for energy storage, monitoring and management systems. As the leader in the home standby generator market, it is incumbent upon us to continue to drive growth and increase the penetration rate of these products in households across the world. Central to this strategy is to increase the awareness, availability and affordability of home standby generators. Ongoing power outage activity due to more severe weather and an aging electrical grid, combined with expanding and developing our residential/light commercial dealer base and overall distribution in affected regions, are key drivers in elevating the awareness of home standby generators over the long term. We intend to continue to supplement these key growth drivers by focusing on a variety of strategic initiatives targeted toward generating increased sales leads, improving close rates and reducing the total overall cost of a home standby system. In addition, we intend to continue to focus on innovation in this growing product category and introduce new products and solutions into the marketplace. With only approximately 5.0% penetration of the addressable market of homes in the United States (which we define as single-family detached, owner-occupied households with a home value of over $125,000, as defined by the U.S. Census Bureau's 2019 American Housing Survey for the United States), we believe there are significant opportunities to further penetrate the residential standby generator market both domestically and internationally.

 

In early 2020, we launched our PWRcell™ energy storage system into the market and began to significantly ramp up our shipment volumes for these products. We expect the market for clean energy products to grow significantly as the energy landscape continues to change and favor on-site renewable power, and homeowners increasingly appreciate the improved payback and resiliency provided by these systems. We expect to further advance our growing capabilities for energy storage systems including product development, sourcing, distribution, and marketing, as well as leveraging our significant competencies developed over the past two decades to grow the residential standby generator market to accelerate our market position in the emerging residential energy storage, monitoring and management markets.

 

Gaining market share and entering new markets. We continue to sharpen our focus on improving our share of the power equipment markets in which we participate around the world by emphasizing our innovation and continually expanding our product lines and services. We design and build a wide range of products from stationary, portable, and mobile generators, light towers, field and brush mowers and trimmers, pressure washers, pumps, and other engine powered equipment. We have many advantages over our competitors with strengths in our engineering, sourcing and operations capabilities as well as a global distribution network that we believe can be leveraged further for continued market share gains. We are also focused on expanding our addressable market opportunities by entering new markets, be it with new products or new geographies around the world.

 

Lead with natural gas power generation products. We will attempt to gain incremental market share within commercial and industrial markets through our leading position in the growing market for cleaner burning, more cost effective natural gas fueled standby power solutions. Demand for these products continues to represent an increasing portion of the overall C&I market, which we believe will continue to increase at a faster rate than traditional diesel fueled generators as a result of their lower capital investment and operating costs. Given the abundance of natural gas as a global source for base-load power, we also intend to explore new gaseous generator related market opportunities, including increasing our product capabilities for applications beyond standby generation including continuous-duty, prime rated, distributed generation, demand response, micro grids and overall use as a distributed energy resource in areas where grid stability or capacity is needed. We plan to do this by leveraging our deep technical capabilities for gaseous-fueled products, leading position for natural gas standby generators and growing market acceptance for these products. As part of this strategy, we plan to continue to expand our natural gas product offering into larger power nodes to take advantage of the continuing shift from diesel to natural gas generators.

 

Connect to monitor and manage energy technology products. We will work to continue to diversify our business model from primarily “equipment centric” to a systems and services provider through connectivity solutions and subscription based applications deployed enterprise wide. This includes an important emphasis on improving the end-user experience, helping customers to lower utility costs and to help offset the purchase cost of our equipment over the product's lifespan. A critical focus continues to be increasing the connection with our products to unlock opportunities and revenue streams. We have developed and acquired tools and programs that add value to dealers, utilities, energy retailers and end-users that will result in recurring revenue from subscriptions and parts. We leverage data obtained from connected devices by developing predictive analytics that result in continuously improving product quality, sales processes and tools, energy optimization, aftermarket penetration, customer experience and alignment with dealers. Finally, we will continue to build or acquire energy management capabilities to monetize an ecosystem of devices that relate to energy use, storage, generation, control and optimization, including capitalizing on the future ability of these devices to be used as distributed energy resources in grid services applications around the world to help support the operational stability of electrical grids.

 

Expansion globally is a core element to the success of each of our strategic objectives. The acquisitions completed over the past several years that now comprise our International segment have significantly increased our global presence by adding product, manufacturing and distribution capabilities that serve local markets around the world, and have resulted in us becoming a leading global player for backup power and mobile power equipment. As we look forward, we intend to leverage our increased international footprint attained from these acquisitions to serve the significant global markets for power generation, energy storage, monitoring and management, and grid services outside the U.S. and Canada.

 

 

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

 

Manufacturing

 

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

 

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

 

Research and Development

 

Our focus on power generation equipment, energy storage systems, grid services solutions and other power products drives technological innovation, specialized engineering and manufacturing competencies. Research and development (R&D) is a core competency and includes a staff of over 500 engineers working on numerous projects at various facilities worldwide. These activities are focused on developing new technologies and product enhancements, as well as maintaining product competitiveness by reducing manufacturing costs, improving safety characteristics, reliability and performance while ensuring compliance with regulatory standards. We have over 35 years of experience using natural gas engines and have developed specific expertise with fuel systems and emissions technology. In the residential and light commercial markets, we have developed proprietary engines, cooling packages, controls, fuel systems and emissions systems. The Pika Energy and Neurio Technologies acquisitions have provided significant resources and expertise in the energy storage and energy monitoring markets, which has been leveraged to further advance the competencies in these areas as well as an increased focus on energy management. This includes advanced capabilities with power electronics and battery management software, along with proprietary inverter technologies and hardware and software for energy monitoring and management. We also have engineering and product management resources focused on evaluating and developing alternative technologies that could become commercially viable options for de-carbonized power generation over the long term. We believe that our expertise in energy technology solutions provides us with the capability to develop new products and services that will allow continued diversification in our end markets.

 

Intellectual Property

 

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

 

Suppliers of Raw Materials, Components and Equipment

 

Our primary raw material inputs are steel, copper and aluminum, all of which are purchased from third parties and, in many cases, as part of machined or manufactured components. In certain instances, we purchase from third-party suppliers complete equipment and systems. Within the clean energy market, we expect batteries to be a significant supply chain input for our energy storage systems. We have developed an extensive network of reliable suppliers in the United States and around the world. We believe our Strategic Global Sourcing function is a competitive strength and continuously evaluates the quality and cost structure of our purchased components and equipment and assesses the capabilities of our supply chain. Components and equipment are sourced accordingly based on this evaluation. Our supplier quality engineers conduct on-site audits of major supply chain partners and help to maintain the reliability of critical sourced components and equipment.

 

Competition

 

The market for power generation equipment, energy storage systems, grid services solutions and other engine powered products is competitive. We face competition from a variety of large diversified industrial companies as well as smaller generator manufacturers, along with mobile equipment, engine powered tools, solar inverter, battery storage and grid services providers, both domestic and internationally.

 

Specifically in the generator market, most of the traditional participants compete on a more focused basis, targeting specific applications within their larger diversified product mix. We are the only significant market participant with a primary focus on power equipment with a key emphasis on standby, portable and mobile generators with broad capabilities across the residential, light-commercial and industrial markets. We believe that our engineering capabilities and core focus on generators provide us with manufacturing flexibility and enables us to maintain a first-mover advantage over our competition for product innovation. We also believe our broad product offering, diverse omni-channel distribution model and strong factory support provide additional advantages as well.

 

The Company in recent years has been evolving its business model toward more of a focus on clean energy products, solutions and services, which has introduced a new set of competitors. 

 

 

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

 

Residential products Kohler, Briggs & Stratton, Cummins, Honda, Champion, Techtronics International, Husqvarna, Ariens, LG Chem, Tesla, Enphase, and Solar Edge, along with a number of smaller domestic and foreign competitors; certain of which also have broad operations in other manufacturing businesses.

 

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

 

Other products – Relative to service parts and extended warranty revenue, all of the above named companies are primary competitors. Relative to grid services optimization software, Autogrid, Energy Hub, along with other grid service solution providers.

 

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

 

Human Capital

 

"Our People" is one of the foundational elements to our “Powering Our Future” strategy and is a corporate value as well. We foster a culture of diversity and engagement to strengthen our company while supporting individual achievement, inclusivity and good corporate citizenship globally. We believe our success is directly tied to our employees’ personal and professional growth. We care about the safety and well-being of our employees, their families, and our communities.

 

Some examples of key human capital programs and initiatives that we are focused on include:

 

Health, wellness and safety – Employee health and safety is the Company’s top priority. Generac’s Healthy & Thriving Total Rewards are based on the four pillars of balance, security, well-being and community. These programs are designed to meet the varied and evolving needs of our diverse workforce. We maintain an employee wellness program, incentivize healthy-living activities, provide emergency paid COVID-19 leave benefits to help employees care for themselves and their families, and we develop and administer company-wide policies to ensure the safety of each employee and compliance with government agency and other standards.

 

Diversity and inclusion – At Generac, people with diverse backgrounds and points of view work together to support our customers around the globe.  As an inclusive workplace, our employees embrace diversity in all forms, celebrate differences, and treat others with equity and respect.  We have hosted a series of culture-changing listening and learning sessions, championed Unconscious Bias training for our employees, launched employee-led Business Employee Resource Groups (BERG) to facilitate networking and connections with peers and leadership, and partner with community job agencies representing disabled clients and workforce release programs to provide job opportunities to those who face barriers to employment.

 

Talent development & employee engagement – We prioritize and invest in creating opportunities to help employees build careers at Generac. We hold internal career events as well as partner with local educational resources to offer on the job learning, collaborative work experiences and formal learning programs on continuous improvement and project management skills to support progressions and advancement of our workforce. Further, we maintain an ongoing global employee engagement initiative with targeted action plans by region, function, and business group. Action plans and their progress are measured by global employee engagement surveys.

 

As of December 31, 2020, we had 6,797 employees (6,452 full time and 345 part-time and temporary employees). Of those, 3,705 employees were directly involved in manufacturing at our manufacturing facilities.

 

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

 

Regulation, including Environmental Matters

 

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

 

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

 

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

 

Available Information

 

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

 

Information About Our Executive Officers

 

The following table sets forth information regarding our executive officers:

 

Name   Age   Position

Aaron P. Jagdfeld

 

49

 

President, Chief Executive Officer and Chairman

York A. Ragen

 

49

 

Chief Financial Officer

Russell S. Minick

 

60

 

Chief Marketing Officer

Tom Pettit

 

52

 

Chief Operations Officer

Erik Wilde

 

46

 

Executive Vice President, Industrial, Americas

Patrick Forsythe

 

53

 

Chief Technical Officer

Raj Kanuru   50   Executive Vice President, General Counsel and Secretary

 

 

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

 

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

 

Russell S. Minick began serving as our Chief Marketing Officer in August 2016. In addition to his CMO responsibilities, Mr. Minick was appointed President of our Energy Technology business in January 2021. Prior to these appointments, he served as our Executive Vice President, Residential Products since October 2011, with this responsibility being expanded in January 2014 to Executive Vice President, North America. Prior to joining Generac, Mr. Minick was President & CEO of Home Care Products for Electrolux from 2006 to 2011, President of The Gunlocke Company at HNI Corporation from 2003 to 2006, Senior Vice President of Sales, Marketing and Product Development at True Temper Sports from 2002 to 2003, and General Manager of Extended Warranty Operations for Ford Motor Company from 1998 to 2002. Mr. Minick is a graduate of the University of Northern Iowa, and holds a degree in marketing.

 

Tom Pettit began serving as our Chief Operations Officer in February 2020. From 2017 until February 2020, Mr. Pettit was Executive Vice President and Chief Integrated Supply Chain Officer of nVent Electric plc, a leading global provider of electrical connection and protection solutions and a former subsidiary of Pentair plc (“Pentair”), a global industrial company. Mr. Pettit previously served as the Operations Vice President of Pentair from 2015 until 2017, and as the Chief Operating Officer for BioScrip, Inc., a provider of infusion and home care management solutions, from 2014 until 2015. Mr. Pettit holds a B.S. in General Engineering from West Point Military Academy and an MBA from the University of Hawaii.

 

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

 

Patrick Forsythe has served as our Chief Technical Officer since January 2021. He previously served as our Executive Vice President of Global Engineering since July 2015. Prior to re-joining Generac, Mr. Forsythe was Vice President, Global Engineering & Technology of Hayward Industries from 2008 to 2015, Vice President, Global Engineering at Ingersoll Rand Company (and the acquired Doosan Infracore International) from 2004 to 2008, and Director of Engineering at Ingersoll Rand Company from 2002 to 2004. Prior to 2002, Mr. Forsythe worked in various engineering management capacities with Generac from 1995 to 2002. Mr. Forsythe holds a Higher National Diploma (HND) in Mechanical Engineering from the University of Ulster (United Kingdom), a B.S. in Mechanical Engineering, and an M.S. in Manufacturing Management & Technology from The Open University (United Kingdom).

 

Raj Kanuru is our Executive Vice President, General Counsel & Secretary and is the Company’s principal legal and compliance officer, roles that he has held since joining Generac in 2013. Prior to joining Generac, Mr. Kanuru served as in-house counsel at Caterpillar Inc. for almost 14 years within various leadership roles, including in the Securities, Regulatory and Tax group, at Caterpillar Financial, and in Caterpillar’s Energy & Transportation group. From 2009 to 2013, Mr. Kanuru served as Vice President, General Counsel and Secretary of Progress Rail Services Inc., and its subsidiaries (a Caterpillar company). He began his legal career as a senior associate in the tax consulting practice of Arthur Andersen LLP. Mr. Kanuru holds a Bachelor of Science in Finance degree from Birmingham-Southern College and received his Juris Doctor degree from the University of Alabama.

 

Item 1A. Risk Factors

 

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

 

 

Risk factors related to COVID-19

 

The duration and scope of the impacts of the COVID-19 pandemic are uncertain and may continue to adversely affect our operations, supply chain, distribution, and demand for certain of our products and services.

 

The global outbreak of COVID-19 has created significant uncertainty within the global markets that we serve. We have operations, customers and suppliers in countries significantly impacted by COVID-19. Governmental authorities around the world have taken a variety of measures to slow the spread of COVID-19, including travel bans or restrictions, increased border controls or closures, quarantines, shelter-in-place orders and business shutdowns and such authorities may impose additional restrictions in the future. We have also taken actions to protect our employees and to mitigate the spread of COVID-19 within our business. There can be no assurance that the measures implemented by governmental authorities or our own actions will be effective or achieve their desired results in a timely fashion. 

 

The impact of COVID-19 on the global economy and our customers, as well as recent volatility in oil prices, has negatively impacted demand for certain of our products and is expected to continue to do so in the future. Its effects could also result in disruptions to our manufacturing operations and supply chain, which could negatively impact our ability to meet customer demand. Our forward-looking statements assume that our production facilities, supply chain and distribution partners continue to operate during the pandemic. To date, we have been able to operate the majority of our facilities given our status as an essential operation. If we were to encounter a significant work stoppage, disruption, or outbreak due to COVID-19 at one or more of our locations or suppliers, we may not be able to satisfy customer demand for a period of time.

 

Furthermore, the impact of COVID-19 on the economy, demand for our products and impacts to our operations, including the measures taken by governmental authorities to address it, may precipitate or exacerbate other risks and/or uncertainties, including specifically many of the risk factors set forth in this Annual Report, including risks related to the fair market value of intangible assets that could lead to an impairment, which may have a significant impact on the Company's operating results and financial condition, although we are unable to predict the extent or nature of these impacts at this time. 

 

Risk factors related to our business and industry

 

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

 

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

 

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

 

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

 

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

 

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

 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 

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

 

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

 

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

 

Changes in government policies on foreign trade and investment can affect the demand for our products, impact the competitive position of our products or prevent us from being able to sell products in certain countries. Our business benefits from free trade agreements, and efforts to withdraw from, or substantially modify such agreements, in addition to the implementation of more restrictive trade policies, such as more detailed inspections, higher tariffs, import or export licensing requirements, exchange controls or new barriers to entry, could have a material adverse effect on our results of operations, financial condition or cash flows. For example, starting in 2018 and continuing, we are experiencing increased tariffs on many of our products and product components, although these tariffs did not ultimately have a material adverse effect on our results due to the implementation of various mitigation efforts and temporary exclusions in conjunction with our supply chain and end market partners.

 

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

 

Risk factors related to our operations

 

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

 

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

 

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

 

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

 

 

We may experience material disruptions to our manufacturing operations.

 

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

 

 

equipment or information technology infrastructure failure; 

 

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

 

fires, floods, tornadoes, earthquakes, disease, pandemics, acts of violence, or other catastrophes; and 

 

other operational problems.

 

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

 

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

 

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

 

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

 

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

 

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

 

 

managing a larger company;

 

maintaining employee morale and retaining key management and other employees;

 

complying with newly applicable foreign regulations;

 

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

 

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

 

retaining existing customers and attracting new customers;

 

consolidating corporate and administrative infrastructures and eliminating duplicative operations;

 

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

 

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

 

unanticipated changes in applicable laws and regulations;

 

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

 

unforeseen expenses or delays associated with the acquisition;

 

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

 

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

 

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

 

 

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

 

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

 

 

inflation or changes in political and economic conditions; 

 

unstable regulatory environments; 

 

changes in import and export duties; 

 

domestic and foreign customs and tariffs; 

 

currency rate fluctuations;

 

trade restrictions; 

 

labor unrest; 

 

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

 

communications challenges; and 

 

other restraints and burdensome taxes.

 

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

 

Risk factors related to legal and regulatory matters

 

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

 

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

 

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

 

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

 

Our products are subject to substantial government regulation.

 

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

 

 

 

Risk factors related to cybersecurity

 

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

 

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

 

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

 

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

 

Risk factors related to our capital structure

 

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

 

As of December 31, 2020 we had total indebtedness of $885.2 million. Our level of indebtedness increases the possibility that we may be unable to generate cash sufficient to pay, when due, the principal of, interest on or other amounts due in respect of our indebtedness. While we maintain interest rate swaps covering a portion of our outstanding debt, our interest expense could increase if interest rates increase because debt under our credit facilities bears interest at a variable rate based on LIBOR or other base rate. In connection with our term loan amendment in December 2019, language was added to the agreement to include a benchmark replacement rate, selected by the administrative agent and the borrower, as a replacement to LIBOR that would take affect at the time LIBOR ceases. The Company plans to work with its lenders in the near future to amend other LIBOR based debt agreements to add a replacement rate should the use of LIBOR cease. If we do not have sufficient earnings to service our debt, we may be required to refinance all or part of our existing debt, sell assets, borrow more money or sell securities, none of which we can guarantee we will be able to do.

 

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

 

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

 

 

incur liens;

 

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

 

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

 

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

 

make loans and investments;

 

make capital expenditures;

 

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

 

change the business conducted by us or our subsidiaries; and

 

amend the terms of subordinated debt.

 

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

 

 

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

 

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

 

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

 

Goodwill represents the excess of cost over the fair market value of net assets acquired in business combinations. Indefinite-lived intangibles are comprised of certain tradenames. At December 31, 2020, goodwill and other indefinite-lived intangibles totaled $983.6 million. We review goodwill and other intangibles at least annually for impairment and any excess in carrying value over the estimated fair value is charged to the statement of comprehensive income. Future impairment may result from, among other things, deterioration in the performance of an acquired business or product line, adverse market conditions and changes in the competitive landscape, adverse changes in applicable laws or regulations, including changes that restrict the activities of an acquired business or product line, and a variety of other circumstances including any of the risk factors noted above. A reduction in net income resulting from the write-down or impairment of goodwill or indefinite-lived intangibles could have a material adverse effect on our financial statements. Refer to the Critical Accounting Policies in Item 7 of this Annual Report on Form 10-K for further information regarding the Company’s process for evaluating its goodwill for impairment.

 

Item 1B. Unresolved Staff Comments

 

None.

 

Item 2. Properties

 

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

 

Location

 

Owned/

Leased

 

Activities

 

Segment

Waukesha, WI

 

Owned

 

Corporate headquarters, R&D

 

Domestic

Eagle, WI

 

Owned

 

Manufacturing, office, training

 

Domestic

Whitewater, WI

 

Owned

 

Manufacturing, office, distribution

 

Domestic

Oshkosh, WI

 

Owned

 

Manufacturing, office, warehouse, R&D

 

Domestic

Berlin, WI    Owned   Manufacturing, office, warehouse, R&D   Domestic

Jefferson, WI

 

Owned

 

Manufacturing, office, distribution, R&D

 

Domestic

Janesville, WI   Leased   Distribution   Domestic
Various WI   Leased   Warehouse   Domestic
Stockton, CA   Leased   Sales, office, warehouse   Domestic
Hamilton, OH   Leased   Manufacturing, office, warehouse, R&D   Domestic

Maquoketa, IA

 

Owned

 

Storage, rental property

 

Domestic

South Burlington, VT

 

Leased

 

Office

 

Domestic

Mexico City, Mexico

 

Owned

 

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

 

International

Hidalgo, Mexico

 

Owned

 

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

 

International

Milan, Italy

 

Leased

 

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

 

International

Casole d’Elsa, Italy 

 

Leased

 

Manufacturing, office, warehouse, R&D

 

International

Balsicas, Spain 

 

Leased

 

Manufacturing, office, warehouse, R&D

 

International

Foshan, China 

 

Owned

 

Manufacturing, office, warehouse, R&D

 

International

Saint-Nizier-sous-Charlieu, France 

 

Leased

 

Sales, office, warehouse

 

International

Ribeirao Preto, Brazil 

 

Leased

 

Manufacturing, office, warehouse

 

International

Stoke-on-Trent, United Kingdom 

 

Leased

 

Sales, office, warehouse

 

International

Sydney, Australia 

 

Leased

 

Sales, office, warehouse

 

International

Fellbach, Germany 

 

Leased

  Sales, office, warehouse  

International

Celle, Germany   Owned   Manufacturing, office, warehouse, R&D   International
Charzyno, Poland   Owned   Manufacturing   International

West Bengal, India 

 

Leased

 

Manufacturing, warehouse

 

International

 

In addition to the countries represented above, the Company has other operations or sales offices in the United Arab Emirates, Romania, Russia, Canada, Colombia and the Dominican Republic.

 

As of December 31, 2020, substantially all of our domestically-owned and a portion of our internationally-owned properties are subject to collateral provisions under our senior secured credit facilities.

 

 

Item 3. Legal Proceedings

 

From time to time, we are involved in legal proceedings primarily involving product liability, employment matters and general commercial disputes arising in the ordinary course of our business. As of December 31, 2020, we believe that there is no litigation pending that would have a material effect on our results of operations or financial condition.

 

Item 4. Mine Safety Disclosures

 

Not Applicable.

 

PART II

 

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

 

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

 

Purchases of Equity Securities By the Issuer and Affiliated Purchasers

 

The following table summarizes the stock repurchase activity for the three months ended December 31, 2020, which consisted of the withholding of shares upon the vesting of restricted stock awards to pay related withholding taxes on behalf of the recipient:

 

   

Total Number of Shares Purchased

   

Average Price Paid per Share

   

Total Number Of Shares Purchased As Part Of Publicly Announced Plans Or Programs

   

Approximate Dollar Value Of Shares That May Yet Be Purchased Under The Plans Or Programs

 
                                 

10/01/20 - 10/31/20

    -       -       -     $ 250,000,000  

11/01/20 - 11/30/20

    2,212     $ 217.12       -     $ 250,000,000  

12/01/20 - 12/31/20

    785       217.29       -     $ 250,000,000  

Total

    2,997     $ 217.17                  

 

For equity compensation plan information, refer to Note 17, “Share Plans,” to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K. For information on the Company’s stock repurchase plans, refer to Note 13, “Stock Repurchase Programs,” to the consolidated financial statements.

 

 

Stock Performance Graph

 

The line graph below compares the cumulative total stockholder return on our common stock with the cumulative total return of the Standard & Poor’s S&P 500 Index, the S&P MidCap 400 Index and the Russell 2000 Index for the five-year period ended December 31, 2020. The graph and table assume that $100 was invested on December 31, 2015 in each of our common stock, the S&P 500 Index, the S&P MidCap 400 Index and the Russell 2000 Index, and that all dividends were reinvested. Cumulative total stockholder returns for our common stock, the S&P 500 Index, the S&P MidCap 400 Index and the Russell 2000 Index are based on our fiscal year.

 

TOTALRETURNGRAPH.JPG

 

 

Company / Market / Peer Group

 

12/31/2015

   

12/31/2016

   

12/31/2017

   

12/31/2018

   

12/31/2019

   

12/31/2020

 
                                                 

Generac Holdings Inc.

  $ 100.00     $ 136.85     $ 166.34     $ 166.95     $ 337.89     $ 763.89  

S&P 500 Index - Total Returns

    100.00       111.96       136.40       130.42       171.49       203.04  

S&P MidCap 400 Index

    100.00       120.74       140.35       124.80       157.49       179.00  

Russell 2000 Index

    100.00       121.31       139.08       123.76       155.35       186.36  

 

Holders

 

As of February 17, 2021, there were 206 registered holders of record of Generac’s common stock. A substantially greater number of holders of Generac common stock are “street name” or beneficial holders, whose shares are held of record by banks, brokers and other financial institutions.

 

Dividends

 

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

 

Securities Authorized for Issuance Under Equity Compensation Plans

 

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

 

Recent Sales of Unregistered Securities

 

None.

 

Use of Proceeds from Registered Securities

 

Not applicable.

 

Item 6. [Reserved]

 

 

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

 

Overview

 

We are a leading global designer and manufacturer of a wide range of energy technology solutions. The Company provides power generation equipment, energy storage systems, grid services solutions, and other power products serving the residential, light commercial and industrial markets.

 

Power generation and storage is a key focus of the Company, which differentiates us from our competitors who also have broad operations outside of the power equipment market. As the only significant market participant with a primary focus on these products, we maintain 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. A key strategic focus for the Company in recent years has been leveraging our leading position in the growing market for cleaner burning, more cost-effective natural gas fueled generators to expand into applications beyond standby power, allowing us to participate in distributed generation projects. The Company in recent years has been evolving its business model to also focus on clean energy products, solutions, and services. In 2019, we began providing energy storage systems as a clean energy solution for residential use that capture and store electricity from solar panels or other power sources and help reduce home energy costs while also protecting homes from shorter-duration power outages. During 2020, we entered the market for grid services involving distributed energy optimization and control software that helps support the operational stability of the world's power grids. We have also been focused on connecting the equipment we manufacture to the users of that equipment, helping to drive additional value to our customers and our distribution partners over the product lifecycle. The strategic focus on expanding the connectivity of our products will broaden our monitoring capabilities and also enable the increasing utilization of this equipment as distributed energy resources as the nascent market for grid-services expands over the next several years. Overall, as the traditional centralized utility model evolves over time, we believe that a cleaner, more decentralized grid infrastructure will build-out, and Generac's energy technology solutions are strategically positioned to participate in this future "Grid 2.0".

 

In addition to power generation and storage solutions, other products that we design and manufacture include light towers which provide temporary lighting for various end markets, and a broad and growing product line of outdoor power equipment for residential and commercial use.

 

 

Impact of COVID-19 on Our Business

 

The global outbreak of COVID-19 was declared a pandemic by the World Health Organization in March 2020 and has negatively affected the global economy, disrupted global supply chains and created significant market volatility and uncertainty. Our management team has been very proactive in addressing the impact of COVID-19 on our business. The situation continues to evolve, and we are working to ensure employee safety, monitor customer demand, proactively address supply chain or production challenges, and support our communities during this challenging time. We manufacture and provide essential products and services to a variety of critical infrastructure customers around the globe, and as a result, substantially all of our operations and production activities have, to-date, been operational. We have implemented changes in our work practices, maintaining a safe working environment for production and office employees at our facilities, while enabling other employees to productively work from home.

 

The further extent of the impact of COVID-19 on our business is dependent on future developments, including the duration of the pandemic, our ability to operate during the pandemic, actions taken by domestic and foreign governments to contain the spread of the virus, and the related length of its impact on the global economy and our customers.

 

Demand

 

The COVID-19 pandemic has created significant uncertainty within various global markets that we serve. Several areas of our business have been and may continue to be negatively impacted, in particular our Commercial and Industrial (C&I) products around the world. The decline in oil prices has impacted our C&I mobile products demand significantly as national rental customers are deferring their capital spending. C&I stationary product shipments through our North American distributor channel and our Telecom customers have slowed during 2020 due to declines in quoting activity. Additionally, the COVID-19 pandemic has caused a broad-based sharp drop in global demand for our C&I products in our International segment, which magnified the slower economic growth and geopolitical headwinds that were already being experienced by our international business. Given the magnitude of the downturn in demand for C&I products, we initiated a number of meaningful cost-cutting actions for this part of our business during the second quarter of 2020 to better align our cost structure with customer demand. We are continuing to monitor these negative impacts on our C&I product demand closely and may implement additional measures in response.

 

With regard to our Residential products, historical experience and our current year results have shown that demand for Residential products can decouple from broader economic trends as these products are largely driven by power outages. The aging and underinvested electrical grid in the U.S. continues to be more vulnerable to elevated power outages across the country. As the vast majority of U.S. citizens are spending much more time at home due to the pandemic, it is becoming more essential to have a backup power strategy, especially as homeowners are doing more critical activities like working and learning from home. In addition, with California emerging as a major market for back-up power and our entrance into clean energy, these incremental growth drivers have helped to more than offset the impact of lower consumer spending due to COVID-19.

 

Supply Chain and Operations

 

As a result of the COVID-19 pandemic, governmental authorities have implemented and are continuing to implement numerous and constantly evolving measures to try to contain the virus, such as travel bans and restrictions, limits on gatherings, quarantines, and business shutdowns. While we are deemed an essential, critical infrastructure business and our facilities currently remain operational, this continues to be a fluid process and subject to change. We have experienced and may continue to experience increased employee absences at several of our production facilities. If we were to encounter a significant work stoppage, disruption, or COVID-19 outbreak at one or more of our locations or suppliers, we may not be able to satisfy customer demand for a period of time.

 

The COVID-19 pandemic has disrupted the global supply chain and we are continually monitoring scheduled material receipts to mitigate any delays. To date, we have not experienced significant impacts or interruptions to our supply chain as a result of the COVID-19 pandemic, but this could be subject to change if one or more of our suppliers can no longer operate in this environment. We have maintained business continuity by utilizing safety stock inventory levels and executing air freight strategies. The COVID-19 pandemic has also impacted the global logistics network. Although we have experienced inbound and outbound logistics delays and increased costs in moving shipments across several regions, the impact to our business thus far has not been significant. This could change if freight carriers are delayed or not able to operate.

 

Liquidity

 

Although the COVID-19 outbreak has created uncertain market conditions, we believe our business model, current cash balance, projected cash flow generation, and availability under our ABL credit facility provide us with a strong balance sheet and liquidity position. This financial strength allows us, notwithstanding unforeseen impacts of the current COVID-19 pandemic, to remain focused on our strategic plan and provides the flexibility to continue to invest in future growth opportunities.

 

 

Business Drivers and Operational Factors

 

In operating our business and monitoring its performance, we pay attention to a number of business drivers and trends as well as operational factors. The statements in this section are based on our current expectations.

 

Business Drivers and Trends

 

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

 

Key Mega-trends:    There are some important mega-trends that we believe represent major themes that will drive significant secular growth opportunities across our business over the long term. “Grid 2.0”, which is the evolution of the traditional electrical utility model, includes the decentralization and de-carbonization of the grid and a migration toward distributed energy resources that is expected to drive demand for a variety of clean energy and grid services solutions going forward.  Attitudes around global warming and climate change are shifting, which includes the expectation of more severe weather driving increased power outage activity.  Natural gas is expected to be a key fuel of the future with the abundance of supply globally leading to increasing demand for natural gas generators in applications beyond standby power.  The legacy infrastructure is in need of a major investment cycle to rebuild and upgrade aging networks and systems including transportation, water and power.  The wireless telecommunications infrastructure is shifting to the next generation “5G” architecture, which will enable new technologies requiring significant improvement in network uptime through backup power solutions. 

 

The onset of the COVID-19 pandemic in early 2020 has led to a new and emerging mega-trend that we refer to as “Home as a Sanctuary,” where millions of people are working, learning, shopping, entertaining, and in general, spending more time at home.  As working adults spend much more time working from home and school-age children learning from home, they become more sensitive to power outages due to lost productivity.  These trends combined with ongoing elevated power outage activity has led to a significant increased awareness, importance and need for backup power security.  As a result of spending more time at home, homeowners are also investing more into home improvement projects and outdoor project activity, which is leading to increased and broad-based demand for home standby generators as well as chore products used in a variety of property maintenance applications.

 

Increasing penetration opportunity.    Many potential customers are still not aware of the costs and benefits of automatic backup power solutions. We estimate that penetration rates for home standby generators are still only approximately 5.0% of the addressable market of homes in the United States. The decision to purchase backup power for many light-commercial buildings such as convenience stores, restaurants and gas stations is more return-on-investment driven and, as a result, these applications have relatively lower penetration rates as compared to buildings used in code-driven or mission critical applications such as hospitals, wastewater treatment facilities, 911 call centers, data centers and certain industrial locations. The emergence of lower cost, cleaner burning natural gas fueled generators has helped to increase the penetration of standby generators over the past decade in the light-commercial market. In addition, the installed base of backup power for telecommunications infrastructure is still increasing due to a variety of factors, including the impending rollout of next-generation 5G wireless networks enabling new technologies and the growing importance for critical communications being transmitted over wireless networks. We believe by expanding our distribution network, continuing to develop our product lines, and targeting our marketing efforts, we can continue to build awareness and increase penetration for our standby generators for residential, commercial and industrial purposes.

 

Effect of large scale and baseline power disruptions.    Power disruptions are an important driver of customer awareness for back-up power and have historically influenced demand for generators, both in the United States and internationally. Increased frequency and duration of major power outage events, that have a broader impact beyond a localized level, increases product awareness and may drive consumers to accelerate their purchase of a standby or portable generator during the immediate and subsequent period, which we believe may last for six to twelve months following a major power outage event for standby generators. For example, there have been a number of major outage events that occurred over the past decade that drove strong demand for portable and home standby generators, and the increased awareness of these products contributed to strong revenue growth in both the year they occurred along with the following subsequent year. 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.

 

Energy storage and monitoring markets developing quickly.    During 2019, we entered the rapidly developing energy storage, monitoring and management markets with the acquisitions of Pika Energy and Neurio Technologies, along with the subsequent introduction of complete energy storage systems - marketed under the names PWRcell™ and PWRview™. We believe the electric utility landscape will undergo significant changes in the decade ahead as a result of rising utility rates, grid instability and power quality issues, environmental concerns, and the continuing performance and cost improvements in renewable energy and batteries. On-site power generation from solar, wind, geothermal, and natural gas generators is projected to become more prevalent as will the need to monitor, manage, and store this power – potentially developing into a significant market opportunity. The capabilities provided by Pika and Neurio have enabled us to bring an efficient and intelligent energy-savings solution to the energy storage and monitoring markets, which enabled us to quickly ramp shipments for these clean energy solutions during 2020, and we believe will position Generac as a key participant going forward. Although different from the emergency backup power space, we believe this market will develop similarly as the home standby generator market has over the past two decades given both products can provide power resiliency to homeowners. We expect to further advance our growing capabilities for energy storage systems including product development, sourcing, distribution, and marketing, as we leverage our significant competencies in the residential standby generator market to accelerate our market position in the emerging residential energy storage, monitoring and management markets.

 

California market for backup power increasing.    Over the past two years, utilities in the state of California have executed a number of Public Safety Power Shutoff (PSPS) events in large portions of their service areas. These events were pro-active measures to prevent their equipment from potentially causing catastrophic wildfires during the dry and windy season of the year. The occurrence of these events, along with the utilities warning these actions could continue in the future as they upgrade their transmission and distribution infrastructure, have resulted in significant awareness and increased demand for our generators in California, where penetration rates of home standby generators still stand at only approximately 1%. We have a significant focus on expanding distribution in California and are working together with local regulators, inspectors, and gas utilities to increase their bandwidth and sense of urgency around approving and providing the infrastructure necessary for home standby and other backup power products. Our efforts in this part of the country will also be helpful in developing the market for energy storage and monitoring where the installed base of solar and other renewable sources of electricity are some of the highest in the U.S., and the regulatory environment is increasingly mandating renewable energy on new construction applications.

 

 

Impact of residential investment cycle.    The market for residential generators and energy storage systems 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 and energy storage systems. Trends in the new housing market, highlighted by residential housing starts, can also impact demand for these products. Demand for outdoor power equipment is also impacted by several of these factors, as well as weather precipitation patterns. Finally, the existence of renewable energy mandates and investment tax credits and other subsidies can also have an impact on the demand for energy storage systems.

 

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

 

Factors Affecting Results of Operations

 

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

 

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

 

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

 

Seasonality.    Although there is demand for our products throughout the year, in each of the past five years, approximately 19% to 21% of our net sales occurred in the first quarter, 22% to 25% in the second quarter, 26% to 28% in the third quarter and 27% to 31% in the fourth quarter, with different seasonality depending primarily 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. 

 

During 2020, elevated power outage activity and the emergence of the "Home as a Sanctuary" trend driven by the COVID-19 pandemic led to a significant increase in demand for home standby generators.  This increased demand has resulted in extended lead times for these products as of December 31, 2020, and as a result, our net sales during 2021 are expected to be more level-loaded throughout the year relative to historical seasonal patterns. 

 

Factors influencing interest expense.    Interest expense can be impacted by a variety of factors, including market fluctuations in LIBOR, interest rate election periods, interest rate swap agreements, repayments or borrowings of indebtedness, and amendments to our credit agreements. In connection with our term loan amendment in December 2019, language was added to the agreement to include a benchmark replacement rate, selected by the administrative agent and the borrower, as a replacement to LIBOR that would take affect at the time LIBOR ceases. We plan to work with our lenders in the future to amend other LIBOR based debt agreements to add a replacement rate should the use of LIBOR cease. Interest expense decreased during 2020 compared to 2019, primarily due to lower LIBOR rates and lower outstanding borrowings. Refer to Note 12, “Credit Agreements,” to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K for further information.

 

Factors influencing provision for income taxes and cash income taxes paid.    On December 22, 2017, the U.S. government enacted the Tax Cuts and Jobs Act, which significantly changed how the U.S. taxes corporations. Since enactment, the U.S. Treasury Department (Treasury) issued several new regulations and other guidance which we have incorporated into our final tax calculations. 

 

 

As of December 31, 2020, we had approximately $102 million of tax-deductible goodwill and intangible asset amortization remaining from our acquisition by CCMP Capital Advisors, LLC in 2006. This remaining balance will fully amortize in our 2021 tax return, resulting in approximately $26 million of cash tax savings during 2021. Beginning in 2022, this tax amortization will no longer exist, resulting in a higher cash tax obligation on a go-forward basis.

 

Components of Net Sales and Expenses

 

Net Sales

 

Our net sales primarily consist of product sales to our customers. This includes sales of our power generation equipment, energy storage systems, and other power products to the residential, light commercial and industrial markets, as well as service parts to our dealer network. Net sales also include shipping and handling charges billed to customers, with the related freight costs included in cost of goods sold. Additionally, we offer other services, including extended warranties, remote monitoring, grid optimization, installation and maintenance services. However, these services accounted for less than two percent of our net sales for the year ended December 31, 2020. Refer to Note 2, “Summary of Accounting Policies - Revenue Recognition,” to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K for further information on our revenue streams and related revenue recognition accounting policies.

 

We are not dependent on any one channel or customer for our net sales, with no single customer representing more than 6% of our sales, and our top ten customers representing less than 24% of our net sales for the year ended December 31, 2020.

 

Costs of Goods Sold

 

The principal elements of costs of goods sold are component parts, raw materials, freight, factory overhead and labor. Component parts and raw materials comprised approximately 75% of costs of goods sold for the year ended December 31, 2020. The principal component parts are engines, alternators, and batteries. We design and manufacture air-cooled engines for certain of our generators up to 24kW, along with certain liquid-cooled, natural gas 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 original equipment manufacturer (OEM) of those engines. We design and manufacture many of the alternators for our units. We also manufacture other generator components where we believe we have a design and cost advantage. We source component parts from an extensive global network of reliable, high quality suppliers. In some cases, these relationships are proprietary.

 

The principal raw materials used in the manufacturing process that are sourced are steel, copper and aluminum. We are susceptible to fluctuations in the cost of these commodities, impacting our costs of goods sold. We seek to mitigate the impact of commodity prices on our business through a continued focus on global sourcing, product design improvements, manufacturing efficiencies, price increases and select hedging transactions. We are also impacted by foreign currency fluctuations given our global supply chain. 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, insurance, support personnel, depreciation, general supplies, support and maintenance. Although we attempt to maintain a flexible manufacturing cost structure, our margins can be impacted when we cannot timely adjust labor and manufacturing costs to match fluctuations in net sales.

 

Operating Expenses

 

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

 

 

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

 

Research and development.    Our research and development expenses support numerous projects covering all of our product lines. They also support our connectivity, remote monitoring, and energy monitoring initiatives. We operate engineering facilities with extensive capabilities at many locations globally and employ over 500 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 technology, and other intangibles assets.

 

Other (Expense) Income

 

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

 

Results of Operations

 

A detailed discussion of the year-over-year changes from the Company's fiscal 2018 to fiscal 2019 can be found in the Management's Discussion and Analysis section of the Company's fiscal 2019 Annual Report on Form 10-K filed February 25, 2020. 

 

Year ended December 31, 2020 compared to year ended December 31, 2019

 

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

 

   

Year Ended December 31,

                 

(U.S. Dollars in thousands)

 

2020

   

2019

   

$ Change

   

% Change

 

Net sales

  $ 2,485,200     $ 2,204,336     $ 280,864       12.7 %

Cost of goods sold

    1,527,546       1,406,584       120,962       8.6 %

Gross profit

    957,654       797,752       159,902       20.0 %

Operating expenses:

                               

Selling and service

    246,373       217,683       28,690       13.2 %

Research and development

    80,251       68,394       11,857       17.3 %

General and administrative

    119,644       110,868       8,776       7.9 %

Amortization of intangible assets

    32,280       28,644       3,636       12.7 %

Total operating expenses

    478,548       425,589       52,959       12.4 %

Income from operations

    479,106       372,163       106,943       28.7 %

Total other expense, net

    (32,915 )     (52,556 )     19,641       -37.4 %

Income before provision for income taxes

    446,191       319,607       126,584       39.6 %

Provision for income taxes

    98,973       67,299       31,674       47.1 %

Net income

    347,218       252,308       94,910       37.6 %

Net income attributable to noncontrolling interests

    (3,358 )     301       (3,659 )     -1215.6 %

Net income attributable to Generac Holdings Inc.

  $ 350,576     $ 252,007     $ 98,569       39.1 %

 

 

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

 

   

Net Sales by Segment

                 
   

Year Ended December 31,

                 

(U.S. Dollars in thousands)

 

2020

   

2019

   

$ Change

   

% Change

 

Domestic

  $ 2,088,808     $ 1,742,898     $ 345,910       19.8 %

International

    396,392       461,438       (65,046 )     -14.1 %

Total net sales

  $ 2,485,200     $ 2,204,336     $ 280,864       12.7 %

 

   

Adjusted EBITDA by Segment

                 
   

Year Ended December 31,

                 
   

2020

   

2019

   

$ Change

   

% Change

 

Domestic

  $ 563,394     $ 428,667     $ 134,727       31.4 %

International

    20,379       25,448       (5,069 )     -19.9 %

Total Adjusted EBITDA

  $ 583,773     $ 454,115     $ 129,658       28.6 %

 

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

 

    Net Sales by Product Class                  
   

Year Ended December 31,

                 

(U.S. Dollars in thousands)

 

2020

   

2019

   

$ Change

   

% Change

 

Residential products

  $ 1,556,501     $ 1,143,723     $ 412,778       36.1 %

Commercial & industrial products

    701,751       871,595       (169,844 )     -19.5 %

Other

    226,948       189,018       37,930       20.1 %

Total net sales

  $ 2,485,200     $ 2,204,336     $ 280,864       12.7 %

 

Net sales.    The increase in Domestic segment sales for the year ended December 31, 2020 was primarily due to strong growth in shipments of home standby generators and portable generators as elevated outage activity and nationwide stay-at-home orders heightened consumer awareness of power reliability concerns. Chore products sold directly to consumers were also strong during the current year as homeowners increased outdoor project activity. In addition, shipments of the PWRcell™ energy storage system had a strong impact on growth as we expanded our presence in the rapidly developing solar-plus-storage market. This broad-based residential products growth was partially offset by continued weakness in sales of C&I mobile products due to the ongoing impacts from the COVID-19 pandemic, as well as lower shipments of C&I products to national telecom customers as compared to a strong prior year comparison.

 

The decrease in International segment sales for the year ended December 31, 2020 was primarily driven by a broad-based sharp drop in global demand caused by the COVID-19 pandemic and its impact on the C&I power generation market in certain key regions of the world, which magnified the slower economic growth and geopolitical headwinds already being experienced prior to the pandemic. However, the year-over-year decline in the fourth quarter was at a notably lesser rate relative to recent quarters as certain regions are beginning to show signs of recovery.  

 

Total contribution from non-annualized recent acquisitions for the year ended December 31, 2020 was $32.4 million.

 

Net income attributable to Generac Holdings Inc.    Net income attributable to Generac Holdings Inc. was $350.6 million as compared to $252.0 million in the prior year period. The current year net income includes $11.5 million of pre-tax charges taken in the second quarter of 2020 relating to business optimization, restructuring, and other costs to address the impact of the COVID-19 pandemic and the decline in oil prices on end markets for our products. The cost reduction actions taken include certain headcount reductions, non-cash asset write-downs, and other charges. The charges, which primarily relate to C&I products, consist of $6.3 million classified within costs of goods sold and $5.2 million classified within operating expenses. 

 

Gross profit.    Gross profit margin for the year ended December 31, 2020 was 38.5% compared to 36.2% for the year ended December 31, 2019. The overall increase in gross profit margin reflected a favorable sales mix towards significantly higher shipments of residential products, along with a lower mix of C&I products. The current year period includes the impact of the aforementioned $6.3 million of charges classified within costs of goods sold. 

 

Operating expenses.    Operating expenses increased $53.0 million, or 12.4%, as compared to the prior year. The current year period includes the impact of the aforementioned $5.2 million of charges classified within operating expenses. In addition, the increase in operating expenses was primarily driven by higher variable expenses from the significant increase in sales volume, incremental spend related to clean energy products and the impact of acquisitions, higher employee costs, and additional intangible amortization. These increases were partially offset by a reduction in operating expenses as a result of the restructuring actions initiated in the second quarter of 2020 and an overall reduction in controllable operating expenses.

 

Other expense.    The decrease in other expense, net was driven by a reduction in interest expense due to lower LIBOR rates and lower outstanding borrowings in the current year, as well as a $10.9 million pre-tax settlement charge related to the termination of the Company’s domestic pension plan in the fourth quarter of 2019. 

 

Provision for income taxes.    The effective income tax rates for the years ended December 31, 2020 and 2019 were 22.2% and 21.1%, respectively. The increase in the effective tax rate is primarily due to a reduction in the prior year U.S. state income tax expense, which did not repeat in the current year, as well as higher earnings in the current year, which dilute the impact of discrete tax benefits.

 

Adjusted EBITDA.    Adjusted EBITDA is defined in, and there is a reconciliation of net income to Adjusted EBITDA attributable to the Company in, "Non-GAAP Measures - Adjusted EBITDA" included below in Item 7 of this Annual Report on Form 10-K. Adjusted EBITDA margins for the Domestic segment for the year ended December 31, 2020 were 27.0% of net sales as compared to 24.6% of net sales for the year ended December 31, 2019. Adjusted EBITDA margin in the current year benefited from favorable sales mix and higher operating leverage from the significant revenue growth, partially offset by the aforementioned higher operating expense investments. 

 

Adjusted EBITDA margins for the International segment, before deducting for non-controlling interests, for the year ended December 31, 2020 were 5.1% of net sales as compared to 5.5% of net sales for the year ended December 31, 2019. Decreased operating leverage on lower sales volumes was the primary contributor to the margin decline, partially offset by lower operating expenses as a result of the restructuring activities initiated in the second quarter of 2020.

 

Adjusted net income.    Adjusted Net Income is defined in, and there is a reconciliation of net income to Adjusted Net Income attributable to the Company in, "Non-GAAP Measures - Adjusted Net Income" included below in Item 7 of this Annual Report on Form 10-K. Adjusted Net Income of $412.2 million for the year ended December 31, 2020 increased 29.7% from $317.8 million for the year ended December 31, 2019, due to the factors outlined above together with an increase in the cash income tax rate from 15.0% in 2019 to 17.9% in 2020.

 

 

Liquidity and Financial Position

 

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

 

Our credit agreements originally provided for a $1.2 billion term loan B credit facility (Term Loan) and include a $300.0 million uncommitted incremental term loan facility. The Term Loan currently matures on December 13, 2026 and bears interest at rates based upon either a base rate plus an applicable margin of 0.75% or adjusted LIBOR rate plus an applicable margin of 1.75%. The Term Loan does not require an Excess Cash Flow payment if our secured leverage ratio is maintained below 3.75 to 1.00 times. As of December 31, 2020, our secured leverage ratio was 1.12 to 1.00 times, and we were in compliance with all covenants of the Term Loan. There are no financial maintenance covenants on the Term Loan.

 

Our credit agreements also provide for the $300.0 million ABL Facility, which matures on June 12, 2023. As of December 31, 2020, there was no outstanding balance under the ABL Facility, leaving $299.6 million of availability, net of outstanding letters of credit. We were in compliance with all covenants of the ABL Facility as of December 31, 2020.

 

As of December 31, 2020, we had $954.7 million of liquidity comprised of $655.1 million of cash and cash equivalents and $299.6 million available under our ABL Facility. Additionally, we have no maturities on our Term Loan until December 2026. We believe we have a strong liquidity position that allows us, notwithstanding unforeseen impacts of the current COVID-19 pandemic, to execute our strategic plan and provides the flexibility to continue to invest in future growth opportunities. 

 

In September 2018, our Board of Directors approved a $250.0 million stock repurchase program, which expired in October 2020. In September 2020, the Board of Directors approved another stock repurchase program, which commenced on October 27, 2020, and under which we may repurchase $250.0 million of common stock over 24 months from time to time, in amounts and at prices we deem appropriate, subject to market conditions and other considerations. During the year ended December 31, 2020, no repurchases were made. Since the inception of all stock repurchase programs starting in August 2015, we have repurchased 8,676,706 shares of our common stock for $305.5 million (an average repurchase price of $35.21 per share), all funded with cash on hand.

 

Long-term Liquidity

 

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

 

Cash Flow

 

Year ended December 31, 2020 compared to year ended December 31, 2019

 

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

 

   

Year Ended December 31,

                 

(U.S. Dollars in thousands)

 

2020

   

2019

   

$ Change

   

% Change

 

Net cash provided by operating activities

  $ 486,533     $ 308,887     $ 177,646       57.5 %

Net cash used in investing activities

    (124,095 )     (170,078 )     45,983       -27.0 %

Net cash used in financing activities

    (30,428 )     (41,918 )     11,490       -27.4 %

 

The increase in net cash provided by operating activities was primarily driven by higher sales volumes and resulting higher operating earnings in the current year, as well as a significant working capital investment that was made in the prior year which did not repeat in the current year.

 

Net cash used in investing activities for the year ended December 31, 2020 primarily represented cash payments of $64.8 million related to the acquisition of businesses and $62.1 million for the purchase of property and equipment. Net cash used in investing activities for the year ended December 31, 2019 primarily consisted of cash payments of $112.0 million related to the acquisition of businesses and $60.8 million for the purchase of property and equipment.

 

Net cash used in financing activities for the year ended December 31, 2020 primarily consisted of $282.5 million of debt repayments ($277.7 million of short-term borrowings and $4.8 million of long-term borrowings), $14.9 million of taxes paid related to equity awards, and $4.0 million of contingent consideration for acquired businesses. These payments were partially offset by $257.9 million cash proceeds from borrowings ($257.6 million for short-term borrowings and $0.3 million for long-term borrowings) and $13.1 million of proceeds from the exercise of stock options.

 

Net cash used in financing activities for the year ended December 31, 2019 primarily consisted of $112.6 million of debt repayments ($53.1 million of long-term borrowings and $59.5 million of short-term borrowings), $6.4 million of taxes paid related to equity awards, and $5.5 million of contingent consideration for acquired businesses. These payments were partially offset by $75.0 million of cash proceeds from borrowings ($73.3 million for short-term borrowings and $1.7 million for long-term borrowings) and $9.4 million of proceeds from the exercise of stock options.

 

 

Senior Secured Credit Facilities

 

Refer to Note 12, “Credit Agreements,” to the consolidated financial statements in Item 8 and the “Liquidity and Financial Position” section included in Item 7 of this Annual Report on Form 10-K for information on the senior secured credit facilities.

 

Covenant Compliance

 

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

 

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

 

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

 

Contractual Obligations

 

The following table summarizes our expected payments for significant contractual obligations as of December 31, 2020, using the interest rates in effect as of that date:

 

(U.S. Dollars in thousands)

 

Total

   

Less than 1 Year

   

2 - 3 Years

   

4 - 5 Years

   

After 5 Years

 
Long-term debt, including current portion (1)   $ 833,990     $ 1,836     $ 1,951     $ 142     $ 830,061  
Finance lease obligations, including current portion     27,371       2,312       3,939       2,517       18,603  
Interest on long-term debt and finance lease obligations     111,035       16,553       34,903       34,641       24,938  
Operating leases     71,706       19,530       27,654       12,811       11,711  

Total contractual cash obligations

  $ 1,044,102     $ 40,231     $ 68,447     $ 50,111     $ 885,313  

 

(1) The Term Loan matures on December 13, 2026. The ABL Facility provides for a $300.0 million senior secured ABL revolving credit facility, which matures on June 12, 2023. There was no outstanding balance on the ABL Facility as of December 31, 2020.

 

Capital Expenditures

 

Our operations require capital expenditures for facilities and related improvements, technology, research & development, tooling, equipment, capacity expansion, IT systems & infrastructure and upgrades. Capital expenditures were $62.1 million, $60.8 million, and $47.6 million for the years ended December 31, 2020, 2019 and 2018, respectively, and were funded through cash from operations. 

 

As a result of increased demand for our products and in order to expand manufacturing and distribution capacity, we have entered into an agreement to purchase an approximate 420,000 square foot building in Trenton, South Carolina. The transaction funded in February 2021. 

 

Off-Balance Sheet Arrangements

 

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

 

Total dealer purchases financed under this arrangement accounted for approximately 12% and 11% of net sales for the years ended December 31, 2020 and 2019, respectively. The amount financed by dealers which remained outstanding was $55.6 million and $49.6 million as of December 31, 2020 and 2019, respectively.

 

 

Critical Accounting Policies

 

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

 

Goodwill and Other Indefinite-Lived Intangible Assets

 

Refer to Note 2, “Summary of 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 2020, 2019 and 2018, and found no impairment.

 

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.

 

In our October 31, 2020 impairment test calculation, the Latin America reporting unit and the Generac Mobile Products reporting unit each had an estimated fair value that exceeded its carrying value by approximately 10%. 

 

The carrying value of the Latin America goodwill was $43.6 million. Key financial assumptions utilized to determine the fair value of the reporting unit include revenue growth levels that reflect the impact of the COVID-19 pandemic with an eventual return to normalized revenue growth patterns and profitability from recovering end markets, improving profit margins, a 3% terminal growth rate and an 11.7% discount rate. The reporting unit’s fair value would approximate its carrying value with a 70 basis point increase in the discount rate or a 75 basis point reduction in the sales continuous annual growth rate and terminal growth rate. 

 

The carrying value of the Generac Mobile Products goodwill was $48.6 million. Key financial assumptions utilized to determine the fair value of the reporting unit include revenue growth levels that reflect the impact of the COVID-19 pandemic as well as the impact of a decline in oil prices on end markets with an eventual return to normalized revenue growth levels from recovering end markets, improving profit margins, a 3% terminal growth rate and a 14.6% discount rate. The reporting unit’s fair value would approximate its carrying value with a 100 basis point increase in the discount rate or a 100 basis point reduction in the sales continuous annual growth rate and terminal growth rate. 

 

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:

 

  continued negative impact from the COVID-19 pandemic;
 

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 unplanned changes in the use of assets or entity structure; and

 

business divestitures.

 

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

 

 

Business Combinations and Purchase Accounting

 

We account for business combinations using the acquisition method of accounting, and accordingly, the assets and liabilities of the acquired business are recorded at their respective fair values. The excess of the purchase price over the estimated fair value of assets and liabilities is recorded as goodwill. Assigning fair market values to the assets acquired and liabilities assumed at the date of an acquisition requires knowledge of current market values, the values of assets in use, and often requires the application of judgment regarding estimates and assumptions. While the ultimate responsibility resides with management, for material acquisitions we retain the services of certified valuation specialists to assist with assigning estimated values to certain acquired assets and assumed liabilities, including intangible assets and tangible long-lived assets. Acquired intangible assets, excluding goodwill, are valued using certain discounted cash flow methodologies based on future cash flows specific to the type of intangible asset purchased. This methodology incorporates various estimates and assumptions, the most significant being projected revenue growth rates, profit margins, forecasted cash flows, discount rates and terminal growth rates. Refer to Note 1, “Description of Business,” and Note 3, "Acquisitions," 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.

 

Income Taxes

 

We account for income taxes in accordance with Accounting Standards Codification (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 15, “Income Taxes,” to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K for further information on the Company’s income taxes.

 

New Accounting Standards

 

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

 

Non-GAAP Measures

 

Adjusted EBITDA

 

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

 

We view Adjusted EBITDA as a key measure of our performance. We present Adjusted EBITDA not only due to its importance for purposes of our credit agreements, but also because it assists us in comparing our performance across reporting periods on a consistent basis as it excludes items that we do not believe are indicative of our core operating performance. Our management uses Adjusted EBITDA:

 

 

for planning purposes, including the preparation of our annual operating budget and developing and refining our internal projections for future periods;

 

to allocate resources to enhance the financial performance of our business;

 

as a benchmark for the determination of the bonus component of compensation for our senior executives under our management incentive plan, as described further in our Proxy Statement;

 

to evaluate the effectiveness of our business strategies and as a supplemental tool in evaluating our performance against our budget for each period; and

 

in communications with our Board of Directors and investors concerning our financial performance.

 

 

We believe Adjusted EBITDA is used by securities analysts, investors and other interested parties in the evaluation of the Company. Management believes the disclosure of Adjusted EBITDA offers an additional financial metric that, when coupled with results prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) and the reconciliation to U.S. GAAP results, provides a more complete understanding of our results of operations and the factors and trends affecting our business. We believe Adjusted EBITDA is useful to investors for the following reasons:

 

 

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

 

investors can use Adjusted EBITDA as a supplemental measure to evaluate the overall operating performance of our Company, including our ability to service our debt and other cash needs; and

 

by comparing our Adjusted EBITDA in different historical periods, our investors can evaluate our operating performance excluding the impact of items described below.

 

The adjustments included in the reconciliation table listed below are provided for under our Term Loan and ABL Facility, and also are presented to illustrate the operating performance of our business in a manner consistent with the presentation used by our management and Board of Directors. These adjustments eliminate the impact of a number of items that:

 

 

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

 

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

 

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

 

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

 

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

 

 

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

 

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

 

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

 

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

 

several of the adjustments that we use in calculating Adjusted EBITDA, such as non-cash write-downs and other charges, while not involving cash expense, do have a negative impact on the value of our assets as reflected in our consolidated balance sheet prepared in accordance with U.S. GAAP; and

 

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

 

 

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

 

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

 

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

 

   

Year Ended December 31,

 

(U.S. Dollars in thousands)

 

2020

   

2019

   

2018

 

Net income attributable to Generac Holdings Inc.

  $ 350,576     $ 252,007     $ 238,257  

Net income attributable to noncontrolling interests (a)

    (3,358 )     301       2,963  

Net income

    347,218       252,308       241,220  

Interest expense

    32,991       41,544       40,956  

Depreciation and amortization

    68,773       60,767       47,408  

Provision for income taxes

    98,973       67,299       69,856  

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

    (327 )     240       3,532  

Non-cash share-based compensation expense (c)

    20,882       16,694       14,563  

Loss on extinguishment of debt (d)

    -       926       1,332  

Loss on pension settlement (e)

    -       10,920       -  

Transaction costs and credit facility fees (f)

    2,151       2,724       3,883  

Business optimization and other charges (g)

    12,158       1,572       952  

Other

    954       (879 )     850  

Adjusted EBITDA

    583,773       454,115       424,552  

Adjusted EBITDA attributable to noncontrolling interests

    2,358       4,965       7,759  

Adjusted EBITDA attributable to Generac Holdings Inc.

  $ 581,415     $ 449,150     $ 416,793  

 

(a) Includes the noncontrolling interests’ share of expenses related to Pramac purchase accounting, including intangible amortization of $4.3 million, $4.2 million, and $4.6 million for the years ended December 31, 2020, 2019, and 2018, respectively.

 

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

 

 

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

 

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

 

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

 

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

 

(d) Represents the non-cash write-off of original issue discount and deferred financing costs due to voluntary prepayments of Term Loan debt. Refer to Note 12, “Credit Agreements,” to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K for further information on the losses on extinguishment of debt.

 

(e) Represents pre-tax settlement charges related to the termination of the Company’s domestic pension plan in the fourth quarter of 2019. Refer to Note 16, “Benefit Plans,” to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K for further information regarding the Company’s pension plans.

 

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

 

(g) Typically, represents severance and non-recurring plant consolidation costs. For the year-ended December 31, 2020, represents severance, non-cash asset write-downs and other charges to address the impact of the COVID-19 pandemic and decline in oil prices on demand for C&I products. These charges represent expenses that are nonrecurring and do not reflect our ongoing operations.

 

 

Adjusted Net Income

 

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

 

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

 

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

 

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

 

 

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

 

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

 

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

 

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

 

   

Year Ended December 31,

 

(U.S. Dollars in thousands)

 

2020

   

2019

   

2018

 

Net income attributable to Generac Holdings Inc.

  $ 350,576     $ 252,007     $ 238,257  

Net income attributable to noncontrolling interests

    (3,358 )     301       2,963  

Net income

    347,218       252,308       241,220  

Provision for income taxes

    98,973       67,299       69,856  

Income before provision for income taxes

    446,191       319,607       311,076  

Amortization of intangible assets

    32,280       28,644       22,112  

Amortization of deferred finance costs and original issue discount

    2,598       4,712       4,749  

Loss on extinguishment of debt

    -       926       1,332  

Loss on pension settlement

    -       10,920       -  

Transaction costs and other purchase accounting adjustments (a)

    (1,328 )     874       2,578  

Business optimization and other charges

    12,158       1,572       952  

Adjusted net income before provision for income taxes

    491,899       367,255       342,799  

Cash income tax expense (b)

    (79,723 )     (47,945 )     (47,064 )

Adjusted net income

    412,176       319,310       295,735  

Adjusted net income attributable to noncontrolling interests

    (32 )     1,488       3,522  

Adjusted net income attributable to Generac Holdings Inc.

  $ 412,208     $ 317,822     $ 292,213  

 

(a) Represents transaction costs incurred directly in connection with any investment, as defined in our credit agreement, equity issuance or debt issuance or refinancing, and certain purchase accounting adjustments.

 

(b) For the years ended December 31, 2020, 2019, and 2018, the amount is based on a cash income tax rate of 17.9%, 15.0%, and 15.1%, respectively. Cash income tax expense is based on the projected taxable income and corresponding cash taxes payable for the full year after considering the effects of current and deferred income tax items, and is calculated by applying the derived cash tax rate to the period’s pretax income. 

 

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

 

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

 

Foreign Currency

 

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

 

The following is a summary of the forty-four foreign currency contracts outstanding as of December 31, 2020 (notional amount in thousands):

 

Currency

Denomination

 

Trade Dates

 

Effective Dates

 

Notional Amount

 

Expiration Date

GBP

 

10/2/20 - 12/22/20

 

10/2/20 - 12/22/20

 

 $                     9,666

 

1/13/21 - 6/28/21

USD

 

11/3/20 - 12/14/20

 

11/3/20 - 12/14/20

 

 $                     4,260

 

1/8/21 - 3/12/21

AUD

 

11/24/20 - 12/14/20

 

11/24/20 - 12/14/20

 

 $                     3,400

 

1/13/21 - 2/10/21

 

Commodity Prices

 

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

 

Periodically, we engage in certain commodity risk management activities to mitigate the impact of potential price fluctuations on our financial results. These derivatives typically have maturities of less than eighteen months. As of December 31, 2020, we had the following commodity forward contract outstanding (notional amount in thousands):

 

Hedged Item

 

Contract Date

 

Effective Date

 

Notional Amount

 

Fixed Price

 

Expiration Date

Copper

 

May 18, 2020

 

January 1, 2021

  $                     661  

$2.215 per LB

 

June 30, 2021

 

Interest Rates

 

As of December 31, 2020, all of the outstanding debt under our Term Loan and ABL Facility was subject to floating interest rate risk. As of December 31, 2020, we had the following interest rate swap contracts outstanding (notional amount in thousands of US dollars):

 

Hedged Item

 

Contract Date

 

Effective Date

 

Notional Amount

 

Fixed LIBOR Rate

 

Expiration Date

Interest Rate

 

June 19, 2017

 

July 1, 2020

 

                    125,000

 

2.1263%

 

July 1, 2021

Interest Rate

 

June 19, 2017

 

July 1, 2021

 

                    125,000

 

2.2733%

 

July 1, 2022

Interest Rate

 

June 19, 2017

 

July 1, 2022

 

                    125,000

 

2.3673%

 

May 31, 2023

Interest Rate

 

June 30, 2017

 

July 1, 2020

 

                    125,000

 

2.2062%

 

July 1, 2021

Interest Rate

 

June 30, 2017

 

July 1, 2021

 

                    125,000

 

2.3717%

 

July 1, 2022

Interest Rate

 

June 30, 2017

 

July 1, 2022

 

                    125,000

 

2.5000%

 

May 31, 2023

Interest Rate

 

August 9, 2017

 

July 1, 2020

 

                    125,000

 

2.0740%

 

July 1, 2021

Interest Rate

 

August 9, 2017

 

July 1, 2021

 

                    125,000

 

2.2367%

 

July 1, 2022

Interest Rate

 

August 9, 2017

 

July 1, 2022

 

                    125,000

 

2.2948%

 

May 31, 2023

Interest Rate

 

August 30, 2017

 

July 1, 2020

 

                    125,000

 

1.9737%

 

July 1, 2021

Interest Rate

 

August 30, 2017

 

July 1, 2021

 

                    125,000

 

2.1508%

 

July 1, 2022

Interest Rate

 

August 30, 2017

 

July 1, 2022

 

                    125,000

 

2.2998%

 

May 31, 2023

Interest Rate   March 4, 2020   May 31, 2023                       200,000   0.9565%   December 14, 2026
Interest Rate   March 5, 2020   May 31, 2023                       100,000   0.9050%   December 14, 2026
Interest Rate   March 6, 2020   May 31, 2023                       200,000   0.7770%   December 14, 2026

 

In conjunction with the December 2019 amendment to our Term Loan, we also amended the interest swaps to remove the LIBOR floor, which resulted in minor reductions to our future dated swap rates. At December 31, 2020, the fair value of these interest rate swaps was a liability of $29.9 million. Even after giving effect to these swaps, we are exposed to risks due to changes in interest rates with respect to the portion of our Term Loan and ABL Facility that is not covered by the swaps. A hypothetical change in the LIBOR interest rate of 100 basis points would have changed annual cash interest expense by approximately $3.3 million (or, without the swaps in place, $8.3 million) in 2020.

 

For additional information on the Company’s foreign currency and commodity forward contracts and interest rate swaps, including amounts charged to the statement of comprehensive income during 2020, 2019, and 2018, refer to Note 5, “Derivative Instruments and Hedging Activities,” and Note 6, “Accumulated Other Comprehensive Loss,” to our consolidated financial statements in Item 8 of this Annual Report on Form 10-K.

 

 

Item 8. Financial Statements and Supplementary Data

 

Report of Independent Registered Public Accounting Firm

 

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

Waukesha, WI

 

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of Generac Holdings Inc. and subsidiaries (the "Company") as of December 31, 2020 and 2019, the related consolidated statements of  comprehensive income, stockholders' equity, and cash flows, for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

 

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 23, 2021, expressed an unqualified opinion on the Company's internal control over financial reporting.

 

Change in Accounting Principle

 

As discussed in Note 10 to the financial statements, effective January 1, 2019, the Company adopted FASB Accounting Standards Update 2016-02, Leases (Topic 842), using the modified retrospective approach.

 

Basis for Opinion

 

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

 

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

 

Critical Audit Matter

 

The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

 

Goodwill – Refer to Note 9 to the financial statements.

 

Critical Audit Matter Description

 

The Company’s evaluation of goodwill for impairment involves the comparison of the fair value of each reporting unit to its carrying value. The Company’s estimate for each reporting unit is based on the present value of estimated future cash flows attributable to the respective reporting unit. This requires management to make significant estimates and assumptions including estimates of future growth rates, inflation rates and discount rates based on the estimated weighted average cost of capital for the business. Changes in the assumptions could have a significant impact on the fair value, which could result in an impairment charge. The Company performed their annual impairment assessment of its reporting units as of October 31, 2020.  In the October 31, 2020 impairment test calculation, the Latin America and Generac Mobile reporting units each had an estimated fair value that exceeded their carrying value by approximately 10%. Because the estimated fair value exceeded the carrying value for each, no impairment was recorded.  The carrying value of goodwill for the Company’s Latin America and Generac Mobile reporting units as of the October 31, 2020 impairment assessment was $43.6 million and $48.6 million, respectively.

 

 

Key financial assumptions utilized to determine the fair value of the Latin America reporting unit include revenue growth levels that reflect the impact of the COVID-19 pandemic with an eventual return to normalized revenue growth patterns and profitability from recovering end markets, improving profit margins, a 3% terminal growth rate and a 11.7% discount rate. Key financial assumptions utilized to determine the fair value of the Generac Mobile reporting unit include revenue growth levels that reflect the impact of the COVID-19 pandemic as well as the impact of a decline in oil prices on end markets with an eventual return to normalized revenue growth levels from recovering end markets, improving profit margins, a 3% terminal growth rate and a 14.6% discount rate.

 

The principle consideration for our determination that the evaluation of goodwill is a critical audit matter is that there is a high degree of auditor effort, judgment and subjectivity involved in designing and performing procedures to evaluate the reasonableness of management’s key financial assumptions utilized to determine the fair value of the Latin America and Generac Mobile reporting units.

 

How the Critical Audit Matter Was Addressed in the Audit

 

Our audit procedures related to the forecasts of future revenue growth rates, improving profit margins, the terminal growth rate and the selection of the discount rate for the Latin America and Generac Mobile reporting units included the following, among others:

 

 

Evaluated the design and effectiveness of the controls over management’s goodwill impairment evaluation, including those over the determination of the fair value of the reporting unit, such as controls related to management’s forecast and the selection of the discount rate.

 

Obtained the Company’s discounted cash flow model and evaluated the valuation analysis for mathematical accuracy.

 

Utilized fair value specialists to evaluate whether the valuation techniques applied by management were appropriate.

 

Assessed management’s historical ability to accurately forecast the Company’s results of operations.

 

Assessed management’s intent and/or ability to take specific actions included in the discounted cash flow model.

 

Evaluated the reasonableness of management’s forecasts by comparing the forecasts to (1) historical results, (2) internal communications to the Board of Directors, and (3) forecasted information included in industry reports.

 

Independently calculated a discount rate and compared it to the rate utilized by the Company.

 

/s/ Deloitte & Touche LLP

 

Milwaukee, Wisconsin

February 23, 2021

 

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

 

  

Report of Independent Registered Public Accounting Firm

 

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

Waukesha, Wisconsin

 

Opinion on Internal Control over Financial Reporting

 

We have audited the internal control over financial reporting of Generac Holdings Inc. and subsidiaries (the “Company”) as of December 31, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.

 

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2020, of the Company and our report dated February 23, 2021, expressed an unqualified opinion on those financial statements.

 

As described in Management’s Report on Internal Control over Financial Reporting, management excluded West Coast Energy Systems LLC, which was acquired in July 2020, Mean Green Products, LLC, which was acquired in September 2020, and Enbala Power Networks Inc., which was acquired in October 2020, and whose financial statements constitute 4.7% and 2.6% of net and total assets, respectively, 0.6% of net sales, and (0.3)% of net income of the consolidated financial statements of the Company as of and for the year ended December 31, 2020. Accordingly, our audit did not include the internal control over financial reporting at West Coast Energy Systems LLC, Mean Green Products, LLC and Enbala Power Networks Inc.

 

Basis for Opinion

 

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

 

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

 

Definition and Limitations of Internal Control over Financial Reporting

 

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

 

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

 

/s/ Deloitte & Touche LLP

 

Milwaukee, Wisconsin

February 23, 2021

 

 

 

Generac Holdings Inc.

Consolidated Balance Sheets

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

 

   

December 31,

 
   

2020

   

2019

 

Assets

               

Current assets:

               

Cash and cash equivalents

  $ 655,128     $ 322,883  
Accounts receivable, less allowance for credit losses of $12,001 and $6,968 at December 31, 2020 and 2019, respectively     374,906       319,538  

Inventories

    603,317       522,024  

Prepaid expenses and other assets

    36,382       31,384  

Total current assets

    1,669,733       1,195,829  
                 

Property and equipment, net

    343,936       316,976  
                 

Customer lists, net

    49,205       55,552  

Patents and technology, net

    86,727       85,546  

Other intangible assets, net

    9,932       8,259  

Tradenames, net

    146,159       148,377  

Goodwill

    855,228       805,284  

Deferred income taxes

    1,497       2,933  

Operating lease and other assets

    73,006       46,913  

Total assets

  $ 3,235,423     $ 2,665,669  
                 

Liabilities and stockholders’ equity

               

Current liabilities:

               

Short-term borrowings

  $ 39,282     $ 58,714  

Accounts payable

    330,247       261,977  

Accrued wages and employee benefits

    63,036       41,361  

Other accrued liabilities

    204,812       132,629  

Current portion of long-term borrowings and finance lease obligations

    4,147       2,383  

Total current liabilities

    641,524       497,064  
                 

Long-term borrowings and finance lease obligations

    841,764       837,767  

Deferred income taxes

    115,769       96,328  

Operating lease and other long-term liabilities

    179,955       140,432  

Total liabilities

    1,779,012       1,571,591  
                 

Redeemable noncontrolling interest

    66,207       61,227  
                 

Stockholders’ equity:

               

Common stock, par value $0.01, 500,000,000 shares authorized, 72,024,329 and 71,667,726 shares issued at December 31, 2020 and 2019, respectively

    721       717  

Additional paid-in capital

    525,541       498,866  

Treasury stock, at cost, 9,173,731 and 9,103,013 shares at December 31, 2020 and 2019, respectively

    (332,164 )     (324,551 )

Excess purchase price over predecessor basis

    (202,116 )     (202,116 )

Retained earnings

    1,432,565       1,084,383  

Accumulated other comprehensive loss

    (34,254 )     (24,917 )

Stockholders’ equity attributable to Generac Holdings Inc.

    1,390,293       1,032,382  

Noncontrolling interests

    (89 )     469  

Total stockholders’ equity

    1,390,204       1,032,851  

Total liabilities and stockholders’ equity

  $ 3,235,423     $ 2,665,669  

 

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,

 
   

2020

   

2019

   

2018

 
                         

Net sales

  $ 2,485,200     $ 2,204,336     $ 2,023,464  

Costs of goods sold

    1,527,546       1,406,584       1,298,424  

Gross profit

    957,654       797,752       725,040  
                         

Operating expenses:

                       

Selling and service

    246,373       217,683       191,887  

Research and development

    80,251       68,394       50,019  

General and administrative

    119,644       110,868       103,841  

Amortization of intangibles

    32,280       28,644       22,112  

Total operating expenses

    478,548       425,589       367,859  

Income from operations

    479,106       372,163       357,181  
                         

Other (expense) income:

                       

Interest expense

    (32,991 )     (41,544 )     (40,956 )

Investment income

    2,182       2,767       1,893  

Loss on extinguishment of debt

          (926 )     (1,332 )

Loss on pension settlement

          (10,920 )      

Other, net

    (2,106 )     (1,933 )     (5,710 )

Total other expense, net

    (32,915 )     (52,556 )     (46,105 )
                         

Income before provision for income taxes

    446,191       319,607       311,076  

Provision for income taxes

    98,973       67,299       69,856  

Net income

    347,218       252,308       241,220  

Net income attributable to noncontrolling interests

    (3,358 )     301       2,963  

Net income attributable to Generac Holdings Inc.

  $ 350,576     $ 252,007     $ 238,257  
                         

Other comprehensive income (loss):

                       

Foreign currency translation adjustment

  $ 4,948     $ 2,210     $ (5,976 )

Net unrealized gain (loss) on derivatives

    (14,285 )     (13,855 )     2,924  

Pension liability adjustment

          10,541       437  

Other comprehensive income (loss)

    (9,337 )     (1,104 )     (2,615 )

Total comprehensive income

    337,881       251,204       238,605  

Comprehensive income (loss) attributable to noncontrolling interests

    (364 )     (635 )     1,647  

Comprehensive income attributable to Generac Holdings Inc.

  $ 338,245     $ 251,839     $ 236,958  
                         
Net income attributable to Generac Holdings Inc. per common share - basic:   $ 5.61     $ 4.09     $ 3.57  

Weighted average common shares outstanding - basic:

    62,280,889       61,926,986       61,662,031  
                         
Net income attributable to Generac Holdings Inc. per common share - diluted:   $ 5.48     $ 4.03     $ 3.54  

Weighted average common shares outstanding - diluted:

    63,737,734       62,865,446       62,233,225  

 

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.

                 
                                           

Excess Purchase Price

           

Accumulated

                         
                   

Additional

                   

Over

           

Other

   

Total

                 
   

Common Stock

   

Paid-In

   

Treasury Stock

   

Predecessor

   

Retained

   

Comprehensive

   

Stockholders'

   

Noncontrolling

         
   

Shares

   

Amount

   

Capital

   

Shares

   

Amount

   

Basis

   

Earnings

   

Income (Loss)

   

Equity

   

Interest

   

Total

 

Balance at December 31, 2017

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

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

                                              2,924       2,924             2,924  

Foreign currency translation adjustment

                                              (5,976 )     (5,976 )     (2 )     (5,978 )
Common stock issued under equity incentive plans, net of shares withheld for employee taxes and strike price     366,245       4       1,737                                     1,741             1,741  

Net share settlement of restricted stock awards

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

Stock repurchases

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

Cash dividends paid to noncontrolling interest of subsidiary

                                                          (314 )     (314 )

Share-based compensation

                14,563                                     14,563             14,563  

Pension liability adjustment, net of tax of $154

                                              437       437             437  

Redemption value adjustment

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

Net income

                                        238,257             238,257       749       239,006  
                                                                                         

Balance at December 31, 2018

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

Change in noncontrolling interest share

                                                          (154 )     (154 )

Unrealized loss on interest rate swaps, net of tax of ($4,877)

                                              (13,855 )     (13,855 )           (13,855 )

Foreign currency translation adjustment

                                              2,210       2,210       (30 )     2,180  
Common stock issued under equity incentive plans, net of shares withheld for employee taxes and strike price     481,308       5       6,056                                     6,061             6,061  

Net share settlement of restricted stock awards

                      (55,953 )     (3,078 )                       (3,078 )           (3,078 )

Cash dividends paid to noncontrolling interest of subsidiary

                                                          (285 )     (285 )

Share-based compensation

                16,694                                     16,694             16,694  

Pension liability adjustment and settlement, net of tax

                                              10,541       10,541             10,541  

Redemption value adjustment

                                        1,253             1,253             1,253  

Net income

                                        252,007             252,007       226       252,233  
                                                                                         

Balance at December 31, 2019

    71,667,726     $ 717     $ 498,866