Generac
Annual Report 2010

Plain-text annual report

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549FORM 10-K (Mark One) xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2010oroTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from to Commission File Number 001-34627GENERAC HOLDINGS INC.(Exact name of registrant as specified in its charter) DELAWARE(State or other jurisdiction of incorporation or formation)20-5654756(IRS Employer Identification No.)S45 W29290 Hwy. 59, Waukesha, WI(Address of principal executive offices)53189(Zip Code)(262) 544-4811(Registrant’s telephone number, including area code)SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:Common Stock, $0.01 par value(Title of class)New York Stock Exchange(Name of exchange on which registered)SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x 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 o No x 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 1934during 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 filingrequirements for the past 90 days. Yes x No o Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data Filerequired to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorterperiod that the registrant was required to submit and post such files). Yes o No o Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, tothe best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment tothis Form 10-K x Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. Seedefinitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large accelerated filer oAccelerated filer oNon-accelerated filer x(Do not check if a smallerreporting company)Smaller reporting company o Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act) Yes o No x The aggregate market value of the voting common equity held by non-affiliates of the registrant on June 30, 2010, the last business day of theregistrant’s most recently completed second fiscal quarter, was approximately $295,142,000 based upon the closing price reported for such date on the NewYork Stock Exchange. For purposes of this disclosure, shares of common stock held by persons who hold more than 5% of the outstanding shares ofcommon stock and shares held by executive officers and directors of the registrant have been excluded because such persons may be deemed to be affiliates.This determination of executive officer or affiliate status is not necessarily a conclusive determination for other purposes. As of February 22, 2011, 67,524,596 shares of registrant's common stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant’s Proxy Statement for the 2011 Annual Meeting of Stockholders (the “2011 Proxy Statement”), which will be filed by the registrant onor prior to 120 days following the end of the registrant’s fiscal year ended December 31, 2010, are incorporated by reference into Part III of this Form 10-K. Table of Contents2010 FORM 10-K ANNUAL REPORTTABLE OF CONTENTS Page PART IItem 1.Business1Item 1A.Risk Factors8Item 1B.Unresolved Staff Comments15Item 2.Properties16Item 3.Legal Proceedings16Item 4.Removed and Reserved16 PART IIItem 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities16Item 6.Selected Financial Data18Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations24Item 7A.Quantitative and Qualitative Disclosures About Market Risk41Item 8.Financial Statements and Supplementary Data42Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure74Item 9A.Controls and Procedures74Item 9B.Other Information75 PART IIIItem 10.Directors, Executive Officers and Corporate Governance75Item 11.Executive Compensation75Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters75Item 13.Certain Relationships and Related Transactions, and Director Independence75Item 14.Principal Accountant Fees and Services75 PART IVItem 15.Exhibits and Financial Statement Schedules75 Table of Contents PART I Forward-Looking Statements This annual report contains forward-looking statements that are subject to risks and uncertainties. Forward-looking statements give our currentexpectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. You canidentify 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,” “project,” “plan,” “intend,” “believe,” “confident,” “may,” “should,” “can have,” “likely,” “future” andother words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance orother events. The forward-looking statements contained in this annual report are based on assumptions that we have made in light of our industry experience andon our perceptions of historical trends, current conditions, expected future developments and other factors we believe are appropriate under thecircumstances. As you read and consider this annual report, you should understand that these statements are not guarantees of performance orresults. They involve risks, uncertainties (some of which are beyond our control) and assumptions. Although we believe that these forward-lookingstatements are based on reasonable assumptions, you should be aware that many factors could affect our actual financial results and cause them todiffer materially from those anticipated in the forward-looking statements. The forward-looking statements contained in this annual report includeestimates 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 statementsinclude: · demand for our products;· frequency of major power outages;· availability of quality raw materials and key components used producing our products;· competitive factors in the industry in which we operate;· our dependence on our distribution network;· our ability to invest in, develop or adapt to changing technologies and manufacturing techniques;· our ability to adjust to operating as a public company;· loss of our key management and employees;· increase in liability claims; and· changes in environmental, health and safety laws and regulations. Should one or more of these risks or uncertainties materialize, or should any of these assumptions prove incorrect, our actual results may vary inmaterial respects from those projected in these forward-looking statements. A detailed discussion of these and other factors that may affect futureresults is contained in Item 1A of this Annual Report on Form 10-K. Any forward-looking statement made by us in this annual report speaks only as of the date on which we make it. Factors or events that could cause ouractual 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 anyforward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law. Item 1. Business We are a leading designer and manufacturer of a wide range of standby generators for the residential, commercial and industrial markets. As the onlysignificant market participant focused predominantly on these products, we have one of the leading market positions in the standby generator market in theUnited States and Canada. We design, engineer and manufacture generators with an output of between 800W and 9mW of power. We design, manufacture,source and modify engines, alternators, automatic transfer switches and other components necessary for our products. Our generators are fueled by naturalgas, liquid propane, gasoline, diesel and Bi-Fuel™. 1Table of Contents We have what we believe is an industry leading, multi-layered distribution network, and our products are available in thousands of outlets across the UnitedStates and Canada. We distribute our generators through independent residential and industrial dealers, electrical wholesalers, national accounts, private labelarrangements, retailers, catalogs and e-commerce merchants. We currently sell our products primarily in North America. We have a significant market sharein the residential and light commercial generator markets, which we believe are currently under penetrated. We believe that our leading market position islargely 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.We own and operate three manufacturing plants and one distribution facility in Eagle, Wisconsin, Waukesha, Wisconsin and Whitewater, Wisconsin,totaling approximately 1,000,000 total square feet. We also maintain inventory warehouses in the United States that accommodate the rapid responserequirements of our customers.HistoryGenerac Holdings Inc. (Generac) is a Delaware corporation that was founded in 2006. Generac Power Systems, Inc., or Generac Power Systems, our principaloperating subsidiary, is a Wisconsin corporation, which was founded in 1959 to market a line of affordable portable generators that offered superiorperformance and features. We expanded beyond portable generators in 1980 into the industrial market with the introduction of our first stationary generatorsthat provided up to 200 kW. We entered the residential market in 1989 with a residential standby generator, and expanded our product development and globaldistribution system in the 1990s, forming a series of alliances that tripled our higher output generator net sales. In 1998, we sold our Generac® portableproducts business to the Beacon Group, a private equity firm, which eventually sold this business to Briggs & Stratton. Our growth accelerated in 2000 aswe expanded our automatic residential standby generator product offering, implemented our multi-layered distribution philosophy, and introduced our quiet-running QT Series generators in 2005, accelerating our penetration in the commercial market. In 2008, we successfully expanded our position in the portablegenerator market after the expiration of our non-compete agreement in 2007 with the Beacon Group entered into in connection with the aforementionedBeacon Group transaction. Today, we manufacture a full line of generators for a wide variety of applications and markets. Our success is built on engineeringexpertise, manufacturing excellence and our innovative approaches to the market.CCMP transactionsIn November 2006, affiliates of CCMP Capital Advisors, LLC, or CCMP, together with affiliates of Unitas Capital Ltd., or Unitas, and members of ourmanagement, purchased an aggregate of $689 million of our equity capital. In addition, on November 10, 2006, Generac Power Systems borrowed anaggregate of $1,380 million, consisting of an initial drawdown of $950 million under a $1.1 billion first lien secured credit facility and $430 million under a$430 million second lien secured credit facility. With the proceeds from these equity and debt financings, together with cash on hand at Generac PowerSystems, we (1) acquired all of the capital stock of Generac Power Systems and repaid certain pre-transaction indebtedness of Generac Power Systems for$2.0 billion, (2) paid $66 million in transaction costs related to the transaction and (3) retained $3.0 million for general corporate purposes.We refer to the foregoing transactions collectively as the “CCMP Transactions.”Initial public offering and corporate reorganizationOn February 17, 2010, we completed our initial public offering (IPO) of 18,750,000 shares of our common stock at a price of $13.00 per share. In addition,on March 18, 2010, the underwriters exercised their option and purchased an additional 1,950,500 shares of our common stock from us. We receivedapproximately $224.1 million in net proceeds at the initial closing, and approximately $23.8 million in net proceeds from the underwriters’ option exercise,after deducting the underwriting discount and total expenses related to the offering. The proceeds from the initial closing of the IPO were used entirely to paydown our 2nd lien credit facility in full and to repay a portion of our 1st lien credit facility. Proceeds from the option exercise were used for general corporatepurposes, including additional pre-payment of the 1st lien credit facility.Our capitalization prior to the IPO consisted of Series A Preferred Stock, Class B Common Stock and Class A Common Stock. In connection with the IPO,we effected a corporate reorganization in which, after giving effect to a 3.294 for one reverse Class A Common Stock split, our Class B Common Stock andSeries A Preferred Stock was converted into Class A Common Stock and our Class A Common Stock was then reclassified as common stock. Following theIPO, we have only one class of common stock outstanding. We refer to these transactions, as the “Corporate Reorganization.” For more information regardingour Corporate Reorganization, see “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations – Corporatereorganization.” 2Table of Contents Our productsWe design, engineer and manufacture generators with an output of between 800W and 9mW. In the manufacturing process for our generators, we design,manufacture, source and modify engines, alternators, transfer switches and other components necessary to production. We classify our products into threeclasses based on similar range of power output and similar primary customer usage: residential power products; industrial and commercial power products;and other products. The following summary outlines our portfolio of products, including their key attributes and customer applications.Residential power productsOur automatic residential standby generators range in output from 6kW to 60kW, with manufacturer's suggested retail prices, or MSRPs, fromapproximately $1,800 to $15,000. They operate on either natural gas or liquid propane and are permanently installed with an automatic transfer switch,which we also manufacture. Our residential standby generators powered by air-cooled engines range in outputs from 6kW to 20kW and are available in steeland aluminum enclosures. Our generators powered by liquid-cooled engines range in outputs from 22kW to 60kW, including the Guardian® Series and thepremium Quietsource® Series, with a quiet, low-speed engine and a standard aluminum enclosure.We provide portable generators fueled by gasoline that range in size from 800W to 17,500W. Following the expiration of a non-compete agreement in 2007, weexpanded our portable product offering to introduce portable generators below 12,500W. We currently have four portable product lines: the GP series, targetedat homeowners, ranging from 1,850W to 17,500W; the XG series, targeted at the premium homeowner markets, ranging from 4,000 to 10,000W; the XPseries, targeted at the professional contractor market, ranging from 4,000 to 8,000W; and the iX series, targeted at the recreational market, ranging from 800Wto 2,000W.Residential power products comprised 57.9%, 63.0% and 62.9%, respectively, of total net sales in 2008, 2009 and 2010.Industrial and commercial power productsOur light-commercial standby generators include a full range of affordable generators from 22kW to 150kW and related transfer switches, providing three-phase power that is sufficient for most small and mid-sized businesses including grocery stores, convenience stores, restaurants, gas stations, pharmacies,retail banks and small health care facilities. Our light-commercial generators run on natural gas or liquid propane thereby eliminating the fuel spillages,spoilage, environmental or odor concerns that are common with traditional diesel units.We manufacture a broad line of standard and configured standby generators and related transfer switches for industrial applications. Our single-engineindustrial generators range in output from 10kW to 600kW with our Modular Power System (MPS) technology extending our product range up to 9mW. Weoffer four fuel options including diesel, natural gas, liquid propane or Bi-Fuel™. Bi-Fuel™ generators operate on a combination of both diesel and natural gasto allow our customers the advantage of multiple fuel sources and extended run times.Our MPS technology combines the power of several smaller generators to produce the output of a larger generator, providing our customers with redundancyand scalability in a cost-effective manner. For larger industrial applications, our MPS products offer customers an efficient, affordable way to scale theirstandby power needs. By offering a series of smaller Generac generators integrated with Generac's proprietary PowerManager control system, we provide alower cost alternative to traditional large, single-engine generators. The MPS product line also offers superior functionality due to the redundancy andscalability of the generator systems.We provide the telecommunications market our full range of generator systems, ranging from 20kW air-cooled generators to 3mW MPS.Industrial and commercial power products comprised 36.2%, 31.9% and 31.0%, respectively, of total net sales in 2008, 2009 and 2010. 3Table of ContentsOther power productsOur RV generators range in size from 3.4kW to 8.5kW and are available in gasoline, liquid propane or diesel fuel models. These generators are sold directly tooriginal equipment manufacturers, or OEMs, as well as aftermarket dealers. We also sell our proprietary air-cooled engines to third-party equipment OEMsand sell after-market generator service parts to our dealers.Other power products comprise 5.9%, 5.1% and 6.1%, respectively, of total net sales in 2008, 2009 and 2010.Distribution channels and customersWe distribute our product through several channels to increase awareness of our product categories and the Generac® brand, and to ensure our products reacha broad customer base. This distribution network includes independent residential and industrial dealers, electrical wholesalers, national accounts, privatelabel arrangements, retailers, catalogs and e-commerce merchants. We believe our distribution network is a competitive advantage that we have strengthenedover the last decade by expanding our network from our base of industrial dealers to include other channels of distribution as we have increased our productofferings. Our network is well balanced with no single sales channel providing more than 25% of our sales and no customer providing more than 6% of oursales in 2010.Our dealer network, which is located principally in the United States and Canada, is the industry's largest network of independent generator contractors.Our residential dealer network sells, installs and services our residential and light-commercial products to end users. We have developed a number ofproprietary dealer management programs to evaluate, manage and incentivize our dealers, which we believe has an important impact on the high level ofcustomer service we provide to end customers. These programs include both technical and sales training, under which we train new and existing dealers aboutour products, service and installation. We regularly perform market analyses to determine if a given market is either under-served or has poor residential dealerrepresentation. Within these locations, we selectively add distribution or invest resources in existing dealer support and training to improve dealer performance.Our industrial dealer network provides industrial and commercial end-users with on-going, local and nationwide product support. Our industrial dealersmaintain the local relationships with commercial electrical contractors, specifying engineers and national account regional buying offices. Our sales groupworks in conjunction with our industrial dealers to ensure that national accounts receive engineering support, competitive pricing and nationwide service. Wepromote our industrial generators through the use of product demonstrations, specifying engineer education events, dealer forums and training. In recent years,we have been particularly focused on expanding our industrial dealer network in Canada and Latin America in order to expand our international salesopportunities.Our wholesaler network consists of selling branches of both national and local distribution houses for electrical and HVAC products. Our wholesalersdistribute our residential and light-commercial generators and are a key introduction to the standby generator category for electrical and HVAC contractors whomay not be Generac dealers.On a selective basis, we have established arrangements with private label partners to provide residential, light-commercial and industrial generators. Thepartners include leading home equipment, electrical equipment and construction machinery companies, each of which provides access to incremental channelsof distribution for our products. We have agreements in place with these partners having terms of between three and four years and further establishingadditional terms and conditions of these arrangements.Our retail distribution network includes thousands of locations and includes regional and national home improvement chains, retailers, clubs, buying groupsand farm supply stores. These physical retail locations are supplemented by a number of catalogue and e-commerce retailers. This network primarily sells ourresidential standby, portable and light-commercial generators. In some cases, we have worked with our retail partners to create installation programs using ourresidential dealers to support the sale and installation of standby generator products sold at retail. We also use a combination of display units and advertisingthrough our retail accounts to promote awareness for our products.Additionally, we sell some generators and air-cooled engines directly to OEM manufacturers and after-market dealers for use in the RV and lawn and gardenindustries. 4Table of Contents ManufacturingOur excellence in manufacturing reflects our philosophy of high standards, continuous improvement and commitment to quality. Our facilities showcase ouradvanced manufacturing techniques and demonstrate the effectiveness of lean manufacturing.We continually seek to reduce manufacturing costs while improving product quality. We deliver an affordable product to our customers through our valueengineering philosophy, our strategic foreign sourcing, our scale, and adherence to lean manufacturing principles. We believe we have sufficient capacity toachieve our business goals for the near term without the need for significant expansion.Our product quality is essential to maintaining a leading market position. Incoming shipments from our suppliers are tested to ensure engineeringspecifications are met. Purchased components are tested for quality at the supplier’s factory and prior to entering production lines and are continuously testedthroughout the manufacturing process. Internal product and production audits are performed to ensure a quality product and process. We test finishedproducts under a variety of simulated conditions at each of our manufacturing facilities.Research and development and intellectual propertyOur primary focus on generators drives technological innovation, specialized engineering and manufacturing competencies. Research and development is a corecompetency and includes a staff of close to 120 engineers working on numerous active projects. Our sponsored research and development expense was$9.9 million, $10.8 million and $14.7 million for the years ended December 2008, 2009 and 2010. Research and development is conducted at each of ourmanufacturing facilities and additionally at our technical center in Suzhou, China with dedicated teams for each product line. Research and development isfocused on developing new technologies and product enhancements as well as maintaining product competitiveness by improving manufacturing costs, safetycharacteristics, reliability and performance while ensuring compliance with governmental standards. We have had over 30 years of experience using naturalgas engines and have developed specific expertise with fuel systems and emissions technology. In the residential market we have developed proprietary engines,cooling packages, controls, fuel systems and emissions systems. We believe that our expertise in engine powered equipment gives us the capability to developnew products that will allow us to diversify our end markets.We rely on a combination of patents and trademarks to establish and protect our proprietary rights. Our commitment to research and development has resultedin a portfolio of approximately 50 U.S. and international patents and patent applications. Our patents expire between January 2017 and September 2027 andprotect certain features and technologies we have developed for use in our products including fuel systems, air flow, electronics and controls, noise reductionand air-cooled engines. U.S. trademark registrations generally have a perpetual duration if they are properly maintained and renewed. New U.S. patents thatare issued generally have a life of 20 years from the date the patent application is initially filed. We believe the existence of these patents and trademarks, alongwith our ongoing processes to register additional patents and trademarks, protect our intellectual property rights and enhance our competitive position. We alsouse proprietary manufacturing processes that require customized equipment.Suppliers of raw materialsOur 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 ormanufactured components. We have developed an extensive network of reliable, low-cost suppliers in the United States and abroad. We continuously evaluatethe cost structure of our products and source components accordingly based on this evaluation. In 2010, we sourced more than half of our components fromoutside the United States.CompetitionThe market for onsite standby generators is competitive. We face competition from a variety of large diversified industrial companies as well as smallergenerator manufacturers abroad. However, most of the traditional participants in the standby generator market compete on a more specialized basis, focusedon specific applications within their larger diversified product mix. We are the only significant market participant focused predominantly on standby andportable generators with broad capabilities across the residential, industrial and light-commercial generator markets. We believe that our engineering capabilitiesand core focus on generators provide us with manufacturing flexibility and enable us to maintain a first-mover advantage over our competition for productinnovation. 5Table of Contents Our competitors include Briggs & Stratton, Caterpillar, Cummins, Honda, Kohler, MTU (Katolight division), and Techtronics International (TTI). In themarket for standby industrial and commercial generators, our primary competitors are Caterpillar, Cummins, Kohler and MTU, most of which focus on themarket for diesel generators as they are also diesel engine manufacturers. In the market for residential standby generators, our primary competitors includeBriggs & Stratton, Cummins (Onan division) and Kohler, which also have broad operations in other manufacturing businesses. In the portable generatormarket, our primary competitors include Briggs & Stratton, Honda and Techtronics International (TTI), along with a number of smaller domestic and foreigncompetitors.There are a number of other standby generator manufacturers located outside North America, but most supply their products mainly to their respectiveregional markets. In a continuously evolving sector, we believe our size 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 and product availability.EmployeesAs of December 31, 2010, we had 1,444 employees (1,282 full time and 162 part-time and temporary employees). Of those, 818 employees were directlyinvolved in manufacturing at our manufacturing facilities.We have had an “open shop” bargaining agreement for the past 45 years. Our current agreement is with the Communication Workers of America, Local 5503.The current agreement, which expires October 14, 2011, covers our Waukesha and Eagle facilities. Currently, less than 2% of our workforce is a member of alabor union. Our facility in Whitewater, Wisconsin is not unionized.Regulation, including environmental mattersAs a manufacturing company, our operations are subject to a variety of foreign, federal, state and local environmental, health and safety laws and regulationsincluding those governing, among other things, emissions to air, discharges to water, noise and the generation, handling, storage, transportation, treatment anddisposal of waste and other materials. In addition, our products are subject to various laws and regulations relating to, among other things, emissions and fuelrequirements, as well as labeling and marketing.Our products are regulated by the EPA, California Air Resources Board (CARB) and various other state and local air quality management districts. Thesegoverning bodies continuously pass regulations that require us to meet more stringent emission standards. With the adoption of a recent regulation coveringstationary propane and natural gas-fueled generators, the EPA now regulates all products we produce for sale in the United States. New regulations couldrequire us to redesign our products and could affect market growth for our products. For example, the EPA has developed multiple phases of national emissionstandards for small air-cooled engines. In 2008, the EPA adopted a proposed Phase III regulation that further reduces permitted exhaust emissions from smallengines and also requires the engines and equipment in which engines are used to meet new evaporative emission standards. The EPA's Phase III programrequires the use of evaporative controls that must be phased in starting in 2009 and take full effect in 2011 for Class II engines (225 cubic center displacementand larger) and 2012 for Class I engines (less than 225 cubic center displacement). The Phase III program's more stringent exhaust emission requirements alsoapply starting in 2011 for Class II engines and 2012 for Class I engines. The Phase III standards are similar to the CARB's Tier 3 emission standards whichwere fully phased in during fiscal year 2008. CARB's Tier 3 regulation required additional reductions to engine exhaust emissions as well as new controls onevaporative emissions from small engines.We believe that our operations and our products are in material compliance with applicable laws and regulations, including environmental and workplacesafety regulations. We are not subject to any pending investigations, claims, or proceedings by any foreign, federal, state, or local governmental agency oradministration that would materially impact our financial condition or our results.Segment informationWe refer you to Note 2, “Segment Reporting,” to our consolidated financial statements included in Item 8 of this annual report for information about ourbusiness segment and geographic areas. 6Table of ContentsExecutive officersThe following table sets forth information regarding our executive officers:Name Age PositionAaron Jagdfeld39 Chief Executive Officer and DirectorYork A. Ragen39 Chief Financial OfficerDawn Tabat58 Chief Operating OfficerAllen Gillette54 Senior Vice President, EngineeringRoger Schaus, Jr.56 Senior Vice President, Service OperationsRoger Pascavis50 Senior Vice President, OperationsTerrence J. Dolan45 Senior Vice President, SalesAaron Jagdfeld has served as our Chief Executive Officer since September 30, 2008 and as a director since November 2006. Prior to becoming ChiefExecutive Officer, Mr. Jagdfeld worked for Generac for 15 years. He began his career in the finance department in 1994 and became our Chief FinancialOfficer 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 BusinessAdministration in Accounting from the University of Wisconsin-Whitewater.York A. Ragen has served as our Chief Financial Officer since September 30, 2008. Prior to becoming Chief Financial Officer, Mr. Ragen held Director ofFinance and Vice President of Finance positions at Generac. Prior to joining Generac in 2005, Mr. Ragen was Vice President, Corporate Controller atAPW Ltd., a spin-off from Applied Power Inc., now known as Actuant Corporation. Mr. Ragen began his career in the Audit division of Arthur Andersen'sMilwaukee office. Mr. Ragen holds a Bachelor of Business Administration in Accounting from the University of Wisconsin-Whitewater.Dawn Tabat has served as our Chief Operating Officer since 2002. Ms. Tabat joined Generac in 1972 and served as Personnel Manager and PersonnelDirector before being promoted to Vice President of Human Resources in 1992. During this period, Ms. Tabat was responsible for creating the human resourcefunction within Generac, including recruiting, compensation, training and workforce relations. In her current position, Ms. Tabat oversees manufacturing,logistics, global supply chain, quality, safety, information services and human resources.Allen Gillette is our Senior Vice President of Engineering. Mr. Gillette joined Generac in 1998 and has served as Engineering Manager, Director ofEngineering and Vice President of Engineering. Prior to joining Generac, Mr. Gillette was Manager of Engineering at Transamerica Delaval Enterprise Division,Chief Engineer—High-Speed Engines at Ajax-Superior Division and Manager of Design & Development, Cooper-Bessemer Reciprocating Products Division.Mr. Gillette holds an M.S. in Mechanical Engineering from Purdue University and a B.S. in Mechanical Engineering from Gonzaga University.Roger Schaus, Jr. serves as our Senior Vice President of Service Operations. Mr. Schaus joined Generac in 1988 and has served as Director ofManufacturing Services, Vice President of Manufacturing Services and Senior Vice President of Operations. Prior to joining Generac, Mr. Schaus was aManufacturing Area Manager for Harley Davidson Motor Company in Wauwatosa, Wisconsin and a Plant Manager for Custom Products in MenomoneeFalls, Wisconsin. Mr. Schaus holds a B.S. in Agricultural Economics from the University of Wisconsin, Madison.Roger Pascavis has served as our Senior Vice President of Operations since January 2008. Mr. Pascavis joined Generac in 1995 and has served as Directorof Materials and Vice President of Operations. Prior to joining Generac, Mr. Pascavis was a Plant Manager for MTI in Waukesha, Wisconsin. Mr. Pascavisholds a B.S. in Industrial Technology from the University of Wisconsin, Stout and an M.B.A. from Lake Forest Graduate School of Management.Terrence J. Dolan began serving as our Senior Vice President, Sales on January 18, 2010. Prior to joining Generac, Mr. Dolan was Senior Vice President ofBusiness Development and Marketing at Boart Longyear, a provider of mineral exploration drilling services, from August 2007 to December 2008; VicePresident of Sales and Marketing at Ingersoll Rand, a global diversified industrial company, from March 2002 to July 2007; and Director of StrategicAccounts at Case Corporation, a manufacture of agricultural and construction equipment, from September 1991 to February 2001. Mr. Dolan holds a B.A. inManagement and Communications from Concordia University. 7Table of Contents Item 1A. Risk Factors You should carefully consider the following risks. These risks could materially affect our business, results of operations or financial condition, causethe trading price of our common stock to decline materially or cause our actual results to differ materially from those expected or those expressed inany forward-looking statements made by us or on our behalf. These risks are not exclusive, and additional risks to which we are subject include, butare not limited to, the factors mentioned under “Forward-Looking Statements” and the risks of our businesses described elsewhere in this Report. Risk factors related to our business and industry Demand for our products is significantly affected by unpredictable major power-outage events that can lead to substantial variations in, anduncertainties regarding, our financial results from period to period. Sales of our products are subject to consumer buying patterns, and demand for our products is affected by outage events, including thunderstorms,hurricanes, ice storms and blackouts caused by grid reliability issues. The impact of these outage events on our sales can vary depending on the location andseverity of the outages. Sustained periods without major power disruptions can lead to reduced consumer awareness of the benefits of standby and portablegenerator products and can result in reduced sales and excess inventory. The lack of major power-outage events can affect our net sales in the quartersfollowing a given storm season. Unpredictable fluctuations in demand are therefore part of managing our business, and these fluctuations could have anadverse effect on our net sales and profits. Demand for our standby generators is significantly affected by durable goods spending by consumers and businesses and other macroeconomicconditions. Our business is affected by general economic conditions, and uncertainty or adverse changes such as the prolonged downturn in U.S. residential investmentand 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 andlarge businesses and municipalities. For example, lower capital spending by our industrial national accounts and other industrial and commercial customerscaused a 9.9% decline in net sales of our industrial and commercial products in the year ended December 31, 2009. This decline continued into the first halfof fiscal year 2010. If these businesses and municipalities cannot access credit markets or do not utilize discretionary funds to purchase our products as aresult 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-commercialand industrial sectors through, among other things, our focus on innovation and product development, including natural gas engine technology, could beadversely affected. In addition, consumer confidence and home remodeling expenditures have a significant impact on sales of our residential products, andprolonged periods of weakness in consumer durable goods spending could have a material impact on our business. Typically, we do not have contracts withour customers, and we cannot guarantee that our current customers will continue to purchase our products. If general economic conditions or consumerconfidence 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 beadversely affected. Decreases in the availability, or increases in the cost, of raw materials and key components we use could materially reduce our earnings. The principal raw materials that we use to produce our generators are steel, copper and aluminum. We also source a significant number of component partsthat we utilize to manufacture our generators from third parties. The prices of those raw materials and components are susceptible to significant fluctuationsdue to trends in supply and demand, transportation costs, government regulations and tariffs, price controls, economic conditions and other unforeseencircumstances beyond our control. We do not have long-term supply contracts in place to ensure the raw materials and components we use are available innecessary amounts or at fixed prices. If we are unable to mitigate raw material or component price increases through product design improvements, priceincreases to our customers, manufacturing productivity improvements, or hedging transactions, our profitability could be adversely affected. For example, in2008, we experienced a 4.8% decrease in gross margin percentage, partially due to increases in commodity prices, including steel, copper and aluminum. Also,our ability to continue to obtain quality materials and components is subject to the continued reliability and viability of our suppliers, including in somecases, suppliers who are the sole source of important components. If we are unable to obtain adequate, cost efficient or timely deliveries of required rawmaterials and components, we may be unable to manufacture sufficient quantities of products on a timely basis. This could cause us to lose sales, incuradditional costs, delay new product introductions or suffer harm to our reputation. 8Table of Contents The industry in which we compete is highly competitive, and our failure to compete successfully could adversely affect our results of operationsand 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 diversifiedcompanies and have substantially greater financial resources. Some of our competitors may be willing to reduce prices and accept lower margins in order tocompete with us. In addition, we could face new competition from large international or domestic companies with established industrial brands that enter thegenerator market. Demand for our products may also be affected by our ability to respond to changes in design and functionality, to respond to downwardpricing pressure, and to provide shorter lead times for our products than our competitors. If we are unable to respond successfully to these competitivepressures, we could lose market share, which could have an adverse impact on our results. For more 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 productsrapidly to market could have an adverse impact on our business. New products, or refinements and improvements of existing products, may have technical failures, their introduction may be delayed, they may have higherproduction costs than originally expected or they may not be accepted by our customers. If we are not able to anticipate, identify, develop and market highquality products in line with technological advancements that respond to changes in customer preferences, demand for our products could decline and ouroperating 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 salesarrangements with significant private label, telecommunications or retail 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 ourproducts and provide service and aftermarket support to our customers. We also rely upon our distribution channels to drive awareness for our productcategories and our brands. In addition, we sell our products to end users through private label arrangements with leading home equipment, electrical equipmentand construction machinery companies, arrangements with top retailers and our direct national accounts with telecommunications and industrial customers.Our distribution agreements and any contracts we have with large telecommunications, retail and other customers are typically not exclusive, and many of thedistributors and customers with whom we do business offer products and services of our competitors. 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' ordealers' sales of our competitors' products to our customers or of our large customers' purchases of our competitors' products could materially reduce our salesand 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 alllayers of our distribution platform, and we cannot be certain that we will be successful in these efforts. Our business could be negatively impacted if we fail to adequately protect our intellectual property rights or if third parties claim that we are inviolation of their intellectual property rights. We view our intellectual property rights, including those relating to our Generac® brand name, fuel management systems, and MPS technology, as importantassets. We seek to protect our intellectual property rights through a combination of patent, trademark, copyright and trade secret laws, as well as licensing andconfidentiality 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 substantiallyequivalent to or superior to our own. The unauthorized use of our intellectual property by others could reduce our competitive advantage and harm ourbusiness. If it became necessary for us to litigate to protect these rights, any proceedings could be burdensome and costly and we may not prevail. We cannotguarantee that any patents, issued or pending, will provide us with any competitive advantage or will not be challenged by third parties. Moreover, theexpiration 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, maybe expensive and time-consuming to defend, subject us to damages, cause us to cease making, using or selling certain products that incorporate the disputedintellectual property, require us to redesign our products, divert management time and attention and/or require us to enter into costly royalty or licensingarrangements. Furthermore, in connection with our sale of Generac Portable Products to the Beacon Group in 1998, we granted the Beacon Group an exclusiveperpetual license for the use of the “Generac Portable Products” trademark in connection with the manufacture and sale of certain engine driven consumerproducts. This perpetual license was eventually transferred to Briggs and Stratton (Briggs) when the Beacon Group sold that business to Briggs. Currently,this trademark is not being used in commerce. However, in the event that the Beacon Group or Briggs use this trademark in the future, we could suffercompetitive confusion and our business could be negatively impacted. 9Table of Contents Our operations are subject to various environmental, health and safety laws and regulations, and non-compliance with or liabilities under suchlaws 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, the generation, handling, storage, transportation, treatment and disposal of waste and othermaterials. In addition, under federal and state environmental laws, we could be required to investigate, remediate and/or monitor the effects of the release ordisposal 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 ourpaying more than our fair share of the related costs. Violations of or liabilities under such laws and regulations could result in substantial costs, fines and civilor criminal proceedings or personal injury and workers' compensation claims. Our products are subject to substantial government regulation. Our products are subject to extensive statutory and regulatory requirements governing, among other things, emissions and noise, including standards imposedby the federal Environmental Protection Agency, or EPA, state regulatory agencies, such as CARB, and other regulatory agencies around the world. These lawsare constantly evolving and many are becoming increasingly stringent. Changes in applicable laws or regulations, or in the enforcement thereof, could requireus to redesign our products and could adversely affect our business or financial condition in the future. Developing and marketing products to meet such newrequirements could result in substantial additional costs that may be difficult to recover in some markets. In some cases, we may be required to modify ourprojects or develop new products to comply with new regulations, particularly those relating to air emissions. For example, we were required to modify ournatural gas and liquid propane-fueled liquid-cooled engines and generators by January 1, 2009 to comply with emissions standards in the United States.Typically, additional costs associated with significant compliance modifications are passed on to the market. While we have been able to meet previousdeadlines, failure to comply with other existing and future regulatory standards could adversely affect our position in the markets we serve. We may incur costs and liabilities as a result of product liability claims. We face a risk of exposure to product liability claims in the event that the use of our products is alleged to have resulted in injury or other damage. Although wecurrently maintain product liability insurance coverage, we may not be able to obtain such insurance on acceptable terms in the future, if at all, or obtaininsurance that will provide adequate coverage against potential claims. Product liability claims can be expensive to defend and can divert the attention ofmanagement and other personnel for long periods of time, regardless of the ultimate outcome. An unsuccessful product liability defense could have a materialadverse effect on our financial condition, and results of operations. In addition, we believe our business depends on the strong brand reputation we havedeveloped. If our reputation is damaged, we may face difficulty in maintaining our market share and pricing with respect to some of our products, whichcould reduce our sales and profitability. The loss of any key members of our senior management team or key employees could disrupt our operations and harm our business. Our success depends, in part, on the efforts of certain key individuals, including the members of our senior management team, who have significantexperience in the generator industry. If, for any reason, our senior executives do not continue to be active in management, or if our key employees leave ourcompany, our business, financial condition or results of operations could be adversely affected. Failure to continue to attract these individuals at reasonablecompensation levels could have a material adverse effect on our business, liquidity and results of operations. Although we do not anticipate that we will have toreplace 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 materialadverse effect on our business. Disruptions caused by labor disputes or organized labor activities could harm our business. Currently, less than 2% of our workforce is a member of a labor union. In addition, we may from time to time experience union organizing activities in ournon-union facilities. Disputes with the current labor union or new union organizing activities could lead to work slowdowns or stoppages and make it difficultor impossible for us to meet scheduled delivery times for product shipments to our customers, which could result in loss of business. In addition, unionactivity could result in higher labor costs, which could harm our financial condition, results of operations and competitive position. 10Table of Contents 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 ourfacilities, a material disruption at one of our manufacturing facilities could prevent us from meeting customer demand, reduce our sales and/or negativelyimpact our financial results. Any of our manufacturing facilities, or any of our machines within an otherwise operational facility, could cease operationsunexpectedly due to a number of events, including: · equipment or information technology infrastructure failure; · disruptions in the transportation infrastructure including roads, bridges, railroad tracks; · fires, floods, earthquakes, or other catastrophes; and · other operational problems. In addition, all of our manufacturing and production facilities are located in Wisconsin within a 30-mile radius. We could experience prolonged periods ofreduced production due to unforeseen events occurring in or around our manufacturing facilities in Wisconsin. In the event of a business interruption at ourWisconsin facilities, we may be unable to shift manufacturing capabilities to alternate locations, accept materials from suppliers or meet customer shipmentneeds, among other severe consequences. Such an event could have a material and adverse impact on our financial condition and results of our operations. A significant portion of our purchased components are sourced in foreign countries, exposing us to additional risks that may not exist in theUnited States. We source a significant portion of our purchased components overseas, primarily in Asia. Our international sourcing subjects us to a number of potentialrisks 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 and communications challenges; and · other restraints and burdensome taxes. These factors may have an adverse effect on our ability to source our purchased components overseas. In particular, if the U.S. dollar were to depreciatesignificantly against the currencies in which we purchase raw materials from foreign suppliers, our cost of goods sold could increase materially, which wouldadversely affect our results of operations. As a U.S. corporation that sources components in foreign countries, we are subject to the Foreign Corrupt Practices Act. A determination that weviolated this act may affect our business and operations adversely. As a U.S. corporation, we are subject to the regulations imposed by the U.S. Foreign Corrupt Practices Act, or the FCPA, which generally prohibits U.S.companies and their intermediaries from making improper payments to foreign officials for the purpose of obtaining or keeping business. Any determinationthat we have violated the FCPA could have a material adverse effect on our financial position, operating results and cash flows. We have significant tax assets, usage of which may be subject to limitations in the future. As of December 31, 2010, we had approximately $166.1 million of net operating loss carryforwards for U.S. federal income tax purposes. Any subsequentaccumulations of common stock ownership leading to a change of control under Section 382 of the U.S. Internal Revenue Code of 1986, including throughsales of stock by large stockholders, all of which are outside of our control, could limit our ability to utilize our net operating loss carryforwards to offsetfuture federal income tax liabilities. 11Table of Contents Our total assets include goodwill and other indefinite-lived intangibles. If we determine these have become impaired in the future, net incomecould 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 ofcertain trade names. At December 31, 2010, goodwill and other indefinite-lived intangibles totaled $667.2 million, most of which arose from the CCMPTransactions. We review goodwill and other intangibles at least annually for impairment and any excess in carrying value over the estimated fair value ischarged to the results of operations. A reduction in net income resulting from the write-down or impairment of goodwill or indefinite-lived intangibles couldhave a material adverse effect on our financial statements. For example, in October 2008, due to an increase in our weighted average cost of capital and lowercomparable public company market values resulting from weakening economic conditions, we determined that an impairment of goodwill existed and recordeda non-cash charge of $503.2 million in 2008. Goodwill and identifiable intangible assets are recorded at fair value on the date of acquisition. In accordance with FASB ASC (Accounting StandardsCodification) Topic 350-20, goodwill and indefinite lived intangibles are reviewed at least annually for impairment and definite-lived intangible assets arereviewed for impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable. Future impairment may resultfrom, among other things, deterioration in the performance of the acquired business or product line, adverse market conditions and changes in the competitivelandscape, adverse changes in applicable laws or regulations, including changes that restrict the activities of the acquired business or product line, and avariety of other circumstances. The amount of any impairment is recorded as a charge to the statement of operations. We may never realize the full value of ourintangible assets. Any future determination requiring the write-off of a significant portion of intangible assets would have an adverse effect on our financialcondition and results of operations. See “Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operations” for details. 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 onacceptable 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 notfavorable. The terms of our senior secured credit facilities limit our ability to incur additional debt. In addition, economic conditions, including a downturn inthe 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 onacceptable terms, we may have to delay, modify or abandon some or all of our growth strategies. Our revolving credit facility matures in November 2012 andour first lien term loan facility matures in November 2013. If we are unable to refinance these facilities on acceptable terms, our liquidity could be adverselyaffected. We are unable to determine the specific impact of changes in selling prices or changes in volumes of our products on our net sales. Because of the wide range of products that we sell, the level of customization for many of our products, the frequent rollout of new products and the fact thatwe do not apply pricing changes uniformly across our entire portfolio of products, we are unable to determine with specificity the effect of volume changes orchanges in selling prices on our net sales. Risks related to our common stock If securities or industry analysts do not publish research or reports about our business, if they adversely change their recommendationsregarding our common stock or if our results of operations do not meet their expectations, our common stock price and trading volume coulddecline. The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business.If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets,which in turn could cause our stock price or trading volume to decline. Moreover, if one or more of the analysts who cover us downgrade recommendationsregarding our stock, or if our results of operations do not meet their expectations, our stock price could decline and such decline could be material. 12Table of Contents As a public company, we are required to meet periodic reporting requirements under the Securities and Exchange Commission, or SEC, rulesand regulations. Complying with federal securities laws as a public company is expensive and we will incur significant time and expenseenhancing, documenting, testing and certifying our internal control over financial reporting. Any deficiencies in our financial reporting orinternal controls could adversely affect our business and the trading price of our common stock. SEC rules require that, as a publicly-traded company, we file periodic reports containing our financial statements within a specified time following thecompletion of quarterly and annual periods. Prior to our initial public offering, we had not been required to comply with these SEC requirements and, assuch, we may experience difficulty in meeting the SEC's reporting requirements. Any failure by us to file our periodic reports with the SEC in a timely mannercould harm our reputation and reduce the trading price of our common stock. As a public company, we incur significant incremental legal, accounting, insurance and other expenses. The Sarbanes-Oxley Act of 2002, as well ascompliance with other rules of the SEC and the New York Stock Exchange, or NYSE, has increased our legal and financial compliance costs and makessome activities more time-consuming and costly. Furthermore, SEC rules require that our chief executive officer and chief financial officer periodically certifythe existence and effectiveness of our internal control over financial reporting. Our independent registered public accounting firm will also be required,beginning with our Annual Report on Form 10-K for our fiscal year ending on December 31, 2011, to attest to the effectiveness of our internal control overfinancial reporting. This process requires significant documentation of policies, procedures and systems, review of that documentation by our internalaccounting staff and our outside auditors and testing of our internal control over financial reporting by our internal accounting staff. This process involvesconsiderable time and expense, may strain our internal resources and have an adverse impact on our operating costs. We may experience higher thananticipated operating expenses and outside auditor fees during the implementation of these changes and thereafter. During the course of our testing, we may identify deficiencies that would have to be remediated to satisfy the SEC rules for certification of our effectiveness ofinternal control over financial reporting. As a consequence, we may have to disclose in periodic reports we file with the SEC material weaknesses in oursystem of internal controls. The existence of a material weakness would preclude management from concluding that our internal control over financialreporting is effective and would preclude our independent auditors from issuing an unqualified opinion that our internal control over financial reporting iseffective. In addition, disclosures of this type in our SEC reports could cause investors to lose confidence in our financial reporting and may negatively affectthe trading price of our common stock. Moreover, effective internal controls are necessary to produce reliable financial reports and to prevent fraud. If we havedeficiencies in our disclosure controls and procedures or internal control over financial reporting, it may negatively impact our business, results of operationsand reputation. Anti-takeover provisions in our amended and restated certificate of incorporation and by-laws could prohibit a change of control that ourstockholders may favor and could negatively affect our stock price. Provisions in our amended and restated certificate of incorporation and by-laws may make it more difficult and expensive for a third party to acquire controlof us even if a change of control would be beneficial to the interests of our stockholders. These provisions could discourage potential takeover attempts andcould adversely affect the market price of our common stock. These provisions may also prevent or frustrate attempts by our stockholders to replace orremove our management. For example, our amended and restated certificate of incorporation and by-laws: · permit our board of directors to issue preferred stock with such terms as they determine, without stockholder approval; · provide that only one-third of the members of the board are elected at each stockholders meeting and prohibit removal without cause; · require advance notice for stockholder proposals and director nominations; and · contain limitations on convening stockholder meetings. These provisions make it more difficult for stockholders or potential acquirers to acquire us without negotiation and could discourage potential takeoverattempts and could adversely affect the market price of our common stock. 13Table of Contents Risks related to our capital structure We have a substantial amount of indebtedness, which may adversely affect our cash flow and our ability to operate our business, remain incompliance with debt covenants and make payments on our indebtedness. We have a significant amount of indebtedness. As of December 31, 2010, we had total indebtedness of $657.2 million. While we reduced this amount of debtduring 2010 through the use of the proceeds of our IPO and of cash on hand, including an additional prepayment of debt on December 21, 2010 of $74.2million (as discussed elsewhere in this report under “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations”), westill have a substantial amount of indebtedness. Our substantial level of indebtedness increases the possibility that we may be unable to generate cashsufficient to pay, when due, the principal of, interest on or other amounts due in respect of our indebtedness. Our substantial indebtedness, combined with ourlease and other financial obligations and contractual commitments could have other important consequences. For example, it could: · make it more difficult for us to satisfy our obligations with respect to our indebtedness, including financial and other restrictive covenants,which could result in an event of default under the agreements governing our indebtedness; · make us more vulnerable to adverse changes in general economic, industry and competitive conditions and adverse changes in governmentregulation; · require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing theavailability of our cash flows to fund working capital, capital expenditures, acquisitions and other general corporate purposes;· limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; · place us at a competitive disadvantage compared to our competitors that have less debt; and · limit our ability to borrow additional amounts for working capital, capital expenditures, acquisitions, debt service requirements, executionof our business strategy or other purposes. Any of the above-listed factors could materially adversely affect our business, financial condition, results of operations and cash flows. Furthermore, ourinterest expense could increase if interest rates increase because debt under our senior secured credit facilities bears interest at a variable rate. If we do not havesufficient 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, noneof which we can guarantee we will be able to do. The terms of our senior secured credit facilities restrict our current and future operations, particularly our ability to respond to changes in ourbusiness or to take certain actions. Our senior secured credit facilities contain, and any future indebtedness of ours or our subsidiaries would likely contain, a number of restrictive covenantsthat impose significant operating and financial restrictions on us and our subsidiaries, including restrictions on our ability to engage in acts that may be in ourbest long-term interests. Our senior secured credit facilities include a financial covenant that requires us not to exceed a maximum total leverage ratio. As of December 31, 2010, Generac Power Systems was required to maintain a maximum leverage ratio of 5.75 to 1.00 under the first lien credit facility. As ofDecember 31, 2010, Generac Power Systems' leverage ratio was 4.01 to 1.00. The maximum leverage ratio decreases over time. The first lien credit facilityrequires Generac Power Systems to have a leverage ratio of no greater than 5.75 to 1.00 in the first quarter of 2011, 5.50 to 1.00 in the second quarter of 2011,5.25 to 1.00 in the third quarter of 2011, and 4.75 to 1.00 in the fourth quarter of 2011 and thereafter. Failure to comply with this covenant would result in anevent of default under our senior secured credit facilities unless waived by our lenders. Our senior secured credit facilities require us to use a portion of excess cash flow and proceeds of certain asset sales that are not reinvested in our business andother dispositions to repay indebtedness under our senior secured credit facilities. Our senior secured credit facilities also include covenants restricting, 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. 14Table of Contents The operating and financial restrictions and covenants in our senior secured credit facilities and any future financing agreements may adversely affect ourability to finance future operations or capital needs or to engage in other business activities. A breach of any of the restrictive covenants in our senior securedcredit facilities would result in a default under our senior secured credit facilities. If any such default occurs, the lenders under our senior secured creditfacilities may elect to declare all outstanding borrowings, together with accrued interest and other fees, to be immediately due and payable, or enforce theirsecurity interest, any of which would result in an event of default. The lenders will also have the right in these circumstances to terminate any commitmentsthey have to provide further borrowings. At September 30, 2008, we failed to satisfy the leverage ratio in our senior secured credit facilities. This default was cured by an equity contribution fromaffiliates of CCMP. However, CCMP and its affiliates are under no obligation to provide additional funds to us in the event of future covenant defaults. Our principal stockholder continues to have substantial control over us. After giving effect to the IPO and underwriters option exercise occurring in 2010, affiliates of CCMP collectively beneficially own approximately 59.1% of ouroutstanding common stock. As a consequence, CCMP or its affiliates are able to exert a significant degree of influence or actual control over our managementand affairs and will control matters requiring stockholder approval, including the election of directors, a merger, consolidation or sale of all or substantially allof our assets, and any other significant transaction. The interests of this stockholder may not always coincide with our interests or the interests of our otherstockholders. For instance, this concentration of ownership may have the effect of delaying or preventing a change in control of us otherwise favored by ourother stockholders and could depress our stock price. Because affiliates of CCMP control more than 50% of the voting power of our common stock, we are a “controlled company” within the meaning of theNYSE's Listed Company Manual. Under the NYSE's Listed Company Manual, a controlled company may elect not to comply with certain NYSE corporategovernance requirements, including requirements that: (1) a majority of the board of directors consist of independent directors; (2) compensation of officers bedetermined or recommended to the board of directors by a majority of its independent directors or by a compensation committee that is composed entirely ofindependent directors; and (3) director nominees be selected or recommended by a majority of the independent directors or by a nominating committeecomposed solely of independent directors. Because we have taken advantage of the controlled company exemption to certain NYSE corporate governancerequirements, our stockholders do not have the same protections afforded to stockholders of companies that are subject to all of the NYSE corporategovernance requirements. Conflicts of interest may arise because some of our directors are principals of our principal stockholder. Representatives of CCMP and its affiliates occupy seats on our board of directors. CCMP or its affiliates could invest in entities that directly or indirectlycompete with us or companies in which CCMP or its affiliates are currently invested may already compete with us. As a result of these relationships, whenconflicts arise between the interests of CCMP or its affiliates and the interests of our stockholders, these directors may not be disinterested. The representativesof CCMP and its affiliates on our board of directors, by the terms of our amended and restated certificate of incorporation, are not required to offer us anytransaction opportunity of which they become aware and could take any such opportunity for themselves or offer it to other companies in which they have aninvestment, unless such opportunity is expressly offered to them solely in their capacity as our directors. Item 1B. Unresolved Staff Comments None. 15Table of Contents Item 2. Properties We own and operate three manufacturing facilities located in Eagle, Wisconsin, Waukesha, Wisconsin and Whitewater, Wisconsin, which totalapproximately 800,000 square feet. We also operate a dealer training center at our Eagle, Wisconsin facility, which allows us to train new industrial andresidential dealers on the service and installation of our products and provide existing dealers with training on product innovations. We own a distribution center totaling approximately 200,000 square feet and an undeveloped lot of approximately 18.1 acres in Whitewater, Wisconsin. Wealso have third party logistics inventory warehouses in the United States that accommodate the rapid response requirements of our customers. The following table shows the location and activities of our operations: LocationOwned /LeasedSquareFootage ActivitiesManufacturing: Waukesha, WIOwned264,000 Corporate headquarters and manufacturing of liquid-cooled generators andtransfer switchesEagle, WIOwned236,000 Manufacturing of liquid-cooled generators and metal fabricationEagle, WIOwned6,000 Training facilityWhitewater, WIOwned295,000 Manufacturing of vertically integrated engines and generatorsDistribution: Whitewater, WIOwned196,000 Distribution centerOther: Maquoketa, IAOwned137,000 Inventory warehouse and rental propertyAll of our properties are subject to mortgages under our senior secured credit facilities. Item 3. Legal Proceedings From time to time, we are involved in legal proceedings primarily involving product liability and employment matters and general commercial disputes arisingin the ordinary course of our business. As of December 31, 2010, we believe that there is no litigation pending that would have a material effect on our resultsof operations or financial condition. Item 4. Removed and Reserved. PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Price Range of Common Stock Shares of our common stock are traded on the NYSE under the symbol “GNRC.” The following table sets forth the high and low sales prices reported on theNYSE for our common stock by fiscal quarter during 2010, beginning on February 11, 2010, the first day that our shares were publicly traded. 2010 High Low Fourth Quarter $16.51 $13.04 Third Quarter $15.08 $11.99 Second Quarter $15.40 $10.65 First Quarter (beginning February 11, 2010) $15.40 $12.84 16Table of Contents 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&P500 Index and S&P 500 Industrials Index for the year ended December 31, 2010. The graph and table assume that $100 was invested on February 11, 2010(first day of trading) in each of our common stock, the S&P 500 Index, S&P 500 Industrials Index, and that all dividends were reinvested. Cumulative totalstockholder returns for our common stock, the S&P 500 Index, and the S&P 500 Industrials Index are based on our fiscal year. Period Ending Company/Market/PeerGroup 2/11/2010 2/28/2010 3/31/2010 4/30/2010 5/31/2010 6/30/2010 7/31/2010 8/31/2010 9/30/2010 10/31/2010 11/30/2010 12/31/2010 Generac Holdings, Inc. $100.00 $104.60 $109.11 $117.52 $85.59 $109.11 $115.03 $94.39 $106.23 $105.37 $115.73 $125.93 S&P 500 Index 100.00 102.54 108.73 110.45 101.63 96.31 103.05 98.40 107.18 111.26 111.28 118.71 S&P 500 IndustrialsIndex 100.00 103.75 113.00 117.70 106.48 99.09 109.35 101.68 113.27 116.26 117.55 126.65 17Table of Contents Holders As of February 22, 2011, there were approximately 91 registered holders of record of Generac’s common stock. A substantially greater number of holders ofGenerac common stock are “street name” or beneficial holders, whose shares are held of record by banks, brokers, and other financial institutions. Dividends We did not declare or pay cash dividends in 2010. We currently do not anticipate paying any dividends on our common stock. However, in the future, subjectto factors such as general economic and business conditions, our financial condition and results of operations, our capital requirements, our future liquidityand capitalization and such other factors that our board of directors may deem relevant, we may change this policy and choose to pay dividends. Our abilityto pay dividends on our common stock is currently restricted by the terms of our senior secured credit facilities and may be further restricted by any futureindebtedness we incur. Our business is conducted through our principal operating subsidiary, Generac Power Systems. Dividends from, and cash generatedby Generac Power Systems will be our principal sources of cash to repay indebtedness, fund operations and pay dividends. Accordingly, our ability to paydividends to our stockholders is dependent on the earnings and distributions of funds from Generac Power Systems. Securities Authorized for Issuance Under Equity Compensation Plans The information required by this item will be included in our 2011 Proxy Statement and is incorporated herein by reference. Recent Sales of Unregistered Securities None. Use of Proceeds from Registered Securities Not applicable. Item 6. Selected Financial Data The following table sets forth our selected historical consolidated financial data for the periods and at the dates indicated. The selected historical consolidatedfinancial data for the years ended December 31, 2008, 2009 and 2010 are derived from our audited consolidated financial statements included elsewhere in thisannual report. The selected historical consolidated financial data for the period from January 1, 2006 through November 10, 2006 (Predecessor Period) and theperiod from November 11, 2006 through December 31, 2006 (Successor Period) and the year ended December 31, 2007 are derived from our audited historicalfinancial statements not included in this annual report.In November 2006, affiliates of CCMP, together with affiliates of Unitas and members of our management, formed Generac and, through Generac, acquiredall of the capital stock of Generac Power Systems. See “Item 1—Business—History—CCMP transactions.” Generac in all periods prior to November 2006 isreferred to as “Predecessor,” and in all periods including and after such date is referred to as “Successor.” The consolidated financial statements for allSuccessor periods may not be comparable to those of the Predecessor Period. 18Table of Contents The results indicated below and elsewhere in this annual report are not necessarily indicative of our future performance. You should read this informationtogether with “Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statementsand related notes included in Item 8 of this annual report. Predecessor Successor Period from January 1, 2006 throughNovember 10, 2006Period from November 11, 2006 through December 31, 2006 Year ended December 31, 2007 Year ended December 31, 2008 Year ended December 31, 2009 Year ended December 31, 2010 (Dollars in thousands, except per sharedata) Statement of operations data: Net sales$606,249 $74,110 $555,705 $574,229 $588,248 $ 592,880 Costs of goods sold 371,425 55,105 333,428 372,199 352,398 355,523 Gross profit 234,824 19,005 222,277 202,030 235,850 237,357 Operating expenses: Selling and service 45,800 5,279 52,652 57,449 59,823 57,954 Research and development 9,141 1,168 9,606 9,925 10,842 14,700 General and administrative 12,631 1,695 17,581 15,869 14,713 22,599 Amortization of intangibles(1) — 8,576 47,602 47,602 51,960 51,808 Transaction-related expenses(2) 149,792 — — — — — Goodwill and trade name impairmentcharge(3) — — — 583,486 — — Total operating expenses 217,364 16,718 127,441 714,331 137,338 147,061 Income (loss) from operations 17,460 2,287 94,836 (512,301 ) 98,512 90,296 Other income (expense): Interest expense (673) (18,354) (125,366) (108,022) (70,862) (27,397)Gain on extinguishment of debt(4) — — 18,759 65,385 14,745 — Write-off of deferred financing costs relatedto debt extinguishment — — — — — (4,809)Investment income 1,571 302 2,682 600 2,205 235 Other, net (52) (192) (1,196) (1,217) (1,206) (1,105)Total other income (expense), net 846 (18,244) (105,121) (43,254) (55,118) (33,076)Income (loss) before provision (benefit) forincome taxes 18,306 (15,957) (10,285) (555,555) 43,394 57,220 Provision (benefit) for income taxes 5,519 — (571) 400 339 307 Net income (loss)$12,787 $(15,957) $(9,714)$(555,955)$43,055 $56,913 Income (loss) per share: Class A Common Stock(5) n/m $(10,106) $(34,994) $(357,628) $(41,111) $(1.65)Class B Common Stock(5) n/m $457 $3,462 $3,780 $4,171 $505 Statement of cash flows data: Depreciation $4,654 $936 $6,181 $7,168 $7,715 $7,632 Amortization 24 8,576 47,602 47,602 51,960 51,808 Expenditures for property and equipment (6,225) (720) (13,191) (5,186) (4,525) (9,631) Other financial data: Adjusted EBITDA(6) $174,303 $19,042 $158,148 $129,858 $159,087 $156,249 Adjusted Net Income(7) $167,774 $156 $21,931 $13,758 $83,643 $ 115,872 19Table of Contents(Dollars in thousands) As of December 31, 2006 As of December 31, 2007 As of December 31, 2008 As of December 31, 2009 As of December 31, 2010 Balance sheet data: Current assets $226,760 $217,750 $274,997 $345,017 $272,519 Property, plant and equipment, net 72,087 78,982 76,674 73,374 75,287 Goodwill 847,442 1,029,068 525,875 525,875 527,148 Other intangibles and other assets 817,720 582,859 448,668 392,977 334,929 Total assets $1,964,009 $1,908,659 $1,326,214 $1,337,243 $1,209,883 Total current liabilities $112,179 $94,690 $127,981 $131,971 $86,685 Long-term debt, less current portion 1,370,500 1,280,750 1,121,437 1,052,463 657,229 Other long-term liabilities 10,436 27,439 43,539 17,418 24,902 Redeemable stock(8) 685,667 747,070 843,451 878,205 — Total liabilities, redeemable stock and stockholders'equity(8) $1,964,009 $1,908,659 $1,326,214 $1,337,243 $1,209,883 (1) Our amortization of intangibles expenses include the straight-line amortization of customer lists, patents and other finite-lived intangibles assets.(2) Transaction-related expenses incurred by the Predecessor, which primarily related to the settlement of the employee share appreciation program inconnection with the CCMP Transactions.(3) As of October 31, 2008, as a result of our annual goodwill and trade names impairment test, we determined that an impairment of goodwill and tradenames existed, and we recognized a non-cash charge of $583.5 million in 2008.(4) During 2007, affiliates of CCMP acquired $80.3 million principal amount of second lien term loans for approximately $60.0 million. CCMP's affiliatesexchanged this debt for additional shares of our Class B Common Stock. The fair value of the shares exchanged was $60.0 million. We recorded thistransaction as additional Class B Common Stock of $60.0 million based on the fair value of the debt contributed by CCMP's affiliates, which approximatedthe fair value of shares exchanged. The debt was held in treasury at face value. Consequently, we recorded a gain on extinguishment of debt of $18.8 million,which includes a write-off of deferred financing fees and other closing costs in the consolidated statement of operations for the year ended December 31, 2007.During 2008, affiliates of CCMP acquired $148.9 million principal amount of second lien term loans for approximately $81.1 million. CCMP's affiliatesexchanged this debt for additional shares of our Class B Common Stock and Series A Preferred Stock. The fair value of the shares exchanged was$81.1 million. We recorded this transaction as Series A Preferred Stock of $62.9 million and Class B Common Stock of $18.2 million based on the fairvalue of the debt contributed by CCMP's affiliates, which approximated the fair value of shares exchanged. The debt was held in treasury at face value.Consequently, we recorded a gain on extinguishment of debt of $65.4 million, which includes a write-off of deferred financing fees and other closing costs inthe consolidated statement of operations for the year ended December 31, 2008.During 2009, affiliates of CCMP acquired $9.9 million principal amount of first lien term loans and $20.0 million principal amount of second lien termloans for approximately $14.8 million. CCMP's affiliates exchanged this debt for 1,475.4596 shares of Series A Preferred Stock. The fair value of the sharesexchanged was $14.8 million. We recorded this transaction as additional Series A Preferred Stock of $14.8 million based on the fair value of the debtcontributed by CCMP's affiliates, which approximated the fair value of shares exchanged. The debt was held in treasury at face value. Consequently, werecorded a gain on extinguishment of debt of $14.7 million, which includes a write-off of deferred financing fees and other closing costs, in the consolidatedstatement of operations for the year ended December 31, 2009.(5) n/m—Earnings per share for the Predecessor has not been presented since it is not meaningful due to changes in our equity structure that resulted fromthe CCMP Transactions. For Successor period, earnings per share reflects the impact of the reverse stock split which occurred immediately prior to the initialpublic offering as discussed in “Item 8 – Financial Statements and Supplementary Data – Note 1”. At the time of the IPO on February 17, 2010, all shares ofClass B common stock were converted into shares of Class A common stock, and the Class A common stock became the one class of outstanding commonstock. See discussion of the IPO in Part 1, Item 1 – Business—History—Initial public offering and corporate reorganization.(6) Adjusted EBITDA represents net income (loss) before interest expense, taxes, depreciation and amortization, as further adjusted for the other itemsreflected in the reconciliation table set forth below. This presentation is substantially consistent with the presentation used in our senior secured credit facilities(Covenant EBITDA), except that we do not give effect to certain additional adjustments that are permitted under those facilities which, if included, wouldincrease the amount reflected in this table. For a description of the additional adjustments permitted for Covenant EBITDA under our senior secured creditfacilities, see "Item 7 - Management's discussion and analysis of financial condition and results of operations—Senior secured credit facilities—Covenantcompliance." 20Table of Contents 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 seniorsecured credit facilities but also because it assists us in comparing our performance across reporting periods on a consistent basis because it excludes itemsthat 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 futureperiods;• 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, asdescribed further in our Proxy Statement;• to evaluate the effectiveness of our business strategies and as a supplemental tool in evaluating our performance against our budget for each period;and• in communications with our board of directors and investors concerning our financial performance.We believe Adjusted EBITDA is used by securities analysts, investors and other interested parties in the evaluation of our company. Management believes thatthe disclosure of Adjusted EBITDA offers an additional financial metric that, when coupled with U.S. GAAP results and the reconciliation to U.S. GAAPresults, provides a more complete understanding of our results of operations and the factors and trends affecting our business. We believe Adjusted EBITDAis 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 toitems that can vary substantially from company to company depending upon financing and accounting methods, book values of assets, taxjurisdictions, 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 abilityto 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 ofitems described below.The adjustments included in the reconciliation table listed below are provided for under our senior secured credit facilities (except where noted in footnote (j)below) and also are presented to illustrate the operating performance of our business in a manner consistent with the presentation used by our management andboard 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 impairment and other charges, transaction costs relating tothe CCMP Transactions and repurchases of our debt by affiliates of CCMP, non-cash gains relating to the retirement of debt, severance costs andother 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 letterof credit fees;• are non-cash in nature, such as share-based compensation; or• were eliminated following the consummation of our initial public offering, such as sponsor fees.We explain in more detail in footnotes (a) through (j) below why we believe these adjustments are useful in calculating Adjusted EBITDA as a measure of ouroperating performance.Adjusted EBITDA does not represent, and should not be a substitute for, net income or cash flows from operations as determined in accordance withU.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 resultsas 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, onour 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 impairment charges, while not involving cash expense,do have a negative impact on the value our assets as reflected in our consolidated balance sheet prepared in accordance with U.S. GAAP;• the adjustments for business optimization expenses, which we believe are appropriate for the reasons set out in note (f) below, represent costsassociated with severance and other items which are reflected in operating expenses and income (loss) from continuing operations in our consolidatedstatements of operations 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. 21Table of Contents Furthermore, as noted above, one of our uses of Adjusted EBITDA is as a benchmark for determining elements of compensation for our senior executives. Atthe same time, some or all of these senior executives have responsibility for monitoring our financial results generally, including the items that are included asadjustments in calculating Adjusted EBITDA (subject ultimately to review by our board of directors in the context of the board's review of our quarterlyfinancial statements). While many of the adjustments (for example, transaction costs and credit facility fees and sponsor fees), involve mathematicalapplication of items reflected in our financial statements, others (such as business optimization adjustments) involve a degree of judgment and discretion.While we believe that all of these adjustments are appropriate, and while the quarterly calculations are subject to review by our board of directors in the contextof the board's review of our quarterly financial statements and certification by our chief financial officer in a compliance certificate provided to the lendersunder our senior secured credit facilities, 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 ourbusiness. We compensate for these limitations by relying primarily on our U.S. GAAP results and using Adjusted EBITDA only supplementally.Our senior secured credit facility requires Generac Power Systems, Inc. to maintain a leverage ratio of consolidated total debt, net of unrestricted cash andmarketable securities, to Covenant EBITDA at a level that varies over time. As of December 31, 2010, Generac Power Systems, Inc.’s ratio was 4.01 to 1.00,which was below the covenant requirement of 5.75 to 1.00. Generac Holdings Inc. net debt to adjusted EBITDA ratio as of December 31, 2010 was3.70x. Our credit agreement does not permit us to net cash and cash equivalents held by the Generac Holdings Inc. entity against our debt balance for covenantpurposes. Failure to comply with this covenant would result in an event of default under our senior secured credit facility unless waived by our lenders. Anevent of default under our senior secured credit facility could result in the acceleration of our indebtedness under the facility, and we may be unable to repaythe amounts due.The following table presents a reconciliation of net income (loss) to Adjusted EBITDA: Predecessor Successor (Dollars in thousands) Period fromJanuary 1,2006 throughNovember 10,2006 Period fromNovember 11,2006 throughDecember 31,2006 Year endedDecember 31,2007 Year endedDecember 31,2008 Year endedDecember 31,2009 Year endedDecember 31,2010 Net income (loss) $12,787 $(15,957) $(9,714) $(555,955) $43,055 $56,913 Interest expense 673 18,354 125,366 108,022 70,862 27,397 Depreciation and amortization 4,678 9,512 53,783 54,770 59,675 59,440 Income taxes provision (benefit) 5,519 - (571) 400 339 307 Non-cash impairment and other charges(income)(a) 416 6,998 5,328 585,634 (1,592) (361)Non-cash share-based compensationexpense(b) - - - - - 6,363 Write-off of deferred financing costs relatedto debt extinguishment(c) - - - - - 4,809 Transaction costs and credit facility fees(d) 149,792 80 1,044 1,319 1,188 1,019 Non-cash gains(e) - - (18,759) (65,385) (14,745) - Business optimization expenses(f) 438 62 1,944 971 - 108 Sponsor fees(g) - 70 500 500 500 56 Letter of credit fees(h) - - 335 169 135 (26)Other state franchise taxes(i) - - - 53 72 317 Holding company interest income(j) - (77) (1,108) (640) (402) (93) Adjusted EBITDA $174,303 $19,042 $158,148 $129,858 $159,087 $156,249 (a) Represents the following non-cash charges:• for the Predecessor Period, a loss on disposal of assets;• for the period from November 11 through December 31, 2006, a charge for the step-up in book value of inventory as a result of the application of purchaseaccounting in connection with the CCMP Transactions;• for the year ended December 31, 2007, primarily a $3.9 million charge for the step-up in book value of inventory as a result of the application of purchaseaccounting in connection with the CCMP Transactions. Also includes $1.4 million of other charges, including a write-off of a pre-CCMP Transactionsreceivable, stock compensation expense, unsettled mark-to-market losses on copper forward contracts and losses on disposals of assets;• for the year ended December 31, 2008, primarily $503.2 million in goodwill impairment charges and $80.3 million in trade name impairment chargesdescribed in "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations—Critical accounting policies—Goodwill andother intangible assets." $1.6 million of the amount is comprised of unsettled mark to market losses on copper forward contracts, a write-off of pre-CCMPTransactions bad debts and losses on disposals of assets. Separately, the amount also includes a write-off of certain inventory;• for the years ended December 31, 2010 and 2009, primarily unrealized mark-to-market adjustments on copper and Euro forward contracts and loss ondisposal of assets; 22Table of ContentsWe believe that adjusting net income for these non-cash charges is useful for the following reasons:• The losses on disposals of assets in several periods described above result from the sale of assets that are no longer useful in our business and thereforerepresent losses that are not from our core operations;• The charge for the step-up in the value of inventory as a result of the application of purchase accounting at the time of the CCMP Transactions is a one-timecharge resulting from our acquisition by CCMP in 2006 described in "Item 7 – Management’s Discussion and Analysis of Financial Condition and Results ofOperations – Transactions with CCMP”;• The write-offs of certain pre-CCMP Transaction bad debts in the years ended December 31, 2007 and 2008 are non-cash charges that we believe do notreflect cash outflows after our acquisition by CCMP;• The adjustments for unrealized mark-to-market gains and losses on copper forward and Euro contracts represent non-cash items to reflect changes in the fairvalue of forward contracts that have not been settled or terminated. We believe that it is useful to adjust net income for these items because the charges do notrepresent a cash outlay in the period in which the charge is incurred, although Adjusted EBITDA must always be used together with our U.S. GAAPstatements of operations and cash flows to capture the full effect of these contracts on our operating performance;• The goodwill and trade name impairment charges recorded in the year ended December 31, 2008 are one-time items that we believe do not reflect our ongoingoperations. These charges are explained in greater detail in "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies—Goodwill and Other Intangible Assets";• The small amount of stock compensation expense recorded in the year ended December 31, 2007 was a non-cash charge for compensation under our 2006Management Equity Incentive Plan. We do not believe that equity awards and the related expense under our 2006 Management Equity Incentive Plan, whichterminated in connection with our initial public offering, will be useful in predicting stock compensation expense that we will incur under the new equityincentive plan that we adopted in connection with the IPO. However, we do expect to incur stock compensation expense under the new plan, and you should seeour Proxy Statement under captions "Compensation discussion and analysis—Components of compensation—Equity-based compensation" and "Executivecompensation—2010 Equity incentive plan" for more information about that plan; and• The write-off of certain pre-CCMP Transaction excess inventory recorded in the year ended December 31, 2008 was a non-cash charge that we believe doesnot reflect cash outflows after our acquisition by CCMP.(b) Represents share-based compensation expense to account for stock options, restricted stock and other stock awards over their vesting period, issued inconnection our initial public offering;(c) Represents the write-off of a portion of deferred financing costs related to the repayment of debt after our initial public offering;(d) Represents the following transaction costs and fees relating to our senior secured credit facilities:• transaction costs relating to the CCMP Transactions recorded in the Predecessor Period from January 1, 2006 through November 10, 2006 and theSuccessor Period from November 11, 2006 through December 31, 2008, which consisted primarily of the expense incurred by our Predecessor when grantsunder its Equity Appreciation Share Plan vested upon the change of control triggered by the CCMP Transactions;• for all periods after 2006, administrative agent fees and revolving credit facility commitment fees under our senior secured credit facilities, which we believeto be akin to, or associated with, interest expense and whose inclusion in Adjusted EBITDA is therefore similar to the inclusion of interest expense in thatcalculation;• for all periods after 2006, transaction costs relating to repurchases of debt under our first and second lien credit facilities by affiliates of CCMP, whichCCMP's affiliates contributed to our company in exchange for the issuances of securities, which repurchases we do not expect to recur;(e) represents the following non-cash gains: • for all periods after 2006, represents non-cash gains on the extinguishment of debt repurchased by affiliates of CCMP, as described in note (d) above, whichwe do not expect to recur.(f) Primarily represents severance costs incurred from restructuring-related activities. For the year ended December 31, 2007, consists of $1.4 million ofseverance costs and $0.6 million of other restructuring-related costs. We do not believe the charges for restructuring-related activities in the year endedDecember 31, 2007 reflect our ongoing operations. Although we have incurred severance costs in most of the periods set forth in the table above, it is difficultto predict the amounts of similar costs in the future, and we believe that adjusting for these costs aids in measuring the performance of our ongoing operations.We believe that these costs will tend to be immaterial to our results of operations in future periods.(g) Represents management, consulting, monitoring, transaction and advisory fees and related expenses paid or accrued to affiliates of CCMP and affiliatesof Unitas (related parties) under an advisory services and monitoring agreement. This agreement automatically terminated upon consummation of our initialpublic offering, and, accordingly, we believe that these expenses do not reflect the expenses of our ongoing operations.(h) Represents fees on letters of credit outstanding under our senior secured credit facilities, which we believe to be akin to, or associated with, interestexpense and whose inclusion in Adjusted EBITDA is therefore similar to the inclusion of interest expense.(i) Represents franchise and business activity taxes paid at the state level. We believe that the inclusion of these taxes in calculating Adjusted EBITDA issimilar to the inclusion of income taxes, as set forth in the table above.(j) Represents interest earned on cash held at Generac Holdings Inc. We exclude these amounts because we do not include them in the calculation of "CovenantEBITDA" under and as defined in our senior secured credit facilities. 23Table of Contents(7) Adjusted Net Income is defined as net income (loss) before provision (benefit) for income taxes adjusted for the following items: cash income tax expense(benefit), amortization of intangible assets, amortization and write-offs of deferred loan costs related to the Company’s debt, intangible asset impairmentcharges, transaction costs and purchase accounting adjustments, and non-cash gains reflected in the reconciliation table set forth below.We believe Adjusted Net Income is used by securities analysts, investors and other interested parties in the evaluation of our company operations. Managementbelieves the disclosure of Adjusted Net Income offers an additional financial metric that, when used in conjunction with U.S. GAAP results and thereconciliation to U.S. GAAP results, provides a more complete understanding of our 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 consistentwith the presentation used by investors and securities analysts. Similar to the Adjusted EBITDA reconciliation, these adjustments eliminate the impact of anumber of items that we do not consider indicative of our ongoing operating performance, such as amortization costs, and non-cash gains and write-offsrelating to the retirement of debt. We also make adjustments to present cash taxes paid.Similar to Adjusted EBITDA, Adjusted Net Income does not represent, and should not be a substitute for, net income or cash flows from operations asdetermined 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 asubstitute 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 anycash requirements for such replacements;• 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 (loss) to Adjusted Net Income: Predecessor Successor (Dollars in thousands) Period fromJanuary 1,2006 throughNovember 10,2006 Period fromNovember 11,2006 throughDecember 31,2006 Year endedDecember 31,2007 Year endedDecember 31,2008 Year endedDecember 31,2009 Year endedDecember 31,2010 Net income (loss) $12,787 $(15,957) $(9,714) $(555,955) $43,055 $56,913 Provision (benefit) for income taxes 5,519 - (571) 400 339 307 Income (loss) before provision (benefit) forincome taxes 18,306 (15,957) (10,285) (555,555) 43,394 57,220 Amortization of intangible assets 24 8,576 47,602 47,602 51,960 51,808 Amortization of deferred loan costs - 590 4,225 3,905 3,417 2,439 Write-off of deferred financing costs relatedto debt extinguishment - - - - - 4,809 Intangible impairment charge - - - 583,486 - - Transaction costs and purchase accountingadjustments 149,792 6,998 3,925 - - - Gain on extinguishment of debt - - (18,759) (65,385) (14,745) - Adjusted net income before income taxes 168,122 207 26,708 14,053 84,026 116,276 Cash income tax expense (348) (51) (4,777) (295) (383) (404) Adjusted net income $167,774 $156 $21,931 $13,758 $83,643 $115,872 (8) Includes our Series A Preferred Stock and Class B Common Stock. See Note 6 to our audited consolidated financial statements included in Item 8 of thisannual report. 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 6 - Selected FinancialData” and the consolidated financial statements and the related notes included in Item 8 of this annual report. This discussion contains forward-looking statements, based on current expectations and related to future events and our future financial performance, that involve risks anduncertainties. 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.” 24Table of ContentsOverviewWe are a leading designer and manufacturer of a wide range of standby generators for the residential, industrial and commercial markets. As the onlysignificant market participant focused predominantly on these products, we have one of the leading market positions in the standby generator market in theUnited States and Canada. We design, engineer and manufacture generators with an output of between 800W and 9mW of power. We design, manufacture,source and modify engines, alternators, automatic transfer switches and other components necessary for our products. Our generators are fueled by naturalgas, liquid propane, gasoline, diesel and Bi-Fuel™. Our products are available through a broad network of independent dealers, retailers and wholesalers.Business drivers and measuresIn operating our business and monitoring its performance, we pay attention to a number of industry trends, performance measures and operational factors.The statements in this section are based on our current expectations.Industry trendsOur performance is affected by the demand for reliable back-up power solutions by our customer base. This demand is influenced by several important trendsaffecting our industry, including the following:Increasing penetration opportunity. Although there have been recent increases in product costs for installed standby generators in the residential and light-commercial markets (driven in the last two years by raw material costs), these costs have declined overall over the last decade, and many potential customersare not aware of the costs and benefits of backup power solutions. We estimate that penetration rates for residential products are approximately 2% of U.S.single-family detached, owner-occupied households with a home value of over $100,000, as defined by the U.S. Census Bureau's 2007 American HousingSurvey for the United States, and penetration rates of many light-commercial outlets such as restaurants, drug stores, and gas stations are significantly lowerthan penetration of hospitals and industrial locations. We believe that by expanding our distribution network, continuing to develop our product line, andtargeting our marketing efforts, we can continue to build awareness and increase penetration for our standby generators.Impact of residential investment cycle. The market for residential generators is affected by the residential investment cycle and overall consumersentiment. When homeowners are confident of their household income or net worth, they are more likely to invest in their home. These trends can have amaterial impact on demand for residential generators.Effect of large scale power disruptions. Power disruptions are an important driver of consumer awareness and have historically influenced demand forgenerators. Disruptions in the aging U.S. power grid and tropical and winter storm activity increase product awareness and may drive consumers to acceleratetheir purchase of a standby or portable generator during the immediate and subsequent period, which we believe may last for six to twelve months for standbygenerators. While there are power outages every year across all regions of the country, major outage activity is unpredictable by nature and, as a result, oursales levels and profitability may fluctuate from period to period.Impact of business capital investment cycle. The market for commercial and industrial generators is affected by the capital investment cycle and overalldurable goods spending, as businesses either add new locations or make investments to upgrade existing locations. These trends can have a material impact ondemand for industrial and commercial generators. However the capital investment cycle may differ for the various industrial and commercial end markets(industrial, telecommunications, distribution, retail health care facilities and municipal infrastructure, among others). The market for generators is alsoaffected by general economic conditions, credit availability and trends in durable goods spending by consumers and businesses.Operational factorsWe are subject to various factors that can affect our results of operations, which we attempt to mitigate through factors we can control, including continuedproduct development, expanded distribution, pricing and cost control. The operational factors that affect our business include the following:New product start-up costs. When we launch new products, we generally experience an increase in start-up costs, including engineering expenses, airfreight expenses, testing expenses and marketing expenses, resulting in lower gross margins after the initial launch of a new product. Margins on new productintroductions generally increase over the life of the product as these start-up costs decline and we focus our engineering efforts on product cost reduction. 25Table of Contents Effect of commodity, currency and component price fluctuations. Industry-wide price fluctuations of key commodities, such as steel, copper andaluminum and other components we use in our products, together with foreign currency fluctuations, can have a material impact on our results of operations.We have historically attempted to mitigate the impact of rising commodity, currency and component prices through improved product design, price increasesand select hedging transactions. Our results are also influenced by changes in fuel prices in the form of freight rates, which in some cases are borne by ourcustomers and in other cases are paid by us.Other factorsOther factors that affect our results of operations include the following:Factors influencing interest and amortization expense. As a result of the CCMP Transactions in 2006, our interest expense and amortization expenseincreased. Accordingly, our consolidated financial statements prior to November 2006 are not comparable to subsequent periods, primarily as a result ofsignificantly increased interest expense and amortization expense. Interest expense decreased in 2010 because we repaid $434.3 million of outstandingindebtedness during 2010, interest rates declined from 2009 levels and certain interest rate swap contracts terminated at the beginning of 2010.Factors influencing provision for income taxes. Because we made a Section 338(h)(10) election in connection with the CCMP Transactions, we have$1.3 billion of tax-deductible goodwill and intangible asset amortization remaining as of December 31, 2010 that we expect to generate cash tax savings of$510 million through 2021, assuming continued profitability and a 38.5% tax rate. The amortization of these assets for tax purposes is expected to be$122 million annually through 2020 and $102 million in 2021, which generates annual cash tax savings of $47 million through 2020 and $39 million in2021, assuming profitability and a 38.5% tax rate. Additionally, we have federal net operating loss, or NOL, carry-forwards of $166.1 million as ofDecember 31, 2010, which we expect to generate an additional $58 million of federal cash tax savings at a 35% rate when and if utilized. Based on currentbusiness plans, we believe that our cash tax obligations through 2021 will be significantly reduced by these tax attributes. However, any subsequentaccumulations of common stock ownership leading to a change of control under Section 382 of the U.S. Internal Revenue Code of 1986, including throughsales of stock by large stockholders, all of which are outside of our control, could limit and defer our ability to utilize our net operating loss carryforwards tooffset future federal income tax liabilities. Seasonality. Although there is demand for our products throughout the year, in each of the past three years approximately 20% to 24% of our net salesoccurred in the first quarter, 22% to 25% in the second quarter, 25% to 29% in the third quarter and 26% to 30% in the fourth quarter, with differentseasonality depending on the timing of outage activity in each year. We maintain a flexible production schedule in order to respond to outage-driven peakdemand, but typically increase production levels in the second and third quarters of each year.Transactions with CCMPIn November 2006, affiliates of CCMP, together with affiliates of Unitas and members of our management, purchased an aggregate of $689 million of ourequity capital. In addition, on November 10, 2006, Generac Power Systems borrowed an aggregate of $1,380 million, consisting of an initial drawdown of$950 million under a $1.1 billion first lien secured credit facility and $430 million under a $430 million second lien secured credit facility. With the proceedsfrom these equity and debt financings, together with cash on hand at Generac Power Systems, we (1) acquired all of the capital stock of Generac PowerSystems and repaid certain pre-transaction indebtedness of Generac Power Systems for $2.0 billion, (2) paid $66 million in transaction costs related to thetransaction and (3) retained $3 million for general corporate purposes. For additional information concerning these and other historical transactions withCCMP, see “Item 1—Business—History—CCMP transactions.”During 2007, affiliates of CCMP acquired $80.3 million principal amount of second lien term loans for approximately $60.0 million. CCMP's affiliatesexchanged this debt for additional shares of Class B Common Stock. The fair value of the shares exchanged was $60.0 million. We recorded this transactionas additional Class B Common Stock of $60.0 million based on the fair value of the debt contributed by CCMP's affiliates, which approximated the fairvalue of shares exchanged. The debt was held in treasury at face value. Consequently, we recorded a gain on extinguishment of debt of $18.8 million, whichincludes the write-off of deferred financing fees and other closing costs, in the consolidated statement of operations for the year ended December 31, 2007. 26Table of Contents During 2008, affiliates of CCMP acquired $148.9 million principal amount of second lien term loans for approximately $81.1 million. CCMP's affiliatesexchanged $24.0 million principal amount of this debt for additional shares of Class B Common Stock and $124.9 million principal amount of this debt forshares of our Series A Preferred Stock. The fair value of the shares of our Class B Common Stock and Series A Preferred Stock so exchanged was $18.2million and $62.9 million, respectively. We recorded this transaction as Series A Preferred Stock of $62.9 million and Class B Common Stock of $18.2million based on the fair value of the debt contributed by CCMP's affiliates, which approximated the fair value of shares exchanged. The debt was held intreasury at face value. Consequently, we recorded a gain on extinguishment of debt of $65.4 million, which includes the write-off of deferred financing feesand other closing costs, in the consolidated statement of operations for the year ended December 31, 2008.As of September 30, 2008, we failed to satisfy the leverage ratio in our senior secured credit facilities. As permitted by the credit agreement, in November,2008, this violation was remedied by an equity contribution of $15,500,000 from affiliates of CCMP, in exchange for 1,550 shares of Series A Preferredstock.During 2009, affiliates of CCMP acquired $9.9 million principal amount of first lien term loans and $20.0 million principal amount of second lien termloans for approximately $14.8 million. CCMP's affiliates exchanged this debt for 1,475.4596 shares of Series A Preferred Stock. The fair value of the sharesexchanged was $14.8 million. We recorded this transaction as additional Series A Preferred Stock of $14.8 million based on the fair value of the debtcontributed by CCMP's affiliates, which approximated the fair value of shares exchanged. The debt was held in treasury at face value. Consequently, werecorded a gain on extinguishment of debt of $14.7 million, which includes a write-off of deferred financing fees and other closing costs, in the consolidatedstatement of operations for the year ended December 31, 2009.In connection with such issuances of our Class B Common Stock to affiliates of CCMP in connection with debt exchanges in 2007 and 2008 and thesatisfaction of preemptive rights under the shareholders' agreement that arose from such issuances, affiliates of CCMP sold some of the shares of our Class BCommon Stock they were issued in connection with such debt exchanges to an entity affiliated with CCMP, certain affiliates of Unitas and certain members ofour management and board of directors. In addition, in connection with such issuances of our Series A Preferred Stock to affiliates and CCMP in connectionwith debt exchanges in 2008 and 2009 and the satisfaction of preemptive rights under the shareholders' agreement that arose from such issuances, during theyear ended December 31, 2009, we issued 2,000 shares of Series A Preferred Stock for an aggregate purchase price of $20.0 million in cash to an entityaffiliated with CCMP and certain members of management and our board of directors, and affiliates of CCMP sold some of the shares of Series A PreferredStock they were previously issued in connection with such debt exchanges to an entity affiliated with CCMP and a member of the board of directors at thesame price.Corporate reorganizationOur capitalization prior to the initial public offering consisted of Series A Preferred Stock, Class B Common Stock and Class A Common Stock. OurSeries A Preferred Stock was entitled to a priority return preference equal to a 14% annual return on the amount originally paid for such shares and equityparticipation equal to 24.3% of the remaining equity value of the Company. Our Class B Common Stock was entitled to a priority return preference equal to a10% annual return on the amount originally paid for such shares. In connection with the initial public offering, we undertook a corporate reorganization whichgave effect to the conversion of our Series A Preferred Stock and Class B Common Stock into the same class of our common stock that was sold in our initialpublic offering while taking into account the rights and preference of those shares, including the priority returns of our Series A Preferred Stock and ourClass B Common Stock and the equity participation rights of the Series A Preferred Stock. A reverse stock split was needed to reduce the number of shares tobe issued to holders of our Class A and Class B Common Stock to the number that correctly reflected the proportionate interest of such stockholders in ourcompany, taking into account the number of shares of common stock to be issued upon the conversion of our Series A Preferred Stock and the number andvalue of shares of common stock to be issued and sold to new investors in the initial public offering. We refer to these transactions as the “CorporateReorganization.” The specific steps in the Corporate Reorganization were as follows:Treatment of Class B Common StockOur certificate of incorporation prior to the offering provided for the mandatory conversion of our Class B Voting Common Stock to Class A Common Stockin the event of an initial public offering, so that our Class B Common Stock is converted into the same class of our common stock that is to be offered in aninitial public offering taking into account of the value, rights and preferences of our Class B Common Stock. In accordance with the terms of our certificate ofincorporation prior to the offering, at the time we entered into an underwriting agreement with respect to the initial public offering, each share of our Class BCommon Stock automatically converted into a number of shares of our Class A Common Stock equal to one plus the quotient obtained by dividing (i)(x) theamount paid for such share of Class B Common Stock plus (y) an increase to such amount equal to 10% per annum calculated and compounded quarterly onthe basis of a 360-day year of twelve 30-day months and which increased amount shall be deemed to have accrued on a daily basis (i.e., the “Class BReturn”), by (ii) the public offering price (net of underwriting discounts and commissions). We refer to this as the “Class B Conversion.” Each share of ourClass B Common Stock converted into 1,118.440 shares of our Class A Common Stock (i.e., the “Class B Conversion Ratio”). As a result of the Class BConversion, we issued an aggregate of 88,484,700 shares of our Class A Common Stock. 27Table of ContentsReverse stock splitImmediately following the Class B Conversion, we effected a 3.294 for one reverse stock split of our then outstanding shares of Class A Common Stock,including those shares of our Class A Common Stock issued as part of the Class B Conversion, which decreased the number of shares of our Class ACommon Stock immediately after the Class B Conversion from 88,490,028 shares to 26,861,523 shares. We refer to this as the “Reverse Stock Split.”Treatment of Series A Preferred StockThe certificate of designations for our Series A Preferred Stock prior to our initial public offering provided for the mandatory conversion of the Series APreferred Stock to Class A Common Stock in the event of an initial public offering, so that our Series A Preferred Stock is converted into the same class of ourcommon stock that is to be offered in an initial public offering taking into account of the value, rights and preferences of our Series A Preferred Stock. Inaccordance with the terms of the certificate of designations to our Series A Preferred Stock and our certificate of incorporation prior to the offering, promptlyfollowing the time we entered into an underwriting agreement with respect to the initial public offering, each share of our Series A Preferred Stock automaticallyconverted into a number of shares of our Class A Common Stock equal to the sum of (A) the quotient obtained by dividing (i)(w) the amount paid for suchshare of Series A Preferred Stock plus (x) an increase to such amount equal to 14% per annum calculated and compounded quarterly on the basis of a 360-dayyear of twelve 30-day months and which increased amount shall be deemed to have accrued on a daily basis (the “Series A Preferred Return”), by (ii) thepublic offering price (net of underwriting discounts and commissions), plus (B) the product of (y) a fraction, the numerator of which is one and thedenominator of which is the number of shares of our Series A Preferred Stock outstanding at such time, and (z) an additional number of shares of our Class ACommon Stock that, when added to the number of shares of our Class A Common Stock outstanding at such time, including after giving effect to the ClassB Conversion and the Reverse Stock Split, equaled 24.3% of the number of shares of our Class A Common Stock outstanding at such time (excluding theshares issued pursuant to clause (A) above). We refer to this as the “Series A Preferred Conversion.” Each share of our Series A Preferred Stock converted into1,724.976 shares of our Class A Common Stock (i.e., the “Series A Preferred Conversion Ratio”). As a result of the Series A Preferred Conversion, we issuedan aggregate of 19,511,018 shares of our Class A Common Stock.Reclassification of Class A Common StockAfter giving effect to the Class B Conversion, the Reverse Stock Split and the Series A Preferred Conversion, there were 46,372,541 shares of Class ACommon Stock which were reclassified as common stock.Initial public offeringOn February 17, 2010, the Company completed its initial public offering of 18,750,000 shares of its common stock at a price of $13.00 per share. Inaddition, the underwriters exercised their option and purchased an additional 1,950,500 shares of the Company’s common stock from the Company onMarch 18, 2010. We received a total of approximately $247.9 million in net proceeds from the initial public offering and underwriters’ option exercise, afterdeducting the underwriting discounts and expenses. Immediately following the Corporate Reorganization, the IPO and underwriters’ option exercise, we had67,529,290 total shares of common stock outstanding.Repayment of debtIn February 2010, we used $221.6 million in net proceeds from the initial closing of the IPO to pay down our second lien term loan in full and to pay down aportion of our first lien term loan. In addition, in March 2010 and December 2010, we used $138.5 million and $74.2 million respectively, of cash and cashequivalents on hand to further pay down our first lien term loan. As a result of these debt repayments, the outstanding balance on the first lien credit facilityhas been reduced to $657.2 million as of December 31, 2010, and our second lien credit facility has been repaid in full and terminated. This reduction in debtwill have a significant impact on cash flows as a result of lower interest expense in future periods, based on current LIBOR rates. 28Table of Contents Components of net sales and expensesNet salesSubstantially all of our net sales are generated through the sale of our standby generators to the residential, commercial and industrial markets. We also sell air-cooled engines to certain customers and sell service parts to our dealer network. Net sales are recognized upon shipment of products to our customers. Net salesalso includes shipping and handling charges billed to customers which are recognized at the time of shipment of products to our customers. Related freightcosts are included in cost of sales. Our generators are fueled by natural gas, liquid propane, gasoline, diesel or Bi-Fuel™ systems with power output from800W to 9mW. Our products are primarily manufactured and assembled at our Wisconsin facilities and distributed through thousands of outlets across theUnited States and Canada. Our smaller kW generators for the residential, portable and commercial markets are typically built to stock, while our larger kWproducts for the industrial markets are generally customized and built to order.Our net sales are affected primarily by the U.S. economy as sales outside of North America represent only approximately 1% of total net sales.We are not dependent on any one channel or customer for our net sales, with no single customer representing more than 6% of our net sales for the year endedDecember 31, 2010 and our top ten customers representing less than 29% of our net sales for the same period.Costs of goods soldThe principal elements of costs of goods sold in our manufacturing operations are component parts, raw materials, factory overhead and labor. Componentparts and raw materials comprised over 80% of costs of goods sold for the year ended December 31, 2010. The principal component parts are engines andalternators. We design and manufacture air-cooled engines for certain of our products smaller than 20kW. We source engines for some of our smaller productsand all of our products larger than 20kW. We design all the alternators for our units and manufacture alternators for certain of our units. We also manufactureother generator components where we believe we have a design and cost advantage. We source component parts from an extensive global network of reliable,low-cost suppliers.The principal raw materials used in our manufacturing processes and in the manufacturing of the components we source are steel, copper and aluminum. Weare 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 ourbusiness through a continued focus on product design improvements and price increases in our products. However, there is typically a lag between rawmaterial price fluctuations and their effect on our costs of goods sold.Other sources of costs include our manufacturing facilities, which require significant factory overhead, labor and shipping costs. Factory overhead includesutilities, support personnel, depreciation, general supplies and support and maintenance. Although we maintain a low-cost, largely non-union workforce andflexible manufacturing processes, our margins can be impacted when we cannot promptly decrease labor and manufacturing costs to match declines in netsales.Operating expensesOur operating expenses consist of costs incurred to support our marketing, distribution, engineering, information systems, human resources, finance,purchasing, risk management, legal and tax functions. All of these categories include personnel costs such as salaries, bonuses, employee benefit costs andtaxes. We classify our operating expenses into four categories: selling and service, research and development, general and administrative, and amortization ofintangibles.Selling and service. Our selling and service expenses consist primarily of personnel expense, marketing expense, warranty expense and other sales expenses.Our personnel expense recorded in selling and services expenses includes the expense of our sales force responsible for our national accounts and otherpersonnel involved in the marketing and sales of our products. Warranty expense, which is recorded at the time of sale, is estimated based on historical trends.Our marketing expenses include direct mail costs, printed material costs, product display costs, market research expenses, trade show expenses and mediaadvertising. Marketing expenses generally increase as our sales efforts increase and are related to the launch of new product offerings and opportunities withinselected markets or associated with specific events such as awareness marketing in areas impacted by storms, participation in trade shows and other events. 29Table of Contents Research and development. Our research and development expenses support over 120 active research and development projects. We currently operate threeadvanced facilities and employ close to 120 engineers who focus on new product development, existing product improvement and cost reduction. Ourcommitment to research and development has resulted in a significant portfolio of approximately 50 U.S. and international patents and patent applications.Our research and development is expensed as incurred.General and administrative. Our general and administrative expenses include personnel costs for general and administrative employees, accounting andlegal professional services fees, information technology costs, insurance, travel and entertainment expense and other corporate expense. In 2010, our generaland administrative expenses have increased as we have incurred additional expenses associated with being a public company, including increased personnelcosts, legal costs, accounting costs, board compensation expense, investor relations costs, higher insurance premiums, stock-based compensation expense,and costs associated with our compliance with Section 404 of the Sarbanes-Oxley Act of 2002, other applicable SEC regulations and the requirements of theNYSE.Amortization of intangibles. Our amortization of intangibles expenses include the straight-line amortization of customer lists, patents and other intangiblesassets.Goodwill and trade name impairment charges. Goodwill primarily represents the excess of the amount paid to acquire us over the estimated fair value ofthe net tangible and intangible assets acquired as of the November 2006 date of the CCMP Transactions.Other indefinite-lived intangible assets consist of trade names. The fair value of trade names is measured using a relief-from-royalty approach, which assumesthe fair value of the trade name is the discounted cash flows of the amount that would be paid had we not owned the trade name and instead licensed the tradename from another company.In some periods, we have recorded a charge for the write down of goodwill and trade names that was recorded in operating expenses. Please see “Criticalaccounting policies—Goodwill and other intangible assets” for additional detail on this charge.Transaction-related expenses. In the year ended December 31, 2006, our operating expenses include one-time transaction-related expenses incurred duringthe Predecessor Period related to the CCMP Transactions.Other income (expense)Our other income (expense) includes the interest expense on the outstanding balances of our $950.0 million first lien term loan, $430.0 million second lien termloan and $150.0 million revolving credit facility entered into in November 2006, and the amortization of debt financing costs. In February 2010, we used thenet proceeds from the initial closing of the initial public offering to pay down our second lien term loan in full and to pay down a portion of our first lien termloan. In addition, in March 2010 and December 2010, we used cash and cash equivalents on hand to further pay down our first lien term loan principal. Noamounts were outstanding under the revolving credit facility at December 31, 2010 and December 31, 2009. The amounts borrowed under our term loans bearinterest at rates based upon either a base rate or LIBOR, plus an applicable margin. We also earn interest income on our cash and cash equivalents, which isincluded in other income (expense). We also recorded expenses related to interest rate swap agreements, which had a notional amount of $675.0 millionoutstanding at December 31, 2009 at an average rate of 5.04%, and a notional amount of $300.0 million outstanding at December 31, 2010 at an average rate of1.5%. Other income (expense) may also include other financial items such as extinguishment of debt. 30Table of Contents Results of operationsYear ended December 31, 2010 compared to year ended December 31, 2009The following table sets forth our consolidated statement of operations data for the periods indicated: Year endedDecember 31, (Dollars in thousands) 2009 2010 Net sales $588,248 $592,880 Costs of goods sold 352,398 355,523 Gross profit 235,850 237,357 Operating expenses: Selling and service 59,823 57,954 Research and development 10,842 14,700 General and administrative 14,713 22,599 Amortization of intangibles 51,960 51,808 Total operating expenses 137,338 147,061 Income from operations 98,512 90,296 Total other expense, net (55,118) (33,076)Income before provision for income taxes 43,394 57,220 Provision for income taxes 339 307 Net income $43,055 $56,913 Year endedDecember 31, (Dollars in thousands)2009 2010 Residential power products $370,740 $372,782 Industrial & Commercial power products 187,323 183,555 Other 30,185 36,543 Net sales $588,248 $592,880 Net sales. Net sales increased $4.6 million, or 0.8%, to $592.9 million for the year ended December 31, 2010 from $588.2 million for the year endedDecember 31, 2009. This increase was driven by a $2.0 million, or a 0.6%, increase in sales to the residential markets due to continued expansion of theCompany’s distribution network and successful new product launches, offset by continued weakness in U.S. residential investment. This residentialproduct sales increase was offset by a $3.8 million, or 2.0%, decline in industrial and commercial product sales as a result of market declines in non-residential construction and reduced capital spending by national account customers. Although a decrease for the full year, industrial and commercial productsales displayed strong momentum in the second half of fiscal 2010 as end markets recovered. Other product sales increased $6.4 million as a result ofstronger RV, OEM engine and service parts sales.Costs of goods sold. Costs of goods sold increased $3.1 million, or 0.9%, to $355.5 million for the year ended December 31, 2010 from $352.4 million forthe year ended December 31, 2009. This increase was driven by a $4.4 million increase in materials cost, primarily due to higher steel, copper and aluminumcosts, as well as by the increase in sales volume, partially offset by lower manufacturing overhead costs.Gross profit. Gross profit increased $1.5 million, or 0.6%, to $237.4 million for the year ended December 31, 2010 from $235.9 million for the year endedDecember 31, 2009, primarily due to the factors affecting net sales and cost of goods sold described above. As a percentage of net sales, gross profit decreasedslightly to 40.0% for the year ended December 31, 2010 from 40.1% for the year ended December 31, 2009.Operating expenses. Operating expenses increased $9.7 million to $147.1 million for the year ended December 31, 2010 from $137.3 million for the yearended December 31, 2009. This increase is due to incremental research and development costs of $3.9 million related to ongoing product development. Inaddition, general and administrative expenses increased $7.9 million, of which $6.4 million is related to non-cash stock compensation expense recorded forthe time vesting of equity awards granted in connection with the IPO. The remaining increase in administrative costs is associated with additional costs tooperate as a public company. 31Table of Contents Other expense. Other expense decreased $22.0 million, or 40.0%, to $33.1 million for the year ended December 31, 2010 from $55.1 million for the yearended December 31, 2009. This decrease was driven by a decline in interest expense of $43.5 million as a result of our reduction in indebtedness, lowerLIBOR rates and the termination of certain interest rate swap agreements. Offsetting this interest expense decline in 2010, there was a prior year gain onextinguishment of debt of $14.7 million that did not occur in 2010, as well as the current year write-off of deferred financing costs related to debtextinguishment of $4.8 million.Income tax expense. Income tax expense was $0.3 million for the year ended December 31, 2010, unchanged from the year ended December 31, 2009. Incometax expense primarily relates to certain state income taxes based on profitability measures other than net income.Net income. As a result of the factors identified above, we generated net income of $56.9 million for the year ended December 31, 2010 compared to a netincome of $43.1 million for the year ended December 31, 2009. The increase in net income is due to the items previously described.Adjusted EBITDA. Adjusted EBITDA decreased to $156.2 million, compared to $159.1 million in 2009, as modest sales growth and consistent grossmargins were more than offset by increased investment in the business. Adjusted EBITDA margins declined slightly in fiscal 2010 to 26.4% compared to27.0% in fiscal 2009.Adjusted net income. Adjusted Net Income increased to $115.9 million in 2010 compared to $83.6 million in 2009. The increase in adjusted net income wasattributable to lower interest expense versus prior year offset by non cash stock compensation expenses and reduced Adjusted EBITDA compared to fiscal2009. Year ended December 31, 2009 compared to year ended December 31, 2008The following table sets forth our consolidated statement of operations data for the periods indicated: Year endedDecember 31, (Dollars in thousands) 2008 2009 Net sales $574,229 $588,248 Costs of goods sold 372,199 352,398 Gross profit 202,030 235,850 Operating expenses: Selling and service 57,449 59,823 Research and development 9,925 10,842 General and administrative 15,869 14,713 Amortization of intangibles 47,602 51,960 Goodwill and trade name impairment charges 583,486 — Total operating expenses 714,331 137,338 Income (loss) from operations (512,301) 98,512 Total other expense, net (43,254) (55,118)Loss before provision for income taxes (555,555) (43,394)Provision for income taxes 400 339 Net loss $(555,955) $43,055 Year endedDecember 31, (Dollars in thousands)2008 2009 Residential power products $332,618 $370,740 Industrial & Commercial power products 207,861 187,323 Other 33,750 30,185 Net sales $574,229 $588,248 Net sales. Net sales increased $14.0 million, or 2.4%, to $588.2 million for the year ended December 31, 2009 from $574.2 million for the year endedDecember 31, 2008. This increase was driven by a $38.1 million, or 11.5%, increase in sales to the residential markets due to the introduction of our newautomatic home standby generator products, increases in our points of distribution, our re-entry into the small kilowatt portable generator market in May2008, and a strong winter storm season in the beginning of 2009, partially offset by a weaker summer storm season during the third quarter of 2009. Theincrease in home standby and portable generators was partially offset by a $20.5 million, or 9.9%, decline in industrial and commercial sales as industrialnational account and other customers lowered capital spending in late 2008 and 2009. Net sales were also impacted by increased selling prices on certainresidential, commercial and industrial units. 32Table of Contents Costs of goods sold. Costs of goods sold decreased $19.8 million, or 5.3%, to $352.4 million for the year ended December 31, 2009 from $372.2 million forthe year ended December 31, 2008. This decrease was driven by a $13.3 million decrease in materials cost, primarily due to lower steel, copper and aluminumcosts, partially offset by the increase in sales volume. Freight costs and labor & overhead costs also decreased $3.3 million and $3.2 million, respectively.Gross profit. Gross profit increased $33.8 million, or 16.7%, to $235.9 million for the year ended December 31, 2009 from $202.0 million for the yearended December 31, 2008, primarily due to the factors affecting net sales and cost of goods sold described above. As a percentage of net sales, gross profitincreased to 40.1% for the year ended December 31, 2009 from 35.2% for the year ended December 31, 2008. Gross profit margin increased as we realized themargin improvement from price increases, commodity normalization and improved sourcing of certain components and products, partially offset by highersales of lower margin products.Operating expenses. Operating expenses decreased $577.0 million to $137.3 million for the year ended December 31, 2009 from $714.3 million for the yearended December 31, 2008. Because of the goodwill and tradename impairment, operating expenses were $583.5 million higher for the year ended December 31,2008. The remaining increase in operating expenses of $6.5 million in 2009 was driven by an increase in amortization of intangibles of $4.4 million,primarily due to the re-characterization of a particular trade name from indefinite-lived to defined life. The impairment of the particular trade name was a resultof the implementation of our re-branding strategy, whereby we consolidated brands under the Generac label and have begun phasing out the particular tradename over time. Selling and service expenses also increased $2.4 million due to higher variable expenses related to our increase in net sales, such as warranty,commission and credit card fees, as well as higher advertising costs. Research and development expenses increased $0.9 million from ongoing productdevelopment and engineering resource investment. General and administrative expenses declined $1.2 million due to cost containment initiatives across thebusiness.Other expense. Other expense increased $11.9 million, or 27.4%, to $55.1 million for the year ended December 31, 2009 from $43.3 million for the yearended December 31, 2008. This increase was driven by a decrease in gains on the extinguishment of debt of $50.6 million, partially offset by a decline ininterest expense of $37.2 million as a result of our reduction in indebtedness and lower LIBOR rates. The gains on extinguishment of debt and the relateddecrease in interest expense are due to the debt repurchases by affiliates of CCMP, which were subsequently contributed to our company in exchange for sharesof our Class B Voting Common Stock and Series A Preferred Stock.Income tax expense. Income tax expense was $0.3 million for the year ended December 31, 2009, a decline of $0.1 million from $0.4 million for the yearended December 31, 2008. Income tax expense primarily relates to certain state income taxes based on profitability measures other than net income.Net income (loss). As a result of the factors identified above, we generated net income of $43.1 million for the year ended December 31, 2009 compared to anet loss of $556.0 million for the year ended December 31, 2008. The increase in net income is due to the items previously described.Adjusted EBITDA. Adjusted EBITDA increased to $159.1 million in 2009, compared to $129.9 million in 2008, due to the increase in income fromoperations previously discussed (excluding the impact of the goodwill and tradename impairment charge in 2008 which is excluded from the calculation ofAdjusted EBITDA).Adjusted net income. Adjusted Net Income increased to $83.6 million in 2009, compared to $13.8 million in 2008, due to the increase in income fromoperations previously discussed (excluding the impact of the goodwill and tradename impairment charge in 2008 which is excluded from the calculation ofAdjusted Net Income), as well as the reduction in interest expense previously discussed.Liquidity and financial positionOur primary cash requirements include the payment of our raw material and components suppliers, salaries & benefits, operating expenses, interest andprincipal payments on our debt, and capital expenditures. We finance our operations primarily through cash flow from operations and, if necessary,borrowings under our revolving credit facility. In November 2006, Generac Power Systems entered into a seven-year $950.0 million first lien term loan, aseven-and-a-half year $430.0 million second lien term loan, and a six-year $150.0 million revolving credit facility. On February 17, 2010, we usedapproximately $221.6 million of the net proceeds of our initial public offering to pay down our second lien term loans in full and to repay a portion of our firstlien term loans. In March 2010 and December 2010, we used a substantial portion of our cash and cash equivalents on hand to repay an additional $138.5million and $74.2 million, respectively, of our first lien term loan. As a result of these pay downs, the outstanding balance on the first lien credit facility hasbeen reduced to $657.2 million as of December 31, 2010, and our second lien credit facility has been repaid in full and terminated. 33Table of Contents At December 31, 2010, we had cash and cash equivalents of $78.6 million and $145.7 million of availability under our revolving credit facility. Our totalindebtedness was $657.2 million at December 31, 2010.Long-term liquidityWe believe that our cash flow from operations, our availability under our revolving credit facility, combined with our low capital expenditure requirements andfavorable tax attributes, will provide us with sufficient capital to continue to grow our business in the next twelve months and beyond. However, even with ourreduced leverage, we will use a significant portion of our cash flow to pay interest on our outstanding debt, limiting the amount available for working capital,capital expenditures and other general corporate purposes. As we continue to expand our business, we may in the future require additional capital to fundworking capital, capital expenditures, or acquisitions.Cash flowYear ended December 31, 2010 compared to year ended December 31, 2009The following table summarizes our cash flows by category for the periods presented: Year endedDecember 31, (Dollars in thousands)2009 2010 Change % Change Net cash provided by operating activities $74,607 $114,481 $39,874 53.4%Net cash used in investing activities (4,351) (11,204) (6,853) -157.5%Net cash provided (used) by financing activities 9,822 (186,001) (195,823) -1,993.7%Net cash provided by operating activities was $114.5 million for 2010 compared to $74.6 million in 2009. This increase of $39.9 million represents a53.4% increase over prior year mainly due to the reduction of cash paid for interest expense of $38.8 million. A reduction in working capital usage alsocontributed to the full year 2010 cash flow improvement as well.Net cash used for investing activities for the year ended December 31, 2010 was $11.2 million and included $9.6 million used for the purchase of propertyand equipment and $1.6 million for a business acquisition, net of cash acquired. Net cash used for investing activities for the year ended December 31, 2009was $4.4 million and included $4.5 million used for the purchase of property and equipment. The increase in property and equipment purchases in 2010relates to certain product development and cost reduction projects. Net cash provided (used) by financing activities was $(186.0) million for the year ended December 31, 2010, a decrease of $195.8 million from 2009, duemainly to $248.3 million of proceeds from the issuance of common stock, offset by payments on debt of $434.3 million. Net cash provided by financingactivities was $9.8 million for the year ended December 31, 2009 due to a $20.0 million capital contribution in exchange for shares of our Series A PreferredStock, offset by principal payments on our first lien term loan of $9.5 million and $0.7 million of payments incurred in advance of our IPO.Year ended December 31, 2009 compared to year ended December 31, 2008The following table summarizes our cash flows by category for the periods presented: Year endedDecember 31, (Dollars in thousands)2008 2009 Change % Change Net cash provided by operating activities $10,224 $74,607 $64,383 629.7%Net cash used in investing activities (5,038) (4,351) 687 13.6%Net cash provided by financing activities 4,728 9,822 5,094 107.7% 34Table of Contents Net cash provided by operating activities was $74.6 million for 2009 compared to $10.2 million in 2008. The $64.4 million increase was primarily due toincreased sales volume and lower cost of goods sold for the year ended December 31, 2009 compared to the year ended December 31, 2008, as well as areduction in cash paid for interest of $33.8 million .Net cash used for investing activities for the year ended December 31, 2009 was $4.4 million and included $4.5 million used for the purchase of property andequipment. Net cash used for investing activities for the year ended December 31, 2008 was $5.0 million and included $5.2 million used for the purchase ofproperty and equipment.Net cash provided by financing activities was $9.8 million for the year ended December 31, 2009, due to a $20.0 million capital contribution in exchange forshares of our Series A Preferred Stock, offset by principal payments on our first lien term loan of $9.5 million and $0.7 million of payments incurred inadvance of our IPO. Net cash provided by financing activities was $4.7 million for the year ended December 31, 2008, driven primarily by $15.5 million instockholder contributions of capital, offset in part by $10.4 million of principal payments on our term loans. Senior secured credit facilitiesIn November 2006, as part of the CCMP Transactions, Generac Power Systems entered into (i) a first lien credit facility with Goldman Sachs CreditPartners L.P., as administrative agent, composed of (x) a $950.0 million term loan, which matures in November 2013 and (y) a $150 million revolving creditfacility, which matures in November 2012, and (ii) a second lien credit facility with JP Morgan Chase Bank, N.A., as administrative agent, composed of a$430.0 million term loan, which matures in May 2014. A summary of these senior secured credit facilities are described below.On February 17, 2010, we used approximately $221.6 million of the net proceeds of our initial public offering to pay down our second lien term loans in fulland to repay a portion of our first lien term loans. In March 2010 and December 2010, we used a substantial portion of our cash and cash equivalents on handto repay an additional $138.5 million and $74.2 million, respectively, of our first lien term loan. As a result of these pay downs, at December 31, 2010 theoutstanding balance on the first lien credit facility had been reduced to $657.2 million, and our second lien credit facility had been repaid in full andterminated.The first lien credit facility bears interest at rates based upon either a base rate, plus an applicable margin (1.50% as of December 31, 2010, 1.50% as ofDecember 31, 2009 and 1.50% as of December 31, 2008) or adjusted LIBOR rate plus an applicable margin (2.50% as of December 31, 2010, 2.50% as ofDecember 31, 2009 and 2.50% as of December 31, 2008) determined based on a leverage ratio. The effective interest rate on the first lien credit facility termloan on December 31, 2010 was 3.3%. The effective interest rate, excluding the effect of interest rate swaps in place on the first lien credit facility term loan,was 2.8%.The second lien credit facility, which was paid in full on February 17, 2010, bore interest at rates based upon a base rate, plus an applicable margin of5.00%, or an adjusted LIBOR rate, plus an applicable margin of 6.00%.Amounts under the revolving credit facility can be borrowed and repaid, from time to time, at our option, provided there is no default or event of default undereither credit facility.The obligations under the senior secured credit facilities are guaranteed by Generac Acquisition Corp. The first lien term loan facility and the revolving creditfacility are secured by a first- priority perfected security interest (subject to permitted liens) in:· substantially all tangible and intangible assets (subject to certain exceptions) owned by Generac Acquisition Corp. and Generac Power Systems;· the capital stock of the existing and future domestic subsidiaries of Generac Acquisition Corp. and Generac Power Systems; provided that the pledgeof the capital stock of non-U.S. subsidiaries is limited to 65% of the stock of the guarantors' non-U.S. subsidiaries; and· all proceeds and products of the property and assets described above.The second lien term loan facility was secured by a second-priority security interest in all the assets pledged to the first lien term loan facility and the revolvingcredit facility, as described above.In addition, our senior secured credit facilities provide us the option to raise incremental credit facilities, subject to certain limitations. 35Table of Contents Covenant complianceThe senior secured credit facility requires Generac Power Systems to maintain a leverage ratio of consolidated total debt, net of unrestricted cash andmarketable securities, to EBITDA (as defined in the senior secured credit facility). We refer to the calculation of EBITDA under and as defined in our seniorsecured credit facility in this annual report as “Covenant EBITDA.” Covenant EBITDA and the leverage ratio are calculated based on the four most recentlycompleted fiscal quarters of Generac Power Systems. Based on the formulations set forth in the first lien credit facility, as of December 31, 2010, GeneracPower Systems was required to maintain a maximum leverage ratio of 5.75 to 1.00. The maximum leverage ratio decreases over time. The first lien creditfacility required Generac Power Systems to have a leverage ratio of no greater than 5.75 to 1.00 in the fourth quarter of 2010, and requires a leverage ratio of nogreater than 5.75 to 1.00 in the first quarter of 2011, 5.50 to 1.00 in the second quarter of 2011, 5.25 to 1.00 in the third quarter of 2011, 4.75 to 1.00 in thefourth quarter of 2011 and thereafter. As of December 31, 2010, Generac Power Systems' leverage ratio was 4.01 to 1.00. Failure to comply with this covenantwould result in an event of default under our senior secured credit facility unless waived by our lenders. As of September 30, 2008, Generac Power Systemshad violated its leverage ratio covenant. As permitted by the senior secured credit facilities, this violation was remedied by an equity contribution of$15.3 million from affiliates of CCMP in the fourth quarter of 2008. Generac Power Systems was in compliance with all of its covenants as of December 31,2008, December 31, 2009 and December 31, 2010.The maximum leverage ratio is a material term of our senior secured credit facility in part because it is a maintenance covenant, and our compliance with thecovenant is used in determining, among other things, the interest rate of the first lien credit facility, our ability to undertake business acquisitions, our abilityto incur certain types of indebtedness and the maximum amount of dividends and distributions that our senior secured credit facilities permit us to pay to ourstockholders, as described in more detail below.The senior secured credit facility contains other events of default that are customary for similar facilities and transactions, including a cross-default provisionwith respect to any other indebtedness in an outstanding aggregate principal amount in excess of $25.0 million. An event of default under the senior securedcredit facility could result in the acceleration of our indebtedness under the facility, and we may be unable to repay or finance the amounts due. If there were anevent of default as a result of a failure to maintain our required leverage ratio or otherwise, it would have an adverse effect on our financial condition andliquidity, including preventing us from utilizing our revolving credit facility. In addition, the senior secured credit facility restricts our ability to take certainactions, such as incur additional debt or make certain acquisitions, if we are unable to meet our leverage ratio.In addition to the financial covenant described above, the senior secured credit facility contains certain other affirmative and negative covenants that, amongother things, provide limitations on the incurrence of additional indebtedness, liens on property, sale and leaseback transactions, investments, loans andadvances, merger or consolidation, asset sales, acquisitions, transactions with affiliates, prepayments of any other indebtedness, modifications of GeneracPower Systems' organizational documents, restrictions on Generac Power Systems' subsidiaries' ability to make capital expenditures. The ability to declare orpay dividends or make any other distributions with respect to any equity interests of Generac Power Systems, or to redeem, purchase, retire or otherwiseacquire for value any equity interests of Generac Power Systems is also restricted under the facility, subject to certain exceptions, including but not limited todividends and distributions with the net proceeds of any issuance of qualified capital stock and a dollar basket which may be increased, subject, in the caseof the dollar basket, to compliance with a pro forma ratio of consolidated senior secured debt (as defined in the senior secured credit facility), which is net ofunrestricted cash and marketable securities and excludes any indebtedness under the second lien credit facility, to Covenant EBITDA not exceeding 3.00 to1.00 under the more restrictive of the facilities and subject to the other restrictions set forth in the credit documents. Additionally, the senior secured creditfacility contains events of default that are customary for similar facilities and transactions, including, among others, non-payment, breach of covenants, otherdefaults, change of control, misrepresentations and a cross-default provision with respect to any other indebtedness. As of December 31, 2010, Generac PowerSystems was in compliance with all covenants.Prior to our March 2010 debt prepayment, the principal amount of the first lien term loan amortized in equal installments of $2.375 million on the last date ofeach fiscal quarter through September 30, 2013, with a final payment of $875.081 million on November 10, 2013. All scheduled quarterly amortizations priorto the final payment have been satisfied by our March 2010 prepayment of first lien debt of $138.5 million. Any amounts outstanding under the revolvingcredit facility are due on November 10, 2012. The principal amount of the second lien term loan facility was due on May 10, 2014, but was paid in full onFebruary 17, 2010 with the proceeds from the IPO. 36Table of Contents Both the first lien and second lien credit facility grant Generac Power Systems the option to prepay its borrowings under the term loans or the revolving creditfacility, subject to the procedures set forth in the credit documents. In certain circumstances, Generac Power Systems may be required to make prepaymentson its borrowings if it receives proceeds as a result of certain asset sales, debt issuances, casualty or similar events of loss or if Generac Power Systems hasexcess cash flow (as defined in the senior secured credit facilities).As of December 31, 2010, $657.2 million of borrowings were outstanding under the first lien term loan. As of December 31, 2009, $910.7 million ofborrowings were outstanding under the first lien term loan and $180.8 million of borrowings were outstanding under the second lien term loan. As previouslydisclosed, on February 17, 2010, we used approximately $221.6 million of the net proceeds of our initial public offering to pay down our second lien termloans in full and to repay a portion of our first lien term loans. In March 2010 and December 2010, we used a substantial portion of our cash and cashequivalents on hand to repay an additional $138.5 million and $74.2 million respectively, of our first lien term loan. Contractual obligationsThe following table summarizes our expected payments for significant contractual obligations as of December 31, 2010: (Dollars in thousands) Payment due by period:Contractual obligationsTotal Less than 1 year 2-3 years 4-5 years After 5 years Long-term debt, including current portion $657,229 $-- $657,229 $-- $-- Interest on long-term debt(1) 52,356 18,305 34,051 -- -- Operating leases 274 124 150 -- -- Total contractual cash obligations(2) $709,859 $18,429 $691,430 $-- $-- (1) Assumes all debt will remain outstanding until maturity and using the interest rates in effect for our senior secured credit facilities as of December 31,2010. (2) Pension obligations are excluded from this table as we are unable to estimate the timing of payment due to the inherent assumptions underlying theobligation. However, the Company estimates we will contribute $2.0 million to our pension plans in 2011. Capital expendituresOur operations require capital expenditures for technology, tooling, equipment, capacity expansion and upgrades. Capital expenditures were $9.6 million forthe year ended December 31, 2010, and were funded through cash from operations. Capital expenditures were $4.5 million for the year ended December 31,2009, and were funded through cash from operations.Off-balance sheet arrangementsWe have an arrangement with a finance company to provide floor plan financing for selected dealers. This arrangement provides liquidity for our dealers byfinancing dealer purchases of products with credit availability from the finance company. We receive payment from the finance company after shipment ofproduct to the dealer and our dealers are given a longer period of time to pay the finance provider. If our dealers do not pay the finance company, we may berequired to repurchase the applicable inventory held by the dealer.Total inventory financed accounted for approximately 4% of net sales for the year ended December 31, 2009 and approximately 7% of net sales for the yearended December 31, 2010. The amount financed by dealers which remained outstanding was $7.4 million and $9.8 million as of December 31, 2009 and2010, respectively. Critical accounting policiesIn preparing the financial statements in accordance with accounting principles generally accepted in the U.S., management is required to make estimates andassumptions that have an impact on the asset, liability, revenue and expense amounts reported. These estimates can also affect supplemental informationdisclosures of the Company, including information about contingencies, risk and financial condition. The Company believes, given current facts andcircumstances, that its estimates and assumptions are reasonable, adhere to accounting principles generally accepted in the U.S., 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 andcircumstances arise. The Company makes routine estimates and judgments in determining net realizable value of accounts receivable, inventories, property,plant and equipment, and prepaid expenses. Management believes the Company’s most critical accounting estimates and assumptions are in the followingareas: goodwill and other indefinite-lived intangible asset impairment assessment, defined benefit pension obligations, estimates of allowance for doubtfulaccounts, excess and obsolete inventory reserves, product warranty, other contingencies, derivative accounting, income taxes, and share based compensation. 37Table of ContentsGoodwill and other intangible assetsWe perform an annual impairment test for goodwill and trade names and more frequently if an event or circumstances indicate that an impairment loss hasbeen incurred. Conditions that would trigger an impairment assessment include, but are not limited to, a significant adverse change in legal factors or businessclimate that could affect the value of an asset. The analysis of potential impairment of goodwill requires a two-step process. The first step is the estimation offair value of the applicable reporting unit. We have determined we have one reporting unit, and all significant decisions are made on a companywide basis byour chief operating decision maker. Estimated fair value is based on management judgments and assumptions with the assistance of a third-party valuationfirm, and those fair values are compared with our aggregate carrying value. If our fair value is greater than the carrying amount, there is no impairment. If ourcarrying amount is greater than the fair value, then the second step must be completed to measure the amount of impairment, if any.The second step calculates the implied fair value of the goodwill, which is compared to its carrying value. The implied fair value of goodwill is calculated byvaluing all of the tangible and intangible assets of the reporting unit at the hypothetical fair value, assuming the reporting unit had been acquired in a businesscombination. The excess of the fair value of the entire reporting unit over the fair value of its identifiable assets and liabilities is the implied fair value ofgoodwill. If the implied fair value of goodwill is less than the carrying value of goodwill, an impairment loss is recognized equal to the difference.As of October 31, 2008, we performed our annual goodwill impairment test. Our fair value was estimated based on a weighted analysis of discounted cashflows and comparable public company analysis (i.e., market approach). The rate used in determining discounted cash flows is a rate corresponding to ourweighted average cost of capital, adjusted for risk where appropriate. In determining the estimated future cash flows, current and future levels of income areconsidered as well as business trends and market conditions. Due to an increase in the our weighted average cost of capital and lower comparable publiccompany market values resulting from weakening economic conditions, the analysis indicated the potential for impairment.We performed the second step of the goodwill impairment evaluation with the assistance of a third-party valuation firm and determined an impairment ofgoodwill existed. Accordingly, a non-cash charge of $503.2 million was recognized in 2008 for goodwill impairment.We performed our annual fair value-based impairment test on trade names as of October 31, 2008. As a result of the test, we recorded a non-cash charge of$80.3 million for trade name impairment. The primary reason for this impairment charge related to a re-branding strategy, which was committed to in thefourth quarter of 2008 and resulted in our plan to discontinue use of the Guardian® trade name over time as we consolidate brands under the Generac label.Accordingly, this particular trade name was written down to its estimated realizable value of $8.7 million, which will be amortized over its remaining usefullife of two years.As of October 31, 2009, we performed our annual goodwill impairment test, which indicated a premium over net book value of 71%. The testing determinedthat there was no impairment of goodwill at that time. In addition, we performed our annual fair value-based impairment test on trade names as of October 31,2009. The testing determined that there was no impairment of our trade names at that time.As of October 31, 2010, we performed our annual goodwill impairment test, which indicated a premium over net book value of 115%. The testing determinedthat there was no impairment of goodwill at that time. In addition, we performed our annual fair value-based impairment test on trade names as of October 31,2010. The testing determined that there was no impairment of our trade names at that time.We can make no assurances that remaining goodwill or trade names will not be impaired in the future. When preparing a discounted cash flow analysis, wemake a number of key estimates and assumptions. We estimate the future cash flows of the business based on historical and forecasted revenues andoperating costs. This, in turn, involves further estimates, such as estimates of future growth rates and inflation rates. In addition, we apply a discount rate tothe 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 businessand may change from year to year. Weighted average cost of capital includes certain assumptions such as market capital structures, market betas, risk-freerate of return and estimated costs of borrowing. Changes in these key estimates and assumptions, or in other assumptions used in this process, couldmaterially affect our impairment analysis for a given year. Additionally, since our measurement also considers a market approach, changes in comparablepublic company multiples can also materially impact our impairment analysis. 38Table of Contents In the long term, our remaining goodwill and trade name balances could be further impaired in future periods. A number of factors, many of which we have noability to control, could affect our financial condition, operating results and business prospects and could cause actual results to differ from the estimates andassumptions we employed. These factors include:· a prolonged global economic crisis;· 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; and· successful efforts by our competitors to gain market share in our markets.Our cash flow assumptions are based on historical and forecasted revenue, operating costs and other relevant factors. If management's estimates of futureoperating results change or if there are changes to other assumptions, the estimate of the fair value of our business may change significantly. Such changecould result in impairment charges in future periods, which could have a significant impact on our operating results and financial condition.Defined benefit pension obligationsThe funded status of our pension plans is more fully described in Note 9 to our audited consolidated financial statements included in Item 8 of this annualreport. As discussed in Note 9, the pension benefit obligation and related pension expense or income are calculated in accordance with ASC 715-30, DefinedBenefit Plans—Pension, and are impacted by certain actuarial assumptions, including the discount rate and the expected rate of return on plan assets.Rates are evaluated on an annual basis considering such factors as market interest rates and historical asset performance. Actuarial valuations for fiscal year2010 used a discount rate of 5.72% and an expected rate of return on plan assets of 7.30%. Our discount rate was selected using a methodology that matchesplan cash flows with a selection of Moody's Aa or higher rated bonds, resulting in a discount rate that better matches a bond yield curve with comparable cashflows. In estimating the expected return on plan assets, we study historical markets and preserve the long-term historical relationships between equities andfixed-income securities. We evaluate current market factors such as inflation and interest rates before we determine long-term capital market assumptions andreview peer data and historical returns to check for reasonableness and appropriateness. Changes in the discount rate and return on assets can have asignificant effect on the funded status of our pension plans, stockholders' equity and related expense. We cannot predict these changes in discount rates orinvestment returns and, therefore, cannot reasonably estimate whether the impact in subsequent years will be significant.The funded status of our pension plans is the difference between the projected benefit obligation and the fair value of its plan assets. The projected benefitobligation is the actuarial present value of all benefits expected to be earned by the employees' service adjusted for future potential wage increases.Our funding policy for our pension plans is to contribute amounts at least equal to the minimum annual amount required by applicable regulations. Given thispolicy, we expect to make $2.0 million in contributions to our pension plans in 2011. Allowance for doubtful accounts, excess and obsolete inventory reserves, product warranty reserves and other contingenciesThe reserves, if any, for customer rebates, product warranty, product liability, litigation, excess and obsolete inventory and doubtful accounts are fact-specificand take into account such factors as specific customer situations, historical experience, and current and expected economic conditions. These reserves arereflected under Notes 2, 3, 4 and 14 to our audited consolidated financial statements included in Item 8 of this annual report. 39Table of Contents Derivative accountingWe have interest rate swap contracts, or the Swaps, in place to fix a portion of our variable rate indebtedness. For 2007 and 2008, the Swaps were deemedhighly effective per ASC 815 (formerly SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities ) and therefore, any changes in fairvalue of these Swaps is recorded in accumulated other comprehensive income (loss). As of January 3, 2009, in accordance with the terms of our senior securedcredit facilities, we changed the interest rate election from three-month LIBOR to one-month LIBOR. As a result, we concluded that as of January 3, 2009, theSwaps no longer met hedge effectiveness criteria under SFAS No. 133. Future changes in the fair value of the Swaps was immediately recognized in ourstatement of operations as interest expense, while the effective portion of the Swaps prior to the change remained in accumulated other comprehensive income(loss) and was amortized as interest expense over the period of the originally designated hedged transactions which ended on January 4, 2010. New interest rateswap contracts entered into in fiscal 2010 are deemed highly effective per ASC 815.As required by ASC 815 Derivatives and Hedging, we record the Swaps at fair value pursuant to ASC 820 Fair Value Measurements and Disclosures,which defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability categorymeasured at fair value. When determining the fair value of the Swaps, we considered our credit risk in accordance with ASC 820. The fair value of theSwaps, including the impact of credit risk, at December 31, 2009 and 2010 was a liability of $0.0 million and $4.1 million, respectively.Income taxesWe account for income taxes in accordance with ASC 740 Income Taxes. Our estimate of income taxes payable, deferred income taxes and the effective tax rateis based on an analysis of many factors including interpretations of federal and state income tax laws, the difference between tax and financial reporting basesof assets and liabilities, estimates of amounts currently due or owed in various jurisdictions, and current accounting standards. We review and update ourestimates on a quarterly basis as facts and circumstances change and actual results are known.We have generated significant deferred tax assets as a result of goodwill and intangible asset book versus tax differences as well as significant net operatingloss carryforwards. In assessing the realizability of these deferred tax assets, we consider whether it is more likely than not that some portion or all of thedeferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the yearsin which those temporary differences become deductible. We consider the scheduled reversal of deferred tax liabilities, projected future taxable income and taxplanning strategies in making this assessment. However, the Company is currently in a three year cumulative net loss position, due primarily to a goodwilland tradename impairment write-off in 2008, and therefore has not considered expected future taxable income in analyzing the realizability of the deferred taxassets as of December 31, 2010. As a result of this analysis, we have recorded a full valuation allowance against these net deferred tax assets.Share based compensationUnder the fair value recognition provisions of ASC 718 Compensation – Stock Compensation, share based compensation cost is measured at the grant datebased on the fair value of the award and is recognized as expense over the requisite service period. Determining the fair value of share based awards at the grantdate requires judgment, including estimating expected dividends and market volatility of our stock. In addition, judgment is also required in estimating theamount of share based awards that are expected to be forfeited. If actual results differ significantly from these estimates, share based compensation expenseand our results of operations could be impacted.New Accounting StandardsThere are currently no significant new accounting standards to be adopted by the Company. 40Table of ContentsItem 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 changes incertain foreign currency exchange rates and commodity prices, we use financial instruments from time to time. We do not hold or issue financial instrumentsfor trading purposes.Foreign currencyWe are exposed to foreign currency exchange risk as a result of purchasing from suppliers in other countries. Periodically, we utilize foreign currency forwardpurchase and sales contracts to manage the volatility associated with foreign currency purchases in the normal course of business. Contracts typically havematurities of one year or less. Realized and unrealized gains and losses on transactions denominated in foreign currency are recorded in earnings as acomponent of cost of goods sold. At December 31, 2010 and December 31, 2009, we had no foreign exchange contracts outstanding.On February 18, 2010, we entered into a ten-month foreign currency average rate option transaction for Euros with a total notional amount of $2.5 million anda termination date of December 31, 2010. Total losses recognized in the statement of operations for foreign currency contracts were $100,000. The primaryobjective of this hedging activity is to mitigate the impact of potential price fluctuations of the Euro on our financial results.Commodity pricesWe are a purchaser of commodities and of components manufactured from commodities, including steel, aluminum, copper and others. As a result, we areexposed to fluctuating market prices for those commodities. While such materials are typically available from numerous suppliers, commodity raw materialsare subject to price fluctuations. We generally buy these commodities and components based upon market prices that are established with the supplier as partof the purchase process. Depending on the supplier, these market prices may reset on a periodic basis based on negotiated lags. To the extent that commodityprices 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 ourgross margins to the extent we are not able to increase selling prices of our products or obtain manufacturing efficiencies to offset increases in commodity costs.Periodically, we engage in certain commodity risk management activities. The primary objectives of these activities are to understand and mitigate the impactof potential price fluctuations on our financial results. Generally, these risk management transactions will involve the use of commodity derivatives to protectagainst exposure resulting from significant price fluctuations.We primarily utilize commodity contracts with maturities of one year or less. These are intended to offset the effect of price fluctuations on actual inventorypurchases. At December 31, 2009, there was one outstanding commodity contract in place to hedge our projected commodity purchases. Total gains recognizedin the statements of operations on commodity contracts were $387,000 for the year ended December 31, 2009. On November 16, 2010, we entered into a four-month commodity hedge transaction for copper with a total notional amount of $2.3 million with an effective date of January 1, 2011. The primary objectiveof the hedge is to mitigate the impact of potential price fluctuations of copper on our financial results. At December 31, 2010, this contract was the onlyoutstanding commodity contract in place to hedge our projected commodity purchases. Total gains recognized in the statements of operations on commoditycontracts were $1,056,000 for the year ended December 31, 2010. Interest ratesAs of December 31, 2010, a portion of the outstanding debt under our term loans was subject to floating interest rate risk. We previously entered into interestrate swaps with certain banks. The notional amount of these swaps was $675.0 million as of December 31, 2009. These swaps expired on January 4, 2010.We entered into a new interest rate swap agreement with a certain bank on January 21, 2010. The effective date of the swap was July 1, 2010 with a notionalamount of $200,000,000, a fixed rate of 1.73% and an expiration date of July 1, 2012. On June 29, 2010, we entered into an additional interest rate swapagreement with a certain bank. The effective date of the swap was October 1, 2010 with a notional amount of $100,000,000, a fixed rate of 1.025% and anexpiration date of October 1, 2012. At December 31, 2010, the fair value of the swaps reduced for our credit risk and excluding related accrued interest was aliability of $4.1 million. For further information on these swaps, see Note 5 to our audited consolidated financial statements included in Item 8 of this annualreport. 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 loans that are notcovered by these swaps. A hypothetical change in the LIBOR interest rate of 100 basis points would have changed annual cash interest expense byapproximately $3.6 million (or, without the swaps in place, $6.6 million).We expect to maintain our existing swaps as highly effective in accordance with ASC 815 (formerly SFAS No. 133, Accounting for Derivative Instrumentsand Hedging Activities) and, therefore, any changes in the fair value of the swap would be recorded in accumulated other comprehensive income (loss). 41Table of Contents Item 8. Financial Statements and Supplementary Data Report of Independent Registered Public Accounting FirmThe Board of Directors and Stockholdersof Generac Holdings Inc.We have audited the accompanying consolidated balance sheets of Generac Holdings Inc. and subsidiaries (the Company) as of December 31, 2010 and 2009,and the related consolidated statements of operations, redeemable stock and stockholders’ equity, and cash flows for each of the three years in the period endedDecember 31, 2010. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on thesefinancial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged toperform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as abasis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of theCompany’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management,and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Generac Holdings Inc.and subsidiaries at December 31, 2010 and 2009, and the consolidated results of their operations and their cash flows for each of the three years in the periodended December 31, 2010 in conformity with U.S. generally accepted accounting principles. /s/ Ernst & Young LLPMilwaukee, WisconsinMarch 7, 2011 42Table of ContentsGenerac Holdings Inc.Consolidated Balance Sheets(Dollars in Thousands, Except Share and Per Share Data) December 31, 2010 2009 Assets Current assets: Cash and cash equivalents $78,583 $161,307 Accounts and notes receivable, less allowance for doubtful accounts of $723 in 2010 and $1,981 in 2009 63,154 54,130 Inventories 127,137 123,700 Prepaid expenses and other assets 3,645 5,880 Total current assets 272,519 345,017 Property and equipment, net 75,287 73,374 Customer lists, net 96,944 134,674 Patents, net 84,933 92,753 Other intangible assets, net 6,483 7,791 Deferred financing costs, net 5,822 13,070 Trade names 140,050 144,407 Goodwill 527,148 525,875 Other assets 697 282 Total assets $1,209,883 $1,337,243 Liabilities and stockholders’ equity Current liabilities: Accounts payable $41,809 $33,639 Accrued wages and employee benefits 6,833 6,930 Other accrued liabilities 38,043 52,326 Current portion of long-term debt – 39,076 Total current liabilities 86,685 131,971 Long-term debt 657,229 1,052,463 Other long-term liabilities 24,902 17,418 Total liabilities 768,816 1,201,852 Class B convertible voting common stock, par value $0.01, 110,000 shares authorized, 0 and 24,018 shares issued atDecember 31, 2010 and 2009, respectively – 765,096 Series A convertible non-voting preferred stock, par value $0.01, 30,000 shares authorized, 0 and 11,311 shares issuedat December 31, 2010 and 2009, respectively – 113,109 Stockholders’ equity (deficit): Common stock (formerly Class A non-voting common stock), par value $0.01, 500,000,000 shares authorized,67,524,596 and 1,617 shares issued at December 31, 2010 and 2009, respectively 675 – Additional paid-in capital 1,133,918 2,394 Excess purchase price over predecessor basis (202,116) (202,116)Accumulated deficit (481,658) (538,571)Accumulated other comprehensive loss (9,752) (4,492)Stockholder notes receivable – (29)Total stockholders’ equity (deficit) 441,067 (742,814) Total liabilities and stockholders’ equity $1,209,883 $1,337,243 See notes to consolidated financial statements. 43Table of Contents Generac Holdings Inc.Consolidated Statements of Operations(Dollars in Thousands, Except Share and Per Share Data) Year Ended December 31, 2010 2009 2008 Net sales $592,880 $588,248 $574,229 Costs of goods sold 355,523 352,398 372,199 Gross profit 237,357 235,850 202,030 Operating expenses: Selling and service 57,954 59,823 57,449 Research and development 14,700 10,842 9,925 General and administrative 22,599 14,713 15,869 Amortization of intangibles 51,808 51,960 47,602 Goodwill impairment – – 503,193 Tradename impairment – – 80,293 Total operating expenses 147,061 137,338 714,331 Income (loss) from operations 90,296 98,512 (512,301) Other (expense) income: Interest expense (27,397) (70,862) (108,022) Gain on extinguishment of debt – 14,745 65,385 Write-off of deferred financing costs related to debt extinguishment (4,809) – – Investment income 235 2,205 600 Other, net (1,105) (1,206) (1,217)Total other expense, net (33,076) (55,118) (43,254) Income (loss) before provision for income taxes 57,220 43,394 (555,555)Provision for income taxes 307 339 400 Net income (loss) 56,913 43,055 (555,955) Preferential distribution to: Series A preferred stockholders (2,042) (14,151) (785) Class B common stockholders (12,133) (100,191) (90,567)Beneficial conversion (140,690) – – Net loss attributable to common stockholders (formerly Class A common stockholders) $(97,952) $(71,287) $(647,307) Net income (loss) per common share - basic: Common stock (formerly Class A common stock) $(1.65) $(41,111) $(357,628) Class B common stock $505 $4,171 $3,780 Net income (loss) per common share - diluted: Common stock (formerly Class A common stock) $(1.65) $(41,111) $(357,628) Class B common stock $505 $4,171 $3,780 Weighted average common shares outstanding - basic: Common stock (formerly Class A common stock) 59,364,958 1,734 1,810 Class B common stock 24,018 24,018 23,961 Weighted average common shares outstanding - diluted: Common stock (formerly Class A common stock) 59,364,958 1,734 1,810 Class B common stock 24,018 24,018 23,961 See notes to consolidated financial statements. 44Table of Contents Generac Holdings Inc.Consolidated Statements of Redeemable Stock and Stockholders' Equity (Deficit)(Dollars in Thousands, Except Share Data) Excess Redeemable Common Stock(formerly PurchasePrice Retained AccumulatedOther Series A PreferredStock Class B CommonStock Class A CommonStock) Additional Paid-In OverPredecessor Earnings(Accumulated Comprehensive Income StockholderNotes TotalStockholders' Comprehensive Income Shares Amount Shares Amount Shares Amount Capital Basis Deficit) (Loss) Receivable Equity (Loss) Balance atDecember 31,2007 – $– 23,296 $747,070 1,904 $– $2,505 $(202,116) $(25,671) $(15,813) $(195) $(241,290) Unrealized losson interest rateswaps – – – – – – – – – (5,715) – (5,715) $(5,715)Repayment ofstockholdernotesreceivable – – – – – – – – – – 37 37 – Contributionof capitalrelated to debtextinguishment 6,285 62,855 729 18,249 – – – – – – – – – Contributionof capital 1,550 15,500 – – – – – – – – – – – Repurchase ofshares frommanagement – – (7) (223) (168) – (189) – – – – (189) – Net loss – – – – – – – – (555,955) – – (555,955) (555,955)Amortization ofrestricted stockexpense – – – – – – 40 – – – – 40 – Pensionliabilityadjustment – – – – – – – – – (7,122) – (7,122) (7,122) $(568,792)Balance atDecember 31,2008 7,835 $78,355 24,018 $765,096 1,736 $– $2,356 $(202,116) $(581,626) $(28,650) $(158) $(810,194) Amortization ofunrealized losson interest rateswaps – – – – – – – – – 24,222 – 24,222 $24,222 Repayment ofstockholdernotesreceivable – – – – – – – – – – 129 129 – Cancellation ofstock – – – – (118) – – – – – – – – Contributionof capitalrelated to debtextinguishment 1,476 14,754 – – – – – – – – – – – Proceeds fromshares issuedto managementand directors 50 497 – – – – – – – – – – – Proceeds fromshares issuedto stockholders 1,950 19,503 – – – – – – – – Net income – – – – – – – – 43,055 – – 43,055 43,055 Amortization ofrestricted stockexpense – – – – – – 38 – – – – 38 – Pensionliabilityadjustment – – – – – – – – – (64) – (64) (64) $67,213 Balance atDecember 31,2009 11,311 $113,109 24,018 $765,096 1,617 $– $2,394 $(202,116) $(538,571) $(4,492) $(29) $(742,814) Unrealized losson interest rateswaps – – – – – – – – – (4,145) – (4,145) $(4,145)Repayment ofstockholdernotesreceivable – – – – – – – – – – 29 29 – Corporatereorganization (11,311) (113,109) (24,018) (765,096) 28,368,581 284 877,921 – – – – 878,205 – Beneficialconversionrelated toClass BCommon andSeries APreferredstockholders – – – – (140,690) – – – – (140,690) – Accumulatedaccretionrelated toClass BCommon andSeries APreferredstockholders – – – – (303,305) – – – – (303,305) – Issuance ofCommon stock(formerly ClassA Commonstock)resulting fromthe beneficialconversion andaccumulatedaccretion 18,002,337 180 443,815 – – – – 443,995 – Proceeds frompublic stockoffering – – – – 20,700,500 207 247,424 – – – – 247,631 – Net income – – – – – – – – 56,913 – – 56,913 56,913 Share basedcompensation – – – – 451,561 5 6,358 – – – – 6,363 – Pensionliabilityadjustment – – – – – – – – – (1,115) – (1,115) (1,115) $51,653 Balance atDecember 31,2010 – $– – $– 67,524,596 $675 $1,133,918 $(202,116) $(481,658) $(9,752) $– $441,067 See notes to consolidated financial statements. 45Table of Contents Generac Holdings Inc. Consolidated Statements of Cash Flows (Dollars in Thousands) Year Ended December 31, 2010 2009 2008 Operating activities Net income (loss) $56,913 $43,055 $(555,955)Adjustment to reconcile net income (loss) to net cash provided by operating activities: Depreciation 7,632 7,715 7,168 Amortization 51,808 51,960 47,602 Goodwill and tradename impairment charge – – 583,486 Gain on extinguishment of debt – (14,745) (65,385) Amortization of deferred finance costs 2,439 3,417 3,905 Write-off of deferred financing costs related to debt extinguishment 4,809 – – Amortization of unrealized loss on interest rate swaps – 24,222 – Provision for losses on accounts receivable (124) 227 212 Provision for losses on notes receivable – – 115 Loss on disposal of property and equipment 56 41 234 Share-based compensation expense 6,363 38 40 Net changes in operating assets and liabilities, net of effects from acquisitions: Accounts receivable (8,621) 11,779 (20,768) Inventories (3,151) 280 (26,366) Other assets 1,177 (1,739) (617) Accounts payable 7,896 (20,886) 34,449 Accrued wages and employee benefits (197) 1,280 (806) Other accrued liabilities (12,519) (32,037) 2,910 Net cash provided by operating activities 114,481 74,607 10,224 Investing activities Proceeds from sale of property and equipment 76 69 92 Expenditures for property and equipment (9,631) (4,525) (5,186)Collections on receivable notes – 105 56 Acquisition of business, net of cash acquired (1,649) – – Net cash used in investing activities (11,204) (4,351) (5,038) Financing activities Stockholders’ contributions of capital – Series A preferred stock – 20,000 15,500 Repurchase of shares from management – Class B common stock – – (224)Repurchase of shares from management – Class A common stock – – (189)Payment of expenses incurred in advance of stock issuance – (678) – Proceeds from issuance of common stock 248,309 – – Repayment of stockholder notes receivable – – 37 Payment of long-term debt (434,310) (9,500) (10,396)Net cash provided by (used in) financing activities (186,001) 9,822 4,728 Net (decrease) increase in cash and cash equivalents (82,724) 80,078 9,914 Cash and cash equivalents at beginning of period 161,307 81,229 71,315 Cash and cash equivalents at end of period $78,583 $161,307 $81,229 Supplemental disclosure of cash flow information Cash paid during the period Interest $36,796 $75,601 $109,431 Income taxes 404 383 295 Supplemental disclosure of noncash financing and investing activities Contributions of capital related to debt extinguishment $– $14,754 $81,105 See notes to consolidated financial statements 46Table of Contents Generac Holdings Inc.Notes to Consolidated Financial StatementsYears Ended December 31, 2010, 2009, and 2008 1. Description of Business Generac Holdings Inc. (the Company) owns all of the common stock of Generac Acquisition Corp., which in turn, owns all of the common stock of GeneracPower Systems, Inc. (the Subsidiary). The Company designs, manufactures, and markets a complete line of backup power generation products forresidential, light-commercial, and industrial markets. On February 10, 2010, as part of the Corporate Reorganization, the Company completed a 3.294 for 1 reverse stock split (reverse stock split) for Class Acommon and Class B common shares that were outstanding prior to the completion of its initial public offering. All share and per share data have beenretrospectively restated to reflect the reverse stock split. Initial Public Offering and Conversion of Class B Common Stock and Series A preferred Stock On February 17, 2010, the Company completed its initial public offering (IPO) of 18,750,000 shares of our common stock at a price of $13.00 per share. Inaddition, the underwriters exercised their over-allotment option outlined in the underwriters agreement, and purchased an additional 1,950,500 shares of theCompany’s common stock on March 18, 2010. The Company received approximately $269,100,000 in gross proceeds from the IPO and over-allotmentexercise, or $247,631,000 in net proceeds after deducting the underwriting discount and total expenses related to the offering. Upon closing of the IPO, allshares of convertible Class B Common stock and Series A preferred stock were automatically converted into 88,476,530 and 19,511,018 Class A Commonshares, respectively. The 88,476,530 shares of Class A Common stock was subject to a 3.294 for 1 reverse stock split, resulting in 26,859,906 Class ACommon shares relative to the Class B Common stock conversion. Subsequent to the IPO, the Company has one class of common stock. Capitalization summary upon closing of initial public offering: Class A Common stock issued and outstanding as of December 31, 2009 after the 3.294 for 1 reversestock split 1,617 Conversion and 3.294 for 1 reverse stock split of Class B Common stock into Common stock uponclosing of IPO 26,859,906 Conversion of Series A Preferred stock into Common stock upon closing of IPO 19,511,018 Sales of Common stock through IPO 18,750,000 Issuance of non-vested and fully vested Common stock upon closing of IPO 456,249 Common stock issued and outstanding after IPO 65,578,790 Issuance of Common stock to underwriters due to exercise of over-allotment 1,950,500 Total Common stock issued and outstanding as of March 18, 2010 67,529,290 The Company determined that the conversion features in the Class B Common stock and Series A Preferred stock were in-the-money at the date of issuanceand therefore represent a beneficial conversion feature. Since the Class B Common stock and Series A Preferred stock were convertible upon an initial publicoffering, conversion was contingent upon a future event and therefore the beneficial conversion feature had not been recorded in the consolidated financialstatements as of December 31, 2009. The beneficial conversion feature at the IPO date was $140,690,000 and was recorded at the IPO date as a return to ClassB Common and Series A Preferred stockholders analogous to a dividend. The beneficial conversion was recorded within additional paid-in-capital, as noretained earnings were available. 47Table of Contents Generac Holdings Inc.Notes to Consolidated Financial StatementsYears Ended December 31, 2010, 2009, and 2008 2. Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany amounts and transactionshave been eliminated in consolidation. Cash Equivalents The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Concentration of Credit Risk The Company maintains the majority of its cash in one commercial bank in multiple operating and investment accounts. Balances on deposit are insured bythe Federal Deposit Insurance Corporation (FDIC) up to specified limits. Balances in excess of FDIC limits are uninsured. One customer accounted for approximately 11% of accounts receivable at December 31, 2010. At December 31, 2009, the Company had two customers whoaccounted for approximately 13% and 12% of accounts receivable, respectively. No one customer accounted for greater than 10% of net sales during the yearsended December 31, 2010, 2009, or 2008. Accounts Receivable Receivables are recorded at their face value amount less an allowance for doubtful accounts. The Company estimates and records an allowance for doubtfulaccounts based on specific identification and historical experience. The Company writes off uncollectible accounts against the allowance for doubtful accountsafter all collection efforts have been exhausted. Sales are generally made on an unsecured basis. Inventories Inventories are stated at the lower of cost or market, with cost determined using the first-in, first-out method. Property and Equipment Property and equipment are recorded at cost and are being depreciated using the straight-line method over the estimated useful lives of the assets, which aresummarized below (in years). Costs of leasehold improvements are amortized over the lesser of the term of the lease (including renewal option periods) or theestimated useful lives of the improvements. Land improvements 15 Buildings and improvements 40 Leasehold improvements 10 – 20 Machinery and equipment 5 – 10 Dies and tools 3 – 5 Vehicles 3 – 5 Office equipment 3 – 10 48Table of Contents Generac Holdings Inc.Notes to Consolidated Financial StatementsYears Ended December 31, 2010, 2009, and 2008 2. Significant Accounting Policies (Continued) Customer Lists, Patents, and Other Intangible Assets The following table summarizes intangible assets by major category as of December 31, 2010 and 2009 (dollars in thousands): 2010 2009 WeightedAverageAmortizationYears Cost AccumulatedAmortization Amortized Cost Cost AccumulatedAmortization Amortized Cost Indefinite lived intangibleassets Tradenames $140,050 $- $140,050 $140,050 $- $140,050 Finite lived intangible assets Tradenames 2 8,715 (8,715) - 8,715 (4,358) 4,357 Customer lists 7 257,310 (160,366) 96,944 256,760 (122,086) 134,674 Patents 15 117,811 (32,878) 84,933 117,811 (25,058) 92,753 Unpatented technology 9 11,015 (5,065) 5,950 11,015 (3,840) 7,175 Software 8 1,014 (524) 490 1,014 (398) 616 Non-compete 1 43 - 43 - - - Total finite lived intangibleassets 9 $395,908 $(207,548) $188,360 $395,315 $(155,740) $239,575 Amortization of intangible assets was $51,808,000 in 2010, $51,960,000 in 2009 and $47,602,000 in 2008. During the fourth quarter of 2008, theCompany recorded an impairment related to its indefinite lived intangible assets. See the Goodwill and Other Indefinite-Lived Intangible Assets section forfurther discussion. Estimated amortization expense each year for the five years subsequent to December 31, 2010 is as follows: 2011, $47,467,000;2012, $43,299,000, 2013, $21,426,000; 2014, $14,028,000; 2015, $12,823,000. Deferred Financing Costs Costs incurred in connection with the issuance of long-term debt have been capitalized and are being amortized using the effective interest rate method over thelife of the related debt agreements. Deferred financing costs incurred related to debt financing totaled $29,571,000. Amortization expense was $2,439,000,$3,417,000, and $3,905,000 for the years ended December 31, 2010, 2009, and 2008, respectively. The Company wrote off $4,809,000 of the deferredfinancing costs in 2010, related to the debt repayments made throughout the year. As a result of the debt extinguishments in 2009 and 2008 (see Note 5),$398,000 and $2,427,000 of the deferred financing costs were written off, respectively, and were recorded as a reduction to the gain on the extinguishment ofdebt (see Note 5). Accumulated amortization was $23,749,000 and $16,501,000 at December 31, 2010 and 2009, respectively. Amortization expense isincluded in interest expense in the consolidated statements of operations. Amortization expense for each of the next two years is expected to be approximately$2,036,000 and $1,750,000 in year three. Long-Lived Assets The Company periodically evaluates the carrying value of long-lived assets (excluding goodwill and trade names). Long-lived assets are reviewed forimpairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the sum of the expected futureundiscounted cash flows is less than the carrying amount of an asset, a loss is recognized for the difference between the fair value and carrying value of theasset. Such analyses necessarily involve significant judgments. Goodwill and Other Indefinite-Lived Intangible Assets Goodwill represents the excess of the amount paid to acquire the Company over the estimated fair value of the net tangible and intangible assets acquired as ofthe acquisition date. Other indefinite-lived intangible assets consist of trade names. The fair value of trade names was measured using a relief-from-royalty approach, whichassumes the fair value of the trade name is the discounted cash flows of the amount that would be paid had the Company not owned the trade name andinstead licensed the trade name from another company. The Company performs an annual impairment test for goodwill and trade names and more frequently if an event or circumstances indicate that an impairmentloss has been incurred. Conditions that would trigger an impairment assessment include, but are not limited to, a significant adverse change in legal factors orbusiness climate that could affect the value of an asset. The analysis of potential impairment of goodwill requires a two-step process. The first step is theestimation of fair value of the applicable reporting unit. The Company has determined it has one reporting unit as the Company considers itself one business,and all significant decisions are made on a companywide basis by its chief decision maker. Estimated fair value is based on management judgments andassumptions and those fair values are compared with the aggregate carrying value of the Company. If the fair value of the Company is greater than its carryingamount, there is no impairment. If the Company carrying amount is greater than the fair value, then the second step must be completed to measure the amountof impairment, if any. The second step calculates the implied fair value of the goodwill, which is compared to its carrying value. If the implied fair value isless than the carrying value, an impairment loss is recognized equal to the difference. 49Table of Contents Generac Holdings Inc.Notes to Consolidated Financial StatementsYears Ended December 31, 2010, 2009, and 2008 2. Significant Accounting Policies (Continued) As of October 31, 2010 and 2009, the Company performed its annual goodwill impairment test. In 2010, the fair value of the Company was determined basedon the market value of the Company’s publicly traded stock. In 2009, the fair value of the Company was estimated based on a weighted average of adiscounted cash flow analysis and comparable public company analysis (i.e. market approach). The rate used in determining discounted cash flows is a ratecorresponding to the Company’s cost of capital, adjusted for risk where appropriate. In determining the estimated future cash flows, current and future levelsof income are considered as well as business trends and market conditions. There was no goodwill impairment indicated as of October 31, 2010 and 2009. As of October 31, 2008, the Company performed its annual goodwill impairment test. The fair value of the Company was estimated based on a weightedaverage of a discounted cash flow analysis and comparable public company analysis (i.e. market approach). The rate used in determining discounted cashflows is a rate corresponding to the Company’s cost of capital, adjusted for risk where appropriate. In determining the estimated future cash flows, currentand future levels of income are considered as well as business trends and market conditions. Due to an increase in the Company’s weighted average cost ofcapital and lower comparable public company market values resulting from weakening economic conditions, the analysis indicated the potential forimpairment. With the assistance of a third-party valuation firm, the Company performed the second step and determined an impairment of goodwill existed.Accordingly, a non-cash charge of $503,193,000 was recognized in 2008 for goodwill impairment. The changes in the carrying amount of goodwill for the years ended December 31, 2010 and 2009 are as follows (dollars in thousands): Year ended December 31, 2010 Year ended December 31, 2009 Gross Accumulated Impairment Net Goodwill Gross Accumulated Impairment Net Goodwill Balance at beginning of year $1,029,068 $503,193 $525,875 $1,029,068 $503,193 $525,875 Acquisition of a business 1,273 — 1,273 — — — Balance at end of year $1,030,341 $503,193 $527,148 $1,029,068 $503,193 $525,875 The Company completed an acquisition of a business on December 31, 2010, for $1,600,000 net of cash acquired, which resulted in additional goodwill of$1,273,000, which is deductible for tax purposes. The Company performed its annual fair value-based impairment test on indefinite lived trade names as of October 31, 2010 and 2009. No impairment wasindicated. The Company performed its annual fair value-based impairment test on trade names as of October 31, 2008. As a result of the test, the Company recorded anon-cash charge of $80,293,000 for trade name impairment. The primary reason for this impairment charge related to a re-branding strategy implemented inthe fourth quarter of 2008, which resulted in the Company’s discontinuance of a particular trade name. Accordingly, this trade name was written down to itsestimated realizable value of $8,715,000, which has been amortized over its remaining useful life of 2 years beginning on January 1, 2009. As of December31, 2010, the company has fully amortized this tradename. Income Taxes The Company is a C Corporation and, therefore, accounts for income taxes pursuant to the liability method. Accordingly, the current or deferred taxconsequences of a transaction are measured by applying the provision of enacted tax laws to determine the amount of taxes payable currently or in future years.Deferred income taxes are provided for temporary differences between the income tax bases of assets and liabilities and their carrying amounts for financialreporting purposes. In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of thedeferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the yearsin which those temporary differences become deductible. The Company considers the scheduled reversal of deferred tax liabilities, projected future taxableincome, and tax planning strategies, as appropriate, in making this assessment. 50Table of Contents Generac Holdings Inc.Notes to Consolidated Financial StatementsYears Ended December 31, 2010, 2009, and 2008 2. Significant Accounting Policies (Continued) Revenue Recognition Sales, net of estimated returns and allowances, are recognized upon shipment of product to the customer, which is when title passes, the Company has nofurther obligations, and the customer is required to pay. The Company, at the request of certain customers, will warehouse inventory billed to the customer butnot delivered. The Company does not recognize revenue on these transactions until the customers take possession of the product. The funds collected onproduct warehoused for these customers are recorded as a customer advance until the customer takes possession of the product and the Company’s obligationto deliver the goods is completed. Customer advances are included in accrued liabilities in the accompanying consolidated balance sheets. The Company provides for estimated sales promotion and incentive expenses which are recognized as a reduction of sales. Historically, product returns, whether in the normal course of business or resulting from repurchases made under a floor plan financing program, have notbeen material. Shipping and Handling Costs Shipping and handling costs billed to customers are included in net sales, and the related costs are included in cost of goods sold in the consolidatedstatements of operations. Advertising and Co-Op Advertising Expenditures for advertising, included in selling and service expenses in the accompanying consolidated statements of operations, are expensed as incurred.Total expenditures for advertising were $11,985,000, $11,695,000, and $9,210,000 for the years ended December 31, 2010, 2009, and 2008, respectively. Research and Development The Company expenses research and development costs as incurred. Total expenditures incurred for research and development were $14,700,000,$10,842,000, and $9,925,000 for the years ended December 31, 2010, 2009 and 2008, respectively. Foreign Currency Transactions Realized and unrealized gains and losses on transactions denominated in foreign currency are recorded in earnings as a component of cost of goods sold. Accumulated Other Comprehensive Income (Loss) Accumulated other comprehensive income (OCI) includes unrealized losses on certain cash flow hedges and the pension liability. The components of OCI atDecember 31, 2010 and 2009 were (dollars in thousands): December 31, 2010 2009 Pension liability $(5,607) $(4,492)Unrealized losses on cash flow hedges (4,145) - Accumulated other comprehensive loss $(9,752) $(4,492) 51Table of Contents Generac Holdings Inc.Notes to Consolidated Financial StatementsYears Ended December 31, 2010, 2009, and 2008 2. Significant Accounting Policies (Continued) Fair Value of Financial Instruments The Company believes the carrying amount of its financial instruments (cash and cash equivalents, accounts receivable, notes receivable, accounts payable,and accrued liabilities), excluding long-term debt, approximates the fair value of these instruments based upon their short-term nature. The fair value of long-term debt was approximately $647.4 million (level 2) at December 31, 2010, as calculated based on current quotations. Fair Value Measurements The Company adopted ASC 820-10 Fair Value Measurements and Disclosures (formerly SFAS No. 157, Fair Value Measurements) on January 1, 2008.ASC 820-10, among other things, defines fair value, establishes a consistent framework for measuring fair value, and expands disclosure for each majorasset and liability category measured at fair value on either a recurring basis or nonrecurring basis. ASC 820-10 clarifies that fair value is an exit price,representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such,fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability.As a basis for considering such assumptions, the pronouncement establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuringfair value as follows: (Level 1) observable inputs such as quoted prices in active markets; (Level 2) inputs, other than the quoted prices in active markets,that are observable either directly or indirectly; and (Level 3) unobservable inputs in which there is little or no market data, which require the reporting entity todevelop its own assumptions. Assets and liabilities measured at fair value are based on the market approach, which is prices and other relevant information generated by markettransactions involving identical or comparable assets or liabilities. Assets and liabilities measured at fair value on a recurring basis are as follows (dollars in thousands): Fair Value Measurement Using TotalDecember 31,2010 Quoted Pricesin ActiveMarkets forIdenticalContracts(Level 1) SignificantOtherObservableInputs(Level 2) Interest rate swaps $(4,145) $– $(4,145)Commodity contracts 627 – 627 Fair Value Measurement Using TotalDecember 31,2009 Quoted Pricesin ActiveMarkets forIdenticalContracts(Level 1) SignificantOtherObservableInputs(Level 2) Commodity Contracts $208 $– $208 The valuation techniques used to measure the fair value of derivative contracts classified as level 2, all of which have counterparties with high credit ratings,were valued based on quoted market prices or model driven valuations using significant inputs derived from or corroborated by observable market data. Thefair value of derivative contracts above considers the Company’s credit risk in accordance with ASC 820-10. Excluding the impact of credit risk, the fairvalue of derivatives at December 31, 2010 and 2009 was $3,642,000 and $208,000, respectively, and this represents the amount the Company would need toreceive or pay to exit the agreements on this date. 52Table of Contents Generac Holdings Inc.Notes to Consolidated Financial StatementsYears Ended December 31, 2010, 2009, and 2008 2. Significant Accounting Policies (Continued) Use of Estimates The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to makeestimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of theconsolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from thoseestimates. Derivative Instruments and Hedging Activities The Company records all derivatives in accordance with ASC 815, Derivatives and Hedging, which requires all derivative instruments be reported on theconsolidated balance sheets at fair value and establishes criteria for designation and effectiveness of hedging relationships. The Company is exposed to marketrisk such as changes in commodity prices, foreign currencies, and interest rates. The Company does not hold or issue derivative financial instruments fortrading purposes. Commodities The primary objectives of the commodity risk management activities are to understand and mitigate the impact of potential price fluctuations on theCompany’s financial results and its economic well-being. While the Company’s risk management objectives and strategies will be driven from an economicperspective, the Company attempts, where possible and practical, to ensure that the hedging strategies it engages in can be treated as “hedges” from anaccounting perspective or otherwise result in accounting treatment where the earnings effect of the hedging instrument provides substantial offset (in the sameperiod) to the earnings effect of the hedged item. Generally, these risk management transactions will involve the use of commodity derivatives to protect againstexposure resulting from significant price fluctuations. The Company primarily utilizes commodity contracts with maturities of less than 12 months. These are intended to offset the effect of price fluctuations onactual inventory purchases. There were one, one, and two outstanding commodity contracts in place to hedge its projected commodity purchases at December31, 2010, 2009, and 2008, respectively. In November 2010, the Company entered into a commodity swap to purchase $2,296,000 of copper. The swaps areeffective from January 1, 2011, and terminate on April 30, 2011. In October 2009, the Company entered into commodity swaps to purchase $1,432,000 ofcopper. The swaps were effective from October 5, 2009, and terminated on March 31, 2010. In October 2008, the Company entered into commodity swapsto purchase $4,180,000 of copper. The swaps were effective from October 1 and November 1, 2008, and terminated on March 31, 2009. Total losses orgains recognized in the consolidated statements of operations on commodity contracts were a gain of $1,056,000, a gain of $387,000, and a loss of$1,092,000 for the years ended December 31, 2010, 2009, and 2008, respectively. Foreign Currencies The Company is exposed to foreign currency exchange risk as a result of transactions in other currencies. The Company periodically utilizes foreign currencyforward purchase and sales contracts to manage the volatility associated with foreign currency purchases in the normal course of business. Contracts typicallyhave maturities of one year or less. There were no foreign currency hedge contracts outstanding as of December 31, 2010 or 2009. There was one Eurocurrency contract outstanding during 2010 that expired on December 31, 2010. There was a loss of $100,000 recognized in the consolidated statements ofoperations for the year ended December 31, 2010 related to this Euro contract. Interest Rates In 2006, the Company entered into various interest rate swap agreements. The Company had formally documented all relationships between interest ratehedging instruments and hedged items, as well as its’ risk-management objectives and strategies for undertaking various hedge transactions. From inceptionthrough December 31, 2008, the Company’s interest rate swap agreements qualified as cash flow hedges. For derivatives that are designated and qualify as acash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of accumulated other comprehensive income (loss) andreclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The ineffective portion of the derivatives’ changein fair value, if any, is immediately recognized in earnings. The Company assesses on an ongoing basis whether derivatives used in hedging transactions arehighly effective in offsetting changes in cash flows of hedged items. The impact of hedge ineffectiveness on earnings was not material for the year endedDecember 31, 2008. 53Table of Contents Generac Holdings Inc.Notes to Consolidated Financial StatementsYears Ended December 31, 2010, 2009, and 2008 2. Significant Accounting Policies (Continued) Effective January 3, 2009, the Company, within the terms of the Credit Agreements (as defined in note 5), changed the interest rate election from three-monthLIBOR to one-month LIBOR. As a result of this change, the Company concluded that as of January 3, 2009, the Swaps no longer met hedge effectiveness testsand were therefore, no longer highly effective as a hedge against the impact on interest payments of changes in the LIBOR interest rate. In 2009, the effectiveportion of the swaps prior to the change was amortized as interest expense over the period of the originally designated hedged transactions. During 2009,changes in the fair value of the swaps were immediately recognized in the consolidated statements of operations as interest expense. These swaps expired onJanuary 4, 2010. The Company entered into two new interest rate swap agreements during the year ended December 31, 2010. The first was entered into on January 21, 2010.The effective date of the swap is July 1, 2010 with a notional amount of $200,000,000, a fixed LIBOR rate of 1.73% and an expiration date of July 1, 2012.The second was entered into on June 29, 2010. The effective date of the swap is October 1, 2010 with a notional amount of $100,000,000, a fixed LIBOR rateof 1.025% and an expiration date of October 1, 2012. We expect to maintain the swaps as highly effective in accordance with ASC 815 (formerly SFAS No.133, Accounting for Derivative Instruments and Hedging Activities) and, therefore, any changes in the fair value of the swap would be recorded inaccumulated other comprehensive income (loss). These two swap agreements are the only interest rate swap agreements outstanding as of December 31,2010. Cash flow hedges are recorded at fair value with a corresponding entry recorded in accumulated other comprehensive income (loss). At December 31,2010, the notional amount of debt under interest rate swap agreements outstanding was $300,000,000. The following table presents, in thousands, the fair value of the Company’s derivatives: December 31,2010 December 31,2009 Derivatives designated as hedging instruments: Interest rate swaps $(4,145) $— (4,145) — Derivatives not designated as hedging instruments: Commodity contracts 627 208 Total derivatives $(3,518) $208 As of December 31, 2010 and 2009, all derivatives that are not designated as hedging instruments are included in other assets in the consolidated balancesheet. All derivatives designated as hedging instruments are included in other long-term liabilities in the consolidated balance sheet at December 31, 2010. The fair value of the derivative contracts considers the Company’s credit risk as of December 31, 2010 and 2009, respectively. The impact of credit risk onthe fair value of derivative contracts at December 31, 2009 was not material. Excluding the impact of credit risk, the fair value of the derivatives atDecember 31, 2010 and 2009 was a $3,642,000 liability and $208,000 asset, respectively, and this represents the amount the Company would need to receiveor pay to exit the agreements on those dates. 54Table of Contents Generac Holdings Inc.Notes to Consolidated Financial StatementsYears Ended December 31, 2010, 2009, and 2008 2. Significant Accounting Policies (Continued) The following presents the impact of interest rate swaps and commodity contracts on the consolidated statement of operations for the year ended December 31,2010 and 2009 (dollars in thousands): Amount of lossrecognized in AOCIforthe twelve monthsendedDecember 31, Location ofgain (loss)reclassifiedfrom AOCI Amount of lossreclassified fromAOCIinto net income(loss) forthe twelve monthsendedDecember 31, Amount of gain(loss)recognized in netincome(loss) on hedges(ineffective portion)forthe twelve monthsendedDecember 31, 2010 2009 into netincome(loss) 2010 2009 2010 2009 Derivatives designated ashedging instruments Interest rate swaps $(4,145) $— Interestexpense $— $(24,222) $— $— Derivatives not designated ashedging instruments Commodity and foreigncurrency contracts — — Cost ofgoods sold — — 956 387 Interest rate swaps $— $— Interestexpense $— $— $— $24,222 There was no impact of derivative instruments on the consolidated statement of operations for the interest rate swaps for the twelve months ended December31, 2010. For the year ended December 31, 2009, the impact of derivative instruments on the consolidated statement of operations for the interest rate swapagreements not designated as hedging instruments was a gain of $24,222,000. During the twelve months ended December 31, 2010 and 2009, the impact ofderivative instruments on the consolidated statement of operations for the commodity and foreign currency contracts not designated as hedging instrumentswere net gains of $956,000 and $387,000, respectively. Stock-Based Compensation The Company accounts for its restricted stock awards and other stock-based payments in accordance with ASC Topic 718 Compensation – StockCompensation (formerly SFAS No. 123(R), Share Based Payments (SFAS No. 123(R)). The Company adopted ASC Topic 718 using the prospectivemethod, accordingly, the provisions of ASC 718 are applied prospectively to new awards and to awards modified, repurchased or cancelled after the adoptiondate. Segment Reporting The Company operates in and reports as a single operating segment, which is the manufacture and sale of power products. Net sales are generated through thesale of generators and service parts to distributors and retailers. The Company manages and evaluates its operations as one segment primarily due tosimilarities in the nature of the products, production processes and methods of distribution. All of the Company’s identifiable assets are located in the UnitedStates. The Company’s sales outside North America are not material, representing approximately 1% of net sales. The Company's product offerings consist primarily of power products with a range of power output. Residential power products and industrial & commercialpower products are each a similar class of products based on similar power output and customer usage. The breakout of net sales between residential,industrial/commercial, and other products is as follows: Year ended December 31, 2010 2009 2008 Residential power products $372,782 62.9% $370,740 63.0% $332,618 57.9%Industrial & Commercial powerproducts 183,555 31.0% 187,323 31.9% 207,861 36.2%Other 36,543 6.1% 30,185 5.1% 33,750 5.9%Total $592,880 $588,248 $574,229 55Table of Contents Generac Holdings Inc.Notes to Consolidated Financial StatementsYears Ended December 31, 2010, 2009, and 2008 2. Significant Accounting Policies (Continued) New Accounting Standards to be Adopted In February 2010, the Financial Accounting Standards Board (“FASB”) issued an update that removes the requirement for a SEC filer to disclose a datethrough which subsequent events have been evaluated. This change removes potential conflicts with SEC requirements. The adoption did not have an impacton the Company’s consolidated financial statements. 3. Balance Sheet Details Inventories consist of the following (dollars in thousands): December 31, 2010 2009 Raw material $66,936 $74,136 Work-in-process 315 775 Finished goods 63,945 52,726 Reserves for excess and obsolescence (4,059) (3,937) $127,137 $123,700 Property and equipment consists of the following (dollars in thousands): December 31, 2010 2009 Land and improvements $3,950 $3,913 Buildings and improvements 48,986 48,521 Machinery and equipment 32,672 26,500 Dies and tools 11,301 9,631 Vehicles 827 857 Office equipment 6,836 5,712 Gross property and equipment 104,572 95,134 Less accumulated depreciation (29,285) (21,760)Property and equipment, net $75,287 $73,374 Other accrued liabilities consist of the following (dollars in thousands): December 31, 2010 2009 Accrued commissions $4,578 $4,211 Accrued interest 5,018 17,062 Accrued warranties – short term 17,155 17,029 Other accrued liabilities 11,292 14,024 $38,043 $52,326 56Table of Contents Generac Holdings Inc.Notes to Consolidated Financial StatementsYears Ended December 31, 2010, 2009, and 2008 4. Product Warranty Obligations The Company records a liability for product warranty obligations at the time of sale to a customer based upon historical warranty experience. The Companyalso records a liability for specific warranty matters when they become known and are reasonably estimable. The Company’s product warranty obligations areincluded in other accrued liabilities and other long-term liabilities in the balance sheets. Changes in product warranty obligations are as follows (dollars in thousands): For the year ended December 31, 2010 2009 2008 Balance at beginning of year $20,729 $17,539 $14,807 Payments (13,178) (14,208) (15,946)Charged to operations 14,927 17,398 18,678 Balance at end of year $22,478 $20,729 $17,539 Product warranty obligations are included in the balance sheets as follows (dollars in thousands): December 31, 2010 2009 Other accrued liabilities $17,155 $17,029 Other long-term liabilities 5,323 3,700 Balance at end of year $22,478 $20,729 5. Credit Agreements Long-term debt consists of the following (dollars in thousands): December 31, 2010 2009 First lien term loan $664,372 $920,604 Second lien term loan -- 430,000 664,372 1,350,604 Less treasury debt – first lien 7,143 9,898 Less treasury debt – second lien -- 249,167 Less current portion -- 39,076 $657,229 $1,052,463 Maturities of long-term debt outstanding at December 31, 2010, are as follows (dollars in thousands): Year 2010 $-- 2011 -- 2012 -- 2013 657,229 Total $657,229 During the years presented, the Company had credit agreements which provided for borrowings under a revolving credit facility (the Revolving Credit Facility)and two term loans (collectively, the Credit Agreements), which are described further below. The Credit Agreements of the Company are secured by theassociated collateral agreements which pledge virtually all assets of the Subsidiary. 57Table of Contents Generac Holdings Inc.Notes to Consolidated Financial StatementsYears Ended December 31, 2010, 2009, and 2008 5. Credit Agreements (Continued) Borrowings available under the Revolving Credit Facility are limited to a maximum of $150,000,000. Availability under the Revolving Credit Facility isreduced by the amount of outstanding undrawn letters of credit. Interest on the Revolving Credit Facility is payable at LIBOR plus 2.5%, or ABR plus 1.5%,as selected by the Company. ABR is the greater of the prime rate or the federal funds rate plus 0.5%. The spreads on these rates may be reduced as a result ofthe Company meeting certain financial ratios. As of December 31, 2010, the Company’s interest rate on the Revolving Credit Facility was 2.26%. As ofDecember 31, 2010, the Company had $145,666,000 available under its Revolving Credit Facility and no outstanding borrowings. The Company pays aRevolving Credit Facility commitment fee of 0.375% on the average available unused commitment. The Revolving Credit Facility matures and is due onNovember 10, 2012, unless terminated earlier under certain conditions contained in the Credit Agreements. The Credit Agreements provide the Company the ability to issue letters of credit. Outstanding undrawn letters of credit reduce availability under theCompany’s Revolving Credit Facility. The letters of credit accrue interest at a rate of 2.63%, paid quarterly on the undrawn daily aggregate exposure of thepreceding quarter. This rate may be reduced as a result of meeting certain financial ratios. At December 31, 2010 and 2009, letters of credit outstanding were$4,334,000 and $5,040,000, and interest rates were 2.13% and 2.63% respectively. The principal amount of and the outstanding balance under the First Lien Term Loan (the First Lien) was $657,229,000 and $910,706,000 (net of loans heldin treasury by the Company) at December 31, 2010 and 2009, respectively. Prior to the 2010 debt repayments, principal payments were due in quarterlyinstallments of $2,375,000. Interest on the First Lien is payable at LIBOR plus 2.5%, or ABR plus 1.5%, as selected by the Company. At December 31, 2010and 2009 the Company’s interest rate on the First Lien was 2.76% and 2.78%, respectively. The outstanding principal balance is payable on the earlier ofNovember 10, 2013, or the date of termination of the First Lien, whether by its terms, by prepayment, or by acceleration. In addition to scheduled principalpayments, the First Lien requires an excess cash flow payment each year. The required excess cash flow payment is the amount by which 50% of the excesscash flow (as defined in the credit agreement) generated by the Company in any given year exceeds the principal payments made during that year. The excesscash flow payment is due 125 days after year-end. For the year ending December 31, 2010, based on the calculation, the Company is not required to make anexcess cash flow payment. For the year ending December 31, 2009, the required excess cash flow payment was $29,576,000, which was paid in 2010. Thispayment was classified as current debt in the consolidated balance sheet as of December 31, 2009. The principal amount of and the outstanding balance under the Second Lien Term Loan (the Second Lien) was $0 and $180,833,000 (net of loans held intreasury by the Company) at December 31, 2010 and 2009, respectively. Interest on the Second Lien was payable at LIBOR plus 6.0%, or ABR plus 5.0%, asselected by the Company. At December 31, 2009, the Company’s interest rate on the Second Lien was 6.28%. The outstanding principal balance was payableon the earlier of May 10, 2014, or the date of termination of the Second Lien, whether by its terms, by prepayment, or by acceleration. In 2010, the Company used net proceeds from its initial public offering and a substantial portion of its cash and cash equivalents to pay down debt. InFebruary 2010, we used $221.6 million in net proceeds from the initial public offering to pay down our second lien term loan in full and to pay down aportion of our first lien term loan. In addition, in March 2010 and December 2010, we used $138.5 million and $74.2 million respectively, of cash and cashequivalents on hand to further pay down our first lien term loan principal. As a result of these debt repayments, the outstanding balance on the first lien creditfacility had been reduced to $657.2 million, and our second lien credit facility had been repaid in full and terminated. Also, quarterly installments forprincipal payments of $2,375,000 were paid in full for the remainder of the first lien term loan. The Credit Agreements require the Company, among other things, to meet certain financial and nonfinancial covenants and maintain financial ratios in suchamounts and for such periods as set forth therein. The Company is required to maintain a leverage ratio (net debt divided by EBITDA, as defined within theCredit Agreements) of 5.75 as of December 31, 2010. The leverage ratio decreases quarterly, and for 2011, the Company will be required to maintain aleverage ratio of 5.75, 5.50, 5.25, and 4.75 for the first, second, third, and fourth quarters, respectively. As of September 30, 2008, the Company hadviolated its debt covenant. As permitted by the Credit Agreements, this violation was remedied by an equity contribution of $15,500,000 from CCMP in thefourth quarter of 2008. The Company was in compliance with all requirements as of December 31, 2010 and 2009. The Credit Agreements restrict the circumstances in which distributions and dividends can be paid by its’ Subsidiary. Payments can be made to theCompany for certain expenses, and dividends can be used to repurchase equity interests, subject to an annual limitation. Additionally, the Credit Agreementsrestrict the aggregate amount of dividends and distributions that can be paid and require the maintenance of certain leverage ratios. 58Table of Contents Generac Holdings Inc.Notes to Consolidated Financial StatementsYears Ended December 31, 2010, 2009, and 2008 5. Credit Agreements (Continued) During 2009, CCMP acquired $9,898,000 par value of First Lien term loans and $20,000,000 par value of Second Lien term loans for approximately$6,459,000 and $8,296,000 respectively. CCMP exchanged this debt for additional shares of Series A Preferred stock issued by the Company. TheCompany subsequently contributed all but $2,000,000 of the Second Lien term loan debt to its Subsidiary. The fair value of the shares exchanged was$6,459,000 and $8,296,000 for the First Lien term loan and Second Lien term loan, respectively. These shares have beneficial conversion features which arecontingent upon a future event (see Note 6). The Company recorded this transaction as Series A Preferred stock of $14,754,000 based on the fair value of thedebt contributed by CCMP which approximated the fair value of shares exchanged. The debt was held in treasury at face value. Consequently, the Companyrecorded a gain on extinguishment of debt of $14,745,000, which includes the write-off of deferred financing fees and other closing costs, in the consolidatedstatement of operations for the year ended December 31, 2009. During 2008, CCMP acquired $148,917,000 par value of Second Lien term loans for approximately $81,105,000. CCMP exchanged this debt for additionalshares of Class B Common stock and Series A Preferred stock issued by the Company. The Company subsequently contributed this debt to its Subsidiary.The fair value of the shares exchanged was $81,105,000. These shares have beneficial conversion features which are contingent upon a future event (see Note6). The Company recorded this transaction as Series A Preferred stock of $62,855,000 and Class B Common Stock of $18,249,000 based on the fair valueof the debt contributed by CCMP which approximated the fair value of shares exchanged. The debt was held in treasury at face value. Consequently, theCompany recorded a gain on extinguishment of debt of $65,385,000, which includes the write-off of deferred financing fees and other closing costs, in theconsolidated statement of operations for the year ended December 31, 2008. In previous periods, the Company entered into various interest rate swap agreements (the Swaps) with certain banks. The Swaps, which were effectiveJanuary 2, 2007, October 3, 2007, and January 3, 2008, had notional amounts totaling $825,000,000, $100,000,000, and $275,000,000, respectively. Thetotal notional amount of $1,200,000,000 declined to $1,100,000,000 at October 3, 2008, further declined to $675,000,000 at January 3, 2009, and terminatedJanuary 4, 2010. The Company swapped floating three-month LIBOR interest rates for fixed rates with an aggregate weighted-average interest rate of 5.041%and 4.775% as of December 31, 2009 and 2008, respectively. Effective January 3, 2009, the Company, within the terms of the Credit Agreements, changed the interest rate election from three-month LIBOR to one-monthLIBOR. The Company concluded that as of January 3, 2009, the Swaps no longer met hedge effectiveness tests and were therefore no longer highly effective asa hedge against the impact on interest payments of changes in the LIBOR interest rate. The effective portion of the Swaps prior to the change remained inaccumulated other comprehensive income (loss) and was amortized as interest expense over the period of the originally designated hedged transactions throughJanuary 3, 2010. Changes in the fair value of the Swaps were immediately recognized in the consolidated statements of operations as interest expense. TheCompany determined its Swaps met hedge effectiveness tests and were deemed highly effective for hedge accounting under ASC 815 as of December 31, 2008.Accordingly, at December 31, 2008 the change in fair value was recorded in accumulated other comprehensive income (loss) net of tax for the effective portionof the hedges. The Company entered into two new interest rate swap agreements during the twelve month period ending December 31, 2010. The first was entered into onJanuary 21, 2010. The effective date of the swap is July 1, 2010 with a notional amount of $200,000,000, a fixed LIBOR rate of 1.73% and an expiration dateof July 1, 2012. The second was entered into on June 29, 2010. The effective date of the swap is October 1, 2010 with a notional amount of $100,000,000, afixed LIBOR rate of 1.025% and an expiration date of October 1, 2012. We expect to maintain the swaps as highly effective in accordance with ASC 815(formerly SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities) and, therefore, any changes in the fair value of the swap would berecorded in accumulated other comprehensive income (loss). These two swap agreements are the only interest rate swap agreements outstanding as ofDecember 31, 2010. The fair value of the interest rate swap agreements, including the impact of credit risk, at December 31, 2010, was a liability of$4,145,000. At December 31, 2009, the fair value of the interest rate swap agreements, including the impact of credit risk, was $0. 59Table of Contents Generac Holdings Inc.Notes to Consolidated Financial StatementsYears Ended December 31, 2010, 2009, and 2008 6. Redeemable Stock and Stockholders’ Equity (Deficit) Certain of the current equity investors (affiliates of CCMP Capital Advisors, LLC and related entities, affiliates of Unitas Capital Ltd., certain members ofmanagement of the Subsidiary and board of directors of the Company) had previously acquired a combination of Class A and Class B Common stock andSeries A Preferred stock of the Company. General terms of these securities are:Preferred stockSeries A Convertible Preferred stock: Each Series A Preferred share was entitled to a priority return preference equal to the sum of $10,000 per share baseamount plus an amount sufficient to generate a 14% annual return on that base amount compounded quarterly from the date of issuance until the accretedpriority return preference was paid in full. Each Series A Preferred share also participated in any equity appreciation beyond the Series A Preferred priorityreturn (the Series A Equity Participation).Voting: Series A Preferred shares did not have voting rights, subject to certain limited approval rights.Distributions: Dividends and other distributions to stockholders in respect of shares, whether as part of an ordinary distribution of earnings, as a leveragedrecapitalization or in the event of an ultimate liquidation and distribution of available corporate assets were to be paid to Series A Preferred stockholders asfollows: Series A Preferred shares were entitled to receive an amount equal to the Series A Preferred base amount of $10,000 per share plus an amount sufficientto generate a 14% annual return on that base amount, compounded quarterly from the date in which the Series A Preferred shares were originally issued.Series A Preferred shares then received an equity participation on all remaining proceeds after payment of this priority return to all Series A Preferredstockholders equal to 24.3% of remaining proceeds (Series A Equity Participation). No distribution would be made to any holder of common stock until theSeries A Preferred stockholders had received all distributions to which they were entitled as previously described. After such distributions were made to theSeries A Preferred stockholders, the holders of common stock were entitled to receive any remaining payments or distributions in accordance with theirrespective priorities.Liquidations: Distributions in connection with any liquidation or change of control transaction would be made in accordance with the distributionsdescribed above. No distribution would be made to any holder of common stock until the Series A Preferred stockholders had received all distributions towhich they were entitled as described above. After such distributions were made to the Series A Preferred stockholders, the holders of common stock would beentitled to receive any remaining payments or distributions in accordance with their respective priorities.Conversion: Series A Preferred shares automatically converted into Class A common shares at the time of the initial public offering (IPO). Any unpaidSeries A preferred return (base $10,000 per share plus 14% accretion) was converted into additional Class A common shares valued at the IPO price net ofunderwriter's discount. That is, each Series A Preferred share was converted into a number of Class A common shares equal to (i) a fraction, the numerator ofwhich is the unpaid priority return on such Series A Preferred share and the denominator of which is the value of a Class A common share at the time ofconversion plus (ii) the number of Class A common shares required to be issued to satisfy the Series A Equity Participation. The number of shares of Class Acommon stock which were issued upon conversion of the Series A Preferred was dependent upon the initial public offering price of the Class A common stockon the date of conversion as well as the unpaid priority return of the Series A Preferred stock.The Series A Preferred were redeemable in a deemed liquidation in the event of a change of control. The redemption features were considered to be outside thecontrol of the Company and therefore, all shares of Series A Preferred stock were recorded outside of permanent equity in accordance with guidance originallyissued under EITF Topic D-98, Classification and Measurement of Redeemable Securities (codified under Accounting Standards Codification 480,Distinguishing Liabilities from Equity). Until the time of the IPO, no adjustment to the carrying value of the Series A Preferred stock securities had beenrecorded, and the priority returns had not been accreted as a change of control was not probable. Common stockClass B Convertible common stock: Class B shares participated in the equity appreciation after the Series A Preferred priority return was satisfied. EachClass B share was entitled to a priority return preference equal to the sum of $10,000 per share base amount plus an amount sufficient to generate a 10%annual return on that base amount compounded quarterly from the date of issue until the Class B priority return preference is paid in full. Each Class B sharealso participated in any equity appreciation beyond the Class B priority return. 60Table of Contents Generac Holdings Inc.Notes to Consolidated Financial StatementsYears Ended December 31, 2010, 2009, and 2008 6. Redeemable Stock and Stockholders’ Equity (Deficit) (Continued) Voting: Each Class B share was entitled to one vote per share on all matters on which stockholders voted.Class A common stock: Class A shares participated in the equity appreciation after the Class B priority return was satisfied.Class A shares did not have voting rights, priority preference or any accretion rights.Distributions: After payment of the priority return to Series A Preferred shareholders previously described above under Preferred Stock, dividends and otherdistributions that remain available to stockholders in respect of shares, whether as part of an ordinary distribution of earnings, as a leveraged recapitalizationor in the event of an ultimate liquidation and distribution of available corporate assets, were to be paid to the common stockholders as follows: Class B shareswere entitled to receive an amount equal to the Class B base amount of $10,000 per share plus an amount sufficient to generate a 10% annual return on thatbase amount, compounded quarterly from the date in which the Class B shares were originally issued. After payment of this priority return to Class Bholders, the holders of Class A shares and Class B shares participated together equally and ratably in any and all distributions by the Company.Liquidations: Distributions made in connection with any liquidation or change of control transaction would be made in accordance with the distributionspreviously described above in the preceding paragraph. In addition, any remaining assets after the Class B preferential distribution would be allocated to theClass A and Class B shares as follows: the Class B shares would receive a percentage of the remaining assets equal to the sum of (i) 88% plus (ii) the productof (A) 12% multiplied by (B) one minus a fraction, the numerator of which is the number of issued and outstanding vested shares of Class A shares and thedenominator is 9,350.0098. The remainder would be allocated to the Class A shares.Conversion: Class B shares automatically converted into Class A shares immediately prior to the IPO. Any unpaid Class B Common priority return (base$10,000 per share plus 10% accretion) was "paid" in additional Class A common shares valued at the IPO price net of underwriter's discount. That is, eachClass B share converted into a number of Class A shares required to be issued to satisfy the Class B Common priority return. Each Class B share convertedinto a number of Class A shares equal to (i) one plus (ii) a fraction, the numerator of which was the unpaid priority return on such Class B share and thedenominator of which was the value of a Class A share at the time of conversion, in all cases subject to the priority rights and preferences of the Series APreferred Shares. The number of shares of Class A common stock which were issued upon conversion of the Class B common stock was dependent upon theinitial public offering price of the Class A common stock on the date of conversion as well as the unpaid priority return of the Class B common stock.The Class B common were redeemable in a deemed liquidation in the event of a change of control. The redemption features were considered to be outside thecontrol of the Company and therefore, all shares of Class B common stock were recorded outside of permanent equity in accordance with guidance originallyissued under EITF Topic D-98, Classification and Measurement of Redeemable Securities (codified under Accounting Standards Codification 480,Distinguishing Liabilities from Equity). Until the time of the IPO, no adjustment to the carrying value of Class B Common stock securities had beenrecorded, and the priority returns had not been accreted as a change of control was not probable. Accretion: Cumulative accretion on Series A preferred stock and Class B common stock at the time of the IPO on February 17, 2010, was as follows: Series APreferred Class BCommon Carrying value $113,109 $765,096 Cumulative accretion 17,006 286,299 $130,115 $1,051,395 The amounts above do not include the additional base amount of $25,790,000 on Class B common stock or the impact of Series A Equity Participation onSeries A Preferred stock, both of which were recognized as a beneficial conversion at the time of the initial public offering. 61Table of Contents Generac Holdings Inc.Notes to Consolidated Financial StatementsYears Ended December 31, 2010, 2009, and 2008 6. Redeemable Stock and Stockholders’ Equity (Deficit) (Continued) Management Equity Incentive Plan: On November 10, 2006, the Company adopted the 2006 Management Equity Incentive Plan (2006 Equity IncentivePlan). The 2006 Equity Incentive Plan provided for awards with respect to a maximum of 9,350.0098 Class A Common shares and 5,000 Class B Commonshares, subject to certain adjustments. On November 10, 2006, and from time to time thereafter, certain members of management purchased restricted sharesof Class A Common stock under the 2006 Equity Incentive Plan for $341 per share and pursuant to restricted stock agreements. One half of the restrictedshares vested over time (Time Vesting Shares), with 25% vesting on November 10, 2007 and on the next three anniversaries thereafter, so long as theparticipant was still employed by the Company or one of its subsidiaries on the applicable vesting date. Upon the occurrence of a change of control of theCompany, any unvested Time Vesting Shares immediately vested in full, so long as the participant was still employed by the Company or one of itssubsidiaries. The other half of the restricted shares immediately vested (performance-based vesting) in full, provided the participant was still then employedby the Company or one of its subsidiaries, upon the occurrence of either: (i) a change of control of the Company that provides CCMP with a certain rate ofreturn with respect to net proceeds received by CCMP from their investment in the Company; or (ii) from and after the date of an IPO, the achievement withrespect to shares of the Class A Common stock of an average closing trading price exceeding, in any 60 consecutive trading day period starting prior to thelater of (a) the fifth year anniversary of the date of grant of the restricted shares, and (b) one year after the IPO, a certain threshold with respect to net proceedsreceived by CCMP from their investment in the Company. As a condition to the purchase of restricted shares, members of management executedconfidentiality, non-competition and intellectual property agreements. The fair value of the Class A common stock on the date of issuance was estimated to be $390 per share. The Company has recorded $6,000, $38,000, and$40,000 of stock-based compensation expense related to the Time Vesting Shares in 2010, 2009, and 2008, respectively, related to amortization of the excess offair value over purchase price of these restricted shares. This excess was being amortized over the vesting provisions of the restricted shares. As a result of theIPO, the remaining unvested performance-based Restricted Shares became fully vested. As a result, the Company has recorded $159,000 of stock-basedcompensation expense related to the accelerated vesting in 2010. Issuance and repurchases of securitiesClass A Common Stock: In 2008, 555.1566 restricted shares of Class A common stock were repurchased by the Company, at a price of $341 per share,from members of management who terminated their employment with the Subsidiary.Class B Common Stock: In 2008, the Company issued 2,400 shares of Class B Common stock to CCMP in exchange for certain term loans under thesecond lien credit facility that CCMP had purchased. The exchange ratio in connection with the exchange was one share of Class B Common stock per$10,000 of the aggregate outstanding principal amount of the loans that were so exchanged. Such purchased term loans had an aggregate outstanding principalamount equal to $24,000,000. In accordance with the preemptive rights provisions of the Shareholders' Agreement, CCMP subsequently transferred shares ofClass B Common stock it had purchased to various investment funds affiliated with CCMP, certain members of management and board members. Theshares exchanged were valued at the discounted amount paid for the debt, which approximated the Class B Common stock's fair value at that date. The equityconsideration was less than the outstanding principal amount, therefore a gain on debt extinguishment was recorded. A summary of how the 2,400 Class BCommon shares issued in exchange for repurchased debt is accounted for in the consolidated financial statements is as follows (dollars in thousands): NumberofShares faceValueof Debt ConsiderationPaid FairValueof SharesExchanged ContingentBeneficialConversation Gain onExtinguishmentof debt Year endingDecember 31,2008 2,400 $24,000 $18,249 $18,249 5,492 $5,363 The Company determined that the conversion feature in the Class B Common stock was in-the-money at the date of issuance and therefore represented abeneficial conversion feature. Since the Class B Common stock was convertible upon an initial public offering, it was contingent upon a future event and hadnot been recorded in the consolidated financial statements prior to the IPO. The beneficial conversion feature, which was valued at $25,790,000 at itscommitment date, was recorded at the completion of the IPO on February 10, 2010 as a return to Class B Common stockholders analogous to a dividend.Since no retained earnings were available to pay this dividend at resolution of the contingency, the dividend was charged against additional paid in capitalresulting in no net impact. Upon the completion of the IPO on February 10, 2010, the Company recorded the beneficial conversion of $25,790,000 as areduction and offsetting increase to additional paid in capital as no retained earnings were available. There was no net impact on additional paid-in-capital. 62Table of Contents Generac Holdings Inc.Notes to Consolidated Financial StatementsYears Ended December 31, 2010, 2009, and 2008 6. Redeemable Stock and Stockholders’ Equity (Deficit) (Continued) Series A Preferred Stock: In November 2008, the Company issued 1,550 shares of the Series A Preferred stock to CCMP for an aggregate purchase priceof $15,500,000. In September 2009, the Company issued 2,000 shares of the Series A Preferred stock to CCMP and certain members of management and theboard of directors, for an aggregate purchase price of $20,000,000. In December 2008 and in 2009, the Company issued an aggregate of 6,285 and 1,476shares of Series A Preferred stock, respectively, to CCMP in exchange for certain term loans under the first and second lien credit facilities that CCMP hadpurchased. The exchange ratio in connection with the exchange was one share of Series A Preferred stock per $10,000 of the amount paid by CCMP for theloans that were so exchanged. Such purchased term loans had an aggregate outstanding principal amount equal to $154,815,000. The equity considerationwas less than the outstanding principal amount, therefore a gain on debt extinguishment was recorded. A summary of the exchanges of purchased term loansfor Series A Preferred stock by year is as follows (dollars in thousands): Numberof Shares face Valueof Debt ConsiderationPaid Gain onExtinguishmentof debt Year ending December 31, 2009 1,476 $29,898 $14,754 $14,745 Year ending December 31, 2008 6,285 124,917 62,855 60,022 The Company determined that the conversion feature in the Series A Preferred stock had a contingent beneficial conversion feature at the date of issuance. TheSeries A Preferred stock was convertible upon an initial public offering and the number of additional Class A Common shares which may be issued wasunknown prior to the IPO. Since it was contingent upon a future event, it had not been recorded in the consolidated financial statements prior to the IPO. Thebeneficial conversion feature, which is the result of the additional Class A shares issued to satisfy the Series A Equity Participation, was recorded at thecompletion of the initial public offering on February 10, 2010, as a return to Series A Preferred stockholders analogous to a dividend. Since no retainedearnings were available to pay this dividend at resolution of the contingency, the dividend was charged against additional paid in capital resulting in no netimpact. Upon the completion of the IPO on February 10, 2010, the Company recorded the beneficial conversion of $114,900,000 as a reduction and offsettingincrease to additional paid in capital as no retained earnings were available. There was no net impact on additional paid-in-capital. 63Table of Contents Generac Holdings Inc.Notes to Consolidated Financial StatementsYears Ended December 31, 2010, 2009, and 2008 7. Earnings Per Share The Class B Common stock was considered a participating stock security requiring use of the “two-class” method for the computation of basic net income(loss) per share in accordance with provision of ASC 260-10 Earnings per share. Losses were not allocated to the Class B Common stock in the computationof basic earnings per share as the Class B Common stock was not obligated to share in losses. Basic earnings per share excludes the effect of common stock equivalents and is computed using the “two-class” computation method, which subtractsearnings attributable to the Class B preference from total earnings. Any remaining loss is attributed to the Class A shares. Year ended December 31 , 2010 2009 2008 Net income (loss) $56,913 $43,055 $(555,955)Less: accretion of Series A Preferred stock (2,042) (14,151) (785)Less: accretion of Class B Common stock (12,133) (100,191) (90,567)Less: beneficial conversion (140,690) - - Net loss attributable to Common stock (formerly Class A Common stock) (97,952) (71,287) (647,307)Income attributable to Class B Common stock 12,133 100,191 90,567 Net income (loss) per common share - basic: Common stock (formerly Class A Common stock) $(1.65) $(41,111) $(357,628)Class B Common stock $505 $4,171 $3,780 Net income (loss) per common share - diluted: Common stock (formerly Class A Common stock) $(1.65) $(41,111) $(357,628)Class B Common stock $505 $4,171 $3,780 Weighted average number of shares outstanding – Common Stock (formerly Class ACommon stock): Basic 59,364,958 1,734 1,810 Dilutive effect of stock compensation awards - - - Diluted 59,364,958 1,734 1,810 Weighted average number of shares outstanding – Class B Common stock – basic anddiluted: 24,018 24,018 23,961 The share and per share data used in basic and diluted earnings per share has been retrospectively restated to reflect a 3.294 for 1 reverse stock splitimmediately prior to the IPO on February 10, 2010. For the year ended December 31, 2010, diluted earnings per share are identical to basic earnings per sharebecause the impact of common stock equivalents on earnings per share is anti-dilutive. Had the impact not been anti-dilutive, the effect of stock compensationawards on weighted average diluted shares outstanding would have been 257,038.The Series A Preferred and Class B Common stock were only convertible to Class A Common stock immediately prior to an initial public offering. Theimpact of the conversion of Series A Preferred and Class B Common stock are excluded from diluted earnings per share calculations for 2009 and 2008, asthis contingent event had not yet occurred by the end of the respective reporting periods. The number of shares of Class A Common stock that were issuedupon conversion of the Series A Preferred and Class B Common stock was dependent upon the initial public offering price of the Class A Common stock onthe date of conversion of February 10, 2010 as well as the unpaid priority return. The conversion at the time of the IPO, as well as the reverse stock split,resulted in 19,511,018 and 26,859,906 shares of common stock issued for the Series A Preferred stock and Class B Common stock, respectively. 64Table of Contents Generac Holdings Inc.Notes to Consolidated Financial StatementsYears Ended December 31, 2010, 2009, and 2008 8. Income Taxes The Company’s provision for income taxes consists of the following (dollars in thousands): Year ended December 31, 2010 2009 2008 Current: Federal $– $– $– State 307 339 400 307 339 400 Deferred: Federal 19,127 15,221 (195,035)State 2,831 (12,378) (11,240) 21,958 2,843 (206,275)Change in valuation allowance (21,958) (2,843) 206,275 Provision for income taxes $307 $339 $400 The Company is the taxpaying entity and files a consolidated federal income tax return. Currently, the Company is not under examination by any major taxingjurisdiction to which the Company is subject. The statute of limitation for tax years 2010, 2009, 2008, and 2007 is open, for federal and state income taxes.Additionally, tax year 2006 remains open for examination by certain state taxing authorities.Significant components of deferred tax assets and liabilities are as follows (dollars in thousands): December 31, 2010 2009 Deferred tax assets: Goodwill and intangible assets $186,014 $214,337 Accrued expenses 11,967 11,700 Deferred revenue 1,093 945 Inventories 2,733 1,970 Pension obligations 3,862 3,635 Stock based compensation 2,435 – Operating loss and contribution carryforwards 64,436 61,555 Other 381 374 Valuation allowance (267,571) (289,529)Total deferred tax assets 5,350 4,987 Deferred tax liabilities: Depreciation 4,780 4,662 Prepaid expenses 570 325 Total deferred tax liabilities 5,350 4,987 Net deferred tax asset $– $– 65Table of Contents Generac Holdings Inc.Notes to Consolidated Financial StatementsYears Ended December 31, 2010, 2009, and 2008 8. Income Taxes (Continued) The net current and noncurrent components of deferred taxes included in the consolidated balance sheets are as follows (dollars in thousands): December 31, 2010 2009 Net current deferred tax assets $15,269 $14,458 Net long-term deferred tax assets 252,302 275,071 Valuation allowance (267,571) (289,529)Net deferred tax assets $– $– The Company is currently in a three year cumulative net loss position, due primarily to a goodwill and tradename impairment write-off in 2008, and thereforehas not considered expected future taxable income in analyzing the realizability of the deferred tax assets as of December 31, 2010. As a result of this analysis,we have recorded a full valuation allowance against these net deferred tax assets. At December 31, 2010, the Company has federal net operating loss carryforwards of approximately $166,100,000, which expire between 2026 and 2030, andvarious state net operating loss carryforwards, which expire between 2016 and 2030. As a result of ownership changes, Section 382 of the Internal Revenue Code of 1986 as amended and similar state provisions can limit the annual deductionsof net operating loss and tax credit carry forwards. Such annual limitations could result in the expiration of net operating loss and tax credit carry forwardsbefore utilization. The Company has no such limitation as of December 31, 2010, and no limitation was triggered by our initial public offering which occurredon February 10, 2010. Future ownership changes may result in such a limitation. A reconciliation of the statutory tax rates and the effective tax rates for the years ended December 31, 2010, 2009 and 2008 are as follows: Year ended December 31, 2010 2009 2008 U.S. statutory rate 35% 35% 35%State taxes 4 4 2 Valuation allowance (38) (38) (37)Effective tax rate 1% 1% 0%At December 31, 2010 and 2009 the Company has no reserves recorded for uncertain tax positions. 9. Benefit Plans Medical and Dental Plan The Company has a medical and dental benefit plan covering full-time employees of the Company and their dependents. The plan is a partially self-fundedplan under which participant claims are obligations of the plan. The plan is funded through employer and employee contributions at a level sufficient to payfor the benefits provided by the plan. The Company’s contributions to the plan were $7,300,000, $5,900,000, and $6,000,000 for the years endedDecember 31, 2010, 2009, and 2008, respectively. The plan maintains individual stop loss insurance policies on the medical portion of $200,000 to mitigatelosses. Balances for the incurred but not yet reported claims, including reported but unpaid claims at December 31, 2010, and 2009, were $800,000 and$1,200,000, respectively. The Company estimates claims incurred but not yet reported each month based on its historical experience, and the Companyadjusts its accrual to meet the estimated liability. Savings Plan The Company maintains a defined-contribution 401(k) savings plan for virtually all employees who meet certain eligibility requirements. Under the plan,employees may defer receipt of a portion of their eligible compensation. 66Table of Contents Generac Holdings Inc.Notes to Consolidated Financial StatementsYears Ended December 31, 2010, 2009, and 2008 9. Benefit Plans (Continued) The Company amended the 401(k) savings plans effective January 1, 2009, to add Company matching and non-elective contributions. The Company maycontribute a matching contribution of 50% of the first 6% of eligible compensation of employees. No matching contribution shall be made with respect toemployee catch-up contributions. The Company may contribute a non-elective contribution for each plan year after 2008. The contribution will apply toeligible employees employed on December 31, 2008. The rate of the non-elective contribution is determined based upon years of service as of December 31,2008, and is fixed. Both Company matching contributions and non-elective contributions are subject to vesting. Forfeitures may be applied against planexpenses. The Company recognized $2,300,000 and $2,300,000 of expense related to this plan in 2010 and 2009, respectively. The Company made no contributions tothis plan in 2008, and accordingly, no expense has been recognized in the accompanying consolidated statement of operations. Pension Plans The Company has noncontributory salaried and hourly pension plans (combined the Pension Plans) covering substantially all of its employees. The benefitsunder the salaried plan are based upon years of service and the participants’ defined final average monthly compensation. The benefits under the hourly planare based on a unit amount at the date of termination multiplied by the participant’s years of credited service. The Company’s funding policy for the PensionPlans is to contribute amounts at least equal to the minimum annual amount required by applicable regulations. The Company elected to freeze the Pension Plans effective December 31, 2008. This resulted in a cessation of all future benefit accruals for both hourly andsalary pension plans. A curtailment liability gain of $5,809,000 related to the salary plan was recognized as a reduction to the unrecognized net loss, as thecurtailment liability gain was less than the unrecognized net loss prior to the plan amendment and, therefore, did not impact the consolidated statement ofoperations for the year ended December 31, 2008. The Company uses a December 31 measurement date for the Pension Plans. Information related to the Pension Plans is as follows (dollars in thousands): Year Ended December 31, 2010 2009 Accumulated benefit obligation at end of period $46,049 $41,845 Change in projected benefit obligation Projected benefit obligation at beginning of period $41,845 $38,030 Service cost – – Interest cost 2,359 2,338 Net actuarial loss 3,138 2,633 Benefits paid (1,293) (1,156)Projected benefit obligation at end of period $46,049 $41,845 Change in plan assets Fair value of plan assets at beginning of period $28,128 $23,663 Actual return on plan assets 3,780 4,132 Company contributions -- 1,489 Benefits paid (1,293) (1,156)Fair value of plan assets at end of period $30,615 $28,128 Funded status: accrued pension liability included in other long-termliabilities $(15,434) $(13,717)Amounts recognized in accumulated other comprehensive income Net actuarial (loss)/gain $(5,607) $(4,492) 67Table of Contents Generac Holdings Inc.Notes to Consolidated Financial StatementsYears Ended December 31, 2010, 2009, and 2008 9. Benefit Plans (Continued) The estimated actuarial loss for the Pension Plans that was amortized from OCI into net periodic benefit cost during 2010 is $247,000. Additional information related to the Pension Plans is as follows (dollars in thousands): Year ended December 31, 2010 2009 2008 Components of net periodic pension expense: Service cost $– $– $2,477 Interest cost 2,359 2,338 2,452 Expected return on plan assets (2,004) (1,804) (2,733)Amortization of net loss 247 240 – Net periodic pension expense $602 $774 $2,196 Weighted-average assumptions used to determine benefit obligation are as follows: December 31, 2010 2009 Discount rate 5.23% 5.76 Rate of compensation increase (1) n/a n/a (1) No compensation increase was assumed, as the plans were frozen effective December 31, 2008.Weighted-average assumptions used to determine net periodic pension expense are as follows: Year ended December 31, 2010 2009 2008 Discount rate 5.76% 6.28% 6.48%Expected long-term rate of return on plan assets 7.30 7.66 9.00 Rate of compensation increase (1) n/a n/a 4.25 (1) No compensation increase was assumed in 2010 or 2009, as the plans were frozen effective December31, 2008. To determine the long-term rate of return assumption for plan assets, the Company studies historical markets and preserves the long-term historicalrelationships between equities and fixed-income securities consistent with the widely accepted capital market principle that assets with higher volatility generatea greater return over the long run. The Company evaluates current market factors such as inflation and interest rates before it determines long-term capitalmarket assumptions and reviews peer data and historical returns to check for reasonableness and appropriateness. 68Table of Contents Generac Holdings Inc.Notes to Consolidated Financial StatementsYears Ended December 31, 2010, 2009, and 2008 9. Benefit Plans (Continued) The Pension Plan’s weighted-average asset allocation at December 31, 2010 and 2009, by asset category, is as follows (dollars in thousands): December 31, 2010 December 31, 2009 Asset Category Target Dollars % Dollars % Fixed Income 24% $7,385 24% $9,246 33%Domestic equity 49% 14,967 49% 13,262 47%International equity 17% 5,211 17% 4,504 16%Real estate 10% 3,052 10% 1,116 4%Total 100% $30,615 100% $28,128 100%The fair values of the Pension Plan's assets at December 31, 2010 are as follows: Total Quotedprices inactivemarkets foridenticalasset(level 1) Significantobservableinputs(level 2) Significantunobservableinputs(level 3) Mutual fund $28,141 $28,141 $– $– Collective trust 2,474 – 2,474 – Total $30,615 $28,141 $2,474 $– The fair values of the Pension Plan's assets at December 31, 2009 are as follows: Total Quotedprices inactivemarkets foridenticalasset(level 1) Significantobservableinputs(level 2) Significantunobservableinputs(level 3) Mutual fund $23,062 $23,062 $– $– Collective trust 3,950 – 3,950 – Pooled separate account 1,116 1,116 Total $28,128 $23,062 $3,950 $1,116 A reconciliation of beginning and ending balances for Level 3 assets for the years ended December 31, 2010 and 2009 is as follows (dollars in thousands): SeparateAccount (Level 3) Balance as of December 31, 2008 $1,631 Realized losses (515)Balance as of December 31, 2009 1,116 Transfers out of Level 3 (1,116)Balance as of December 31, 2010 $- The transfers out of level 3 in 2010 were the result of changes in investment allocation from a pooled separate account to mutual funds (a level 1 investment).The valuation techniques used to measure the fair value of plan assets classified as level 3, were valued based on quoted or observed market prices of theunderlying assets. 69Table of Contents Generac Holdings Inc.Notes to Consolidated Financial StatementsYears Ended December 31, 2010, 2009, and 2008 9. Benefit Plans (Continued) Mutual Funds – This category includes investments in mutual funds that encompass both equity and fixed income securities that are designed to provide adiverse portfolio. The plan’s mutual funds are designed to track exchange indices, and invest in diverse industries. Some mutual funds are classified asregulated investment companies. Investment managers have the ability to shift investments from value to growth strategies, from small to large capitalizationfunds, and from U.S. to international investments. These investments are valued at the closing price reported on the active market on which the individualsecurities are traded. These investments are classified within Level 1 of the fair value hierarchy.Collective Trusts – This category includes public investment vehicles valued using the Net Asset Value (NAV) provided by the administrator of the trust. TheNAV is based on the value of the underlying assets owned by the trust, minus its liabilities, and then divided by the number of shares outstanding. The NAVof the trust is classified within Level 2 of the fair value hierarchy.Pooled Separate Account - This category invests mainly in commercial real estate and includes mortgage loans which are backed by the associated properties.These underlying real estate investments have unobservable level 3 pricing inputs.The Company’s target allocation for equity securities and real estate is generally between 65% – 85%, with the remainder allocated primarily to bonds. TheCompany regularly reviews its actual asset allocation and periodically rebalances its investments to the targeted allocation when considered appropriate. The Company expects to make estimated contributions of $2,000,000 to the Pension Plans in 2011. The following benefit payments are expected to be paid from the Pension Plans (dollars in thousands): Year 2011 $1,389 2012 1,485 2013 1,589 2014 1,721 2015 1,810 Years 2016 – 2020 $11,199 10. Share PlansOn November 10, 2006, the Company adopted the 2006 Management Equity Incentive Plan (2006 Equity Incentive Plan). The 2006 Equity Incentive Planprovided for awards with respect to a maximum of 9,350.0098 shares of Common stock (formerly Class A Common stock) and 5,000 Class B Commonshares, subject to certain adjustments. On November 10, 2006, and from time to time thereafter, certain members of management purchased restricted sharesof Class A Common stock under the 2006 Equity Incentive Plan for $341 per share and pursuant to restricted stock agreements. One half of the restrictedshares vested over time (Time Vesting Shares), with 25% vesting on November 10, 2007 and on the next three anniversaries thereafter, so long as theparticipant was still employed by the Company or one of its subsidiaries on the applicable vesting date. Upon the occurrence of a change of control of theCompany, any unvested Time Vesting Shares immediately vested in full, so long as the participant was still employed by the Company or one of itssubsidiaries. The remaining restricted shares immediately vested (performance-based vesting) in full, provided the participant was still then employed by theCompany or one of its subsidiaries, upon the occurrence of either: (i) a change of control of the Company that provides CCMP with a certain rate of returnwith respect to net proceeds received by CCMP from their investment in the Company; or (ii) from and after the date of an IPO, the achievement with respect toshares of the Common stock (formerly Class A Common stock) of an average closing trading price exceeding, in any 60 consecutive trading day periodstarting prior to the later of (a) the fifth year anniversary of the date of grant of the restricted shares, and (b) one year after the IPO, a certain threshold withrespect to net proceeds received by CCMP from their investment in the Company. As a condition to the purchase of restricted shares, members of managementexecuted confidentiality, non-competition and intellectual property agreements.The fair value of the Class A common stock on the date of issuance was estimated to be $390 per share. The Company has recorded $6,000, $38,000, and$40,000 of stock-based compensation expense related to the Time Vesting Shares in 2010, 2009, and 2008, respectively, related to amortization of the excess offair value over purchase price of these restricted shares. This excess was being amortized over the vesting provisions of the restricted shares. As a result of theIPO, the remaining unvested performance-based Restricted Shares became fully vested. As a result, the Company has recorded $159,000 of stock-basedcompensation expense related to the accelerated vesting in 2010. The Company adopted an equity incentive plan on February 10, 2010 in connection with the IPO. At the time of the IPO, 4,341,504 stock options and456,249 shares of restricted stock and other stock awards were granted to employees and Board members of the Company pursuant to the equity incentiveplan. Total share-based compensation cost related to the equity incentive plan recognized in the consolidated statement of operations was $6,198,000 in 2010,net of actual forfeitures, which is recorded in operating expenses in the consolidated statement of operations. 70Table of Contents Generac Holdings Inc.Notes to Consolidated Financial StatementsYears Ended December 31, 2010, 2009, and 2008 10. Share Plans (Continued) Stock Options - The stock options issued at the time of the IPO have an exercise price equal to the IPO price of $13.00 per share, and vest in equal installmentsover five years, subject to the grantee’s continued employment or service. The options expire 10 years after the date of grant.The grant-date fair value of each option grant is estimated using the Black-Scholes-Merton option pricing model. The fair value is then amortized on a straight-line basis over the requisite service period of the awards, which is generally the vesting period. Use of a valuation model requires management to make certainassumptions with respect to selected model inputs. Since there was no history for the Company’s stock, expected volatility was calculated based on ananalysis of historic and implied volatility measures for a set of peer companies. The average expected life was based on the contractual term of the option usingthe simplified method. The risk-free interest rate was based on U.S. Treasury zero-coupon issues with a remaining term equal to the expected life assumed atthe date of grant. The compensation expense recognized is net of estimated forfeitures. Forfeitures are estimated based on voluntary termination behavior, asthere is not sufficient history of actual share option forfeitures at this time. The weighted-average assumptions used in the Black-Scholes-Merton option pricingmodel for 2010 are as follows: 2010 Expected stock price volatility 50%Risk free interest rate 2.94%Expected annual dividend per share $- Expected life of options (years) 6.5 The weighted-average grant-date fair value of options granted during 2010 was $6.84 per option. There have been no options exercised during 2010.A summary of option activity as of December 31, 2010 and changes during the twelve months then ended is presented below: Shares Weighted- Average Exercise Price Weighted- Average Remaining ContractualTerm (in years) Aggregate Intrinsic Value ($ in thousands) Outstanding as of December 31, 2009- - Granted4,366,504 $13.02 Exercised- - Expired- - Forfeited(130,245) (13.00) Outstanding as of December 31, 20104,236,259 $ 13.02 9.1 $13,349 Exercisable as of December 31, 2010- - - - As of December 31, 2010, there was $21,205,000 of total unrecognized compensation cost, net of expected forfeitures, related to unvested options. The cost isexpected to be recognized over the remaining service period, having a weighted-average period of 4.1 years. Total share-based compensation cost related to thestock options for 2010 was $4,470,000, which is recorded in operating expenses in the consolidated statement of operations. Non-vested Stock - The non-vested stock awards will vest in full on the third anniversary of the date of grant, subject to the grantee’s continued employment.The fair market value of the award at the time of the grant is amortized to expense over the period of vesting. The fair value of restricted share awards isdetermined based on the market value of the Company's shares on the grant date. The compensation expense recognized for restricted share awards is net ofestimated forfeitures. 71Table of Contents Generac Holdings Inc.Notes to Consolidated Financial StatementsYears Ended December 31, 2010, 2009, and 2008 10. Share Plans (Continued) A summary of the status of the Company's restricted share awards as of December 31, 2010 and changes during the twelve months then ended is presented inthe table below:Non-vested Stock AwardsShares Weighted-Average Grant-Date Fair Value Non-vested as of December 31, 2009- $- Granted439,999 13.02 Vested- - Forfeited(9,844) (13.00) Non-vested as of December 31, 2010430,155 $13.02 As of December 31, 2010, there was $3,543,000 of total unrecognized compensation cost, net of expected forfeitures, related to non-vested stock awards. Thatcost is expected to be recognized over the remaining service period, having a weighted-average period of 2.1 years. Total share-based compensation cost relatedto the restricted stock for 2010 was $1,447,000, which is recorded in operating expenses in the consolidated statement of operations.During 2010, 21,406 shares of fully vested stock were granted to certain members of the Company’s board of directors as a component of their compensationfor their service on the board. Total compensation cost for these share grants was $281,000, which is recorded in operating expenses in the consolidatedstatement of operations. 11. Commitments and Contingencies The Company leases certain computer equipment, automobiles, and warehouse space under operating leases with initial lease terms ranging up to three years. The approximate aggregate minimum rental commitments at December 31, 2010, are as follows (dollars in thousands): Amount Year 2011 $124 2012 106 2013 44 2014 - 2015 - Total $274 Total rent expense for the years ended December 31, 2010, 2009 and 2008, which includes short-term data processing equipment rentals, was approximately$554,000, $347,000, and $415,000, respectively. The Company has an arrangement with a finance company to provide floor plan financing for selected dealers. The Company receives payment from thefinance company after of shipment of product to the dealer. The Company participates in the cost of dealer financing up to certain limits. The Company hasagreed to repurchase products repossessed by the finance company, but does not indemnify the finance company for any credit losses they incur. The amountfinanced by dealers which remained outstanding under this arrangement at December 31, 2010 and 2009 was approximately $9,735,000 and 6,966,000,respectively. In the normal course of business, the Company is named as a defendant in various lawsuits in which claims are asserted against the Company. In the opinionof management, the liabilities, if any, which may result from such lawsuits are not expected to have a material adverse effect on the financial position, resultsof operations, or cash flows of the Company. 12. Related-Party Transactions Prior to the IPO, the Company had an agreement to pay CCMP and Unitas Capital and related entities an annual advisory fee of $500,000. The Companyexpensed $55,000 in advisory fees for 2010, and $500,000 in advisory fees for 2009 and 2008. This agreement was terminated effective with the IPO onFebruary 10, 2010. 72Table of Contents Generac Holdings Inc.Notes to Consolidated Financial StatementsYears Ended December 31, 2010, 2009, and 2008 13. Quarterly Financial Information (Unaudited) Unaudited quarterly financial information for the years ended December 31, 2010 and 2009, (in thousands, except per share data): Quarters Ended 2010 Q1 Q2 Q3 Q4 Net sales $130,718 $140,455 $160,666 $161,041 Gross profit 51,418 54,745 67,362 63,832 Operating income 15,464 18,854 29,770 26,208 Net income 2,468 12,834 22,998 18,613 Less: accretion of Series A preferred stock (2,042) - - - Less: accretion of Class B common stock (12,133) - - - Less: beneficial conversion (140,690) - - - Net (loss) income attributable to Common stock (formerly Class A Commonstock) (152,397) 12,834 22,998 18,613 Income attributable to Class B common stock 12,133 - - - Net (loss) income per common share, basic: Common stock (formerly Class A Common stock) $(4.26) $0.19 $0.34 $0.28 Class B common stock $505 $- $- $- Net (loss) income per common share, diluted: Common stock (formerly Class A Common stock) $(4.26) $0.19 $0.34 $0.28 Class B common stock $505 $- $- $- Quarters Ended 2009 Q1 Q2 Q3 Q4 Net sales $140,446 $149,577 $144,261 $153,964 Gross profit 47,527 60,188 64,491 63,644 Operating income 13,816 24,786 30,588 29,322 Net income 5,794 7,032 18,281 11,948 Less: accretion of Series A preferred stock (2,792) (3,320) (3,709) (4,330)Less: accretion of Class B common stock (24,128) (24,731) (25,349) (25,983)Net loss attributable to Class A common stock (21,126) (21,019) (10,777) (18,365)Income attributable to Class B common stock 24,128 24,731 25,349 25,983 Net (loss) income per common share, basic and diluted: Class A common stock $(12,172) $(12,111) $(6,209) $(10,613)Class B common stock $1,005 $1,030 $1,055 $1,082 14. Valuation and Qualifying Accounts For the years ended December 31, 2010, 2009 and 2008 (dollars in thousands): Balance atBeginning ofPeriod AdditionsCharged toEarnings Charges toReserve, Net(1) Balance atEndof Year Year ended December 31, 2010 Allowance for doubtful accounts $1,016 $(124) $(169) $723 Allowance for doubtful notes 965 – (965) – Reserves for inventory 3,937 1,056 (934) 4,059 Valuation of deferred tax assets 289,529 (21,958) – 267,571 Year ended December 31, 2009 Allowance for doubtful accounts $1,020 $227 $(231) $1,016 Allowance for doubtful notes 965 – – 965 Reserves for inventory 4,908 548 (1,519) 3,937 Valuation of deferred tax assets 292,372 (2,843) – 289,529 Year ended December 31, 2008 Allowance for doubtful accounts $808 $394 $(182) $1,020 Allowance for doubtful notes 850 115 – 965 Reserves for inventory 3,656 1,689 (437) 4,908 Valuation of deferred tax assets 86,097 206,275 – 292,372 (1) Deductions from the allowance for doubtful accounts equal accounts receivable written off, less recoveries, against the allowance. Deductions from thereserves for inventory excess and obsolete items equal inventory written off against the reserve as items were disposed of. Deductions to the valuation ofdeferred tax assets relate to the reversals due to changes in management’s judgments regarding the future realization of the underlying deferred tax assets. 73Table of Contents Generac Holdings Inc.Notes to Consolidated Financial StatementsYears Ended December 31, 2010, 2009, and 2008 15. Subsequent Events The Company evaluated its financial statements for subsequent events through the date the financial statements were available to be issued. The Company isnot aware of any subsequent events which require recognition or disclosure in the financial statements. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There were no changes in, or disagreements with, accountants reportable herein. Item 9A. Controls and Procedures Evaluation of Disclosure Controls and ProceduresDisclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by us in reports wefile or submit under the Securities Exchange Act of 1934, or the Exchange Act, is recorded, processed, summarized and reported within the time periodsspecified in the Securities and Exchange Commission rules and forms. Disclosure controls and procedures include, without limitation, controls andprocedures designed to ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer and ChiefFinancial Officer, as appropriate, to allow for timely decisions regarding required disclosure.Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, has conducted an evaluation of the design andoperation of our disclosure controls and procedures as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act as of the end of the period covered bythis report on Form 10-K. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls andprocedures were effective in providing reasonable assurance that the information required to be disclosed in this report on Form 10-K has been recorded,processed, summarized and reported as of the end of the period covered by this report on Form 10-K.Management’s Report on Internal Control Over Financial ReportingOur management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) and 15d-15(f)under the Exchange Act. Our internal control over financial reporting is designed under the supervision of our Chief Executive Officer and Chief FinancialOfficer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the consolidated financial statements inaccordance with U.S. generally accepted accounting principles.Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail,accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded asnecessary to permit preparation of the financial statements in accordance with U.S. generally accepted accounting principles, and that receipts andexpenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) providereasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have amaterial effect on the Company’s financial statements.There are inherent limitations to the effectiveness of any internal control over financial reporting, including the possibility of human error or the circumventionor overriding of the controls. Accordingly, even an effective internal control over financial reporting can provide only reasonable assurance of achieving itsobjective. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls may become inadequate, because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate.Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, our management conducted an assessment of theeffectiveness of internal control over financial reporting as of December 31, 2010 based on the criteria established in Internal Control – IntegratedFramework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, our management hasconcluded that our internal control over financial reporting was effective as of December 31, 2010.This annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financialreporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to rules of the Securities andExchange Commission that permit us, as a “non-accelerated filer”, to provide only management’s report in this annual report. 74Table of Contents Changes in Internal Control Over Financial ReportingThere was no change in our internal control over financial reporting that occurred during the three months ended December 31, 2010 that has materiallyaffected, or is reasonably likely to materially affect, our internal control over financial reporting. Item 9B. Other Information None PART III Item 10. Directors, Executive Officers and Corporate Governance The information required by Item 10 not already provided herein under “Item 1 – Business – Executive Officers”, will be included in our 2011 ProxyStatement, and is incorporated by reference herein. Item 11. Executive Compensation The information required by this item will be included in our 2011 Proxy Statement and is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required by this item will be included in our 2011 Proxy Statement and is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions, and Director Independence The information required by this item will be included in our 2011 Proxy Statement and is incorporated herein by reference. Item 14. Principal Accountant Fees and Services The information required by this item will be included in our 2011 Proxy Statement and is incorporated herein by reference. PART IV Item 15. Exhibits, Financial Statement Schedules (a)(1) Financial Statements Included in Part II of this report: Page Report of Independent Registered Public Accounting Firm42 Consolidated balance sheets as of December 31, 2010 and 200943 Consolidated statements of operations for years ended December 31, 2010, 2009 and 200844 Consolidated statements of redeemable stock and stockholders’ equity (deficit) for years endedDecember 31, 2010, 2009 and 200845 Consolidated statements of cash flows for the years ended December 31, 2010, 2009 and 200846 Notes to consolidated financial statements47 (a)(2) Financial Statement Schedules All financial statement schedules have been omitted, since the required information is not applicable or is not present in amounts sufficient to requiresubmission of the schedule, or because the information required is included in the consolidated financial statements and notes thereto. 75Table of Contents (a)(3) Exhibits ExhibitsNumber Description 2.1Agreement and Plan of Merger by and among Generac Power Systems, Inc., the representative named therein, GPS CCMP Acquisition Corp.,and GPS CCMP Merger Corp., dated as of September 13, 2006 (incorporated by reference to Exhibit 2.1 of the Registration Statement onForm S-1 filed with the SEC on January 11, 2010). 2.2Amendment to Agreement and Plan of Merger by and among Generac Power Systems, Inc., the representative named therein, GPS CCMPAcquisition Corp., and GPS CCMP Merger Corp (incorporated by reference to Exhibit 2.1 of the Registration Statement on Form S-1 filedwith the SEC on January 11, 2010). 3.1Third Amended and Restated Certificate of Incorporation of Generac Holdings Inc. (incorporated by reference to Exhibit 3.1 to the Company’sAnnual Report on Form 10-K for the fiscal year ended December 31, 2009). 3.2Amended and Restated Bylaws of Generac Holdings Inc. (incorporated by reference to Exhibit 3.2 to the Company’s Annual Report on Form10-K for the fiscal year ended December 31, 2009). 4.1Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 of the Registration Statement on Form S-1 filed with the SEC onJanuary 25, 2010). 4.2Shareholders Agreement, dated as of November 10, 2006, by and among Generac Holdings Inc., certain stockholders of GeneracHoldings Inc., including CCMP Capital Investors II, L.P., various of it affiliated funds, various funds affiliated with Unitas Capital Ltd.and the Management Shareholders (as defined in Shareholders Agreement) (incorporated by reference to Exhibit 4.2 of the RegistrationStatement on Form S-1 filed with the SEC on October 20, 2009). 10.1Credit Agreement, dated as of November 10, 2006, by and among Generac, GPS CCMP Merger Corp., Goldman Sachs Credit Partners L.P.,as administrative agent, JP Morgan Chase Bank, N.A. as syndication agent, Barclays Bank PLC, as documentation agent, and GoldmanSachs Credit Partners L.P. and J.P. Morgan Securities Inc. as joint lead arrangers and joint bookrunners (incorporated by reference to Exhibit10.5 of the Registration Statement on Form S-1 filed with the SEC on December 17, 2009). 10.2First Lien Guarantee and Collateral Agreement, dated November 10, 2006, among Generac Acquisition Corp., GPS CCMP Merger Corp.,certain Subsidiaries of GPS CCMP Merger Corp. and Goldman Sachs Credit Partners L.P., as Administrative Agent (incorporated byreference to Exhibit 10.5.1 of the Registration Statement on Form S-1 filed with the SEC on December 17, 2009). 10.3Advisory Services and Monitoring Agreement, dated November 10, 2006 (incorporated by reference to Exhibit 10.7 of the RegistrationStatement on Form S-1 filed with the SEC on November 24, 2009). 10.4+2006 Management Equity Incentive Plan, effective as of November 10, 2006 (incorporated by reference to Exhibit 10.8 of the RegistrationStatement on Form S-1 filed with the SEC on November 24, 2009). 10.5+2009 Executive Management Incentive Compensation Program (incorporated by reference to Exhibit 10.46 of the Registration Statement onForm S-1 filed with the SEC on December 17, 2009). 10.6+Generac Holdings Inc. 2010 Equity Incentive Plan (incorporated by reference to Exhibit 10.1 of the Registration Statement on Form S-1 filedwith the SEC on January 25, 2010). 10.7+Generac Holdings Inc. Annual Performance Bonus Plan (incorporated by reference to Exhibit 10.63 of the Registration Statement on Form S-1filed with the SEC on January 25, 2010). 10.8+Amended and Restated Employment Agreement, dated January 14, 2010, between Generac and Aaron Jagdfeld (incorporated by reference toExhibit 10.65 of the Registration Statement on Form S-1 filed with the SEC on January 25, 2010). 10.9+Employment Agreement, dated as of November 10, 2006, between Generac and Dawn Tabat (incorporated by reference to Exhibit 10.3 of theRegistration Statement on Form S-1 filed with the SEC on January 25, 2010). 10.10+Amendment to Employment Agreement, dated January 14, 2010, between Generac and Dawn Tabat (incorporated by reference to Exhibit10.66 of the Registration Statement on Form S-1 filed with the SEC on October 20, 2009). 10.11+Employment Letter to Clement Feng, dated December 29, 2009 (incorporated by reference to Exhibit 10.47 of the Registration Statement onForm S-1 filed with the SEC on January 11, 2010). 10.12+Employment Letter with Terrence Dolan (incorporated by reference to Exhibit 10.62 of the Registration Statement on Form S-1 filed with theSEC on January 25, 2010). 76Table of Contents 10.13+Severance Agreement with Edward LeBlanc, dated September 22, 2008 (incorporated by reference to Exhibit 10.49 of the RegistrationStatement on Form S-1 filed with the SEC on January 11, 2010). 10.14+Form of Change in Control Severance Agreement (incorporated by reference to Exhibit 10.64 of the Registration Statement on Form S-1 filedwith the SEC on January 25, 2010). 10.15Form of Confidentiality, Non-Competition and Intellectual Property Agreement (incorporated by reference to Exhibit 10.40 of the RegistrationStatement on Form S-1 filed with the SEC on November 24, 2009). 10.16Employee Nondisclosure and Noncompete Agreement, by and between Generac Power Systems, Inc. and Clement Feng, dated as ofSeptember 5, 2007 (incorporated by reference to Exhibit 10.41 of the Registration Statement on Form S-1 filed with the SEC on November24, 2009). 10.17Promissory Note dated December 27, 2007 between Generac Power Systems, Inc. and Clement Feng (incorporated by reference to Exhibit10.43 of the Registration Statement on Form S-1 filed with the SEC on December 17, 2009). 10.18Promissory Note Repayment Letter to Clement Feng, dated December 28, 2009 (incorporated by reference to Exhibit 10.48 of the RegistrationStatement on Form S-1 filed with the SEC on January 11, 2010). 10.19+Form of Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.44 of the Registration Statement on Form S-1 filed withthe SEC on January 25, 2010). 10.20+Form of Nonqualified Stock Option Award Agreement (incorporated by reference to Exhibit 10.45 of the Registration Statement on Form S-1filed with the SEC on January 25, 2010). 10.21Form of Generac Holdings Inc. Director Indemnification Agreement for Stephen Murray, Timothy Walsh and Stephen V. McKenna(incorporated by reference to Exhibit 10.50 of the Registration Statement on Form S-1 filed with the SEC on January 11, 2010). 10.22Form of Generac Holdings Inc. Director Indemnification Agreement for Barry Goldstein, John D. Bowlin and Edward A. LeBlanc(incorporated by reference to Exhibit 10.51 of the Registration Statement on Form S-1 filed with the SEC on January 11, 2010). 10.23Form of Generac Holdings Inc. Officer Indemnification Agreement (incorporated by reference to Exhibit 10.52 of the Registration Statement onForm S-1 filed with the SEC on January 11, 2010). 10.24Form of Generac Power Systems, Inc. Director Indemnification Agreement for Stephen Murray, Timothy Walsh and Stephen V. McKenna(incorporated by reference to Exhibit 10.53 of the Registration Statement on Form S-1 filed with the SEC on January 25, 2010). 10.25Form of Generac Power Systems, Inc. Indemnification Agreement for Barry Goldstein, John D. Bowlin, Edward A. LeBlanc, AaronJagdfeld, York A. Ragen, Dawn Tabat, Clement Feng, Allen Gillette, Roger Schaus, Jr. and Roger Pascavis (incorporated by reference toExhibit 10.54 of the Registration Statement on Form S-1 filed with the SEC on January 25, 2010). 21.1*List of Subsidiaries of Generac Holdings Inc. 23.1*Consent of Ernst & Young, Independent Registered Public Accounting Firm, relating to Generac Holdings Inc. 31.1*Certification of Chief Executive Officer pursuant to Rule 13a-14 Securities Exchange Act Rules 13a-14(a) and 15d-14(a), pursuant tosection 302 of the Sarbanes-Oxley Act of 2002. 31.2*Certification of Chief Financial Officer pursuant to Rule 13a-14 Securities Exchange Act Rules 13a-14(a) and 15d-14(a), pursuant tosection 302 of the Sarbanes-Oxley Act of 2002. 32.1**Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002. 32.2**Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002. *Filed herewith.** Furnished herewith.+Indicates management contract or compensatory plan or arrangement. 77Table of Contents SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed onits behalf by the undersigned, thereunto duly authorized. Generac Holdings Inc. By:/s/ Aaron Jagdfeld Aaron Jagdfeld Chief Executive Officer Dated: March 7, 2011 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons and on behalf of theRegistrant in the capacities and on the dates indicated. SignatureTitleDate /s/ Aaron Jagdfeld Aaron Jagdfeld Chief Executive Officer and DirectorMarch 7, 2011 /s/ York A. Ragen York A. Ragen Chief Financial Officer and ChiefAccounting OfficerMarch 7, 2011 /s/ John D. Bowlin John D. BowlinDirectorMarch 7, 2011 /s/ Barry J. Goldstein Barry J. GoldsteinDirectorMarch 7, 2011 /s/ Edward A. LeBlanc Edward A. LeBlancDirectorMarch 7, 2011 /s/ Stephen Murray Stephen MurrayDirectorMarch 7, 2011 /s/ David Ramon David RamonDirectorMarch 7, 2011 /s/ Timothy Walsh Timothy WalshDirectorMarch 7, 2011 78  Exhibit 21.1 LISTING OF SUBSIDIARIES OF GENERAC HOLDINGS INC. Generac Holdings Inc.Subsidiaries (all 100% owned) Subsidiaries of the Registrant State or Other Jurisdiction of IncorporationGenerac Acquisition Corp. Delaware, U.S.Generac Power Systems, Inc. Wisconsin, U.S.Pro Power Solutions, LLC Georgia, U.S. Exhibit 23.1 Consent of Independent Registered Public Accounting Firm We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-164851) pertaining to the 2010 Equity Incentive Plan of GeneracHoldings Inc. of our report dated March 7, 2011, with respect to the consolidated financial statements of Generac Holdings Inc., included in this AnnualReport (Form 10-K) for the year ended December 31, 2010. /s/ Ernst & Young LLP Milwaukee, WisconsinMarch 7, 2011Exhibit 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TOSECURITIES EXCHANGE ACT RULES 13a-14(a) AND 15d-14(a), AS ADOPTEDPURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Aaron Jagdfeld, certify that: 1. I have reviewed this annual report on Form 10-K of Generac Holdings Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which this report is being prepared; b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles; c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's mostrecent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likelyto materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internalcontrol over financial reporting. Date: March 7, 2011 /s/ Aaron Jagdfeld Name: Aaron Jagdfeld Title: Chief Executive OfficerExhibit 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TOSECURITIES EXCHANGE ACT RULES 13a-14(a) AND 15d-14(a), AS ADOPTEDPURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, York A. Ragen, certify that: 1. I have reviewed this annual report on Form 10-K of Generac Holdings Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which this report is being prepared; b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles; c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's mostrecent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likelyto materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internalcontrol over financial reporting. Date: March 7, 2011 /s/ York A. Ragen Name: York A. Ragen Title: Chief Financial OfficerExhibit 32.1 CERTIFICATION OF THE CHIEF EXECUTIVE OFFICERPURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTEDBY SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned,as Chief Executive Officer of Generac Holdings Inc. (the “Company”), does hereby certify that to my knowledge: 1. the Company's annual report on Form 10-K for the fiscal year ended December 31, 2010 fully complies with the requirements of Section 13(a) or15(d) of the Securities Exchange Act of 1934, as amended; and 2. the information contained in the Company's annual report on Form 10-K for the fiscal year ended December 31, 2010 fairly presents, in all materialrespects, the financial condition and results of operations of the Company. Date: March 7, 2011 /s/ Aaron Jagdfeld Name: Aaron Jagdfeld Title: Chief Executive OfficerExhibit 32.2 CERTIFICATION OF THE CHIEF FINANCIAL OFFICERPURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTEDBY SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned,as Chief Financial Officer of Generac Holdings Inc. (the “Company”), does hereby certify that to my knowledge: 1. the Company's annual report on Form 10-K for the fiscal year ended December 31, 2010 fully complies with the requirements of Section 13(a) or15(d) of the Securities Exchange Act of 1934, as amended; and 2. the information contained in the Company's annual report on Form 10-K for the fiscal year ended December 31, 2010 fairly presents, in all materialrespects, the financial condition and results of operations of the Company. Date: March 7, 2011 /s/ York A. Ragen Name: York A. Ragen Title: Chief Financial Officer

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