Generac
Annual Report 2012

Plain-text annual report

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549 FORM 10-K (Mark One) xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2012oroTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 001-34627 GENERAC HOLDINGS INC.(Exact name of registrant as specified in its charter) DELAWARE(State or other jurisdiction of incorporation or organization)20-5654756(IRS Employer Identification No.)S45 W29290 Hwy. 59, Waukesha, WI(Address of principal executive offices)53189(Zip Code)(262) 544-4811(Registrant’s telephone number, including area code)SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:Common Stock, $0.01 par value(Title of class)New York Stock Exchange(Name of exchange on which registered)SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No o 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 x No o Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein,and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of thisForm 10-K or any amendment to this Form 10-K. o 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 xNon-accelerated filer o(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, 2012, the last business day of theregistrant’s most recently completed second fiscal quarter, was approximately $621,912,000 based upon the closing price reported for such date on the NewYork Stock Exchange. As of March 1, 2013, 68,278,598 shares of registrant's common stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant’s Proxy Statement for the 2013 Annual Meeting of Stockholders (the “2013 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, 2012, are incorporated by reference into Part III of this Form 10-K.  2012 FORM 10-K ANNUAL REPORTTABLE OF CONTENTS Page PART IItem 1.Business2Item 1A.Risk Factors7Item 1B.Unresolved Staff Comments15Item 2.Properties15Item 3.Legal Proceedings16Item 4.Mine Safety Disclosures16 PART IIItem 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities16Item 6.Selected Financial Data19Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations24Item 7A.Quantitative and Qualitative Disclosures About Market Risk37Item 8.Financial Statements and Supplementary Data39Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure76Item 9A.Controls and Procedures76Item 9B.Other Information76 PART IIIItem 10.Directors, Executive Officers and Corporate Governance77Item 11.Executive Compensation77Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters77Item 13.Certain Relationships and Related Transactions, and Director Independence77Item 14.Principal Accountant Fees and Services77 PART IVItem 15.Exhibits and Financial Statement Schedules77  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,” “forecast,”“project,” “plan,” “intend,” “believe,” “confident,” “may,” “should,” “can have,” “likely,”“future” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financialperformance or other events. The forward-looking statements contained in this annual report are based on assumptions that we have made in light of our industry experience 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 report, you should understand that these statements are not guarantees of performance or results. Theyinvolve risks, uncertainties (some of which are beyond our control) and assumptions. Although we believe that these forward-looking statements arebased on reasonable assumptions, you should be aware that many factors could affect our actual financial results and cause them to differ materiallyfrom those anticipated in the forward-looking statements. The forward-looking statements contained in this annual report include estimates regarding: · our business, financial and operating results and future economic performance; · proposed new product and service offerings; and · management's goals, expectations and objectives and other similar expressions concerning matters that are not historical facts. Factors that could affect our actual financial results and cause them to differ materially from those anticipated in the forward-looking statementsinclude: · demand for our products; · frequency and duration of major power outages; · availability, cost and quality of raw materials and key components used in producing our products; · the impact on our results of the substantial increases in our outstanding indebtedness and related interest expense due to the dividendrecapitalization discussed below under “Liquidity and financial position”; · the possibility that the expected synergies, efficiencies and cost savings of the acquisition of the Ottomotores businesses or other acquisitionswill not be realized, or will not be realized within the expected time period; · the risk that the Ottomotores businesses or other acquisitions that we make will not be integrated successfully; · 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; · loss of our key management and employees; · increase in product and other 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 any forward-looking statements. A detailed discussion of these and other factors that may affect future resultsis contained in Item 1A of this Annual Report on Form 10-K. Any forward-looking statement made by us in this report speaks only as of the date on which we make it. Factors or events that could cause our actualresults to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law. 1Table of Contents Item 1. Business We are a leading designer and manufacturer of a wide range of generators and other engine powered products for the residential, light commercial, industrialand construction markets. As the only significant market participant focused predominantly on these products, we have one of the leading market positions inthe power equipment market in North America. We design, manufacture, source and modify engines, alternators, transfer switches and other componentsnecessary for our products. Our products are fueled by natural gas, liquid propane, gasoline, diesel and Bi-Fuel™ and are available through a broad networkof independent dealers, retailers, wholesalers, and equipment rental companies.We have what we believe is an industry leading, multi-layered distribution network, and our products are available in thousands of outlets across NorthAmerica. We sell and distribute our products to and through independent residential and industrial dealers, electrical wholesalers, national accounts, privatelabel arrangements, retailers, catalogs, e-commerce merchants, equipment rental companies, equipment dealers and construction companies. We have asignificant market share in the residential and light commercial generator markets, which we believe are currently under penetrated. We believe that our leadingmarket position is largely attributable to our strategy of providing a broad product line of high-quality, innovative and affordable products through ourextensive and multi-layered distribution network. In addition, through recent acquisitions, we are also a leading provider of light towers, mobile generators andindustrial diesel gensets for international markets ranging in sizes up to 2,500kW.We operate several manufacturing plants located principally in Wisconsin and Mexico totaling over two million square feet. We also maintain inventorywarehouses in the United States that accommodate material storage and rapid response requirements 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 of power output. We entered the residential market in 1989 with a residential standby generator, and expanded our productdevelopment and global distribution system in the 1990s, forming a series of alliances that tripled our higher output generator sales. In 1998, we sold ourGenerac® portable products business to the Beacon Group, a private equity firm, which eventually sold this business to Briggs & Stratton. Our growthaccelerated in 2000 as we expanded our automatic residential standby generator product offering, implemented our multi-layered distribution philosophy, andintroduced our quiet-running QT Series generators in 2005, accelerating our penetration in the commercial market. In 2008, we successfully expanded ourposition in the portable generator market after the expiration of our non-compete agreement with the Beacon Group entered into in connection with theaforementioned Beacon Group transaction. In late 2011, we purchased substantially all the assets of the Magnum Products business (Magnum or MagnumProducts) which is the number one light tower manufacturer in the U.S. and has a growing share of the mobile generator market. In February 2012, wepurchased substantially all the assets of GenTran, a leading transfer switch and portable generator accessory manufacturer. In December 2012, we purchasedall of the equity of Ottomotores UK Limited and its affiliates (Ottomotores) which is one of the largest manufactures of industrial generators in Mexico. Today,we manufacture a full line of power products for a wide variety of applications and markets. Our success is built on engineering expertise, manufacturingexcellence and our innovative approaches to the market.CCMP transactionsIn November 2006, affiliates of CCMP Capital Advisors, LLC, or CCMP, together with certain other investors and members of our management, purchasedan aggregate of $689 million of our equity capital. In addition, on November 10, 2006, Generac Power Systems borrowed an aggregate of $1.38 billion,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 liensecured credit facility. With the proceeds from these equity and debt financings, together with cash on hand at Generac Power Systems, we (1) acquired all ofthe capital stock of Generac Power Systems and repaid certain pre-transaction indebtedness of Generac Power Systems for $2.0 billion, (2) paid $66 millionin 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 second lien credit facility in full and to repay a portion of our first lien credit facility. Proceeds from the option exercise were used for generalcorporate purposes, including additional pre-payment of the first 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, as well as other engine powered products such as light towers,pumps and power washers. With the acquisition of Ottomotores, we also become a leader in the manufacture and distribution in Latin America of industrialdiesel gensets ranging in output between 15kW and 2,500kW and an important player in the Uninterrupted Power Supply (UPS) market in Mexico. In themanufacturing process, we design, manufacture, source and modify engines, alternators, transfer switches and other components necessary to production. Weclassify our products into three classes based on similar range of power output geared for varying end customer uses: residential power products; commercialand industrial power products; and other products. The following summary outlines our portfolio of products, including their key attributes and customerapplications.Residential power productsOur automatic residential standby generators range in output from 6kW to 60kW, with manufacturer's suggested retail prices, or MSRPs, fromapproximately $1,900 to $16,700. They operate on either natural gas or liquid propane and are permanently installed with an automatic transfer switch,which we also manufacture. Air-cooled residential standby generators range in outputs from 6kW to 20kW, are available in steel and aluminum enclosuresand serve as an emergency backup for small to medium homes. Liquid-cooled generators serve as emergency backup for larger homes and small businessesand range in output from 22kW to 60kW. Liquid-cooled brands include the Guardian® Series and the premium Quietsource® Series, which have 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. These products serve as an emergency home backup and are alsoused for construction and recreational purposes. Following the expiration of a non-compete agreement in 2007, we expanded our portable product offering tointroduce portable generators below 12,500W. We currently have four portable product lines: the GP series, targeted at homeowners, ranging from 1,800W to17,500W; the XG series, targeted at the premium homeowner markets, ranging from 4,000 to 10,000W; the XP series, targeted at the professional contractormarket, ranging from 3,600 to 10,000W; and the iX series, targeted at the recreational market, ranging from 800W to 2,000W. With our acquisition of Gen-Tran in February 2012, we now offer manual transfer switches to supplement our portable generator product offering.Our power washers produce line, which was first introduced in the first quarter of 2011, includes models for residential and commercial use.Residential power products comprised 60.0%, 62.0% and 62.9%, respectively, of total net sales in 2012, 2011 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 sufficient for most small and mid-sized businesses including grocery stores, convenience stores, restaurants, gas stations, pharmacies, retailbanks 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 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 2,500kW 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. These units are primarily used as emergency backup for largehealthcare, telecom, datacom, commercial office, municipal and manufacturing customers.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 reliability given its built-in redundancy whichallows individual units to be taken off-line for routine maintenance while retaining coverage for critical circuits.We provide the telecommunications market our full range of generator systems.Our light towers and mobile generators provide temporary lighting and power for various end markets, such as road and commercial construction, energy,mining, military and special events. We also manufacture mobile pumps which utilize wet and dry-priming pump systems for a wide variety of wastewaterapplications.Industrial and commercial power products comprised 34.9%, 31.6% and 31.0%, respectively, of total net sales in 2012, 2011 and 2010. 3Table of Contents Other power productsWe sell aftermarket service parts to our dealers and proprietary engines to third-party original equipment manufacturers, or OEMs.Other power products comprise 5.1%, 6.4% and 6.1%, respectively, of total net sales in 2012, 2011 and 2010.Distribution channels and customersWe distribute our product through several channels to increase awareness of our product categories and the Generac®, Magnum®, and Ottomotores brands,and to ensure our products reach a broad customer base. This distribution network includes independent residential and industrial dealers, wholesalers,national accounts, private label arrangements, retailers, catalogs, e-commerce merchants, equipment rental companies, equipment dealers and constructioncompanies. We believe our distribution network is a competitive advantage that has strengthened over the last decade by expanding our network from our baseof industrial dealers to include other channels of distribution as product offerings have increased. Our network is well balanced with no single sales channelproviding more than 24% of our sales and no customer providing more than 7% of our sales in 2012.Our dealer network, which is located principally in the United States, Canada and Latin America, is the industry's largest network of factory directindependent generator contractors.Our residential/commercial dealer network sells, installs and services our residential and light-commercial products to end users. We have developed a numberof proprietary 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. In addition, we have invested in marketing and sales tools to more effectively market and sell our home standbyproducts. We regularly perform market analyses to determine if a given market is either under-served or has poor residential dealer representation. Within theselocations, 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 product support. Our industrial dealers maintain the localrelationships with commercial electrical contractors, specifying engineers and national account regional buying offices. Our sales group works in conjunctionwith our industrial dealers to ensure that national accounts receive engineering support, competitive pricing and nationwide service. We promote our industrialgenerators through the use of product demonstrations, specifying engineer education events, dealer forums and training. In recent years, we have beenparticularly focused on expanding our dealer network in Latin America and other regions of the world in order to expand our international sales opportunities.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 private label and licensing arrangements with third party partners to provide residential, light-commercial andindustrial generators. The partners include leading home equipment, electrical equipment and construction machinery companies, each of which providesaccess to incremental channels of distribution for our products. We have agreements in place with these partners having terms of between three and four yearsand further establishing additional 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.The distribution for our mobile products includes international, national and regional equipment rental companies, equipment dealers and constructioncompanies.Additionally, we sell certain engines directly to OEM manufacturers and after-market dealers for use in the lawn, garden and rental markets.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, our investment in advanced manufacturing technology and adherence to lean manufacturingprinciples. We believe we have sufficient capacity to achieve our business goals for the near term.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 reliable product and process. We test finishedproducts under a variety of simulated conditions at each of our manufacturing facilities. 4Table of Contents Research and development and intellectual propertyOur primary focus on generators and engine powered equipment drives technological innovation, specialized engineering and manufacturing competencies.Research and development is a core competency and includes a staff of over 200 engineers working on numerous active projects. Our sponsored research anddevelopment expense was $23.5 million, $16.5 million and $14.7 million for the years ended December 2012, 2011 and 2010, respectively. Research anddevelopment is conducted at each of our manufacturing facilities and additionally at our technical center in Suzhou, China with dedicated teams for eachproduct line. Research and development is focused on developing new technologies and product enhancements as well as maintaining product competitivenessby improving manufacturing costs, safety characteristics, reliability and performance while ensuring compliance with governmental standards. We have hadover 30 years of experience using natural gas engines and have developed specific expertise with fuel systems and emissions technology. In the residential andlight commercial markets, we have developed proprietary engines, cooling packages, controls, fuel systems and emissions systems. We believe that ourexpertise in engine powered equipment gives us the capability to develop new products that will allow continued diversification in 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 90 U.S. and international patents and patent applications. Our patents expire between 2016 and 2031 and protect certainfeatures and technologies we have developed for use in our products including fuel systems, air flow, electronics and controls, noise reduction and air-cooledengines. U.S. trademark registrations generally have a perpetual duration if they are properly maintained and renewed. New U.S. patents that are issuedgenerally have a life of 20 years from the date the patent application is initially filed. We believe the existence of these patents and trademarks, along with ourongoing processes to register additional patents and trademarks, protect our intellectual property rights and enhance our competitive position. We also useproprietary 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. Our strategic globalsourcing function continuously evaluates the cost structure of our products and capabilities of our supply chain, and sources components accordingly basedon this evaluation. In 2012, we sourced approximately half of our components from outside 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. We also believe our broad product offering and diverse distribution model provide for additional advantages as well.In the market for standby commercial and industrial generators, our primary competitors are Caterpillar, Cummins, Kohler, and MTU, most of which focuson the market for diesel generators as they are also diesel engine manufacturers. In the market for residential standby generators, our primary competitorsinclude Briggs & Stratton, Cummins (Onan division) and Kohler, which also have broad operations in other manufacturing businesses. In the portablegenerator market, our primary competitors include Briggs & Stratton, Honda and Techtronics International (TTI), along with a number of smaller domesticand foreign competitors. In the market for mobile generators, our primary competitors are Doosan/IR, Multi Quip, Caterpiller and Wacker. Our competitors inthe market for light towers include Terex, Allmand and Wacker.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, 2012, we had 3,048 employees (2,700 full time and 348 part-time and temporary employees). Of those, 1,935 employees were directlyinvolved in manufacturing at our manufacturing facilities.We have had an “open shop” bargaining agreement for the past 47 years. Our current agreement is with the Communication Workers of America, Local 4603.The current agreement, which expires October 17, 2016, covers our Waukesha and Eagle facilities. Currently, less than 1% of our workforce is a member of alabor union. Our facilities in Whitewater, Wisconsin, Jefferson, Wisconsin and Berlin, Wisconsin are not unionized. 5Table of Contents 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 U.S. Environmental Protection Agency (“EPA”), California Air Resources Board (“CARB”) and various other state andlocal air quality management districts. These governing bodies continue to pass regulations that require us to meet more stringent emission standards, and allof our engines and engine-driven products are regulated within the United States and its territories. Other countries have various degrees of regulationdepending upon product application and fuel types. New regulations could require us to redesign our products and could affect market growth for ourproducts.Segment informationWe refer you to Note 2, “Segment Reporting,” of our consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for informationabout our business segment and geographic areas.Available InformationThe Company’s principal executive offices are located at S45 W29290 Highway 59, Waukesha, Wisconsin, 53189 and the Company’s telephone number is(262) 544-4811. The Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to thosereports are available free of charge through the “Investors” portion of the Company’s web site, www.generac.com, as soon as reasonably practical after they arefiled with the Securities and Exchange Commission, or the “SEC”. The SEC maintains a web site, www.sec.gov, which contains reports, proxy andinformation statements, and other information filed electronically with the SEC by the Company. The information provided on these websites is not part ofthis report and is therefore not incorporated herein by reference.Executive officersThe following table sets forth information regarding our executive officers: Name AgePositionAaron P. Jagdfeld41President, Chief Executive Officer and DirectorYork A. Ragen41Chief Financial OfficerDawn A. Tabat60Chief Operating OfficerTerrence J. Dolan47Executive Vice President, Commercial & Industrial GroupRussell S. Minick52Executive Vice President, Residential GroupAllen A. Gillette56Senior Vice President, EngineeringRoger F. Pascavis52Senior Vice President, OperationsAaron P. Jagdfeld has served as our Chief Executive Officer since September 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 joiningGenerac, 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 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 A. 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 and information services.Terrence J. Dolan began serving as our Executive Vice President, Commercial & Industrial Group in October 2011. Prior to becoming Executive VicePresident of Industrial Products, he served as our Senior Vice President of Sales from January 2010 to October 2011. Prior to joining Generac, Mr. Dolan wasSenior Vice President of Business Development and Marketing at Boart Longyear from 2007 to 2008, Vice President of Sales and Marketing at Ingersoll Randfrom 2002 to 2007, and Director of Strategic Accounts at Case Corporation from 1991 to 2001. Mr. Dolan holds a B.A. in Management and Communicationsfrom Concordia University. 6Table of Contents Russell S. Minick joined Generac in August 2011, and was named Executive Vice President, Residential Group in October 2011. Prior to joining Generac,Mr. Minick was President & CEO of Home Care Products for Electrolux from 2006 to 2011, President of The Gunlocke Company at HNI Corporation from2003 to 2006, Senior Vice President of Sales, Marketing and Product Development at True Temper Sports from 2002 to 2003, and General Manager ofExtended Warranty Operations for Ford Motor Company from 1998 to 2002. Mr. Minick is a graduate of the University of Northern Iowa, and holds a degreein marketing.Allen A. 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 F. Pascavis has served as our Senior Vice President of Operations since January 2008. Mr. Pascavis joined Generac in 1995 and has served asDirector of Materials and Vice President of Operations. Prior to joining Generac, Mr. Pascavis was a Plant Manager for MTI in Waukesha, Wisconsin.Mr. Pascavis holds a B.S. in Industrial Technology from the University of Wisconsin, Stout and an M.B.A. from Lake Forest Graduate School ofManagement.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 AnnualReport. 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 power outage events caused by thunderstorms,hurricanes, ice storms, blackouts and other 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 growth rates and excess inventory. The lack of major power-outage events can affect our net sales in theyears following 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. Despite their unpredictable nature, we believe major power outages create awareness and accelerate adoption for ourhome standby products. Demand for our products is significantly affected by durable goods spending by consumers and businesses and other macroeconomic conditions. Our business is affected by general economic conditions, and uncertainty or adverse changes such as the prolonged downturn in U.S. residential 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. If these businesses and municipalities cannot access credit markets or do not utilize discretionary funds to purchase ourproducts as a result of the economy or other factors, our business could suffer and our ability to realize benefits from our strategy of increasing sales in thelight-commercial and industrial sectors through, among other things, our focus on innovation and product development, including natural gas engine andmodular technology, could be adversely affected. In addition, consumer confidence and home remodeling expenditures have a significant impact on sales ofour residential products, and prolonged periods of weakness in consumer durable goods spending could have a material impact on our business. Typically,we do not have contracts with our customers which call for committed volume, and we cannot guarantee that our current customers will continue to purchaseour products. If general economic conditions or consumer confidence were to worsen, or if the non-residential construction sector or rate of capital investmentswere to decline, our net sales and profits would likely be adversely affected. Additionally, timing of capital spending by our national account customers canvary from quarter-to-quarter based on capital availability and internal capital spending budgets. Decreases in the availability and quality, or increases in the cost, of raw materials and key components we use could materially reduce ourearnings. The principal raw materials that we use to produce our products are steel, copper and aluminum. We also source a significant number of component partsfrom third parties that we utilize to manufacture our products. The prices of those raw materials and components are susceptible to significant fluctuations dueto 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. Also, our abilityto continue to obtain quality materials and components is subject to the continued reliability and viability of our suppliers, including in some cases, supplierswho are the sole source of certain important components. If we are unable to obtain adequate, cost efficient or timely deliveries of required raw materials andcomponents, we may be unable to manufacture sufficient quantities of products on a timely basis. This could cause us to lose sales, incur additional costs,delay new product introductions or suffer harm to our reputation.  7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 ourend markets. Demand for our products may also be affected by our ability to respond to changes in design and functionality, to respond to downward pricingpressure, and to provide shorter lead times for our products than our competitors. If we are unable to respond successfully to these competitive pressures, wecould 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, retail or equipment rental customers, would adversely affect our business. In addition to our direct sales force and manufacturer sales representatives, we depend on the services of independent distributors and dealers to sell ourproducts and provide service and aftermarket support to our end 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 equipment rental companies, and our direct national accounts withtelecommunications and industrial customers. Our distribution agreements and any contracts we have with large telecommunications, retail and othercustomers are typically not exclusive, and many of the distributors 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 morelarge customers, or an increase in our distributors' or dealers' sales of our competitors' products to our customers or of our large customers' purchases of ourcompetitors' products could materially reduce our sales and profits. Also, our ability to successfully realize our growth strategy is dependent in part on ourability to identify, attract and retain new distributors at all layers of our distribution platform, and we cannot be certain that we will be successful in theseefforts. 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 as very important assets. We seek to protect our intellectual property rights through a combination of patent,trademark, copyright and trade secret laws, as well as licensing and confidentiality agreements. These protections may not be adequate to prevent third partiesfrom using our intellectual property without our authorization, breaching any confidentiality agreements with us, copying or reverse engineering our products,or developing and marketing products that are substantially equivalent to or superior to our own. The unauthorized use of our intellectual property by otherscould reduce our competitive advantage and harm our business. Not only are intellectual property-related proceedings burdensome and costly, but they couldspan years to get a conclusion and we may not prevail. We cannot guarantee that any patents, issued or pending, will provide us with any competitiveadvantage or will not be challenged by third parties. Moreover, the expiration of our patents may lead to increased competition with respect to certain products. In addition, we cannot be certain that we do not or will not infringe third parties' intellectual property rights. Any such claim, even if it is without merit, 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 and, as such, there is a rebuttable presumption that Briggs has abandoned the trademark. However, in the eventthat the Beacon Group or Briggs use this trademark in the future, we could suffer competitive confusion and our business could be negatively impacted. 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. 8Table of Contents 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 (“EPA”), state regulatory agencies, such as California Air Resources Board (“CARB”), and other regulatoryagencies around the world. These laws are constantly evolving and many are becoming increasingly stringent. Changes in applicable laws or regulations, or inthe enforcement thereof, could require us to redesign our products and could adversely affect our business or financial condition in the future. Developing andmarketing products to meet such new requirements could result in substantial additional costs that may be difficult to recover in some markets. In some cases,we may be required to modify our projects or develop new products to comply with new regulations, particularly those relating to air emissions. For example,we were required to modify our spark-ignited air-cooled gaseous engines to comply with the 2011 EPA and CARB regulations, as well as the continuedimplementation of Tier 4 nonroad diesel engine changes associated with the Magnum acquisition. Typically, additional costs associated with significantcompliance modifications are passed on to the market. While we have been able to meet previous deadlines, failure to comply with other existing and futureregulatory 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. A significant unsuccessful product liability defense could have amaterial adverse effect on our financial condition and results of operations. In addition, we believe our business depends on the strong brand reputation wehave developed. 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 power products industry. If, for any reason, our senior executives do not continue to be active in management, or if our key employees leaveour company, our business, financial condition or results of operations could be adversely affected. Failure to continue to attract these individuals atreasonable compensation levels could have a material adverse effect on our business, liquidity and results of operations. Although we do not anticipate that wewill have to replace any of these individuals in the near future, the loss of the services of any of our key employees could disrupt our operations and have amaterial adverse effect on our business. Disruptions caused by labor disputes or organized labor activities could harm our business. We may from time to time experience union organizing activities in our non-union facilities. Disputes with the current labor union or new union organizingactivities could lead to work slowdowns or stoppages and make it difficult or impossible for us to meet scheduled delivery times for product shipments to ourcustomers, which could result in loss of business. In addition, union activity could result in higher labor costs, which could harm our financial condition,results of operations and competitive position. 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, tornados, earthquakes, or other catastrophes; and · other operational problems. In addition, the majority of our manufacturing and production facilities are located in Wisconsin within a 100-mile radius. We could experience prolongedperiods of reduced production due to unforeseen events occurring in or around our manufacturing facilities in Wisconsin. In the event of a businessinterruption at our facilities, in particular our Wisconsin facilities, we may be unable to shift manufacturing capabilities to alternate locations, accept materialsfrom suppliers or meet customer shipment needs, among other severe consequences. Such an event could have a material and adverse impact on our financialcondition and results of our operations. 9Table of Contents 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 and Europe. Our international sourcing subjects us to a number ofpotential risks in addition to the risks associated with third-party sourcing generally. Such risks include: · inflation or changes in political and economic conditions; · unstable regulatory environments; · changes in import and export duties; · domestic and foreign customs and tariffs; · currency rate fluctuations; · trade restrictions; · labor unrest; · logistical and communications challenges; and · other restraints and burdensome taxes. These factors may have an adverse effect on our ability to efficiently and cost effectively source our purchased components overseas. In particular, if the U.S.dollar were to depreciate significantly against the currencies in which we purchase raw materials from foreign suppliers, our cost of goods sold could increasematerially, which would adversely affect our results of operations. We are vulnerable to supply disruptions from single-sourced suppliers. We single-sourced certain types of parts in our product designs during 2012. Any delay in our suppliers’ deliveries may impair our ability to deliver productsto our customers. A wide variety of factors could cause such delays including, but not limited to, lack of capacity, economic downturns, availability ofcredit, weather events or natural disasters. As a U.S. corporation that conducts business in a variety of foreign countries including, but not limited to, Mexico and Brazil, we are subject tothe Foreign Corrupt Practices Act and a variety of anti-corruption laws worldwide. A determination that we violated any of these laws may affectour business and operations adversely. As a U.S. corporation that conducts business in a variety of foreign countries including, but not limited to, Mexico and Brazil, we are subject to theregulations imposed by a variety of anti-corruption laws worldwide. The U.S. Foreign Corrupt Practices Act, or the FCPA, generally prohibits U.S. companiesand their intermediaries from making improper payments to foreign officials for the purpose of obtaining or keeping business. The United Kingdom BriberyAct, or the UKBA, prohibits domestic and foreign bribery of the private sector as well as public officials. Any determination that we have violated any anti-corruption laws could have a material adverse effect on our financial position, operating results and cash flows. We have significant tax assets, usage of which may be subject to limitations in the future. As of December 31, 2012, we had approximately $54.1 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 and defer our ability to utilize our net operating loss carryforwards tooffset future federal income tax liabilities. However, we believe any limitation would not be material. 10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, 2012, goodwill and other indefinite-lived intangibles totaled $711.8 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 statement of operations. A reduction in net income resulting from the write-down or impairment of goodwill or indefinite-lived intangibles, suchas the $9.4 million non-cash charge recorded in the fourth quarter of 2011 primarily related to the write down of a certain trade name as we strategicallytransition to the Generac brand, could have a material adverse effect on our financial statements. Goodwill and identifiable intangible assets are recorded at fair value on the date of acquisition. In accordance with FASB Accounting Standards Codification(ASC) Topic 350-20, goodwill and indefinite lived intangibles are reviewed at least annually for impairment and definite-lived intangible assets are reviewedfor impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable. Future impairment may result from,among other things, deterioration in the performance of an acquired business or product line, adverse market conditions and changes in the competitivelandscape, adverse changes in applicable laws or regulations, including changes that restrict the activities of an 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. On May 30, 2012, the Company completed a refinancing ofits senior secured credit facilities, pursuant to which it has incurred $900 million of senior secured term loans to replace its prior $575 million term loanfacilities. Following the refinancing, the Company used the available proceeds from the new term loans and cash on hand to fund a special cash dividend toits stockholders of $6.00 per share and to pay related financing fees and expenses. In the future, if we are unable to refinance such facilities on acceptableterms, our liquidity could be adversely affected. 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. We may not realize all of the anticipated benefits of our acquisition of the Ottomotores business or other acquisitions or those benefits may takelonger to realize than expected. We may also encounter significant unexpected difficulties in integrating acquired businesses. Our ability to realize the anticipated benefits of the Ottomotores acquisition, which was consummated on December 8, 2012, or other acquisitions, willdepend, to a large extent, on our ability to integrate the acquired businesses with our business. The combination of two independent businesses is a complex,costly and time-consuming process. Further, integrating and managing businesses with international operations, such as the Ottomotores business, may posechallenges not previously experienced by our management. As a result, we will be required to devote significant management attention and resources tointegrating the business practices and operations of any acquired businesses with ours. The integration process may disrupt our business and, if implementedineffectively, would preclude realization of the full benefits expected by us. Our failure to meet the challenges involved in integrating an acquired business intoour existing operations or otherwise to realize the anticipated benefits of the transaction could cause an interruption of, or a loss of momentum in, our activitiesand could adversely affect our results of operations. In addition, the overall integration of the Ottomotores business or other acquired businesses may result in material unanticipated problems, expenses,liabilities, competitive responses, loss of customer relationships, and diversion of management's attention, and may cause our stock price to decline. 11Table of Contents The difficulties of combining the operations of acquired businesses with ours include, among others: · managing a larger company; · maintaining employee morale and retaining key management and other employees; · integrating two business cultures, which may prove to be incompatible; · the possibility of faulty assumptions underlying expectations regarding the integration process; · retaining existing customers and attracting new customers; · consolidating corporate and administrative infrastructures and eliminating duplicative operations; · the diversion of management's attention from ongoing business concerns and performance shortfalls as a result of the diversion of management'sattention to the acquisition; · unanticipated issues in integrating information technology, communications and other systems; · unanticipated changes in applicable laws and regulations; · managing tax costs or inefficiencies associated with integrating the operations of the combined company; · unforeseen expenses or delays associated with the acquisition; · difficulty comparing financial reports due to differing financial and/or internal reporting systems; and · making any necessary modifications to internal financial control standards to comply with the Sarbanes-Oxley Act of 2002 and the rules andregulations promulgated thereunder. Many of these factors will be outside of our control and any one of them could result in increased costs, decreases in the amount of expected revenues anddiversion of management's time and energy, which could materially impact our business, financial condition and results of operations. In addition, even if theoperations of Ottomotores or other acquired businesses are integrated successfully with our operations, we may not realize the full benefits of the transaction,including the synergies, cost savings or sales or growth opportunities that we expect. These benefits may not be achieved within the anticipated time frame, orat all. Or, additional unanticipated costs may be incurred in the integration of our businesses. All of these factors could cause dilution to our earnings pershare, decrease or delay the expected accretive effect of the acquisition, and cause a decrease in the price of our common stock. As a result, we cannot assureyou that the combination of Ottomotores or other acquisitions with our business will result in the realization of the full benefits anticipated from thetransaction. 12Table of Contents 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. 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. We do not anticipate paying dividends on our common stock in the foreseeable future. While we declared a special dividend in June 2012, we do not anticipate paying any further dividends in the foreseeable future on our common stock. Weintend to retain all future earnings for the operation and expansion of our business and the repayment of outstanding debt. In addition, the terms of our seniorsecured credit facilities limit our ability to pay dividends on our common stock. As a result, capital appreciation, if any, of our common stock will be the solesource of gain for the foreseeable future. While we may change this policy at some point in the future, we cannot assure that we will make such a change. 13Table of Contents Risks related to our capital structure We have a significant amount of indebtedness which could adversely affect our cash flow and our ability to remain in compliance with debtcovenants and make payments on our indebtedness. We have a significant amount of indebtedness. As of December 31, 2012, we had total indebtedness of $881.3 million. Our significant level of indebtednessincreases the possibility that we may be unable to generate cash sufficient to pay, when due, the principal of, interest on or other amounts due in respect of ourindebtedness. Our significant indebtedness, combined with our lease and other financial obligations and contractual commitments could have other importantconsequences. For example, it could: · make it more difficult for us to satisfy our obligations with respect to our indebtedness, which could result in an event of default under theagreements 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 portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flowsto 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, execution of ourbusiness strategy or other purposes. Any of the above-listed factors could materially adversely affect our business, financial condition, results of operations and cash flows. While we maintaininterest rate swaps covering a portion of our outstanding debt, our interest expense could increase if interest rates increase because debt under our creditfacilities bears interest at a variable rate once above a certain LIBOR floor. If we do not have sufficient earnings to service our debt, we may be required torefinance all or part of our existing debt, sell assets, borrow more money or sell securities, none of which we can guarantee we will be able to do. The terms of our credit facilities restrict our current and future operations, particularly our ability to respond to changes in our business or totake certain actions. Our credit facilities contain, and any future indebtedness of ours or our subsidiaries would likely contain, a number of restrictive covenants that imposesignificant operating and financial restrictions on us and our subsidiaries, including restrictions on our ability to engage in acts that may be in our best long-term interests. These restrictions include, among other things, our ability to: · incur liens; · incur or assume additional debt or guarantees or issue preferred stock; · pay dividends, or make redemptions and repurchases, with respect to capital stock; · prepay, or make redemptions and repurchases of, subordinated debt; · make loans and investments; · make capital expenditures; · engage in mergers, acquisitions, asset sales, sale/leaseback transactions and transactions with affiliates; · change the business conducted by us or our subsidiaries; and · amend the terms of subordinated debt. The operating and financial restrictions in our credit facilities and any future financing agreements may adversely affect our ability to finance futureoperations or capital needs or to engage in other business activities. A breach of any of the restrictive covenants in our credit facilities would result in a default.If any such default occurs, the lenders under our credit facilities may elect to declare all outstanding borrowings, together with accrued interest and other fees,to be immediately due and payable, or enforce their security interest, any of which would result in an event of default. The lenders will also have the right inthese circumstances to terminate any commitments they have to provide further borrowings. Our existing credit facilities do not contain any financialmaintenance covenants 14Table of Contents Our principal stockholder continues to have substantial control over us. Affiliates of CCMP collectively beneficially own approximately 34.4% of our outstanding common stock. Prior to sales of a portion of their holdings in us inFebruary 2013 and November 2012, affiliates of CCMP owned approximately 58.6% of our outstanding common stock. Notwithstanding this reduction,CCMP or its affiliates remain able to exert a significant degree of influence over our management and affairs and will exert a significant degree of influence inmatters requiring stockholder approval, including the election of directors, a merger, consolidation or sale of all or substantially all of our assets, and anyother significant transaction. The interests of this stockholder may not always coincide with our interests or the interests of our other stockholders. Forinstance, this concentration of ownership may have the effect of delaying or preventing a change in control of us otherwise favored by our other stockholdersand could depress our stock price. Conflicts of interest may arise because some of our directors are principals of our principal stockholder. Representatives of CCMP and its affiliates currently occupy two of eight seats on our board of directors. CCMP or its affiliates could invest in entities thatdirectly or indirectly compete with us or companies in which CCMP or its affiliates are currently invested may already compete with us. As a result of theserelationships, when conflicts arise between the interests of CCMP or its affiliates and the interests of our stockholders, these directors may not be disinterested.The representatives of CCMP and its affiliates on our board of directors, by the terms of our amended and restated certificate of incorporation, are not requiredto offer us any transaction opportunity of which they become aware and could take any such opportunity for themselves or offer it to other companies inwhich they have an investment, unless such opportunity is expressly offered to them solely in their capacity as our directors. Item 1B. Unresolved Staff Comments None. Item 2. Properties We own, operate or lease manufacturing and distribution facilities located principally in Wisconsin totaling over 2 million square feet. We also operate a dealertraining center at our Eagle, Wisconsin facility, which allows us to train new industrial and residential dealers on the service and installation of our productsand provide existing dealers with training on product innovations. We also have inventory warehouses in the United States that accommodate material storageand rapid response requirements of our customers. We also operate manufacturing facilities in Mexico and Brazil. The following table shows the location and activities of our principal operations: LocationOwned /Leased SquareFootage ActivitiesWaukesha, WIOwned 307,250 Corporate headquarters, manufacturing, storage, research anddevelopmentEagle, WIOwned 242,000 Manufacturing, office, trainingWhitewater, WIOwned 295,000 Manufacturing , officeWhitewater, WIOwned 196,000 DistributionBerlin, WIOwned 129,000 Manufacturing, officeBerlin, WILeased 122,500 Manufacturing, storage, research and developmentFort Atkinson, WILeased 203,000 StorageEdgerton, WILeased 328,000 StorageMaquoketa, IAOwned 137,000 Storage, rental propertyNor Cross, GALeased 12,550 Sales, distribution, trainingAlpharetta, GALeased 13,000 Manufacturing, sales, distributionJefferson, WIOwned 252,500 Manufacturing, distributionMexico City, MexicoOwned 53,740 Manufacturing, sales, distribution, storage, officeMexico City, MexicoOwned 107,640 Manufacturing, sales, distribution, storage, officeCuritiba, BrazilLeased 21,500 Manufacturing, sales, distribution, storage, office As of December 31, 2012, substantially all of our owned properties are subject to collateral provisions under our senior secured credit facilities. 15Table of Contents 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, 2012, we believe that there is no litigation pending that would have a material effect on our resultsof operations or financial condition. Item 4. Mine Safety Disclosures. Not Applicable. PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Price Range of Common Stock Shares of our common stock are traded on the New York Stock Exchange (NYSE) under the symbol “GNRC.” The following table sets forth the high andlow sales prices reported on the NYSE for our common stock by fiscal quarter during 2012 and 2011, respectively. 2012 High Low Fourth Quarter $39.18 $24.43 Third Quarter $25.33 $18.35 Second Quarter $30.61 $22.40 First Quarter $30.50 $24.27 2011 High Low Fourth Quarter $29.06 $18.29 Third Quarter $21.41 $15.41 Second Quarter $21.10 $17.10 First Quarter $20.85 $14.72 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, 2012. 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. Company/Market/PeerGroup 2/11/2010 3/31/2010 6/30/2010 9/30/2010 12/31/2010 3/31/2011 6/30/2011 9/30/2011 12/31/2011 3/31/2012 6/30/2012 9/30/2012 12/31/2012 GeneracHoldingsInc. $100.00 $109.11 $109.11 $106.23 $125.93 $158.02 $151.09 $146.50 $218.30 $191.20 $187.38 $229.77 $344.40 S&P 500Index $100.00 $108.73 $96.30 $107.17 $118.70 $125.73 $125.85 $108.40 $121.21 $136.46 $132.71 $141.14 $140.60 S&P 500IndustrialsIndex $100.00 $113.01 $99.09 $113.27 $126.65 $137.74 $136.82 $108.06 $125.90 $140.14 $135.16 $140.04 $145.23 17Table of ContentsHolders As of February 1, 2013, there were approximately 124 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 On June 29, 2012, the Company used a portion of the proceeds from the May 30, 2012 debt refinancing (see footnote #6 – Credit Agreement in Item 8 of thisAnnual Report on Form 10-K) together with cash on its balance sheet to pay a special cash dividend of $6.00 per share on its common stock, resulting inpayments totaling $404.3 million to stockholders. We currently do not have plans to pay any further dividends on our common stock in the near term.However, in the future, subject to factors such as general economic and business conditions, our financial condition and results of operations, our capitalrequirements, our future liquidity and capitalization and such other factors that our board of directors may deem relevant, we may change this policy andchoose to pay dividends. Our ability to pay dividends on our common stock is currently restricted by the terms of our senior secured credit facilities and maybe further restricted by any future indebtedness we incur. Our business is conducted through our subsidiaries, including our principal operating subsidiary,Generac Power Systems. Dividends from, and cash generated by our subsidiaries will be our principal sources of cash to repay indebtedness, fund operationsand pay dividends. Accordingly, our ability to pay dividends to our stockholders is dependent on the earnings and distributions of funds from oursubsidiaries, including Generac Power Systems. Securities Authorized for Issuance Under Equity Compensation Plans The information required by this item will be included in our 2013 Proxy Statement and is incorporated herein by reference. Recent Sales of Unregistered Securities None. Use of Proceeds from Registered Securities Not applicable. 18Table of Contents 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, 2012, 2011 and 2010 are derived from our audited consolidated financial statements included elsewhere inthis annual report. The selected historical consolidated financial data for the years ended December 31, 2009 and December 31, 2008 are derived from ouraudited historical financial statements not included in this annual report.The results indicated below and elsewhere in this annual report are not necessarily indicative of our future performance. 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 on Form 10-K. (Dollars in thousands, except per share data) Year endedDecember 31,2012 Year endedDecember 31,2011 Year endedDecember 31,2010 Year endedDecember 31,2009 Year endedDecember 31,2008 Statement of operations data: Net sales $1,176,306 $791,976 $592,880 $588,248 $574,229 Costs of goods sold 735,906 497,322 355,523 352,398 372,199 Gross profit 440,400 294,654 237,357 235,850 202,030 Operating expenses: Selling and service 101,448 77,776 57,954 59,823 57,449 Research and development 23,499 16,476 14,700 10,842 9,925 General and administrative 46,031 30,012 22,599 14,713 15,869 Amortization of intangibles (1) 45,867 48,020 51,808 51,960 47,602 Goodwill and trade name impairment charge (2) — 9,389 — — 583,486 Total operating expenses 216,845 181,673 147,061 137,338 714,331 Income (loss) from operations 223,555 112,981 90,296 98,512 (512,301)Other income (expense): Interest expense (49,114) (23,718) (27,397) (70,862) (108,022)Gain (loss) on extinguishment of debt (3) (14,308) (377) (4,809) 14,745 65,385 Investment income 79 110 235 2,205 600 Costs related to acquisition (1,062) (875) — — — Other, net (2,798) (1,155) (1,105) (1,206) (1,217)Total other expense, net (67,203) (26,015) (33,076) (55,118) (43,254)Income (loss) before provision for income taxes 156,352 86,966 57,220 43,394 (555,555)Provision (benefit) for income taxes (4) 63,129 (237,677) 307 339 400 Net income (loss) $93,223 $324,643 $56,913 $43,055 $(555,955)Income (loss) per share - diluted: Common Stock (formerly Class A non-voting common stock)(5) 1.35 4.79 (1.65) (41,111) (357,628)Class B Common Stock (5) n/a n/a 505 4,171 3,780 Statement of cash flows data: Depreciation 8,293 8,103 7,632 7,715 7,168 Amortization 45,867 48,020 51,808 51,960 47,602 Expenditures for property and equipment (22,392) (12,060) (9,631) (4,525) (5,186) Other financial data: Adjusted EBITDA (6) 289,809 188,476 156,249 159,087 129,858 Adjusted Net Income (7) 220,792 147,176 115,954 83,643 13,758 19Table of Contents (Dollars in thousands) As ofDecember 31,2012 As ofDecember 31,2011 As ofDecember 31,2010 As ofDecember 31,2009 As ofDecember 31,2008 Balance sheet data: Current assets $522,553 $383,265 $272,519 $345,017 $274,997 Property, plant and equipment, net 104,718 84,384 75,287 73,374 76,674 Goodwill 552,943 547,473 527,148 525,875 525,875 Other intangibles and other assets 423,633 537,671 334,929 392,977 448,668 Total assets $1,603,847 $1,552,793 $1,209,883 $1,337,243 $1,326,214 Total current liabilities $294,859 $165,390 $86,685 $131,971 $127,981 Long-term borrowings, less current portion 799,018 575,000 657,229 1,052,463 1,121,437 Other long-term liabilities 46,342 43,514 24,902 17,418 43,539 Redeemable stock (8) — — — 878,205 843,451 Stockholders' equity 463,628 768,889 441,067 (742,814) (810,194)Total liabilities, redeemable stock and stockholders' equity (8) $1,603,847 $1,552,793 $1,209,883 $1,337,243 $1,326,214 (1) Our amortization of intangibles expenses includes the straight-line amortization of customer lists, patents and other finite-lived intangibles assets.(2) During the fourth quarter of 2011, the Company decided to strategically transition certain products to their more widely known Generac brand. Based onthis decision, the Company recorded a $9.4 million non-cash charge which primarily related to the write down of the impacted trade name to net realizablevalue. As of October 31, 2008, as a result of our annual goodwill and trade name 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.(3) During 2012, the Company recorded a loss on extinguishment of debt related to the refinancing transactions that occurred on February 9, 2012 and May30, 2012. During 2011 and 2010, the Company wrote-off a portion of deferred financing costs related to accelerated repayments of debt.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.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.(4) The 2011 net tax benefit of $237.7 million includes a tax benefit of $271.4 million recorded due to the reversal of valuation allowances recorded on theCompany’s net deferred tax assets. See discussion in Item 8 – Financial Statements and Supplementary Data – Note 9 for additional information.(5) Diluted earnings per share reflects the impact of the reverse stock split which occurred immediately prior to the initial public 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 of Class B common stock wereconverted into shares of Class A common stock, and the Class A common stock became the one class of outstanding common stock. See discussion of theIPO in Part 1, Item 1 – 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 Term Loan Credit Agreementand ABL Credit Agreement. Note that the definitions of EBITDA in the new Term Loan Credit Agreement and ABL Credit Agreement are substantially thesame as the definitions of EBITDA in previous credit agreements. 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 TermLoan Credit Agreement and ABL Credit Agreement but also because it assists us in comparing our performance across reporting periods on a consistent basisbecause it excludes items that we do not believe are indicative of our core operating performance. Our management uses Adjusted EBITDA:• for planning purposes, including the preparation of our annual operating budget and developing and refining our internal projections for 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 Term Loan Credit Agreement and ABL Credit Agreement and alsoare presented to illustrate the operating performance of our business in a manner consistent with the presentation used by our management and board ofdirectors. 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.We explain in more detail in footnotes (a) through (d) 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;• 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 financialstatements). While many of the adjustments (for example, transaction costs and credit facility fees), involve mathematical application of items reflected in ourfinancial statements, others involve a degree of judgment and discretion. While we believe that all of these adjustments are appropriate, and while thecalculations are subject to review by our board of directors in the context of the board's review of our financial statements and certification by our chieffinancial officer in a compliance certificate provided to the lenders under our Term Loan Credit Agreement and ABL Credit Agreement, this discretion may beviewed 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.The following table presents a reconciliation of net income (loss) to Adjusted EBITDA: (Dollars in thousands) Year endedDecember 31,2012 Year endedDecember 31,2011 Year endedDecember 31,2010 Year endedDecember 31,2009 Year endedDecember 31,2008 Net income (loss) $93,223 $324,643 $56,913 $43,055 $(555,955)Interest expense 49,114 23,718 27,397 70,862 108,022 Depreciation and amortization 54,160 56,123 59,440 59,675 54,770 Income taxes provision (benefit) 63,129 (237,677) 307 339 400 Non-cash impairment and other charges (income) (a) 247 10,400 (361) (1,592) 585,634 Non-cash share-based compensation expense (b) 10,780 8,646 6,363 — — Loss (gain) on extinguishment of debt (c) 14,308 377 4,809 (14,745) (65,385)Transaction costs and credit facility fees (d) 4,117 1,719 1,019 1,188 1,319 Other 731 527 362 305 1,053 Adjusted EBITDA $289,809 $188,476 $156,249 $159,087 $129,858 (a) Represents the following non-cash charges:• for the year ended December 31, 2012, includes loss on disposals of assets, unrealized mark-to-market adjustments on copper forward contracts and anadjustment to an earn-out obligation in connection with a permitted business acquisition, as defined in our credit agreement;• for the year ended December 31, 2011, primarily $9.4 million trade name write-down described in "Item 7 - Management's Discussion and Analysis ofFinancial Condition and Results of Operations—Critical accounting policies—Goodwill and other intangible assets." Also includes unrealized mark-to-marketadjustments on copper forward contracts and loss on disposal of assets;• 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;• for the year ended December 31, 2008, primarily $503.2 million in goodwill impairment charges and $80.3 million in trade name impairment charges.$1.6 million of the amount is comprised of unsettled mark to market losses on copper forward contracts, a write-off of pre-CCMP Transactions bad debtsand excess inventory and loss on disposals of assets. Separately, the amount also includes a write-off of certain inventory;We 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 write-offs of certain pre-CCMP Transaction bad debts in the year ended December 31, 2008 are non-cash charges that we believe do not reflect cashoutflows 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 income 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 and the trade name write-down recorded in the year endedDecember 31, 2011 are one-time items that we believe do not reflect our ongoing operations;• 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. 22Table of Contents (b) Represents share-based compensation expense to account for stock options, restricted stock and other stock awards over their vesting period.(c) Represents the loss (gain) on extinguishment of debt from:• for the year ended December 31, 2012, represents the loss on extinguishment of debt related to the refinancing transactions that occurred on February 9, 2012and May 30, 2012;• for the years ended December 31, 2011 and 2010, represents the write-off of a portion of deferred financing costs related to accelerated repayments of debt;• for the years ended December 31, 2009 and 2008, represents non-cash gains on the extinguishment of debt repurchased by affiliates of CCMP, as describedin note (3) above, which we do not expect to recur;(d) Represents transaction costs incurred directly in connection with any investment, as defined in our credit agreement, equity issuance or debt issuance orrefinancing, together with certain fees related to our Term Loan Credit Agreement or ABL Credit Agreement, such as:• administrative agent fees and revolving credit facility commitment fees under our Term Loan Credit Agreement and ABL Credit Agreement, 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;• in the year ended December 31, 2012, transaction costs relating to the acquisition of the Ottomotores business and other financing costs incurred related tothe dividend recapitalization transaction and security registration statement;• in the year ended December 31, 2011, transaction costs relating to the acquisition of the Magnum Products business;• before 2011, transaction costs relating to repurchases of debt under our first and second lien credit facilities by affiliates of CCMP, which CCMP's affiliatescontributed to our company in exchange for the issuances of securities, which repurchases we do not expect to recur;(7) Adjusted Net Income is defined as net income before provision (benefit) for income taxes adjusted for the following items: cash income tax expense,amortization of intangible assets, amortization of deferred financing costs and original issue discount related to the Company’s debt, losses (gains) onextinguishment of the Company’s debt, intangible asset impairment charges, transaction costs and other purchase accounting adjustments, and certain non-cash gains and losses as reflected in the reconciliation table set forth below (as applicable).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, our cash flows, and the factors and trends affectingour 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 we do not consider indicative of our ongoing operating performance, such as amortization costs, transaction costs and write-offs relating tothe retirement of debt. We also make adjustments to present cash taxes paid as a result of our favorable tax attributes.Similar to Adjusted EBITDA, Adjusted Net Income does not represent, and should not be a substitute for, net income or cash flows from operations 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. 23Table of Contents The following table presents a reconciliation of net income (loss) to Adjusted Net Income:(Dollars in thousands) Year endedDecember 31,2012 Year endedDecember 31,2011 Year endedDecember 31,2010 Year endedDecember 31,2009 Year endedDecember 31,2008 Net income (loss) $93,223 $324,643 $56,913 $43,055 $(555,955)Provision (benefit) for income taxes 63,129 (237,677) 307 339 400 Income (loss) before provision (benefit) for income taxes 156,352 86,966 57,220 43,394 (555,555) Amortization of intangible assets 45,867 48,020 51,808 51,960 47,602 Amortization of deferred finance costs and original issuediscount 3,759 1,986 2,439 3,417 3,905 Loss (gain) on extinguishment of debt 14,308 377 4,809 (14,745) (65,385)Trade name write-down — 9,389 — — 583,486 Transaction costs and other purchase accounting adjustments 3,317 875 — — — Adjusted net income before provision for income taxes 223,603 147,613 116,276 84,026 14,053 Cash income tax expense (2,811) (437) (322) (383) (295) Adjusted net income $220,792 $147,176 $115,954 $83,643 $13,758 (8) Includes our Series A Preferred Stock and Class B Common Stock. 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 on Form 10-K. This discussioncontains forward-looking statements, based on current expectations and related to future events and our future financial performance, that involverisks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of manyfactors, including those set forth under “Item 1A - Risk Factors.”OverviewWe are a leading designer and manufacturer of a wide range of generators and other engine powered products for the residential, light commercial, industrialand construction markets. As the only significant market participant focused predominantly on these products, we have one of the leading market positions inthe power equipment market in the United States, Canada and Mexico. We design, manufacture, source and modify engines, alternators, transfer switchesand other components necessary for our products. Our products are fueled by natural gas, liquid propane, gasoline, diesel and Bi-Fuel™ and are availablethrough a broad network of independent dealers, retailers, wholesalers and equipment rental companies.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 power solutions by our customer base. This demand is influenced by several important trendsaffecting our industry, including the following:Increasing penetration opportunity. Many potential customers are not aware of the costs and benefits of automatic backup power solutions. We estimatethat penetration rates for residential products are approximately 2.5% of U.S. single-family detached, owner-occupied households with a home value of over$100,000, as defined by the U.S. Census Bureau's 2009 American Housing Survey for the United States, and penetration rates of many light-commercialoutlets such as restaurants, drug stores, and gas stations are significantly lower than penetration of hospitals and industrial locations. We believe byexpanding our distribution network, continuing to develop our product line, and targeting our marketing efforts, we can continue to build awareness andincrease 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. Trends in the new housing market can also impact demand for our residential products. 24Table of Contents Effect of large scale power disruptions. Power disruptions are an important driver of consumer awareness and have historically influenced demand forgenerators. Increased frequency and duration of major power outage events caused by the aging U.S. power grid increases product awareness and may driveconsumers to accelerate their purchase of a standby or portable generator during the immediate and subsequent period, which we believe may last for six totwelve months for standby generators. For example, multiple major outage events that occurred over the last six quarters drove strong demand for portable andhome standby generators, and the increased awareness of these products contributed to substantial revenue growth for us in 2012. As a result of recent majorpower outage activity in late October/early November 2012 affecting the east coast, we have seen increased demand for our home standby and portablegenerators. While the full impact is uncertain, we expect near term results of operations to be positively impacted by this outage activity. While there are poweroutages every day across all regions of the country, major outage activity is unpredictable by nature and, as a result, our sales levels and profitability mayfluctuate from period to period.Impact of business capital investment cycle. The market for commercial and industrial stationary and mobile generators and other power equipment isaffected by the capital investment cycle and overall non-residential construction and durable goods spending, as businesses either add new locations or makeinvestments to upgrade existing locations or equipment. These trends can have a material impact on demand for these products. The capital investment cyclemay differ for the various industrial and commercial end markets that we serve (industrial, telecommunications, distribution, retail, health care facilities,construction, energy and municipal infrastructure, among others). The market for these products is also affected by general economic conditions and creditavailability in the geographic regions that we serve.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. Certain 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,expediting costs, testing expenses, marketing expenses and warranty costs, resulting in lower gross margins after the initial launch of a new product. Marginson new product introductions generally increase over the life of the product as these start-up costs decline and we focus our engineering efforts on product costreduction.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 and sourcing,manufacturing efficiencies, price increases and select hedging transactions. Our results are also influenced by changes in fuel prices in the form of freightrates, which in some cases are borne by our customers and in other cases are paid by us.Other factorsOther factors that affect our results of operations include the following:Factors influencing interest expense. Interest expense can be impacted by a variety of factors, including market fluctuations in LIBOR, interest rate electionperiods, interest rate swap agreements and repayments of indebtedness. Interest expense increased in 2012 compared to 2011, primarily due to a slight increasein the weighted-average cost of debt associated with the Credit Agreement (see footnote #6 – Credit Agreement), for the period between February 9, 2012 andMay 29, 2012, as well as an increase in outstanding debt and the weighted-average cost of debt associated with the Term Loan Credit Agreement (definedbelow), for the period between May 30, 2012 and December 31, 2012.Factors influencing provision for income taxes. Because we made a Section 338(h)(10) election in connection with the CCMP Transactions, we have$1.1 billion of tax-deductible goodwill and intangible asset amortization remaining as of December 31, 2012 that we expect to generate cash tax savings of$422 million through 2021, assuming continued profitability and a 39% 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 $48 million through 2020 and $40 million in2021, assuming profitability and a 39% tax rate. Additionally, we have federal net operating loss, or NOL, carry-forwards of $54.1 million as of December31, 2012, which we expect to generate an additional $18.9 million of federal cash tax savings at a 35% rate when and if utilized. Based on current businessplans, we believe that our cash tax obligations through 2021 will be significantly reduced by these tax attributes. However, any subsequent accumulations ofcommon stock ownership leading to a change of control under Section 382 of the U.S. Internal Revenue Code of 1986, including through sales of stock bylarge stockholders, all of which are outside of our control, could limit and defer our ability to utilize our net operating loss carryforwards to offset futurefederal income tax liabilities. We believe any limitations would not be material.In addition, as a result of the asset acquisition of Magnum, we have approximately $52.0 million of tax deductible goodwill and intangible assets remaining asof December 31, 2012. We expect these assets to generate tax savings of $20.3 million through 2026 assuming continued profitability and a 39% tax rate. Theamortization of these assets for tax purposes is expected to be $3.8 million annually through 2025 and $2.8 million in 2026, which generates an additionalannual cash tax savings of $1.5 million through 2025 and $1.1 million in 2026, assuming profitability and a 39% tax rate.Seasonality. Although there is demand for our products throughout the year, in each of the past three years approximately 16% to 25% of our net salesoccurred in the first quarter, 20% to 24% in the second quarter, 26% to 30% in the third quarter and 27% to 34% in the fourth quarter, with differentseasonality depending on the timing of major power outage activity in each year, such as the outage activity experienced in the third and fourth quarters of both2011 and 2012. Due to the significant demand and awareness created by the outage events in the second half of 2012, our historical seasonality patterns maynot apply in 2013.We maintain a flexible production and supply chain schedule in order to respond to outage-driven peak demand, but typically increase production levels in thesecond and third quarters of each year. 25Table of Contents Transactions with CCMPIn November 2006, affiliates of CCMP, together with certain other investors 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 $1.38 billion, 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. During 2007, 2008 and 2009, affiliates of CCMP acquired approximately $249.2 million of second lien term loans and $9.9 million of first lien term loansfor approximately $155.9 million. CCMP’s affiliates exchanged this debt for additional shares of Class B Common Stock and Series A Preferred Stock. Werecorded these transactions as additional Class B Common Stock and Series A Preferred Stock based on the fair value of the debt contributed by CCMP’saffiliates, which approximated the fair value of the shares exchanged. In connection with such issuances of our Class B Common Stock and the satisfactionof preemptive rights under the stockholders’ agreement that arose from such issuances, affiliates of CCMP sold some of the shares of our Class B CommonStock to an entity affiliated with CCMP, certain other investors and certain members of our management and board of directors. In addition, in connectionwith such issuances of our Series A Preferred Stock and the satisfaction of preemptive rights under the stockholders' agreement that arose from suchissuances, during 2009, we issued 2,000 shares of Series A Preferred Stock for an aggregate purchase price of $20.0 million in cash to an entity affiliated withCCMP and certain members of management and our board of directors, and affiliates of CCMP sold some of the shares of Series A Preferred Stock they wereissued to an entity affiliated with CCMP and a member of the board of directors at the same 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, by (ii) the public offeringprice (net of underwriting discounts and commissions). We refer to this as the “Class B Conversion.” Each share of our Class B Common Stock convertedinto 1,118.440 shares of our Class A Common Stock. As a result of the Class B Conversion, we issued an aggregate of 88,484,700 shares of our Class ACommon Stock. 26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.Components of net sales and expensesNet salesSubstantially all of our net sales are generated through the sale of our generators and other engine powered products for the residential, commercial, industrialand construction markets. We also sell engines to certain customers and service parts to our dealer network. Net sales, which include shipping and handlingcharges billed to customers, are recognized upon shipment of products to our customers. Related freight costs are included in cost of sales. Our generators andother products are fueled by natural gas, liquid propane, gasoline, diesel or Bi-Fuel™ systems with power output from 800W to 9mW. Our products areprimarily manufactured and assembled at our Wisconsin and Mexico facilities and distributed through thousands of outlets across North America. Oursmaller kW generators for the residential, portable and commercial markets are typically built to stock, while our larger kW products for the industrialmarkets are generally customized and built to order.During 2012, our net sales were affected primarily by the U.S. economy as sales outside of the United States represented only approximately 7% of total netsales.We are not dependent on any one channel or customer for our net sales, with no single customer representing more than 7% of our net sales for the year endedDecember 31, 2012 and our top ten customers representing less than 29% of our net sales for the same period. 27Table of Contents 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 85% of costs of goods sold for the year ended December 31, 2012. 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 certain of our smallerproducts and all of our products larger than 20kW. We design all the alternators for our units and manufacture alternators for certain of our units. We alsomanufacture other generator components where we believe we have a design and cost advantage. We source component parts from an extensive global networkof reliable, high quality and value oriented 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 global sourcing, product design improvements and price increases in our products. However, there is typically a lagbetween raw material price fluctuations and their effect on our costs of goods sold.Other sources of costs include our manufacturing facilities, factory overhead, labor and shipping costs. Factory overhead includes utilities, supportpersonnel, depreciation, general supplies, support and maintenance. Although we attempt to maintain a flexible manufacturing cost structure, our margins canbe impacted when we cannot timely adjust labor and manufacturing costs to match fluctuations in net sales.Operating expensesOur operating expenses consist of costs incurred to support our marketing, distribution, engineering, information systems, human resources, finance, riskmanagement, legal and tax functions. All of these categories include personnel costs such as salaries, bonuses, employee benefit costs and taxes. We typicallyclassify our operating expenses into four categories: selling and service, research and development, general and administrative, and amortization of intangibles.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 major power outages, participation in trade shows andother events.Research and development. Our research and development expenses support over 130 active research and development projects. We currently operate fiveadvanced engineering facilities and employ over 200 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 90 U.S. and international patents and patent applications.Our research and development costs are expensed as incurred.General and administrative. Our general and administrative expenses include personnel costs for general and administrative employees, accounting andlegal professional services fees, information technology costs, insurance, travel and entertainment expense and other corporate expense.Amortization of intangibles. Our amortization of intangibles expenses include the straight-line amortization of customer lists, patents and other intangiblesassets. 28Table of Contents Goodwill and trade name. Goodwill primarily represents the excess of amount paid over the fair market value of net tangible and intangible assets acquiredin business combinations.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.During the fourth quarter of 2011, we recorded a non-cash charge which primarily related to the write down of a certain trade name. We refer you to Note 2,“Critical accounting policies—Goodwill and other intangible assets,” of our consolidated financial statements included in Item 8 of this Annual Report onForm 10-K for additional information about this charge.Other income (expense)Our other income (expense) includes the interest expense on our outstanding borrowings and amortization of debt financing costs. In November 2006, weentered into a $950.0 million first lien term loan, $430.0 million second lien term loan and $150.0 million revolving credit facility. In February 2010, we usedthe net 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 lienterm loan. In addition, in March 2010, December 2010, April 2011 and December 2011, we used cash and cash equivalents on hand to further pay down ourfirst lien term loan principal. In February 2012, we paid our debt down further and entered into a new Credit Agreement. The Credit Agreement provided forborrowings under a $150.0 million revolving credit facility, a $325.0 million tranche A term loan facility and a $250.0 million tranche B term loan facility. InMay 2012, we amended and restated our existing Credit Agreement by entering into the Term Loan Credit Agreement and the ABL Credit Agreement. TheTerm Loan Credit Agreement provides for a $900.0 million Term Loan and a $125.0 million uncommitted incremental term loan facility and the ABL CreditAgreement provides for borrowings under a $150.0 million ABL Facility and an uncommitted $50.0 million incremental credit facility. No amounts wereoutstanding under the revolving credit facility at December 31, 2012 and December 31, 2011. The amounts borrowed under our term loans bear interest atrates based upon either a base rate or LIBOR, plus an applicable margin. We also earn interest income on our cash and cash equivalents, which is included inother income (expense). We also recorded expenses related to interest rate swap agreements, which had a notional amount of $300.0 million outstanding atDecember 31, 2011 at an average rate of 1.5%, and a notional amount of $300.0 million outstanding at December 31, 2012 at an average rate of 2.0%. Otherincome (expense) may also include other financial items such as gain/loss on extinguishment of debt.Costs related to acquisition. In 2012, our other expenses include one-time transaction-related expenses related to the acquisition of the Ottomotoresbusinesses. In 2011, our other expenses include one-time transaction-related expenses related to the acquisition of the Magnum business.Results of operationsYear ended December 31, 2012 compared to year ended December 31, 2011The following table sets forth our consolidated statement of operations data for the periods indicated: Year ended December 31, (Dollars in thousands) 2012 2011 Net sales $1,176,306 $791,976 Costs of goods sold 735,906 497,322 Gross profit 440,400 294,654 Operating expenses: Selling and service 101,448 77,776 Research and development 23,499 16,476 General and administrative 46,031 30,012 Amortization of intangibles 45,867 48,020 Trade name write-down - 9,389 Total operating expenses 216,845 181,673 Income from operations 223,555 112,981 Total other expense, net (67,203) (26,015)Income before provision for income taxes 156,352 86,966 Provision for income taxes 63,129 (237,677)Net income $93,223 $324,643 Year ended December 31, (Dollars in thousands) 2012 2011 Residential power products $705,444 $491,016 Commercial & Industrial power products 410,341 250,270 Other 60,521 50,690 Net sales $1,176,306 $791,976 29Table of Contents Net sales. Net sales increased $384.3 million, or 48.5%, to $1,176.3 million for the year ended December 31, 2012 from $792.0 million for the year endedDecember 31, 2011. This increase was driven by a $214.4 million, or a 43.7% increase in residential product sales largely driven by increased demand createdby major power outages in recent quarters along with expanded distribution and new product offerings. Commercial & industrial product sales increased$160.1million, or 64.0%, driven primarily by the additional Magnum Products revenue, and to a lesser extent, increased shipments of natural gas backupgenerators.Gross profit. Gross profit increased $145.7 million, or 49.5%, to $440.4 million for the year ended December 31, 2012 from $294.7 million for the yearended December 31, 2011. Gross profit margin for the year ended December 31, 2012 increased to 37.4% from 37.2% for the year ended December 31,2011. Gross margin increased over the prior year primarily due to the positive impact from price increases, improved manufacturing overhead absorption andmoderation in commodity costs relative to the prior year. These margin improvements were partially offset by the mix impact from the addition of MagnumProducts sales.Operating expenses. Operating expenses increased $35.2 million to $216.8 million for the year ended December 31, 2012 from $181.7 million for the yearended December 31, 2011. These additional expenses were driven primarily by operating expenses associated with Magnum, increased sales, engineering andadministrative infrastructure to support the strategic growth initiatives and higher baseline sales levels of the Company, increased incentive compensationexpenses as a result of the Company’s financial performance during the year, and increased variable expenses resulting from the increase in organic sales.Other expense. Other expense increased $41.2 million, or 158.3%, to $67.2 million for the year ended December 31, 2012 from $26.0 million for the yearended December 31, 2011. Interest expense increased by $25.4 million, or 107.1% as a result of the higher debt levels from the May 2012 refinancingtransaction. In addition, losses on extinguishment of debt increased $13.9 million in 2012 as a result of the February 2012 and May 2012 debt refinancingtransactions.Income tax expense. Income tax expense increased $300.8 million to a provision of $63.1 million for the year ended December 31, 2012 from a benefit of$237.7 million for the year ended December 31, 2011. The large income tax benefit in the prior year consisted primarily of the reversal of the full valuationallowance on the Company’s net deferred tax assets. We refer you to Note 9, “Income Taxes,” of our consolidated financial statements included in Item 8 ofthis Annual Report on Form 10-K for additional information.Net income. As a result of the factors identified above, we generated net income of $93.2 million for the year ended December 31, 2012 compared to netincome of $324.6 million for the year ended December 31, 2011. The decrease in net income is due to the items previously described.Adjusted EBITDA. Adjusted EBITDA, as reconciled in “Item 6 - Selected Financial Data,” increased to $289.8 million, compared to $188.5 million in2011, due to the factors discussed above. Adjusted net income. Adjusted Net Income, as reconciled in “Item 6 - Selected Financial Data,” increased to $220.8 million in 2012 compared to $147.2million in 2011, due to the factors discussed above.Year ended December 31, 2011 compared to year ended December 31, 2010 Year ended December 31, (Dollars in thousands) 2011 2010 Net sales $791,976 $592,880 Costs of goods sold 497,322 355,523 Gross profit 294,654 237,357 Operating expenses: Selling and service 77,776 57,954 Research and development 16,476 14,700 General and administrative 30,012 22,599 Amortization of intangibles 48,020 51,808 Trade name write-down 9,389 - Total operating expenses 181,673 147,061 Income (loss) from operations 112,981 90,296 Total other expense, net (26,015) (33,076)Loss before provision for income taxes 86,966 57,220 Provision for income taxes (237,677) 307 Net loss $324,643 $56,913 Year ended December 31, (Dollars in thousands) 2011 2010 Residential power products $491,016 $372,782 Commercial & Industrial power products 250,270 183,555 Other 50,690 36,543 Net sales $791,976 $592,880 30Table of Contents Net sales. Net sales increased $199.1 million, or 33.6%, to $792.0 million for the year ended December 31, 2011 from $592.9 million for the year endedDecember 31, 2010. This increase was driven by a $118.2 million, or a 31.7%, increase in residential product sales largely driven by demand created by themajor power outages in the third and fourth quarters of 2011. The frequency and duration of these major outages in certain regions of the country led to asurge in demand for portable generators as well as increased awareness and accelerated adoption of home standby generators. Commercial and industrialproduct sales increased $66.7 million, or 36.3%. Magnum Products contributed $36.5 million during the fourth quarter of 2011. In addition, overall capitalspending from our national account customers and strong demand for our large industrial systems also contributed to increased commercial and industrialsales. Other product sales increased $14.1 million mainly due to stronger service parts sales as a result of the major power outage events during the secondhalf of 2011. Magnum Products also contributed $2.3 million to service parts sales during the fourth quarter of 2011.Gross profit. Gross profit increased $57.3 million, or 24.1%, to $294.7 million for the year ended December 31, 2011 from $237.4 million for the yearended December 31, 2010, primarily due to the factors affecting net sales described above. As a percent of net sales, gross profit margin for the year endedDecember 31, 2011 decreased to 37.2% from 40.0% for the year ended December 31, 2010. This decline is primarily attributable to a higher sales mix of lowermargin portable generators during 2011 and the mix impact from the addition of the Magnum Products business during the fourth quarter of 2011. To a lesserextent, higher commodity costs versus the prior year also contributed to the year-over-year gross margin decline.Operating expenses. Operating expenses increased $34.6 million to $181.7 million for the year ended December 31, 2011 from $147.1 million for the yearended December 31, 2010. Selling and service expenses increased $19.8 million due to higher variable operating expenses and incentive compensation as aresult of higher sales experienced during 2011. General and administration costs increased $7.4 million mainly due to increased incentive compensation andincremental stock-based compensation expense. Operating expenses also increased in 2011 as a result of investments made in infrastructure to support thestrategic growth initiatives of the Company. In addition, in the fourth quarter of 2011 the Company recorded a $9.4 million non-cash charge which primarilyrelated to the write down of a certain trade name as we strategically transition to the Generac brand. The fourth quarter of 2011 also includes operating expensesof the Magnum Products business.Other expense. Other expense decreased $7.1 million, or 21.3%, to $26.0 million for the year ended December 31, 2011 from $33.1 million for the year endedDecember 31, 2010. This decrease was driven by a decline in interest expense of $3.7 million as a result of approximately $134 million of debt pre-paymentsmade over the last thirteen months. In addition, there was a $4.4 million decrease in the write-off of deferred financing costs related to debtextinguishment. Partially offsetting the aforementioned decreases are transaction costs related to the Magnum Products acquisition totaling $0.9 million.Income tax expense. Income tax expense decreased $238.0 million to a benefit of $237.7 million for the year ended December 31, 2011 from $0.3 million forthe year ended December 31, 2010 due to a reversal of the full valuation allowance on net deferred tax assets. See discussion in Item 8 – Financial Statementsand Supplementary Data – Note 9 for additional information.Net income. As a result of the factors identified above, we generated net income of $324.6 million for the year ended December 31, 2011 compared to a netincome of $56.9 million for the year ended December 31, 2010. The increase in net income is due to the items previously described.Adjusted EBITDA. Adjusted EBITDA, as reconciled in “Item 6 - Selected Financial Data,” increased to $188.5 million, compared to $156.2 million in2010, due to the factors discussed above. Adjusted net income. Adjusted Net Income, as reconciled in “Item 6 - Selected Financial Data,” increased to $147.2 million in 2011 compared to $116.0million in 2010, due to the factors discussed above.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 generated 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. During 2010 and 2011, we used the netproceeds of our initial public offering and a substantial portion of our cash and cash equivalents on hand totaling $493.8 million to pay down our second lienterm loans in full and to repay a portion of our first lien term loan. In February 2012, we paid our debt down further and entered into a new Credit Agreement. The Credit Agreement provided for borrowings under a $150.0 million revolving credit facility, a $325.0 million tranche A term loan facility and a $250.0million tranche B term loan facility. Proceeds received by the Company from loans made under the Credit Agreement were used to repay in full all outstandingborrowings under the former credit agreement, dated as of November 10, 2006, as amended from time to time, and for general corporate purposes. In May2012, we amended and restated our existing Credit Agreement by entering into the Term Loan Credit Agreement and the ABL Credit Agreement. The TermLoan Credit Agreement provides for a $900.0 million Term Loan and a $125.0 million uncommitted incremental term loan facility and the ABL CreditAgreement provides for borrowings under a $150.0 million ABL Facility and an uncommitted $50.0 million incremental credit facility. Proceeds from theTerm Loan were used to repay the Company’s previous Credit Agreement. The remaining proceeds from the Term Loan were used, along with cash on hand,to pay a special cash dividend of $6.00 per share on the Company’s common stock (”dividend recapitalization”).As a result of these refinancing transactions, the outstanding balance on the Term Loan Credit Agreement at December 31, 2012 is $881.3 million. AtDecember 31, 2012, we had cash and cash equivalents of $108.0 million and $147.0 million of availability under our revolving credit facility. Our totalindebtedness was $893.8 million at December 31, 2012, which includes a local bank facility at Ottomotores Mexico. 31Table of Contents Long-term liquidityWe believe that our cash flow from operations, our availability under our revolving credit facility, combined with our relatively low ongoing capital expenditurerequirements and favorable tax attributes, will provide us with sufficient capital to continue to grow our business in the next twelve months and beyond. Wewill use a portion of our cash flow to pay principal and interest on our outstanding debt, impacting the amount available for working capital, capitalexpenditures and other general corporate purposes. As we continue to expand our business, we may in the future require additional capital to fund workingcapital, capital expenditures, or acquisitions.Cash flowYear ended December 31, 2012 compared to year ended December 31, 2011The following table summarizes our cash flows by category for the periods presented: Year ended December 31, (Dollars in thousands) 2012 2011 Change % Change Net cash provided by operating activities $235,594 $169,712 $65,882 38.8%Net cash used in investing activities $(69,345) $(95,953) $26,608 27.7%Net cash used in financing activities $(151,352) $(59,216) $(92,136) (155.6)%Net cash provided by operating activities was $235.6 million for 2012 compared to $169.7 million in 2011. This increase of $65.9 million, or 38.8%, isprimarily attributable to strong operating earnings partially offset by increased working capital investments, such as increases in inventory levels to supporthigher production rates.Net cash used for investing activities for the year ended December 31, 2012 was $69.3 million. This included $22.4 million used for the purchase ofproperty and equipment and $47.0 million for the acquisition of the Ottomotores businesses. Net cash used for investing activities for the year ended December31, 2011 was $96.0 million and included $12.1 million used for the purchase of property and equipment and $83.9 million for the acquisition of theMagnum Products business. The increase in purchases of property and equipment was primarily driven by the purchase of a manufacturing facility andexpansion of our corporate headquarters and engineering lab facilities.Net cash used in financing activities was $151.4 million for the year ended December 31, 2012, an increase of $92.1 million in net cash outflows from 2011primarily representing the net cash impact of our refinancing activities and dividend recapitalization transaction during the first half of 2012, including grossproceeds from long-term borrowings of $1,455.6 million offset by $1,175.1 million of long-term borrowing repayments. The Company made $25.7 millionof cash payments for transaction fees incurred in connection with these refinancing transactions. Following the refinancing, the Company paid a special cashdividend of $6.00 per share ($404.3 million, which excludes dividends for unvested restricted stock) on the Company’s common stock during the secondquarter of 2012.Year ended December 31, 2011 compared to year ended December 31, 2010The following table summarizes our cash flows by category for the periods presented: Year ended December 31, (Dollars in thousands) 2011 2010 Change % Change Net cash provided by operating activities $169,712 $114,481 $55,231 48.2%Net cash used in investing activities $(95,953) $(11,204) $(84,749) (756.4)%Net cash used in financing activities $(59,216) $(186,001) $126,785 68.2%Net cash provided by operating activities was $169.7 million for 2011 compared to $114.5 million in 2010. This increase of $55.2 million, or 48.2%, isprimarily attributable to increased sales volume during 2011 and to a lesser extent favorable net cash inflows from working capital in 2011 compared to netcash flow outflows from working capital in 2010.Net cash used for investing activities for the year ended December 31, 2011 was $96.0 million. This included $12.1 million used for the purchase ofproperty and equipment and $83.9 million for the acquisition of the Magnum Products business. Net cash used for investing activities for the year endedDecember 31, 2010 was $11.2 million and included $9.6 million used for the purchase of property and equipment and $1.6 million for a businessacquisition, net of cash acquired.Net cash used in financing activities was $59.2 million for the year ended December 31, 2011, a decrease of $126.8 million in net cash outflows from 2010due to higher levels of debt payments made in 2010 totaling $434.3 million which were offset by $248.3 million of proceeds from the issuance of commonstock. In 2011, $59.4 million of payments on debt were made. 32Table of Contents Senior secured credit facilitiesIn November 2006, as part of the CCMP Transactions, Generac Power Systems (the "Borrower") entered into (i) a first lien credit facility with GoldmanSachs Credit Partners L.P., as administrative agent, composed of (x) a $950.0 million term loan, which was scheduled to mature in November 2013 and (y) a$150.0 million revolving credit facility, which was scheduled to mature 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 was scheduled to mature in May 2014.During 2010 and 2011, we used the net proceeds of our initial public offering and a substantial portion of our cash and cash equivalents on hand totaling$493.8 million to pay down our second lien term loans in full and to repay a portion of our first lien term loans. As a result of these pay downs, theoutstanding balance on the first lien credit facility was reduced to $597.9 million as of December 31, 2011, and our second lien credit facility was repaid infull and terminated. We refer you to Note 6, “Credit Agreements,” of our consolidated financial statements included in Item 8 of this Annual Report on Form10-K for additional information about this credit facility.On February 9, 2012, Generac Power Systems repaid an additional $22.9 million against its first lien term loan and entered into new senior secured creditfacilities. The new credit facilities included a new five-year $150.0 million revolving credit facility, a five-year $325.0 million tranche A term loan facility anda seven-year $250.0 million tranche B term loan facility. Proceeds from loans made under the new credit facilities were used to repay in full all first lien termloans outstanding under our former first lien credit facility, and for general corporate purposes. As a result of the repayments of debt and refinancing, our totalindebtedness was $575.0 million and there were no borrowings on the revolving credit facility at February 9, 2012.From February 9, 2012 through May 30, 2012, the new revolving credit facility and tranche A term loan facility initially incurred interest at rates based uponeither a base rate plus an applicable margin of 1.25% or adjusted LIBOR rate plus an applicable margin of 2.25%. The tranche B term loan facility incurredinterest at rates based upon either a base rate (which, with respect to such tranche B term loan facility, will not be less than 2.00%) plus an applicable marginof 1.75% or adjusted LIBOR rate (which, with respect to such tranche B term loan facility, will not be less than 1.00%) plus an applicable margin of2.75%. In subsequent periods through May 30, 2012, the new revolving credit facility and the tranche A term loan facility incurred interest at rates basedupon either a base rate plus an applicable margin ranging from 0.75% to 1.50% or adjusted LIBOR rate plus an applicable margin ranging from 1.75% to2.50%, each determined based on a leverage ratio.On May 30, 2012, the Borrower amended and restated its then existing Credit Agreement by entering into a new credit agreement (“Term Loan CreditAgreement”) with certain commercial banks and other lenders. The Term Loan Credit Agreement provides for a $900.0 million term loan B credit facility(“Term Loan”) and a $125.0 million uncommitted incremental term loan facility. The Term Loan Credit Agreement matures on May 30, 2018. Proceeds fromthe Term Loan were used to repay the Company’s previous Credit Agreement. The remaining proceeds from the Term Loan were used, along with cash onhand, to pay a special cash dividend of $6.00 per share on the Company’s common stock. We refer you to Note 13, “Special Cash Dividend,” of ourconsolidated financial statements included in Item 8 of this Annual Report on Form 10-K for additional information.The Term Loan is guaranteed by all of the Borrower’s wholly-owned domestic restricted subsidiaries and the Parent, and is secured by associated collateralagreements which pledge a first priority lien on virtually all of the Borrower’s assets, including fixed assets and intangibles, and the assets of the guarantors(other than the Company), other than all cash, trade accounts receivable, inventory, and other current assets and proceeds thereof, which are secured by asecond priority lien.The Term Loan amortizes in equal installments of 0.25% of the original principal amount of the Term Loan payable on the first day of April, July, Octoberand January commencing on October 1, 2012 until the maturity date of the Term Loan. The final principal repayment installment of the Term Loan isrequired to be repaid on the maturity date in an amount equal to the aggregate principal amount of the Term Loan outstanding on such date. In February 2013,the Borrower made an $80.0 million debt prepayment that was applied to all required future principal amortizations. The Term Loan initially bears interest atrates based upon either a base rate plus an applicable margin of 4.00% or adjusted LIBOR rate plus an applicable margin of 5.00%, subject to a LIBOR floorof 1.25%.The Term Loan Credit Agreement restricts the circumstances in which the Borrower can pay distributions and dividends, which are in addition to those to bepaid in connection with the Transactions (as defined in the Term Loan Credit Agreement). Payments can be made by the Borrower to the Company or otherparent companies for certain expenses such as operating expenses in the ordinary course, fees and expenses related to any debt or equity offering and to payfranchise or similar taxes. Dividends can be used to repurchase equity interests, subject to limitations in certain circumstances. Additionally, the Term LoanCredit Agreement restricts the aggregate amount of dividends and distributions that can be paid and, in certain circumstances, requires Pro Forma (as definedin the Term Loan Credit Agreement) compliance with certain fixed charge coverage ratios in order to pay certain dividends or distributions. The Term LoanCredit Agreement also contains certain other affirmative and negative covenants that, among other things, provide limitations on the incurrence of additionalindebtedness, liens on property, sale and leaseback transactions, investments, loans and advances, mergers or consolidations, asset sales, acquisitions,transactions with affiliates, prepayments of certain other indebtedness and modifications of the Company’s organizational documents. The Term Loan CreditAgreement does not contain any financial maintenance covenants.The Term Loan Credit Agreement contains customary events of default, including, among others, nonpayment of principal, interest or other amounts, failureto perform covenants, inaccuracy of representations or warranties in any material respect, cross-defaults with other material indebtedness, certainundischarged judgments, the occurrence of certain ERISA or bankruptcy or insolvency events or the occurrence of a change in control (as defined in the TermLoan Credit Agreement). A bankruptcy or insolvency event of default causes such obligations to automatically become immediately due and payable.The effective interest rate on the Term Loan on December 31, 2012, inclusive of the impact of outstanding interest rate swaps, was 6.5%. The effectiveinterest rate, excluding the effect of interest rate swaps in place on the Term Loan on December 31, 2012, was 6.3%.Concurrent with the closing of the Term Loan Credit Agreement, on May 30, 2012, the Borrower also entered into a new revolving credit agreement (the “ABLCredit Agreement”) with certain commercial banks and other lenders. The ABL Credit Agreement provides for borrowings under a $150.0 million seniorsecured ABL revolving credit facility (the “ABL Facility”). The size of the ABL Facility could increase by $50.0 million pursuant to an uncommittedincremental credit facility. The ABL Credit Agreement matures May 30, 2017. 33Table of Contents Borrowings under the ABL Facility are guaranteed by all of the Borrower’s wholly-owned domestic restricted subsidiaries and the Parent, and are secured byassociated collateral agreements which pledge a first priority lien on all cash, trade accounts receivable, inventory, and other current assets and proceedsthereof, and a second priority lien on all other assets, including fixed assets and intangibles of the Borrower, certain domestic subsidiaries of the Borrower andthe guarantors (other than the Company). Borrowings under the ABL Facility bear interest at rates based upon either a base rate plus an applicable margin of 1.00% or adjusted LIBOR rate plus anapplicable margin of 2.00%, in each case, subject to adjustments based upon average availability under the ABL Facility. The ABL Credit Agreement requiresthe Borrower to maintain a minimum consolidated fixed charge coverage ratio of 1.0x, tested on a quarterly basis, when Availability plus the amount ofQualified Cash (up to $5 million) (as defined in the ABL Credit Agreement) under the ABL Facility is less than the greater of (i) 10.0% of the lesser of theaggregate commitments and the applicable borrowing base under the ABL Facility or (ii) $10.0 million. The ABL Credit Agreement also contains covenantsand events of default substantially similar to those in the Term Loan Credit Agreement, as described above. The Company is required to pay an ABL Facilitycommitment fee of 0.50% on the average available unused commitment. As of December 31, 2012, the Company had $147.0 million of availability under theABL facility, net of outstanding letters of credit. As of December 31, 2012, the Company’s interest rate on the ABL Facility was 1.96%. There were noborrowings outstanding under the ABL Facility as of December 31, 2012.The ABL Credit Agreement provides the Company the ability to issue letters of credit. Outstanding undrawn letters of credit reduced availability under theCompany’s ABL Facility. The letters of credit accrued interest at a rate of 1.88%, paid quarterly on the undrawn daily aggregate exposure of the precedingquarter. This rate is subject to meeting certain financial ratios. At December 31, 2012 and 2011, letters of credit outstanding were $3.0 million and $5.8million, and interest rates were 1.88% and 2.13% respectively. Covenant complianceThe first lien credit facility in place at December 31, 2011 required Generac Power Systems to maintain a leverage ratio of consolidated total debt, net ofunrestricted cash and marketable securities, to EBITDA (as defined in such first lien credit facility). We refer to the calculation of EBITDA under and asdefined in such first lien credit facility in this annual report as “Covenant EBITDA.” Covenant EBITDA and the leverage ratio were calculated based on thefour most recently completed fiscal quarters of Generac Power Systems. Based on the formulations set forth in the first lien credit facility, Generac PowerSystems was required to maintain a maximum leverage ratio of 4.75 to 1.00 as of December 31, 2011 and for the remainder of the term of such first lien creditagreement. As of December 31, 2011, Generac Power Systems’ leverage ratio was 2.83 to 1.00. Failure to comply with this covenant would have resulted inan event of default under the first lien credit facility unless waived by the lender thereunder. Generac Power Systems was in compliance with the financialcovenants under the first lien credit facility as of December 31, 2010 and December 31, 2011. We refer you to Note 6, “Credit Agreements,” of ourconsolidated financial statements included in Item 8 of this Annual Report on Form 10-K for additional information about the first lien credit facility.Effective February 9, 2012 through May 30, 2012, the new credit facilities required Generac Power Systems to maintain a leverage ratio of consolidated totaldebt, net of unrestricted cash and marketable securities, to EBITDA (as defined in the new credit agreement) and an interest coverage ratio of EBITDA to cashinterest expense (as defined in the new credit agreement). The calculation of EBITDA under and as defined in the new credit agreement is referred to in thisannual report as “Covenant EBITDA.” Covenant EBITDA, the leverage ratio and interest coverage ratio were calculated based on the four most recentlycompleted fiscal quarters of Generac Power Systems. Based on the formulations set forth in the new credit agreement, Generac Power Systems was required tomaintain a maximum leverage ratio of 4.00 to 1.00 from the periods June 30, 2012 to September 30, 2012, and 3.75 to 1.00 thereafter. Additionally, GeneracPower Systems was required to maintain a minimum interest coverage ratio of 2.50 to 1.00 from June 30, 2012 to September 30, 2012, 2.75 to 1.00 fromDecember 31, 2012 to June 30, 2013, 3.00 to 1.00 from September 30, 2013 to June 30, 2014 and 3.25 to 1.00 thereafter.On May 30, 2012, the Borrower amended and restated its then existing Credit Agreement by entering into a new credit agreement (“Term Loan CreditAgreement”) with certain commercial banks and other lenders. The Term Loan Credit Agreement provides for a $900.0 million term loan B credit facility(“Term Loan”).The Term Loan Credit Agreement restricts the aggregate amount of dividends and distributions that can be paid and, in certain circumstances, requires ProForma (as defined in the Term Loan Credit Agreement) compliance with certain fixed charge coverage ratios in order to pay certain dividends or distributions.The Term Loan Credit Agreement also contains certain other affirmative and negative covenants that, among other things, provide limitations on the incurrenceof additional indebtedness, liens on property, sale and leaseback transactions, investments, loans and advances, mergers or consolidations, asset sales,acquisitions, transactions with affiliates, prepayments of certain other indebtedness and modifications of the Company’s organizational documents.The Term Loan Credit Agreement does not contain any financial maintenance covenants.The Term Loan Credit Agreement contains customary events of default, including, among others, nonpayment of principal, interest or other amounts, failureto perform covenants, inaccuracy of representations or warranties in any material respect, cross-defaults with other material indebtedness, certainundischarged judgments, the occurrence of certain ERISA or bankruptcy or insolvency events or the occurrence of a change in control (as defined in the TermLoan Credit Agreement). A bankruptcy or insolvency event of default causes such obligations to automatically become immediately due and payable.Concurrent with the closing of the Term Loan Credit Agreement, on May 30, 2012, the Borrower also entered into a new revolving credit agreement (the “ABLCredit Agreement”) with certain commercial banks and other lenders. The ABL Credit Agreement provides for borrowings under a $150.0 million seniorsecured ABL revolving credit facility (the “ABL Facility”). The size of the ABL Facility could increase by $50.0 million pursuant to an uncommittedincremental credit facility. The ABL Credit Agreement also contains covenants and events of default substantially similar to those in the Term Loan CreditAgreement, as described above. As of December 31, 2012, $881.3 million of borrowings were outstanding under the Term Loan. As of December 31, 2011, $597.9 million of borrowingswere outstanding under the first lien credit facility. On February 11, 2013, Generac Power Systems repaid an additional $80.0 million against its Term Loan,which was applied against all required future principal amortizations. As of February 11, 2013, a total of $801.3 million were outstanding under the TermLoan. There were no borrowings outstanding under the ABL Facility as of December 31, 2012. 34Table of Contents Contractual obligations The following table summarizes our expected payments for significant contractual obligations as of December 31, 2012 (dollars in thousands):Payment due by periodContractual obligations Total Less than 1 year 2-3 years 4-5 years After 5 years Long-term debt, including current portion(1) $881,268 $82,250 $- $- $799,018 Interest on long-term debt(2) 279,703 51,618 103,353 103,495 21,237 Operating leases 1,760 825 809 126 - Total contractual cash obligations(3) $1,162,731 $134,693 $104,162 $103,621 $820,255 (1) On May 30, 2012, the Borrower amended and restated its then existing Credit Agreement by entering into a new credit agreement (“Term Loan CreditAgreement”) with certain commercial banks and other lenders. The Term Loan Credit Agreement provides for a $900.0 million term loan B credit facility(“Term Loan”) and a $125.0 million uncommitted incremental term loan facility. The Term Loan Credit Agreement matures on May 30, 2018. In February2013, the Borrower made an $80.0 million debt prepayment that was applied to all required future principal amortizations.(2) Assumes $80.0 million voluntary prepayment on February 11, 2013, and remaining debt will remain outstanding until maturity and using the interestrates in effect for our senior secured credit facilities as of December 31, 2012.(3) 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 $1.0 million to our pension plans in 2013.Capital expendituresOur operations require capital expenditures for technology, tooling, equipment, capacity expansion and upgrades. Capital expenditures were $22.4 million and$12.1 million for the years ended December 31, 2012 and 2011, respectively, 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 6% of net sales for the year ended December 31, 2011 and approximately 7% of net sales for the yearended December 31, 2012. The amount financed by dealers which remained outstanding was $10.0 million and $16.6 million as of December 31, 2011 and2012, 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.Goodwill and other intangible assetsGoodwill represents the excess of the purchase price over fair value of identifiable net assets acquired from business acquisitions. Goodwill is not amortized,but is reviewed for impairment on an annual basis and between annual tests if indicators of impairment are present. The Company conducts its annualimpairment test for goodwill on October 31st of each year. Conditions that would trigger an impairment assessment include, but are not limited to, a significantadverse change in legal factors or business climate that could affect the value of an asset. The Company uses a two-step process to test for goodwill impairment. First, the reporting unit's fair value is compared to its carrying value. Fair value isestimated using a combination of qualitative analyses, a discounted cash flow approach and a market approach. If a reporting unit's carrying amount exceedsits fair value, an indication exists that the reporting unit's goodwill may be impaired, and the second step of the impairment test would be performed. Thesecond step of the goodwill impairment test is used to measure the amount of the potential impairment loss. In the second step, the implied fair value of thereporting unit's goodwill is determined by allocating the reporting unit's fair value to all of its assets and liabilities other than goodwill in a manner similar to apurchase price allocation. The implied fair value of the goodwill that results from the application of this second step is then compared to the carrying amountof the goodwill and an impairment charge would be recorded for the difference if the carrying value exceeds the implied fair value of the goodwill. 35Table of Contents The Company performed the required annual impairment tests for fiscal years 2012, 2011 and 2010 and found no impairment of goodwill.Other indefinite-lived intangible assets consist of trade names. The Company tests the carrying value these trade names by comparing the assets fair value toits carrying value. Fair value was measured using a relief-from-royalty approach, which assumes the fair value of the trade name is the discounted cash flowsof the amount that would be paid had the Company not owned the trade name and instead licensed the trade name from another company. The Companyconducts its annual impairment test for indefinite-lived intangible assets on October 31st of each year. The Company performed the required annual impairment tests for fiscal years 2012 and 2010 and found no impairment of indefinite-lived trade names.During the fourth quarter of 2011, the Company decided to strategically transition certain products to their more widely known Generac brand. Based on thisdecision, the Company recorded a $9.4 million non-cash trade name impairment charge as of October 31, 2011 which primarily related to the write down ofthe impacted trade name to net realizable value. We can make no assurances that remaining goodwill or indefinite-lived trade names will not be impaired in the future. When preparing a discounted cash flowanalysis, we make a number of key estimates and assumptions. We estimate the future cash flows of the business based on historical and forecasted revenuesand operating costs. This, in turn, involves further estimates, such as estimates of future growth rates and inflation rates. In addition, we apply a discountrate to the estimated future cash flows for the purpose of the valuation. This discount rate is based on the estimated weighted average cost of capital for thebusiness and may change from year to year. Weighted average cost of capital includes certain assumptions such as market capital structures, market betas,risk-free rate of return and estimated costs of borrowing. 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.In the long term, our remaining goodwill and indefinite-lived trade name balances could be further impaired in future periods. A number of factors, many ofwhich we have no ability to control, could affect our financial condition, operating results and business prospects and could cause actual results to differ fromthe estimates and assumptions 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 on Form 10-K. As discussed in Note 9, the pension benefit obligation and related pension expense or income are calculated in accordance with ASC715-30, Defined Benefit Plans—Pension, and are impacted by certain actuarial assumptions, including the discount rate and the expected rate of return onplan assets.Rates are evaluated on an annual basis considering such factors as market interest rates and historical asset performance. Actuarial valuations for fiscal year2012 used a discount rate of 4.10% for the salaried pension plan and 4.14% for the hourly pension plan. Our discount rate was selected using a methodologythat matches plan 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 withcomparable cash flows. In estimating the expected return on plan assets, we study historical markets and preserve the long-term historical relationshipsbetween equities and fixed-income securities. We evaluate current market factors such as inflation and interest rates before we determine long-term capitalmarket assumptions and review peer data and historical returns to check for reasonableness and appropriateness. Changes in the discount rate and return onassets can have a significant effect on the funded status of our pension plans, stockholders' equity and related expense. We cannot predict these changes indiscount rates or investment returns and, therefore, cannot reasonably estimate whether the impact in subsequent years will be significant.The funded status of our pension plans is the difference between the projected benefit obligation and the fair value of its plan assets. The projected 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 $1.0 million in contributions to our pension plans in 2013.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, 4, 5 and 16 to our audited consolidated financial statements included in Item 8 of this Annual Report on Form 10-K. 36Table of Contents Derivative accountingWe have interest rate swap contracts, or the Swaps, in place to fix a portion of our variable rate indebtedness. Due to the incorporation of a new interest ratefloor provision in the Term Loan Credit Agreement, which constitutes a change in critical terms, the Company concluded that as of May 30, 2012, theoutstanding swaps would no longer be highly effective in achieving offsetting changes in cash flows during the periods the hedges are designated. As a result,the Company was required to de-designate the hedges as of May 30, 2012. Beginning May 31 2012, the effective portion of the swaps prior to the change (i.e.amounts previously recorded in Accumulated Other Comprehensive Loss) have been and will continue to be amortized as interest expense over the period of theoriginally designated hedged transactions which have various dates through October 2013. Future changes in fair value of the swaps have been and willcontinue to be immediately recognized in the consolidated statements of comprehensive income as interest expense.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, 2012 and 2011 was a liability of $3.0 million and $5.3 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, state and international income tax laws, the difference between tax and financialreporting bases of assets and liabilities, estimates of amounts currently due or owed in various jurisdictions, and current accounting standards. We review andupdate our estimates 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. As of September 30, 2011, we were in a three year cumulative loss position and had a full valuation allowancerecorded against our net deferred tax assets. In the fourth quarter of 2011, we came out of a three-year cumulative loss position and, as part of the normalassessment of the future realization of our net deferred tax assets, determined that a valuation allowance was no longer required. As a result, the valuationallowance previously recorded was reversed in the fourth quarter of 2011 and was recorded as a component of the income tax provision.Ottomotores Brazil, acquired in the Ottomotores acquisition in December 2012, is in a three-year cumulative net loss position and therefore we have notconsidered expected future taxable income in analyzing the realizability of their deferred tax assets as of December 31, 2012. As a result, a full valuationallowance was recorded in the opening balance sheet for the deferred tax assets of Ottomotores Brazil.In performing the assessment of the realization of our deferred tax assets as of December 31, 2012, excluding Ottomotores Brazil, we have determined that it ismore likely than not that our deferred tax assets will be realized, and therefore no valuation allowance is required.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 Standards For information with respect to new accounting pronouncements and the impact of these pronouncements on our consolidated financial statements, we referyou to Note 2, “New Accounting Pronouncements,” of our consolidated financial statements included in Item 8 of this Annual Report on Form 10-K.Item 7A. Quantitative and Qualitative Disclosures About Market Risk We are exposed to market risk from changes in foreign currency exchange rates, commodity prices and interest rates. To reduce the risk from 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. 37Table of Contents 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, 2012 and December 31, 2011, 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 consolidated statement of comprehensive income for foreign currency contracts were$100,000. The primary objective of this hedging activity is to mitigate the impact of potential price fluctuations of the Euro on our financial results.With the purchase of the Ottomotores businesses in December 2012, a small portion of revenues and expenses are now denominated in Mexican Pesos andBrazilian Real.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 or supply chain savings to offsetincreases 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. The primary objective of the hedge is to mitigate the impact of potential price fluctuations of copper on our financial results. As of December 31,2012, we had the following commodity forward contracts outstanding (in thousands): Hedged Item Number ofContractsOutstanding Effective Date AggregateNotionalAmount Fixed Copper PriceCopper 1 January 1, 2013 to September 30, 2013 $3,472 $3.50 per LBFor additional information on the Company’s commodity forward contracts, including amounts charged to the statement of comprehensive income during2012, see Note 2 to our audited consolidated financial statements included in Item 8 of this Annual Report on Form 10-K.Interest ratesAs of December 31, 2012, a portion of the outstanding debt under our term loans was subject to floating interest rate risk. As of this date, we had the followinginterest rate swap contracts outstanding (in thousands): Hedged Item Effective DateNotional Amount Expiration DateContract DateFixed LIBOR Rate Interest rateApril 1, 2011October 1, 2012$100,0002.22%October 1, 2013 Interest rateApril 1, 2011July 1, 2012$200,0001.905%July 1, 2013At December 31, 2012, the fair value of the swaps reduced for our credit risk and excluding related accrued interest was a liability of $3.0 million. Foradditional information on the Company’s interest rate swaps, including amounts charged to the statement of comprehensive income during 2012, see Note 2 toour audited consolidated financial statements included in Item 8 of this Annual Report on Form 10-K. Even after giving effect to these swaps, we are exposed torisks due to changes in interest rates with respect to the portion of our term loans that are not covered by the swaps. A hypothetical change in the LIBORinterest rate of 100 basis points would have changed annual cash interest expense by approximately $0.5 million (or, without the swaps in place,$0.3 million). The existence of a 1.25% LIBOR floor provision in our new Term Loan Credit Agreement, effective May 30, 2012, significantly limits theimpact of a hypothetical 100 basis point change in LIBOR at current December 31, 2012 LIBOR rates.Due to the incorporation of a new interest rate floor provision in the Term Loan Credit Agreement, which constitutes a change in critical terms, the Companyconcluded that as of May 30, 2012, the outstanding swaps would no longer be highly effective in achieving offsetting changes in cash flows during the periodsthe hedges are designated. As a result, the Company was required to de-designate the hedges as of May 30, 2012. Beginning May 31, 2012, the effectiveportion of the swaps prior to the change (i.e. amounts previously recorded in Accumulated Other Comprehensive Loss) have been and will continue to beamortized as interest expense over the period of the originally designated hedged transactions which have various dates through October 2013. Future changesin fair value of the swaps have been and will continue to be immediately recognized in the consolidated statements of comprehensive income as interest expense. 38Table of ContentsItem 8. Financial Statements and Supplementary Data Report of Independent Registered Public Accounting FirmTo the Board of Directors and Stockholders of Generac Holdings Inc.We have audited Generac Holdings Inc.’s internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Generac Holdings Inc.’smanagement is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control overfinancial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express anopinion on the company’s internal control over financial reporting based on our audit.We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all materialrespects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testingand evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considerednecessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting andthe preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control overfinancial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflectthe transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are beingmade only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation 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.As indicated in the accompanying Management’s Report on Internal Control Over Financial Reporting, management’s assessment of and conclusion on theeffectiveness of internal control over financial reporting did not include the internal controls of Ottomotores UK Ltd., which is included in the December 31,2012 consolidated financial statements of Generac Holdings Inc. and constituted 4.6% and 8.7% of total and net assets, respectively, as of December 31, 2012and 0.6% and 0.3% of revenues and net income, respectively, for the year then ended. Our audit of internal control over financial reporting of GeneracHoldings Inc. also did not include an evaluation of the internal control over financial reporting of Ottomotores UK Ltd.In our opinion, Generac Holdings Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012, basedon the COSO criteria.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheetsas of December 31, 2012 and 2011, and related consolidated statements of comprehensive income, redeemable stock and stockholders' equity and cash flowsfor each of the three years in the period ended December 31, 2012 of Generac Holdings Inc. and our report dated March 13, 2013 expressed an unqualifiedopinion thereon./s/ Ernst & Young LLPMilwaukee, WI, USAMarch 13, 2013 39Table of Contents Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of Generac Holdings Inc. We have audited the accompanying consolidated balance sheets of Generac Holdings Inc. (the Company) as of December 31, 2012 and 2011, and the relatedconsolidated statements of comprehensive income, redeemable stock and stockholders’ equity (deficit) and cash flows for each of the three years in the periodended December 31, 2012. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion onthese financial 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. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our auditsprovide 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. atDecember 31, 2012 and 2011, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31,2012, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Generac Holdings Inc.’s internalcontrol over financial reporting as of December 31, 2012, based on criteria established in Internal Control-Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission and our report dated March 13, 2013 expressed an unqualified opinion thereon. /s/ Ernst & Young LLP Milwaukee, WI, USAMarch 13, 2013 40Table of ContentsGenerac Holdings Inc.Consolidated Balance Sheets(Dollars in Thousands, Except Share and Per Share Data) December 31, 2012 2011 Assets Current assets: Cash and cash equivalents $108,023 $93,126 Accounts receivable, less allowance for doubtful accounts of $1,166 in 2012 and $789 in 2011 134,978 109,705 Inventories 225,817 162,124 Deferred income taxes 48,687 14,395 Prepaid expenses and other assets 5,048 3,915 Total current assets 522,553 383,265 Property and equipment, net 104,718 84,384 Customer lists, net 37,823 72,897 Patents, net 70,302 78,167 Other intangible assets, net 5,783 7,306 Deferred financing costs, net 13,987 3,459 Trade names, net 158,831 148,401 Goodwill 552,943 547,473 Deferred income taxes 136,754 227,363 Other assets 153 78 Total assets $1,603,847 $1,552,793 Liabilities and stockholders’ equity Current liabilities: Short-term borrowings $12,550 $– Accounts payable 94,543 81,053 Accrued wages and employee benefits 19,435 14,439 Other accrued liabilities 86,081 47,024 Current portion of long-term borrowings 82,250 22,874 Total current liabilities 294,859 165,390 Long-term borrowings 799,018 575,000 Other long-term liabilities 46,342 43,514 Total liabilities 1,140,219 783,904 Stockholders’ equity: Common stock (formerly Class A non-voting common stock), par value $0.01, 500,000,000 shares authorized,68,295,960 and 67,652,812 shares issued and outstanding at December 31, 2012 and 2011, respectively 683 676 Additional paid-in capital 743,349 1,142,701 Excess purchase price over predecessor basis (202,116) (202,116)Accumulated deficit (63,792) (157,015)Accumulated other comprehensive loss (14,496) (15,357)Total stockholders’ equity 463,628 768,889 Total liabilities and stockholders’ equity $1,603,847 $1,552,793 See notes to consolidated financial statements. 41Table of ContentsGenerac Holdings Inc.Consolidated Statements of Comprehensive Income(Dollars in Thousands, Except Share and Per Share Data) Year Ended December 31, 2012 2011 2010 Net sales $1,176,306 $791,976 $592,880 Costs of goods sold 735,906 497,322 355,523 Gross profit 440,400 294,654 237,357 Operating expenses: Selling and service 101,448 77,776 57,954 Research and development 23,499 16,476 14,700 General and administrative 46,031 30,012 22,599 Amortization of intangibles 45,867 48,020 51,808 Trade name write-down – 9,389 – Total operating expenses 216,845 181,673 147,061 Income from operations 223,555 112,981 90,296 Other (expense) income: Interest expense (49,114) (23,718) (27,397)Loss on extinguishment of debt (14,308) (377) (4,809)Investment income 79 110 235 Costs related to acquisition (1,062) (875) – Other, net (2,798) (1,155) (1,105)Total other expense, net (67,203) (26,015) (33,076) Income before provision for income taxes 156,352 86,966 57,220 Provision (benefit) for income taxes 63,129 (237,677) 307 Net income 93,223 324,643 56,913 Preferential distribution to: Series A preferred stockholders – – (2,042)Class B common stockholders – – (12,133)Beneficial conversion – – (140,690)Net income (loss) attributable to common stockholders (formerly Class A common stockholders) $93,223 $324,643 $(97,952) Net income (loss) per common share - basic: Common stock (formerly Class A common stock) $1.38 $4.84 $(1.65) Class B common stock n/a n/a $505 Net income (loss) per common share - diluted: Common stock (formerly Class A common stock) $1.35 $4.79 $(1.65) Class B common stock n/a n/a $505 Weighted average common shares outstanding - basic: Common stock (formerly Class A common stock) 67,360,632 67,130,356 59,364,958 Class B common stock n/a n/a 24,018 Weighted average common shares outstanding - diluted: Common stock (formerly Class A common stock) 69,193,138 67,797,371 59,364,958 Class B common stock n/a n/a 24,018 Dividends declared per share $6.00 $– $– Other comprehensive income (loss): Amortization of unrealized loss on interest rate swaps $2,082 $– $– Foreign currency translation adjustment (34) – – Net unrealized gain (loss) on derivatives 365 (683) (4,145)Pension liability adjustment (1,552) (4,922) (1,115)Other comprehensive income (loss) 861 (5,605) (5,260)Comprehensive income $94,084 $319,038 $51,653 See notes to consolidated financial statements.  42Table of ContentsGenerac Holdings Inc.Consolidated Statements of Redeemable Stock and Stockholders' Equity (Deficit)(Dollars in Thousands, Except Share Data) Redeemable Series A PreferredStock Class B CommonStock Common Stock(formerlyClass A CommonStock) AdditionalPaid-In ExcessPurchasePrice OverPredecessor RetainedEarnings(Accumulated AccumulatedOtherComprehensiveIncome StockholderNotes TotalStockholders' Shares Amount Shares Amount Shares Amount Capital Basis Deficit) (Loss) Receivable Equity 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 loss oninterest rateswaps – – – – – – – – – (4,145) – (4,145)Repayment ofstockholder notesreceivable – – – – – – – – – – 29 29 Corporatereorganization (11,311) (113,109) (24,018) (765,096) 28,368,581 284 877,921 – – – – 878,205 Beneficialconversion relatedto Class BCommon andSeries A Preferredstockholders – – – – – – (140,690) – – – – (140,690)Accumulatedaccretion related toClass B Commonand Series APreferredstockholders – – – – – – (303,305) – – – – (303,305)Issuance ofCommon stock(formerly Class ACommon stock)resulting from thebeneficialconversion 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 Share-basedcompensation – – – – 451,561 5 6,358 – – – – 6,363 Pension liabilityadjustment – – – – – – – – – (1,115) – (1,115) Balance atDecember 31, 2010 – – – – 67,524,596 $675 $1,133,918 $(202,116)$(481,658)$(9,752)$– $441,067 Unrealized loss oninterest rateswaps, net of taxof $440 – – – – – – – – – (683) – (683)Common stockissued underequity incentiveplans, net ofshares withheldfor employee taxesand strike price – – – – 128,216 1 (63) – – – – (62)Excess taxbenefits fromequity awards – – – – – – 200 – – – – 200 Share-basedcompensation – – – – – – 8,646 – – – – 8,646 Pension liabilityadjustment, netof tax of $3,173 – – – – – – – – – (4,922) – (4,922)Net income – – – – – – – – 324,643 – – 324,643 Balance atDecember 31, 2011 – – – – 67,652,812 $676 $1,142,701 $(202,116)$(157,015)$(15,357)$– $768,889 Unrealized gain oninterest rateswaps, net of taxof $236 – – – – – – – – – 365 – 365 Amortization ofunrealized loss oninterest rateswaps, net of taxof $95 – – – – – – – – – 2,082 – 2,082 Foreign currencytranslationadjustment – – – – – – – – – (34) – (34)Common stockissued underequity incentiveplans, net ofshares withheldfor employee taxesand strike price – – – – 643,148 7 (6,431) – – – – (6,424)Excess taxbenefits fromequity awards – – – – – – 4,588 – – – – 4,588 Share-basedcompensation – – – – – – 10,780 – – – – 10,780 Dividendsdeclared – – – – – – (408,289) – – – – (408,289)Pension liabilityadjustment, netof tax of $1,001 – – – – – – – – – (1,552) – (1,552)Net income – – – – – – – – 93,223 – – 93,223 Balance atDecember 31, 2012 – – – – 68,295,960 $683 $743,349 $(202,116) $(63,792) $(14,496) $– $463,628 See notes toconsolidatedfinancial statements 43Table of ContentsGenerac Holdings Inc.Consolidated Statements of Cash Flows(Dollars in Thousands) Year Ended December 31, 2012 2011 2010 Operating activities Net income $93,223 $324,643 $56,913 Adjustment to reconcile net income to net cash provided by operating activities: Depreciation 8,293 8,103 7,632 Amortization of intangible assets 45,867 48,020 51,808 Trade name write-down – 9,389 – Amortization of original issue discount 1,598 – – Amortization of deferred finance costs 2,161 1,986 2,439 Amortization of unrealized loss on interest rate swaps 2,082 – – Loss on extinguishment of debt 14,308 377 4,809 Provision for losses on accounts receivable 204 (7) (124)Deferred income taxes 62,429 (238,170) – Loss on disposal of property and equipment 261 10 56 Share-based compensation expense 10,780 8,646 6,363 Net changes in operating assets and liabilities, net of effects from acquisitions: Accounts receivable (137) (22,235) (8,621)Inventories (31,656) (11,224) (3,151)Other assets (8,416) (6,834) 1,177 Accounts payable (3,898) 18,517 7,896 Accrued wages and employee benefits 3,168 6,516 (197)Other accrued liabilities 35,327 21,975 (12,519)Net cash provided by operating activities 235,594 169,712 114,481 Investing activities Proceeds from sale of property and equipment 91 14 76 Expenditures for property and equipment (22,392) (12,060) (9,631)Acquisition of business, net of cash acquired (47,044) (83,907) (1,649)Net cash used in investing activities (69,345) (95,953) (11,204) Financing activities Proceeds from short-term borrowings 23,018 – – Proceeds from long-term borrowings 1,455,614 – – Repayments of short-term borrowings (23,000) – – Repayments of long-term borrowings (1,175,124) (59,355) (434,310)Payment of debt issuance costs (25,691) – – Cash dividends paid (404,332) – – Taxes paid related to the net share settlement of equity awards (6,425) (371) – Excess tax benefits from equity awards 4,588 200 – Proceeds from issuance of common stock – – 248,309 Proceeds from exercise of stock options – 310 – Net cash used in financing activities (151,352) (59,216) (186,001) Net increase (decrease) in cash and cash equivalents 14,897 14,543 (82,724)Cash and cash equivalents at beginning of period 93,126 78,583 161,307 Cash and cash equivalents at end of period $108,023 $93,126 $78,583 Supplemental disclosure of cash flow information Cash paid during the period Interest $33,076 $24,264 $36,796 Income taxes 2,811 437 322 See notes to consolidated financial statements 44Table of ContentsGenerac Holdings Inc.Notes to Consolidated Financial StatementsYears Ended December 31, 2012, 2011, and 2010(Dollars in Thousands, Except Share and Per Share Data)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 and the Borrower). The Company is a leading designer and manufacturer of a wide range of generators and other enginepowered products for the residential, light-commercial, industrial and construction markets. 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.Prior to completion of the IPO, the Company had various classes of equity securities that contained conversion features, distribution rights, and liquidationpreferences. Upon completion of our IPO, all shares of the Company’s Series A Preferred Stock and Class B Common Stock were converted into shares ofcommon stock. Please refer to Note 7, “Redeemable Stock and Stockholders’ Equity (Deficit),” for additional information. 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 9% and 12% of accounts receivable at December 31, 2012 and December 31, 2011, respectively. No one customeraccounted for greater than 7%, 10% and 10%, respectively, of net sales during the years ended December 31, 2012, 2011, or 2010. 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 20 – 40 Leasehold improvements 10 – 20 Machinery and equipment 5 – 10 Dies and tools 3 – 5 Vehicles 3 – 5 Office equipment 3 – 10 45Table of Contents Generac Holdings Inc.Notes to Consolidated Financial StatementsYears Ended December 31, 2012, 2011, and 2010(Dollars in Thousands, Except Share and Per Share Data) 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, 2012 and 2011: WeightedAverage 2012 2011 AmortizationYears Cost AccumulatedImpairment Amortized Cost Cost AccumulatedImpairment Amortized Cost Indefinite lived intangibleassets Trade names $168,220 $(9,389) $158,831 $157,790 $(9,389) $148,401 Cost AccumulatedAmortization Amortized Cost Cost AccumulatedAmortization Amortized Cost Finite lived intangibleassets Trade names 0 $8,775 $(8,775) $- $8,715 $(8,715) $- Customer lists 7 273,355 (235,532) 37,823 272,050 (199,153) 72,897 Patents 15 118,921 (48,619) 70,302 118,881 (40,714) 78,167 Unpatented technology 11 13,165 (7,696) 5,469 13,165 (6,325) 6,840 Software 8 1,014 (779) 235 1,014 (650) 364 Non-compete 5 113 (34) 79 113 (11) 102 Total finite livedintangible assets $415,343 $(301,435) $113,908 $413,938 $(255,568) $158,370 Amortization of intangible assets was $45,867, $48,020 and $51,808 in 2012, 2011 and 2010, respectively. During the fourth quarter of 2011, theCompany wrote down its trade name indefinite-lived intangible asset. See the Goodwill and Other Indefinite-Lived Intangible Assets section for furtherdiscussion. Estimated amortization expense each year for the five years subsequent to December 31, 2012 is as follows: 2013, $24,084; 2014, $16,686;2015, $15,480; 2016, $13,668; 2017, $10,328. Debt Issuance Costs Direct and incremental costs incurred in connection with the issuance of long-term debt are capitalized and amortized to interest expense over the terms of therelated credit agreements. Debt discounts incurred in connection with the issuance of long-term debt are deferred and recorded as a reduction of outstandingdebt and amortized to interest expense using the effective interest method over the terms of the related credit agreements. Approximately $3,759, $1,986, and$2,439 of deferred financing costs and original issue discounts were amortized to interest expense during fiscal years 2012, 2011 and 2010, respectively.Estimated amortization expense each year for the five years subsequent to December 31, 2012 is as follows: 2013, $5,105; 2014, $5,360; 2015, $5,634;2016, $5,944; 2017, $5,960. 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 purchase price over fair value of identifiable net assets acquired from business acquisitions. Goodwill is not amortized,but is reviewed for impairment on an annual basis and between annual tests if indicators of impairment are present. The Company conducts its annualimpairment test for goodwill on October 31st of each year. Conditions that would trigger an impairment assessment include, but are not limited to, a significantadverse change in legal factors or business climate that could affect the value of an asset. 46Table of Contents Generac Holdings Inc.Notes to Consolidated Financial StatementsYears Ended December 31, 2012, 2011, and 2010(Dollars in Thousands, Except Share and Per Share Data) 2. Significant Accounting Policies (continued) The Company uses a two-step process to test for goodwill impairment. First, the reporting unit's fair value is compared to its carrying value. Fair value isestimated using a combination of qualitative analyses, a discounted cash flow approach and a market approach. If a reporting unit's carrying amount exceedsits fair value, an indication exists that the reporting unit's goodwill may be impaired, and the second step of the impairment test would be performed. Thesecond step of the goodwill impairment test is used to measure the amount of the potential impairment loss. In the second step, the implied fair value of thereporting unit's goodwill is determined by allocating the reporting unit's fair value to all of its assets and liabilities other than goodwill in a manner similar to apurchase price allocation. The implied fair value of the goodwill that results from the application of this second step is then compared to the carrying amountof the goodwill and an impairment charge would be recorded for the difference if the carrying value exceeds the implied fair value of the goodwill. The Company performed the required annual impairment tests for fiscal years 2012, 2011 and 2010 and found no impairment of goodwill. There can be noassurance that future goodwill impairment tests will not result in a charge to earnings. The changes in the carrying amount of goodwill for the years ended December 31, 2012 and 2011 are as follows: Year ended December 31, 2012 Year ended December 31, 2011 Gross Accumulated Impairment Net Goodwill Gross Accumulated Impairment Net Goodwill Balance at beginning of year $1,050,666 $(503,193) $547,473 $1,030,341 $(503,193) $527,148 Acquisition of a business, net 5,470 — 5,470 20,325 — 20,325 Balance at end of year $1,056,136 $(503,193) $552,943 $1,050,666 $(503,193) $547,473 The Company acquired two businesses during fiscal 2012 for a combined purchase price of $47,044, net of cash acquired, which resulted in additionalgoodwill of $5,545. Separately, the Magnum purchase price allocation was finalized during the third quarter of 2012, which resulted in an adjustment togoodwill of $(75). The Company acquired one business during fiscal 2011 for $85,490, net of cash acquired and inclusive of estimated earn-out payments.This resulted in additional goodwill of $20,337. Offsetting this increase in goodwill was a $(12) adjustment to goodwill recorded during the second quarter of2011 due to finalization of the purchase price allocation from a 2010 acquisition. A majority of goodwill amounts are deductible for tax purposes. Other indefinite-lived intangible assets consist of trade names. The Company tests the carrying value these trade names by comparing the assets fair value toits carrying value. Fair value was measured using a relief-from-royalty approach, which assumes the fair value of the trade name is the discounted cash flowsof the amount that would be paid had the Company not owned the trade name and instead licensed the trade name from another company. The Companyconducts its annual impairment test for indefinite-lived intangible assets on October 31st of each year. The Company performed the required annual impairment tests for fiscal years 2012 and 2010 and found no impairment of indefinite-lived trade names.During the fourth quarter of 2011, the Company decided to strategically transition certain products to their more widely known Generac brand. Based on thisdecision, the Company recorded a $9,389 non-cash trade name impairment charge as of October 31, 2011 which primarily related to the write down of theimpacted trade name to net realizable value. There can be no assurance that future impairment tests will not result in a charge to earnings. 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. 47Table of Contents Generac Holdings Inc.Notes to Consolidated Financial StatementsYears Ended December 31, 2012, 2011, and 2010(Dollars in Thousands, Except Share and Per Share Data) 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. Unless all revenue recognition criteria have been met, the Company does not recognize revenue on these transactions until the customers takepossession of the product. The funds collected on product warehoused for these customers are recorded as a customer advance until the customer takespossession of the product and the Company’s obligation to deliver the goods is completed. Customer advances are included in accrued liabilities in theaccompanying consolidated balance sheets. The Company provides for certain 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 comprehensive income. Advertising and Co-Op Advertising Expenditures for advertising, included in selling and service expenses in the accompanying consolidated statements of comprehensive income, are expensed asincurred. Total expenditures for advertising were $13,360, $11,742, and $11,985 for the years ended December 31, 2012, 2011, and 2010, respectively. Research and Development The Company expenses research and development costs as incurred. Total expenditures incurred for research and development were $23,499, $16,476, and$14,700 for the years ended December 31, 2012, 2011 and 2010, respectively. Foreign Currency Translation and Transactions Foreign currency balance sheet accounts are translated into dollars at the rates of exchange in effect at fiscal year-end. Income and expenses incurred in aforeign currency are translated at the average rates of exchange in effect during the year. The related translation adjustments are made directly to a separatecomponent of Stockholders’ Equity. Realized and unrealized gains and losses on transactions denominated in foreign currency are generally recorded in earnings as a component of cost of goodssold. 48Table of Contents Generac Holdings Inc.Notes to Consolidated Financial StatementsYears Ended December 31, 2012, 2011, and 2010(Dollars in Thousands, Except Share and Per Share Data) 2. Significant Accounting Policies (continued) Accumulated Other Comprehensive Loss Accumulated other comprehensive loss includes foreign currency translation adjustments, pension liability adjustments and unrealized losses on certain cashflow hedges. The components of accumulated other comprehensive loss at December 31, 2012 and 2011 were: December 31, 2012 2011 Foreign currency translation adjustments $(34) $- Pension liability, net of tax of $(4,174) and $(3,173) (12,081) (10,529)Unrealized losses on cash flow hedges, net of tax of $(109) and $(440) (2,381) (4,828)Accumulated other comprehensive loss $(14,496) $(15,357)Fair Value of Financial Instruments The Company believes the carrying amount of its financial instruments (cash and cash equivalents, accounts receivable, accounts payable, accrued liabilitiesand short-term borrowings), excluding long-term borrowings, approximates the fair value of these instruments based upon their short-term nature. The fairvalue of long-term borrowings, including amounts classified as current, was approximately $913,191 (level 2) at December 31, 2012, as calculated based onindependent valuations whose inputs and significant value drivers are observable. Fair Value Measurements ASC 820-10 Fair Value Measurements and Disclosures among other things, defines fair value, establishes a consistent framework for measuring fairvalue, and expands disclosure for each major asset and liability category measured at fair value on either a recurring basis or nonrecurring basis. ASC 820-10clarifies that fair value is an exit price, representing the amount that would be received in the sale of an asset or paid to transfer a liability in an orderlytransaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions marketparticipants would use in pricing an asset or liability. As a basis for considering such assumptions, the pronouncement establishes a three-tier fair valuehierarchy, which prioritizes the inputs used in measuring fair value as follows: (Level 1) observable inputs such as quoted prices in active markets; (Level 2)inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and (Level 3) unobservable inputs in which there is littleor no market data, which require the reporting entity to develop its own assumptions. Assets and liabilities measured at fair value are based on the market approach, which are 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: Fair Value Measurement Using TotalDecember 31,2012 Quoted Pricesin ActiveMarkets forIdenticalContracts(Level 1) SignificantOtherObservableInputs(Level 2) Interest rate swaps $(2,973) $– $(2,973)Commodity contracts $111 $– $111 Fair Value Measurement Using TotalDecember 31,2011 Quoted Pricesin ActiveMarkets forIdenticalContracts(Level 1) SignificantOtherObservableInputs(Level 2) Interest rate swaps $(5,268) $– $(5,268)Commodity Contracts $(373) $– $(373) 49Table of Contents Generac Holdings Inc.Notes to Consolidated Financial StatementsYears Ended December 31, 2012, 2011, and 2010(Dollars in Thousands, Except Share and Per Share Data)2. Significant Accounting Policies (continued) 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, 2012 and 2011 was $2,936 (liability) and $5,780 (liability), respectively, and this represents the amount the Companywould need to pay to exit the agreements on this date. 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, two, and one outstanding commodity contracts in place to hedge its projected commodity purchases at December31, 2012, 2011, and 2010, respectively. In October 2009, the Company entered into commodity swaps to purchase $1,432 of copper. The swaps wereeffective from October 5, 2009, and terminated on March 31, 2010. In November 2010, the Company entered into a commodity swap to purchase $2,296 ofcopper. The swap was effective from January 1, 2011, and terminated on April 30, 2011. In February 2011, the Company entered into a commodity forwardcontract to purchase a notional amount of $2,378 of copper. The contract was effective from March 1, 2011, and terminated on December 31, 2011. InMarch 2011, the Company entered into a commodity forward contract to purchase a notional amount of $2,100 of copper. The contract was effective fromApril 1, 2011, and terminated on December 31, 2011. In May 2011, the Company entered into a commodity forward contract to purchase a notional amountof $1,808 of copper. The contract was effective from May 5, 2011, and terminated on December 31, 2011. In September 2011, the Company entered into twonew commodity forward contracts to purchase notional amounts of $4,533 and $1,935 of copper. The contracts are effective from October 1, 2011, andterminate on June 30, 2012. In May 2012, the Company entered into a commodity forward contract to purchase a notional amount of $1,898 of copper. Thecontract was effective from July 1, 2012, and terminated on December 31, 2012. In October 2012, the Company entered into a commodity forward contract topurchase a notional amount of $3,472 of copper. The contract was effective from January 1, 2013, and terminates on September 30, 2013. Total losses or gains recognized in the consolidated statements of operations on commodity contracts were a gain of $386, a loss of $861, and a gain of$1,056 for the years ended December 31, 2012, 2011, and 2010, 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, 2012, 2011 or 2010. There was one Eurocurrency contract outstanding during 2010 that expired on December 31, 2010. A loss of $100 was recognized in the consolidated statements of operations forthe year ended December 31, 2010 related to this Euro contract. 50Table of Contents Generac Holdings Inc.Notes to Consolidated Financial StatementsYears Ended December 31, 2012, 2011, and 2010(Dollars in Thousands, Except Share and Per Share Data) 2. Significant Accounting Policies (continued) Interest Rates The Company has two interest rate swap agreements outstanding as of December 31, 2012 with a notional amount of $300,000. The Company had fourinterest rate swap agreements outstanding as of December 31, 2011 with a notional amount of $300,000. In 2010, the Company entered into two interest rateswap agreements and had formally documented all relationships between interest rate hedging instruments and hedged items, as well as its' risk-managementobjectives and strategies for undertaking various hedge transactions. The first was entered into on January 21, 2010. The effective date of this swap was July1, 2010 with a notional amount of $200,000, 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 that swap was October 1, 2010 with a notional amount of $100,000, a fixed LIBOR rate of 1.025% and an expiration date ofOctober 1, 2012. The Company entered into two interest rate swap agreements on April 1, 2011. The effective date of the first swap is July 1, 2012 with anotional amount of $200,000, a fixed LIBOR rate of 1.905% and an expiration date of July 1, 2013. The effective date of the second swap is October 1, 2012with a notional amount of $100,000, a fixed LIBOR rate of 2.22% and an expiration date of October 1, 2013. Due to the incorporation of a new interest ratefloor provision in the Term Loan Credit Agreement, which constitutes a change in critical terms, the Company concluded that as of May 30, 2012, theoutstanding swaps would no longer be highly effective in achieving offsetting changes in cash flows during the periods the hedges are designated. As a result,the Company was required to de-designate the hedges as of May 30, 2012. Beginning May 31 2012, the effective portion of the swaps prior to the change (i.e.amounts previously recorded in Accumulated Other Comprehensive Loss) have been and will continue to be amortized as interest expense over the period of theoriginally designated hedged transactions which have various dates through October 2013. Future changes in fair value of these swaps have been and willcontinue to be immediately recognized in the consolidated statements of comprehensive income as interest expense. The following table presents the fair value of the Company’s derivatives: December 31,2012 December 31,2011 Derivatives designated as hedging instruments: Interest rate swaps $- $(5,268) - (5,268)Derivatives not designated as hedging instruments: Commodity contracts 111 (373)Interest rate swaps (2,973) - Total derivatives $(2,862) $(5,641) The fair value of all derivatives not designated as hedging instruments is included in other current liabilities and other assets in the consolidated balance sheetsas of December 31, 2012 and 2011, respectively. The fair value of derivatives designated as hedging instruments included in other current liabilities and other long-term liabilities is $1,546 and $3,722,respectively, as of December 31, 2011. The fair value of the derivative contracts considers the Company’s credit risk as of December 31, 2012 and 2011. The impact of credit risk on the fair valueof derivative contracts at December 31, 2012 and 2011 was $74 and $139, respectively. Excluding the impact of credit risk, the fair value of the derivativesat December 31, 2012 and 2011 was $2,936 (liability) and $5,780 (liability), respectively, and this represents the amount the Company would need to pay toexit the agreements on those dates. 51Table of Contents Generac Holdings Inc.Notes to Consolidated Financial StatementsYears Ended December 31, 2012, 2011, and 2010(Dollars in Thousands, Except Share and Per Share Data) 2. Significant Accounting Policies (continued) The following presents the impact of interest rate swaps and commodity contracts on the consolidated statement of comprehensive income for the year endedDecember 31, 2012, 2011 and 2010: Amount of gain (loss)recognized in AOCI forthe twelve months endedDecember 31, Locationof gain(loss)recognizedin netincome(loss) onineffectiveportion ofhedges Amount of loss reclassified from AOCI intonet income (loss) for the twelve monthsended December 31, Amount of gain (loss)recognized in net income(loss) on hedges(ineffective portion) fortwelve months endedDecember 31, 2012 2011 2010 2012 2011 2010 2012 2011 2010 Derivatives designated as hedginginstruments Interest rateswaps (1) $365 $(683) $(4,145) Interestexpense $- $- $- $- $- $- Derivatives not designatedas hedging instruments Commodityand foreigncurrencycontracts - - - Cost ofgoodssold - - - 386 (861) 956 Interest rateswaps (2) $- $- $- Interestexpense $(2,082) $- $- $1,695 $- $- (1) Periods prior to May 30, 2012(2) Period between May 30, 2012 and December 31, 2012 Stock-Based Compensation Stock-based compensation expense, including stock options and restricted stock awards, is generally recognized on a straight-line basis over the vesting periodbased on the fair value of awards which are expected to vest. The fair value of all share-based awards is estimated on the date of grant. Segment Reporting The Company operates in and reports as a single operating segment, which is the design and manufacture of a wide range of power products. Net sales arepredominantly generated through the sale of generators and other engine powered products through various distribution channels. The Company manages andevaluates its operations as one segment primarily due to similarities in the nature of the products, production processes and methods of distribution. TheCompany’s sales in the United States represent approximately 93%, 95%, and 95% of total sales for the years ended December 31, 2012, 2011 and 2010,respectively. Approximately 98%, 100% and 100% of the Company’s identifiable long-lived assets are located in the United States as of December 31, 2012,2011 and 2010, respectively. 52Table of Contents Generac Holdings Inc.Notes to Consolidated Financial StatementsYears Ended December 31, 2012, 2011, and 2010(Dollars in Thousands, Except Share and Per Share Data) 2. Significant Accounting Policies (continued) The Company's product offerings consist primarily of power products with a range of power output geared for varying end customer uses. Residential powerproducts and commercial & industrial power products are each a similar class of products based on similar power output and end customer usage. Thebreakout of net sales between residential, commercial & industrial, and other products is as follows: Year ended December 31, 2012 2011 2010 Residential power products $705,444 $491,016 $372,782 Commercial & industrial power products 410,341 250,270 183,555 Other 60,521 50,690 36,543 Total $1,176,306 $791,976 $592,880 New Accounting Pronouncements In December 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-12, “ComprehensiveIncome (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other ComprehensiveIncome in Accounting Standards Update No. 2011-05”. In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220): Presentation ofComprehensive Income”. Both ASU’s are effective for annual reporting periods beginning after December 15, 2011, and both were adopted by the Companyas of January 1, 2012. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes instockholders’ equity. In addition, items of other comprehensive income that are reclassified to profit or loss are required to be presented separately on the faceof the financial statements. This guidance is intended to increase the prominence of other comprehensive income in financial statements by requiring that suchamounts be presented either in a single continuous statement of income and comprehensive income or separately in consecutive statements of income andcomprehensive income. ASU 2011-12 defers the changes in ASU 2011-05 that pertain to how, when and where reclassification adjustments are presented. TheCompany’s adoption of these standards did not have a material impact on the consolidated financial statements. In July 2012, the FASB issued ASU 2012-02, “Intangibles- Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment”. Thisstandard is effective for annual and interim indefinite-lived intangible asset impairment tests performed for fiscal years beginning after September 15, 2012,with early adoption permitted. This standard provides for an optional qualitative assessment for the testing of indefinite-lived intangible asset impairment todetermine whether it is more likely than not that such asset is impaired. If it is concluded that this is the case, it is necessary to perform the currentlyprescribed quantitative impairment test by comparing the fair value of the indefinite-lived intangible asset with its carrying value. Otherwise, the quantitativeimpairment test is not required. The Company’s adoption of this standard is not expected to have a material impact on the consolidated financial statements. There are several other new accounting pronouncements issued by the FASB. Each of these pronouncements, as applicable, has been or will be adopted by theCompany. Management does not believe any of these accounting pronouncements has had or will have a material impact on the Company’s consolidatedfinancial statements. 53Table of Contents Generac Holdings Inc.Notes to Consolidated Financial StatementsYears Ended December 31, 2012, 2011, and 2010(Dollars in Thousands, Except Share and Per Share Data) 3. Acquisitions Acquisition of OttomotoresOn December 8, 2012, a subsidiary of the Company acquired all of the shares of Ottomotores UK Limited and its affiliates, including the operations ofOttomotores Mexico and Ottomotores Brazil (collectively, “Ottomotores”). Ottomotores was founded in 1950 and is located in Mexico City, Mexico andCuritiba, Brazil. Ottomotores is a leading manufacturer in the Mexican market for industrial diesel gensets ranging in size from 15kW to 2,500kW and is asignificant market participant throughout all of Latin America.The cash paid at closing of $44,769, net of cash acquired, included a preliminary estimate of acquired working capital. This estimate will be finalized in2013 to reflect actual working capital acquired, which will result in a change in the total purchase price. This acquisition was funded solely by existing cash.The Company recorded a preliminary purchase price allocation during the fourth quarter of 2012 based upon a fair value appraisal by a third party valuationfirm. As a result, the Company recorded approximately $16,100 of intangible assets, including approximately $5,050 of goodwill, as of the acquisition date. The 2012 consolidated financial statements include the results of Ottomotores from December 8, 2012 through December 31, 2012. In addition, transactioncosts of approximately $1,062 are included in other expense in the consolidated statement of comprehensive income for the year ended December 31, 2012.Acquisition of GenTranOn February 1, 2012, a subsidiary of the Company acquired substantially all of the assets and assumed certain liabilities of a leading transfer switch andportable generator accessory manufacturer (“GenTran”) for a purchase price, net of cash acquired of $2,275. The purchase price allocation was finalizedduring the second quarter of 2012, and the Company recorded $1,200 of intangible assets, including approximately $495 of goodwill, as of the acquisitiondate. The goodwill ascribed to this acquisition is deductible for tax purposes. The acquisition is not material to the Company’s consolidated financialstatements.Acquisition of MagnumOn October 3, 2011, a subsidiary of the Company acquired substantially all of the assets and assumed certain liabilities of Magnum Products, LLC andcertain of its affiliates (collectively, Magnum) for a purchase price, net of cash acquired and inclusive of estimated earn-out payments, of approximately$85,490. The acquisition was funded solely by existing cash.Magnum is a supplier of generator powered light towers, mobile generators and combination power units for a variety of industries and specialties includingconstruction, energy, mining, government, military, and special events. Its products are distributed through international, national and regional equipmentrental companies, equipment dealers and construction companies. The Magnum business is a strategic fit for the Company as it provides diversificationwithin the existing business, with the introduction of new engine powered products and distribution channels, while also providing opportunities for futurerevenue and cost synergies. 54Table of Contents Generac Holdings Inc.Notes to Consolidated Financial StatementsYears Ended December 31, 2012, 2011, and 2010(Dollars in Thousands, Except Share and Per Share Data) 3. Acquisitions (continued) The purchase price of $85,490 consisted of $83,907 paid in cash at closing and $1,583 recorded as an estimated liability to the sellers for contingentconsideration based upon future performance of a particular product line currently in development, as described below. The cash paid at closing included anestimate of acquired working capital. This estimate was finalized in 2012 to reflect actual working capital acquired, resulting in a $75 negative adjustment tothe $20,337 of goodwill recorded for this transaction during the fourth quarter of 2011. The goodwill ascribed to this acquisition is deductible for taxpurposes.The Company recorded a purchase price allocation during the fourth quarter of 2011 based on a fair value appraisal by a third party valuation firm. Asummary of the fair values assigned to the acquired assets is as follows:Accounts receivable $24,309 Inventory 23,763 Prepaid expenses and other current assets 280 Property and equipment 5,164 Goodwill 20,337 Trade name 17,740 Customer relationships 14,740 Patents 1,070 Other intangible assets 2,220 Trade accounts payable (20,727)Accrued expenses (2,746)Other long term liabilities (2,243)Total cash paid, net of $30 cash acquired $83,907 Under the acquisition agreement, the purchase price may be increased based upon the performance of a particular product line for the years 2012 through thesecond quarter of 2017. Based on performance projections available at the date of the acquisition, the Company recorded estimated contingent consideration of$1,583 which is the net present value of the estimated earn-out. The contingent consideration is payable periodically during 2012 through 2017, based uponactual future performance. As of December 31, 2011, there had been no changes to our original estimates. Due primarily to the accretion from the passage oftime, the contingent consideration liability balance increased to $1,656 as of December 31, 2012.The 2011 consolidated financial statements include the results of Magnum from October 3, 2011 through December 31, 2011. The acquisition contributed$38,817 and $3,353 of net sales and net income, respectively, for the period from October 3, 2011 to December 31, 2011. The 2012 consolidated financialstatements include the results of Magnum for the full year. Transaction costs of approximately $876 are included in other expense in the consolidatedstatement of comprehensive income for the year ended December 31, 2011.The following unaudited pro forma information has been prepared as if the Magnum acquisition had been consummated at January 1, 2010. This informationis presented for informational purposes only, and is not necessarily indicative of the operating results that would have occurred if the acquisitions had beenconsummated as of that date. This information should not be used as a predictive measure of our future financial position, results of operations, or liquidity. Year ended December 31, 2011 2010 Net sales $897,892 $681,278 Net income 334,076 68,369 55Table of Contents Generac Holdings Inc.Notes to Consolidated Financial StatementsYears Ended December 31, 2012, 2011, and 2010(Dollars in Thousands, Except Share and Per Share Data) 4. Balance Sheet Details Inventories consist of the following: December 31, 2012 2011 Raw material $168,459 $121,098 Work-in-process 8,580 578 Finished goods 55,777 45,165 Reserves for excess and obsolescence (6,999) (4,717)Total $225,817 $162,124 As of December 31, 2012 and 2011, inventories totaling $4,401 and $1,736, respectively, were on consignment at customer locations. Property and equipment consists of the following: December 31, 2012 2011 Land and improvements $6,511 $5,050 Buildings and improvements 68,934 52,941 Machinery and equipment 42,581 38,132 Dies and tools 15,406 12,982 Vehicles 1,872 1,026 Office equipment 12,993 8,380 Leasehold improvements 1,393 44 Construction in progress 3,439 3,131 Gross property and equipment 153,129 121,686 Accumulated depreciation (48,411) (37,302)Total $104,718 $84,384 Other accrued liabilities consist of the following: December 31, 2012 2011 Accrued commissions $7,467 $5,731 Accrued interest 15,809 3,119 Product warranty obligations – short term 28,752 19,187 Accrued dividends for unvested restricted stock 3,957 - Accrued volume rebates 7,991 4,645 Accrued customer prepayments 6,569 3,370 Other accrued selling expenses 7,753 6,024 Other accrued liabilities 7,783 4,948 Total $86,081 $47,024 56Table of Contents Generac Holdings Inc.Notes to Consolidated Financial StatementsYears Ended December 31, 2012, 2011, and 2010(Dollars in Thousands, Except Share and Per Share Data)4. Balance Sheet Details (continued) Other long-term liabilities consist of the following: December 31, 2012 2011 Accrued pension costs $23,174 $22,044 Product warranty obligations – long term 20,833 15,193 Other long-term liabilities 2,335 6,277 Total $46,342 $43,514 5. 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 consolidated balance sheets. The Company recognizes the revenue from sales ofextended warranties over the life of the contracts. Changes in product warranty obligations are as follows: For the year ended December 31, 2012 2011 2010 Balance at beginning of year $34,380 $22,478 $20,729 Payments, net of extended warranty receipts (14,257) (11,195) (13,178)Charged to operations 29,462 23,097 14,927 Balance at end of year $49,585 $34,380 $22,478 Product warranty obligations are included in the balance sheets as follows: December 31, 2012 2011 Other accrued liabilities $28,752 $19,187 Other long-term liabilities 20,833 15,193 Balance at end of year $49,585 $34,380 57Table of Contents Generac Holdings Inc.Notes to Consolidated Financial StatementsYears Ended December 31, 2012, 2011, and 2010(Dollars in Thousands, Except Share and Per Share Data)6. Credit Agreements The revolving credit facilities and credit agreements discussed below were outstanding for all periods presented. The Company refinanced this debt onFebruary 9, 2012 and amended and restated its credit agreements on May 30, 2012. Short-term borrowings are included in the balance sheets as follows: December 31, 2012 2011 ABL facility $- $- Other lines of credit, as described below 12,550 - $12,550 $- Long-term borrowings are included in the balance sheets as follows: December 31, 2012 2011 Term loan $897,750 $- Discount on debt (16,482) - First lien term loan - 604,372 Total 881,268 604,372 Less treasury debt – first lien - 6,498 Less current portion 82,250 22,874 $799,018 $575,000 Maturities of long-term borrowings outstanding at December 31, 2012, are as follows: Year 2012 $- 2013 - 2014 - 2015 - After 2015 799,018 Total $799,018 On February 11, 2013, the Company made an $80,000 voluntary prepayment of debt with available cash on hand that was applied to both the required excesscash flow payment and all required future principal amortizations. The Company classified this portion of debt as a current liability in the consolidatedbalance sheet at December 31, 2012.For all years presented, the Company had credit agreements which provided for borrowings under a revolving credit facility (the Revolving Credit Facility),and term loans (collectively, the Credit Agreements), which are described further below. The Credit Agreements of the Company were secured by the associatedcollateral agreements which pledged virtually all assets of the Subsidiary. On February 9, 2012, a subsidiary of the Company (the “Borrower” or “Generac Power Systems”) entered into a new credit agreement (“Credit Agreement”)with certain commercial banks and other lenders. The Credit Agreement provided for borrowings under a $150,000 revolving credit facility, a $325,000tranche A term loan facility and a $250,000 tranche B term loan facility. The revolving credit facility and tranche A term loan facility were scheduled tomature in February 2017 and the tranche B term loan facility was scheduled to mature in February 2019. Proceeds received by the Company from loansmade under the Credit Agreement were used to repay in full all outstanding borrowings under the former credit agreement, dated as of November 10, 2006, asamended from time to time, and for general corporate purposes. The Company’s former credit agreement outstanding in 2011 and 2010 was comprised of arevolving credit facility and a first-lien term loan which were scheduled to mature in November 2012 and November 2013, respectively. 58Table of Contents Generac Holdings Inc.Notes to Consolidated Financial StatementsYears Ended December 31, 2012, 2011, and 2010(Dollars in Thousands, Except Share and Per Share Data) 6. Credit Agreements (continued) On May 30, 2012, the Borrower amended and restated its then existing Credit Agreement by entering into a new credit agreement (“Term Loan CreditAgreement”) with certain commercial banks and other lenders. The Term Loan Credit Agreement provides for a $900,000 term loan B credit facility (“TermLoan”) and a $125,000 uncommitted incremental term loan facility. The Term Loan Credit Agreement matures on May 30, 2018. Proceeds from the TermLoan were used to repay the Company’s previous Credit Agreement. The remaining proceeds from the Term Loan were used, along with cash on hand, to paya special cash dividend of $6.00 per share on the Company’s common stock (see Note #13 – Special Cash Dividend).Concurrent with the closing of the Term Loan Credit Agreement, on May 30, 2012, the Borrower also entered into a new revolving credit agreement (the “ABLCredit Agreement”) with certain commercial banks and other lenders. The ABL Credit Agreement provides for borrowings under a $150,000 senior securedABL revolving credit facility (the “ABL Facility”). The size of the ABL Facility could increase by $50,000 pursuant to an uncommitted incremental creditfacility. The ABL Credit Agreement matures May 30, 2017.Borrowings under the ABL Facility are guaranteed by all of the Borrower’s wholly-owned domestic restricted subsidiaries and the Parent, and are secured byassociated collateral agreements which pledge a first priority lien on all cash, trade accounts receivable, inventory, and other current assets and proceedsthereof, and a second priority lien on all other assets, including fixed assets and intangibles of the Borrower, certain domestic subsidiaries of the Borrower andthe guarantors (other than the Company). Borrowings under the ABL Facility bear interest at rates based upon either a base rate plus an applicable margin of 1.00% or adjusted LIBOR rate plus anapplicable margin of 2.00%, in each case, subject to adjustments based upon average availability under the ABL Facility. The ABL Credit Agreement requiresthe Borrower to maintain a minimum consolidated fixed charge coverage ratio of 1.0x, tested on a quarterly basis, when Availability plus the amount ofQualified Cash (up to $5,000) (as defined in the ABL Credit Agreement) under the ABL Facility is less than the greater of (i) 10.0% of the lesser of theaggregate commitments and the applicable borrowing base under the ABL Facility or (ii) $10,000. The ABL Credit Agreement also contains covenants andevents of default substantially similar to those in the Term Loan Credit Agreement, as described below. The Company is required to pay an ABL Facilitycommitment fee of 0.50% on the average available unused commitment. As of December 31, 2012, the Company had $147,036 of availability under the ABLfacility, net of outstanding letters of credit. As of December 31, 2012, the Company’s interest rate on the ABL Facility was 1.96%. There were no borrowingsoutstanding under the ABL Facility as of December 31, 2012.The ABL Credit Agreement provides the Company the ability to issue letters of credit. Outstanding undrawn letters of credit reduced availability under theCompany’s ABL Facility. The letters of credit accrued interest at a rate of 1.88%, paid quarterly on the undrawn daily aggregate exposure of the precedingquarter. This rate is subject to meeting certain financial ratios. At December 31, 2012 and 2011, letters of credit outstanding were $2,964 and $5,809, andinterest rates were 1.88% and 2.13% respectively. As of December 31, 2012, short-term borrowings primarily consisted of borrowings by our foreign subsidiaries on local lines of credit, which totaled $12.5million at a weighted average interest rate of approximately 2.20%. The Term Loan is guaranteed by all of the Borrower’s wholly-owned domestic restricted subsidiaries and the Parent, and is secured by associated collateralagreements which pledge a first priority lien on virtually all of the Borrower’s assets, including fixed assets and intangibles, and the assets of the guarantors(other than the Company), other than all cash, trade accounts receivable, inventory, and other current assets and proceeds thereof, which are secured by asecond priority lien.The Term Loan amortizes in equal installments of 0.25% of the original principal amount of the Term Loan payable on the first day of April, July, Octoberand January commencing on October 1, 2012 until the maturity date of the Term Loan. The final principal repayment installment of the Term Loan isrequired to be repaid on the maturity date in an amount equal to the aggregate principal amount of the Term Loan outstanding on such date. In February 2013,the Borrower made an $80.0 million debt prepayment that was applied to all required future principal amortizations. The Term Loan initially bears interest atrates based upon either a base rate plus an applicable margin of 4.00% or adjusted LIBOR rate plus an applicable margin of 5.00%, subject to a LIBOR floorof 1.25%. At December 31, 2012 and 2011 the Company’s interest rate was 6.25% and 2.80%, respectively.The Term Loan Credit Agreement restricts the circumstances in which the Borrower can pay distributions and dividends, which are in addition to those to bepaid in connection with the Transactions (as defined in the Term Loan Credit Agreement). Payments can be made by the Borrower to the Company or otherparent companies for certain expenses such as operating expenses in the ordinary course, fees and expenses related to any debt or equity offering and to payfranchise or similar taxes. Dividends can be used to repurchase equity interests, subject to limitations in certain circumstances. Additionally, the Term LoanCredit Agreement restricts the aggregate amount of dividends and distributions that can be paid and, in certain circumstances, requires Pro Forma (as definedin the Term Loan Credit Agreement) compliance with certain fixed charge coverage ratios in order to pay certain dividends or distributions. The Term LoanCredit Agreement also contains certain other affirmative and negative covenants that, among other things, provide limitations on the incurrence of additionalindebtedness, liens on property, sale and leaseback transactions, investments, loans and advances, mergers or consolidations, asset sales, acquisitions,transactions with affiliates, prepayments of certain other indebtedness and modifications of the Company’s organizational documents. The Term Loan CreditAgreement does not contain any financial maintenance covenants. The Company was in compliance with all requirements of the Credit Agreements as ofDecember 31, 2012, 2011 and 2010. 59Table of Contents Generac Holdings Inc.Notes to Consolidated Financial StatementsYears Ended December 31, 2012, 2011, and 2010(Dollars in Thousands, Except Share and Per Share Data)6. Credit Agreements (continued) The Term Loan Credit Agreement contains customary events of default, including, among others, nonpayment of principal, interest or other amounts, failureto perform covenants, inaccuracy of representations or warranties in any material respect, cross-defaults with other material indebtedness, certainundischarged judgments, the occurrence of certain ERISA or bankruptcy or insolvency events or the occurrence of a change in control (as defined in the TermLoan Credit Agreement). A bankruptcy or insolvency event of default causes such obligations to automatically become immediately due and payable.Prior to entering into the new credit agreement on February 9, 2012, and the subsequent amendment and restatement on May 30, 2012 the Company had (i) afirst lien credit facility with Goldman Sachs Credit Partners L.P., as administrative agent, composed of (x) a $950,000 term loan, which was scheduled tomature in November 2013 and (y) a $150,000 revolving credit facility, which was scheduled to mature in November 2012, and (ii) a second lien credit facilitywith JP Morgan Chase Bank, N.A., as administrative agent, composed of a $430,000 term loan, which was scheduled to mature in May 2014.The principal amount of and the outstanding balance under the Term Loan was $881,268 and $597,874, net of loans held in treasury by the Company, atDecember 31, 2012 and 2011, respectively. In addition to scheduled principal payments, the Term Loan requires an excess cash flow payment each year. Therequired excess cash flow payment is the amount by which 50% of the excess cash flow (as defined in the credit agreement) generated by the Company in anygiven year exceeds the principal payments made during that year, subject to certain leverage ratio requirements. The excess cash flow payment is scheduled tobe due 125 days after year-end. For the year ending December 31, 2012, based on the calculation, including voluntary prepayments made prior to the excesscash flow payment date, the Company was not required to make an excess cash flow payment. For the year ending December 31, 2011, as a result ofrefinancing the Credit Agreement on February 9, 2012, the Company was not required to make an excess cash flow payment. For the year ending December31, 2010, based on the calculation, the Company was not required to make an excess cash flow payment. 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, the Company used $221,622 in net proceeds from the initial public offering to pay down the second lien term loan in full and to pay down aportion of the first lien term loan. In addition, in March 2010, December 2010, April 2011, December 2011 and February 2012 the Company used $138,495,$74,194, $24,731, $34,624 and $22,874 respectively, of cash and cash equivalents on hand to further pay down principal. Due to the incorporation of a new interest rate floor provision in the Term Loan Credit Agreement, which constitutes a change in critical terms, the Companyconcluded that as of May 30, 2012, the outstanding interest rate swaps would no longer be highly effective in achieving offsetting changes in cash flowsduring the periods the hedges are designated. As a result, the Company was required to de-designate the hedges as of May 30, 2012. Beginning May 31 2012,the effective portion of the swaps prior to the change (i.e. amounts previously recorded in Accumulated Other Comprehensive Loss) have been and willcontinue to be amortized as interest expense over the period of the originally designated hedged transactions which have various dates through October2013. Future changes in fair value of the swaps have been and will continue to be immediately recognized in the condensed consolidated statements ofcomprehensive income as interest expense. 7. Redeemable Stock and Stockholders’ Equity (Deficit) Between November 2006 and February 2010, certain of the current equity investors (affiliates of CCMP Capital Advisors, LLC and related entities, certainother investors, certain members of management of the Subsidiary and board of directors of the Company) had previously acquired a combination of Class Aand Class B Common stock and Series 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 were then entitled to receive an equity participation on all remaining proceeds after payment of this priority return to all Series APreferred stockholders equal to 24.3% of remaining proceeds (Series A Equity Participation). No distribution would be made to any holder of common stockuntil the Series A Preferred stockholders had received all distributions to which they were entitled as previously described. After such distributions were madeto the Series A Preferred stockholders, the holders of common stock were entitled to receive any remaining payments or distributions in accordance with theirrespective priorities. 60Table of Contents Generac Holdings Inc.Notes to Consolidated Financial StatementsYears Ended December 31, 2012, 2011, and 2010(Dollars in Thousands, Except Share and Per Share Data) 7. Redeemable Stock and Stockholders’ Equity (Deficit)(continued) 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.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. 61Table of Contents Generac Holdings Inc.Notes to Consolidated Financial StatementsYears Ended December 31, 2012, 2011, and 2010(Dollars in Thousands, Except Share and Per Share Data)7. Redeemable Stock and Stockholders’ Equity (Deficit)(continued) Distributions: After payment of the priority return to Series A Preferred stockholders previously described above under Preferred Stock, dividends andother distributions that remain available 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 the common stockholders as follows:Class B shares were 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% annualreturn on that base amount, compounded quarterly from the date in which the Class B shares were originally issued. After payment of this priority return toClass B holders, 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 on Class B common stock or the impact of Series A Equity Participation of$114,900 on Series A Preferred stock, both of which were recognized as a beneficial conversion at the time of the initial public offering. 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, the beneficial conversion was contingent upona future event and had not been recorded in the consolidated financial statements prior to the IPO. The beneficial conversion feature, which was valued at$25,790 at its commitment date, was recorded at the completion of the IPO on February 10, 2010 as a return to Class B Common stockholders analogous to adividend. Since no retained earnings were available to pay this dividend at resolution of the contingency, the dividend was charged against additional paid incapital resulting in no net impact.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. 62Table of Contents Generac Holdings Inc.Notes to Consolidated Financial StatementsYears Ended December 31, 2012, 2011, and 2010(Dollars in Thousands, Except Share and Per Share Data) 7. Redeemable Stock and Stockholders’ Equity (Deficit)(continued) The fair value of the Class A common stock on the date of issuance was estimated to be $390 per share. The Company recorded $6, and $38, and $40 ofstock-based compensation expense related to the Time Vesting Shares in 2010, 2009, and 2008, respectively, related to amortization of the excess of fair valueover purchase price of these restricted shares. This excess was being amortized over the vesting provisions of the restricted shares. As a result of the IPO, theremaining unvested performance-based Restricted Shares became fully vested. As a result, the Company has recorded $159 of stock-based compensationexpense related to the accelerated vesting in 2010. Issuance and repurchases of securitiesSeries A Preferred Stock: In September 2009, the Company issued 2,000 shares of the Series A Preferred stock to CCMP and certain members ofmanagement and the board of directors, for an aggregate purchase price of $20,000. In December 2009, the Company issued an aggregate of 1,476 shares ofSeries A Preferred stock to CCMP in exchange for certain term loans under the first and second lien credit facilities that CCMP had purchased. The exchangeratio in connection with the exchange was one share of Series A Preferred stock per $10 of the amount paid by CCMP for the loans that were so exchanged.Such purchased term loans had a cumulative outstanding principal amount equal to $154,815. As the equity consideration was less than the outstandingprincipal amount, a gain on debt extinguishment was recorded.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 the beneficial conversion was contingent upon a future event, it had not been recorded in the consolidated financial statementsprior to the IPO. The $114,900 beneficial conversion feature, which is the result of the additional Class A shares issued to satisfy the Series A EquityParticipation, was recorded at the completion of the initial public offering on February 10, 2010, as a return to Series A Preferred stockholders analogous to adividend. Since no retained earnings were available to pay this dividend at resolution of the contingency, the dividend was charged against additional paid incapital resulting in no net impact. 8. Earnings Per Share In fiscal years 2012, 2011 and 2010, basic earnings per share is calculated by dividing net income by the weighted average number of shares outstanding.Except where the result would be anti-dilutive, diluted earnings per share is calculated by assuming the vesting of unvested restricted stock and the exercise ofstock options, as well as their related income tax benefits. The following table reconciles the numerator and the denominator used to calculate basic and dilutedearnings per share: Year ended December 31 , 2012 2011 2010 Net income $93,223 $324,643 $56,913 Less: accretion of Series A Preferred stock - - (2,042)Less: accretion of Class B Common stock - - (12,133)Less: beneficial conversion - - (140,690)Net income (loss) attributable to Common stock (formerly Class A Common stock) 93,223 324,643 (97,952)Income attributable to Class B Common stock - - 12,133 Net income (loss) per common share - basic: Common stock (formerly Class A Common stock) $1.38 $4.84 $(1.65)Class B Common stock n/a n/a $505 Net income (loss) per common share - diluted: Common stock (formerly Class A Common stock) $1.35 $4.79 $(1.65)Class B Common stock n/a n/a $505 Weighted average number of shares outstanding – Common Stock (formerly Class A Commonstock): Basic 67,360,632 67,130,356 59,364,958 Dilutive effect of equity awards (1) 1,832,506 667,015 - Diluted 69,193,138 67,797,371 59,364,958 Weighted average number of shares outstanding – Class B Common stock – basic and diluted: n/a n/a 24,018 (1) Excludes approximately 363,000 stock options and restricted stock awards for the twelve month period ended December 31, 2012, as the impact of suchawards was anti-dilutive. There were no anti-dilutive awards for the twelve month period ended December 31, 2011. For the year ended December 31, 2010,diluted earnings per share are identical to basic earnings per share because the impact of common stock equivalents on earnings per share is anti-dilutive. Hadthe impact not been anti-dilutive, the effect of stock compensation awards on weighted average diluted shares outstanding would have been 257,038. 63Table of Contents Generac Holdings Inc.Notes to Consolidated Financial StatementsYears Ended December 31, 2012, 2011, and 2010(Dollars in Thousands, Except Share and Per Share Data) 8. Earnings Per Share (continued) In fiscal year 2010, the Company’s Class B Common stock was considered a participating stock security requiring use of the “two-class” method for thecomputation of basic net income (loss) per share in accordance with provisions of ASC 260-10 Earnings per share. Losses were not allocated to the Class BCommon stock in the computation of basic earnings per share as the Class B Common stock was not obligated to share in losses. Basic earnings per shareexcludes the effect of common stock equivalents and was computed using the “two-class” computation method, which subtracts earnings attributable to theClass B preference from total earnings. In addition, earnings attributable to the Series A Preferred preference and the Class B and Series A Preferred beneficialconversion were subtracted from total earnings. Any remaining loss was attributed to the Class A Common shares. 9. Income Taxes The Company’s provision for income taxes consists of the following: Year ended December 31, 2012 2011 2010 Current: Federal $34,170 $14,312 $– State 3,854 1,885 307 Foreign 81 – – 38,105 16,197 307 Deferred: Federal 21,972 15,632 19,127 State 3,048 1,887 2,831 Foreign 25 – – 25,045 17,519 21,958 Change in valuation allowance (21) (271,393) (21,958)Provision for income taxes $63,129 $(237,677) $307 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 2012, 2011, 2010, and 2009 is open, for federal and state income taxes.Additionally, tax years 2007 and 2008 remain open for examination by certain state and foreign taxing authorities.Significant components of deferred tax assets and liabilities are as follows: December 31, 2012 2011 Deferred tax assets: Goodwill and intangible assets $125,457 $160,311 Accrued expenses 26,606 16,572 Deferred revenue 3,503 1,370 Inventories 2,544 2,720 Pension obligations 9,064 8,641 Stock-based compensation 6,408 5,302 Operating loss and credit carryforwards 24,915 50,429 Interest rate swap, copper derivative 1,119 2,065 Other 36 719 Valuation allowance (806) – Total deferred tax assets 198,846 248,129 Deferred tax liabilities: Depreciation 12,274 5,994 Prepaid expenses 1,131 377 Total deferred tax liabilities 13,405 6,371 Net deferred tax asset $185,441 $241,758 64Table of Contents Generac Holdings Inc.Notes to Consolidated Financial StatementsYears Ended December 31, 2012, 2011, and 2010(Dollars in Thousands, Except Share and Per Share Data) 9. Income Taxes (continued) The net current and noncurrent components of deferred taxes included in the consolidated balance sheets are as follows: December 31, 2012 2011 Net current deferred tax assets $48,687 $14,395 Net long-term deferred tax assets 137,560 227,363 Valuation allowance (806) – Net deferred tax assets $185,441 $241,758 The Company was in a three year cumulative net loss position, due primarily to a 2008 goodwill and tradename impairment write-off, and therefore had notconsidered expected future taxable income in analyzing the realizability of the deferred tax assets as of December 31, 2010, resulting in a full valuationallowance against these net deferred tax assets. In the fourth quarter of 2011, the Company was no longer in a three-year cumulative loss position and, as partof the normal assessment of the future realization of the net deferred tax assets, determined that a valuation allowance was no longer required. As a result, thevaluation allowance was reversed in the fourth quarter of 2011 and the Company recorded as a tax benefit of $271,393. Acquired as part of the Ottomotores acquisition, Ottomotores Brazil generated net operating losses for multiple years. The realizability of the deferred tax assetsassociated with these net operating losses is uncertain so a valuation allowance has been recorded in the opening balance sheet as of December 8, 2012. At December 31, 2012, the Company has federal net operating loss carryforwards of approximately $54,079, which expire between 2028 and 2030, andvarious state net operating loss carryforwards, which expire between 2017 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, 2011 and expects no limitation was triggered in 2012. Future ownership changesmay result in such a limitation. However, the Company believes any limitation would not be significant. At December 31, 2012 and 2011, the Company has no reserves recorded for uncertain tax positions. A reconciliation of the statutory tax rates and the effective tax rates for the years ended December 31, 2012, 2011 and 2010 are as follows: Year ended December 31, 2012 2011 2010 U.S. statutory rate 35.0% 35.0% 35.0%State taxes 4.1 4.0 4.0 Valuation allowance - (312.3) (38.0)Other 1.3 - - Effective tax rate 40.4% (273.3)% 1.0%The American Taxpayer Relief Act of 2012 (the “Act”) was signed into law on January 2, 2013. The Act retroactively restored several expired business taxprovisions, including the research and experimentation credit. Because a change in tax law is accounted for in the period of enactment, the retroactive benefitof the Act on the Company’s U.S. federal taxes for 2012 will be recognized in 2013. The Company expects the Act’s extension of this provision through theend of 2013 will reduce our estimated annual effective tax rate for 2013, however we do not believe the effect will be material. 65Table of Contents Generac Holdings Inc.Notes to Consolidated Financial StatementsYears Ended December 31, 2012, 2011, and 2010(Dollars in Thousands, Except Share and Per Share Data) 10. Benefit Plans Medical and Dental Plan The Company maintains medical and dental benefit plans covering full-time employees of the Company and their dependents. Certain plans are partially orfully self-funded plans under which participant claims are obligations of the plan. These plans are funded through employer and employee contributions at alevel sufficient to pay for the benefits provided by the plan. The Company’s contributions to the plan were $8,741, $6,700, and $7,300 for the years endedDecember 31, 2012, 2011, and 2010, respectively. The plan covering a majority of full-time employees maintains individual stop loss insurance policies onthe medical portion with a limit of stop loss of $235 to mitigate losses. Balances for the incurred but not yet reported claims, including reported but unpaidclaims at December 31, 2012, and 2011, were $1,185 and $800, respectively. The Company estimates claims incurred but not yet reported based on itshistorical experience. During 2012, the Company paid premiums of $2,446 for other standard medical benefits covering certain full-time employees. Savings Plan The Company maintains a defined-contribution 401(k) savings plan for virtually all domestic employees who meet certain eligibility requirements. Under theplan, employees may defer receipt of a portion of their eligible compensation. The Company amended the 401(k) savings plans effective January 1, 2009, to add Company matching and non-elective contributions. The Company 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 $3,000, $2,400 and $2,300 of expense related to this plan in 2012, 2011 and 2010, respectively. Pension Plans The Company has noncontributory salaried and hourly pension plans (collectively, “Pension Plans”) covering certain domestic employees. The benefits underthe salaried plan are based upon years of service and the participants’ defined final average monthly compensation. The benefits under the hourly plan arebased 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 PensionPlans effective December 31, 2008. This resulted in a cessation of all future benefit accruals for both hourly and salary pension plans. The Company uses a December 31 measurement date for the Pension Plans. Information related to the Pension Plans is as follows: Year Ended December 31, 2012 2011 Accumulated benefit obligation at end of period $59,744 $53,467 Change in projected benefit obligation Projected benefit obligation at beginning of period $53,467 $46,049 Interest cost 2,453 2,369 Net actuarial loss 5,332 6,649 Benefits paid -1,508 -1,600 Projected benefit obligation at end of period $59,744 $53,467 Change in plan assets Fair value of plan assets at beginning of period $31,423 $30,615 Actual return on plan assets 4,268 623 Company contributions 2,387 1,785 Benefits paid -1,508 -1,600 Fair value of plan assets at end of period $36,570 $31,423 Funded status: accrued pension liability included in other long-term liabilities $(23,174) $(22,044) Amounts recognized in accumulated other comprehensive income Net actuarial loss $(12,081) $(10,529) The actuarial loss for the Pension Plans that was amortized from OCI into net periodic benefit cost during 2012 is $909. The amount in OCI as ofDecember 31, 2012 that is expected to be recognized as a component of net periodic pension expense during the next fiscal year is $1,108. 66Table of Contents Generac Holdings Inc.Notes to Consolidated Financial StatementsYears Ended December 31, 2012, 2011, and 2010(Dollars in Thousands, Except Share and Per Share Data) 10. Benefit Plans (continued) Additional information related to the Pension Plans is as follows: Year ended December 31, 2012 2011 2010 Components of net periodic pension expense: Interest cost $2,453 $2,369 $2,359 Expected return on plan assets (2,398) (2,342) (2,004)Amortization of net loss 909 273 247 Net periodic pension expense $964 $300 $602 Weighted-average assumptions used to determine benefit obligation are as follows: December 31, 2012 2011 Discount rate – salaried pension plan 4.10% 4.65%Discount rate – hourly pension plan 4.14% 4.65%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, 2012 2011 2010 Discount rate 4.65% 5.23% 5.76%Expected long-term rate of return on plan assets 7.57 7.62 7.30 Rate of compensation increase (1) n/a n/a n/a (1) No compensation increase was assumed as the plans were frozen effective December 31, 2008. To determine the long-term rate of return assumption for plan assets, the Company studies historical markets and preserves the long-term 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. 67Table of Contents Generac Holdings Inc.Notes to Consolidated Financial StatementsYears Ended December 31, 2012, 2011, and 2010(Dollars in Thousands, Except Share and Per Share Data) 10. Benefit Plans (continued) The Pension Plan’s weighted-average asset allocation at December 31, 2012 and 2011, by asset category, is as follows: December 31, 2012 December 31, 2011 Asset Category Target Dollars % Dollars % Fixed Income 24% 8,736 24% 7,349 23%Domestic equity 49% 17,926 49% 15,879 51%International equity 17% 6,257 17% 4,766 15%Real estate 10% 3,651 10% 3,429 11%Total 100% $36,570 100% $31,423 100% The fair values of the Pension Plan's assets at December 31, 2012 are as follows: Total Quoted pricesin activemarkets foridentical asset(level 1) Significantobservableinputs(level 2) Significantunobservableinputs(level 3) Mutual fund $33,683 $33,683 $– $– Collective trust 2,887 – 2,887 – Total $36,570 $33,683 $2,887 $– The fair values of the Pension Plan's assets at December 31, 2011 are as follows: Total Quoted pricesin activemarkets foridentical asset(level 1) Significantobservableinputs(level 2) Significantunobservableinputs(level 3) Mutual fund $28,530 $28,530 $– $– Collective trust 2,893 – 2,893 – Total $31,423 $28,530 $2,893 $– 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. 68Table of Contents Generac Holdings Inc.Notes to Consolidated Financial StatementsYears Ended December 31, 2012, 2011, and 2010(Dollars in Thousands, Except Share and Per Share Data) 10. Benefit Plans (continued)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 $1,052 to the Pension Plans in 2013. The following benefit payments are expected to be paid from the Pension Plans: Year 2013 $1,656 2014 1,768 2015 1,863 2016 1,994 2017 2,191 Years 2018 – 2022 $12,715 11. 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 recorded $6 of stock-basedcompensation expense related to the Time Vesting Shares in 2010 related to amortization of the excess of fair value over purchase price of these restrictedshares. This excess was being amortized over the vesting provisions of the restricted shares. As a result of the IPO, the remaining unvested performance-basedRestricted Shares became fully vested. As a result, the Company recorded $159 of stock-based compensation expense related to the accelerated vesting in2010.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. The Company has subsequently granted an additional 470,372 stock options and 287,618 shares of restricted stock and other stock awards toemployees and Board members of the Company. Total share-based compensation cost related to the equity incentive plan recognized in the consolidatedstatements of comprehensive income was $10,780, $8,646 and $6,198 in 2012, 2011 and 2010, respectively, net of actual forfeitures, which is recorded inoperating expenses in the consolidated statements of comprehensive income. 69Table of Contents Generac Holdings Inc.Notes to Consolidated Financial StatementsYears Ended December 31, 2012, 2011, and 2010(Dollars in Thousands, Except Share and Per Share Data)11. Share Plans (continued) Stock Options - Stock options granted in 2012 have an exercise price of between $18.82 per share and $37.05 per share, stock options granted in 2011 havean exercise price of between $11.15 per share and $18.73 per share, and the stock options granted in 2010 have an exercise price of between $7.00 per shareand $10.18 per share. On June 29, 2012, the Company used a portion of the proceeds from the May 30, 2012 debt refinancing (see footnote #6 – CreditAgreement) together with cash on its balance sheet to pay a special cash dividend of $6.00 per share on its common stock. In connection with the specialdividend, and pursuant to the terms of the Company’s stock option plan, certain adjustments are required to be made to stock options outstanding under theplan in order to avoid dilution of the intended benefits which would otherwise result as a consequence of the special dividend. As such, the strike price for alloutstanding stock options as of the special dividend date was adjusted by the $6.00 special dividend amount. There was no change to compensation expenseas a result of this adjustment. On July 2, 2012, the strike price of all stock option awards outstanding prior to the special dividend date was restated to reflectthese adjustments. The exercise prices noted above reflect this adjustment. Stock options issued in 2012 vest in equal installments over four years, subject tothe grantee’s continued employment or service and expire 10 years after the date of grant. Stock options issued in 2011 and 2010 vest in equal installmentsover five years, subject to the grantee’s continued employment or service and expire 10 years after the date of grant.Beginning in 2011, stock option exercises are net-share settled such that the Company withholds shares with value equivalent to the exercise price of theawards plus the employees’ minimum statutory obligation for the applicable income and other employment taxes. Total shares withheld were approximately667,041 and 55,202 in 2012 and 2011, respectively, and were based on the value of the stock on the exercise date as determined based upon an average of theCompany’s high and low stock sales price. Total payments for the employees’ tax obligations to the taxing authorities were $6,425, $371 and $0 in 2012,2011 and 2010, respectively, and are reflected as a financing activity within the Consolidated Statement of Cash Flows. The net-share settlements had theeffect of share repurchases by the Company as they reduced the number of shares that would have otherwise been issued as a result of the vesting and did notrepresent an expense to the Company.The Company has agreed to pay these taxes on behalf of the employees in return for the employee exchanging an equivalent value of options to the Company.This transaction resulted in a decrease of approximately $6,425 and $371 in 2012 and 2011, respectively, to equity on the consolidated balance sheet as thecash payment of the taxes effectively acted as a repurchase of the stock options previously granted.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 is limited history for the Company’s stock, expected volatility is calculated based on ananalysis of historic and implied volatility measures for a set of peer companies. The average expected life is based on the contractual term of the option usingthe simplified method. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with a remaining term equal to the expected life assumed at thedate of grant. The compensation expense recognized is net of estimated forfeitures. Forfeitures are estimated based on termination history, as there is notsufficient history of actual share option forfeitures at this time. The weighted-average assumptions used in the Black-Scholes-Merton option pricing model for2012 and 2011 are as follows: 2012 2011 Weighted average grant date fair value $12.13 $11.10 Assumptions: Expected stock price volatility 45% 50%Risk free interest rate 1.22% 2.69%Expected annual dividend per share $0.00 $0.00 Expected life of options (years) 6.25 6.5 70Table of Contents Generac Holdings Inc.Notes to Consolidated Financial StatementsYears Ended December 31, 2012, 2011, and 2010(Dollars in Thousands, Except Share and Per Share Data) 11. Share Plans (continued) The Company periodically evaluates its forfeiture rates and updates the rates it uses in the determination of its stock-based compensation expense. The impactof the change to the forfeiture rates on non-cash compensation expense was immaterial for the years ended December 31, 2012, 2011 and 2010. A summary ofthe Company’s stock option activity and related information for the three years ended December 31, 2012 is as follows: Number ofOptions Weighted- Average Exercise Price Weighted- Average Remaining Contractual Term (in years) Aggregate Intrinsic Value ($ in thousands)Outstanding as of December 31, 2009- $- Granted4,366,504 13.02 Exercised- - Expired- - Forfeited(130,245) (13.00) Outstanding as of December 31, 20104,236,259 13.02 9.1$ 13,349Granted179,877 21.26 Exercised(107,591) 13.00 Expired- - Forfeited- - Outstanding as of December 31, 20114,308,545 13.36 8.2$ 63,193Granted256,112 21.28 Exercised(1,113,827) 13.21 Expired- - Forfeited(10,788) 20.52 Outstanding as of December 31, 20123,440,042 14.38 $68,549Exercisable as of December 31, 2012509,054 $13.19 7.3$ 10,750Of the 1,113,827 stock options exercised during the fiscal year 2012, 667,041 shares underlying such exercised options were retained by the Company in anet-share settlement to cover the aggregate exercise price and the required amount of employee withholding taxes.As of December 31, 2012, there was $16,356 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 2.4 years. Total share-based compensation cost related to thestock options for 2012, 2011 and 2010 was $6,835, $6,475 and $4,470, respectively, which is recorded in operating expenses in the consolidated statementsof comprehensive income.Restricted Stock – For awards issued prior to 2012, restricted stock awards vest in full on the third anniversary of the date of grant, subject to the grantee’scontinued employment. Restricted stock awards issued in 2012 vest in equal installments over three years, subject to the grantee’s continued employment orservice. 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 awardsis determined based on the market value of the Company's shares on the grant date. The compensation expense recognized for restricted share awards is net ofestimated forfeitures. 71Table of Contents Generac Holdings Inc.Notes to Consolidated Financial StatementsYears Ended December 31, 2012, 2011, and 2010(Dollars in Thousands, Except Share and Per Share Data) 11. Share Plans (continued)A summary of the Company's restricted share awards activity for the three years ended December 31, 2012 is as follows: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 Granted59,147 20.59 Vested- - Forfeited- - Non-vested as of December 31, 2011489,302 $13.93 Granted195,771 26.94 Vested- - Forfeited(20,002) - Non-vested as of December 31, 2012665,071 $17.75 72Table of Contents Generac Holdings Inc.Notes to Consolidated Financial StatementsYears Ended December 31, 2012, 2011, and 2010(Dollars in Thousands, Except Share and Per Share Data) 11. Share Plans (continued) As of December 31, 2012, there was $4,431 of total unrecognized compensation cost, net of expected forfeitures, related to non-vested stock awards. That costis expected to be recognized over the remaining service period, having a weighted-average period of 2.0 years. Total share-based compensation cost related to therestricted stock for 2012, 2011 and 2010 was $3,645, $1,871 and 1,447, respectively, which is recorded in operating expenses in the consolidated statementsof comprehensive income.During 2012, 2011 and 2010, 10,864, 16,680 and 21,406 shares, respectively, of fully vested stock were granted to certain members of the Company’sboard of directors as a component of their compensation for their service on the board. Total compensation cost for these share grants in 2012, 2011 and 2010was $300, $300 and $281, respectively, which is recorded in operating expenses in the consolidated statements of comprehensive income. 12. Commitments and Contingencies The Company leases certain computer equipment, automobiles, and warehouse space under operating leases with lease terms generally ranging between 3-5years. The approximate aggregate minimum rental commitments at December 31, 2012, are as follows: Amount Year 2013 $825 2014 540 2015 269 2016 108 2017 18 Total $1,760 Total rent expense for the years ended December 31, 2012, 2011 and 2010, which includes short-term data processing equipment rentals, was approximately$2,870, $1,309, and $554, 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 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, 2012 and 2011 was approximately $16,600 and 10,035,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. 73Table of Contents Generac Holdings Inc.Notes to Consolidated Financial StatementsYears Ended December 31, 2012, 2011, and 2010(Dollars in Thousands, Except Share and Per Share Data)13. Special Cash Dividend On June 29, 2012, the Company used a portion of the proceeds from the May 30, 2012 debt refinancing (see Note #6 – Credit Agreements) together with cashon its balance sheet to pay a special cash dividend of $6.00 per share on its common stock, resulting in payments totaling $404,332 to stockholders.Dividends declared but unpaid as of December 31, 2012 of $3,957, which relate to dividends earned on unvested restricted stock awards, are included inother accrued liabilities in the consolidated balance sheet. In connection with the special dividend, and pursuant to the terms of the Company’s stock optionplan, certain adjustments were required to be made to stock options outstanding under the plan in order to avoid dilution of the intended benefits which wouldotherwise result as a consequence of the special dividend. As such, on July 2, 2012, the strike price for all outstanding stock options at that time wasmodified by the $6.00 special dividend amount. There was no change to compensation expense as a result of this adjustment. Dividends have been recorded as a reduction to additional paid-in capital as the Company has an accumulated deficit balance. 14. Related-Party Transactions Prior to the IPO, the Company had an agreement to pay CCMP and certain other investors and related entities an annual advisory fee of $500. The Companyexpensed $55 in advisory fees for 2010. This agreement was terminated effective with the IPO on February 10, 2010. 15. Quarterly Financial Information (Unaudited) Quarters Ended 2012 Q1 Q2 Q3 Q4 Net sales $294,561 $239,137 $300,586 $342,022 Gross profit 111,005 87,429 115,813 126,153 Operating income 59,493 37,158 59,124 67,780 Net income 30,060 9,335 25,541 28,287 Net income per common share, basic: $0.45 $0.14 $0.38 $0.42 Net income per common share, diluted: $0.44 $0.14 $0.37 $0.41 Quarters Ended 2011 Q1 Q2 Q3 Q4 Net sales $123,981 $161,363 $239,324 $267,308 Gross profit 47,177 60,353 88,659 98,465 Operating income 11,143 21,800 44,178 35,860 Net income 4,844 15,289 37,379 267,131 Net income per common share, basic: $0.07 $0.23 $0.56 $3.98 Net income per common share, diluted: $0.07 $0.23 $0.55 $3.91 74Table of Contents Generac Holdings Inc.Notes to Consolidated Financial StatementsYears Ended December 31, 2012, 2011, and 2010(Dollars in Thousands, Except Share and Per Share Data)16. Valuation and Qualifying Accounts For the years ended December 31, 2012, 2011 and 2010: Balance atBeginning ofPeriod ReservesAssumed inAcquisition AdditionsCharged toEarnings Charges toReserve, Net(1) Balance atEndof Year Year ended December 31, 2012 Allowance for doubtful accounts $789 $383 $204 $(210) $1,166 Reserves for inventory 4,717 1,694 1,785 (1,197) 6,999 Valuation of deferred tax assets – 827 (21) – 806 Year ended December 31, 2011 Allowance for doubtful accounts $723 $171 $(7) $(98) $789 Reserves for inventory 4,059 657 1,092 (1,091) 4,717 Valuation of deferred tax assets 271,393 – (271,393) – – 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 – (18,136) – 271,393 (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.17. Subsequent Events On February 11, 2013, the Company prepaid $80,000 of principal on its existing Term Loan with available cash on hand, which was applied against bothrequired excess cash flow payments and all required future principal amortizations on the Term Loan. 75Table of Contents 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, 2012 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, 2012. In conducting this assessment, our management excludedOttomotores UK Ltd. because it was acquired only in the fourth quarter 2012 and constituted 4.6% and 8.7% of total and net assets, respectively, as ofDecember 31, 2012 and 0.6% and 0.3% of revenues and net income, respectively, for the year then ended. Our independent registered public accounting firm has issued an attestation report on our internal control over financial reporting as of December 31, 2012. Itsreport appears in the consolidated financial statements included in this Annual Report on Form 10-K on page 39.Changes in Internal Control Over Financial ReportingOn December 8, 2012, a subsidiary of the Company acquired all of the equity of the Ottomotores businesses. As a result of the acquisition, we are in theprocess of reviewing the internal control structure of Ottomotores and, if necessary, will make appropriate changes as we incorporate our controls andprocedures into the acquired business. Except for this acquisition, there have been no changes in our internal control over financial reporting that occurredduring the three months ended December 31, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financialreporting.Item 9B. Other Information None 76Table of ContentsPART 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 2013 ProxyStatement, and is incorporated by reference herein.Item 11. Executive Compensation The information required by this item will be included in our 2013 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 2013 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 2013 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 2013 Proxy Statement and is incorporated herein by reference. PART IV Item 15. Exhibits and Financial Statement Schedules (a)(1) Financial Statements Included in Part II of this report: Page Report of Independent Registered Public Accounting Firm39Consolidated balance sheets as of December 31, 2012 and 201141Consolidated statements of comprehensive income for years ended December 31, 2012, 2011 and 201042Consolidated statements of redeemable stock and stockholders’ equity (deficit) for years ended December 31, 2012, 2011 and 201043Consolidated statements of cash flows for the years ended December 31, 2012, 2011 and 201044Notes to consolidated financial statements45 (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.(a)(3) Exhibits See the Exhibits Index following the signature pages for a list of the exhibits being filed or furnished with or incorporated by reference into this Annual Reporton Form 10-K. 77Table of ContentsSIGNATURES 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 President and Chief Executive Officer Dated: March 13, 2013 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. Signature Title Date /s/ Aaron Jagdfeld Aaron Jagdfeld President, Chief Executive Officer and DirectorMarch 13, 2013/s/ York A. Ragen York A. Ragen Chief Financial Officer andChief Accounting OfficerMarch 13, 2013/s/ John D. Bowlin John D. Bowlin DirectorMarch 13, 2013/s/ Robert D. Dixon Robert D. Dixon DirectorMarch 13, 2013/s/ Barry J. Goldstein Barry J. Goldstein DirectorMarch 13, 2013/s/ Stephen Murray Stephen Murray DirectorMarch 13, 2013/s/ david ramon David Ramon DirectorMarch 13, 2013/s/ Timothy W. Sullivan DirectorMarch 13, 2013Timothy W. Sullivan /s/ Timothy Walsh Timothy WalshDirectorMarch 13, 2013 78Table of ContentsExhibitsNumberDescription 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 on FormS-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 filed withthe SEC on January 11, 2010). 3.1Third Amended and Restated Certificate of Incorporation of Generac Holdings Inc. (incorporated by reference to Exhibit 3.1 of the Company’sAnnual Report on Form 10-K for the fiscal year ended December 31, 2010). 3.2Amended and Restated Bylaws of Generac Holdings Inc. (incorporated by reference to Exhibit 3.2 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010). 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). 4.2Stockholders Agreement, dated as of November 10, 2006, by and among Generac Holdings Inc., certain stockholders of Generac Holdings Inc.,including CCMP Capital Investors II, L.P., various of it affiliated funds, various funds affiliated with Unitas Capital Ltd. and the ManagementStockholders (as defined in Stockholders Agreement) (incorporated by reference to Exhibit 4.2 of the Registration Statement on Form S-1 filedwith the SEC on October 20, 2009).10.1Credit Agreement, dated as of February 9, 2012, as amended and restated as of May 30, 2012, among Generac Power Systems, Inc., GeneracAcquisition Corp., the lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, and Bank of America, N.A. and GoldmanSachs Bank USA, as syndication agents (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed withthe SEC on May 31, 2012).10.2Guarantee and Collateral Agreement, dated as of February 9, 2012, as amended and restated as of May 30, 2012, among Generac Holdings Inc.,Generac Acquisition Corp., Generac Power Systems, Inc., certain subsidiaries of Generac Power Systems, Inc. and JPMorgan Chase Bank,N.A., as Administrative Agent (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed with the SEC onMay 31, 2012).10.3Credit Agreement, dated as of May 30, 2012, among Generac Power Systems, Inc., its Domestic Subsidiaries listed as Borrowers on thesignature pages thereto, Generac Acquisition Corp., the lenders party thereto, Bank of America, N.A. as Administrative Agent, JPMorgan ChaseBank, N.A. and Goldman Sachs Bank USA, as syndication agents, and Wells Fargo Bank, National Association, as Documentation Agent(incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K filed with the SEC on May 31, 2012).10.4Guarantee and Collateral Agreement, dated as of May 30, 2012, among Generac Holdings Inc., Generac Acquisition Corp., Generac PowerSystems, Inc., certain subsidiaries of Generac Power Systems, Inc. and Bank of America, N.A., as Administrative Agent (incorporated byreference to Exhibit 10.4 of the Company’s Current Report on Form 8-K filed with the SEC on May 31, 2012).10.5Advisory Services and Monitoring Agreement, dated November 10, 2006 (incorporated by reference to Exhibit 10.7 of the Registration Statementon Form S-1 filed with the SEC on November 24, 2009).10.6+2009 Executive Management Incentive Compensation Program (incorporated by reference to Exhibit 10.46 of the Registration Statement on FormS-1 filed with the SEC on December 17, 2009).10.7+Generac Holdings Inc. Amended and Restated 2010 Equity Incentive Plan (incorporated by reference to Appendix A to the Definitive ProxyStatement on Schedule 14A of the Company filed with the SEC on April 27, 2012).10.8+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).10.9+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).10.10+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). 79Table of ContentsExhibitsNumberDescription10.11+Amendment to Employment Agreement, dated January 14, 2010, between Generac and Dawn Tabat (incorporated by reference to Exhibit 10.66of the Registration Statement on Form S-1 filed with the SEC on October 20, 2009).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).10.13+Form of Change in Control Severance Agreement (incorporated by reference to Exhibit 10.64 of the Registration Statement on Form S-1 filed withthe SEC on January 25, 2010).10.14Form 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).10.15+Form of Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.44 of the Registration Statement on Form S-1 filed with theSEC on January 25, 2010).10.16+Form of Nonqualified Stock Option Award Agreement (incorporated by reference to Exhibit 10.45 of the Registration Statement on Form S-1 filedwith the SEC on January 25, 2010).10.17+Amended Form of Restricted Stock Award Agreement pursuant to the 2010 Equity Incentive Plan (incorporated by reference to Exhibit 10.3 of theQuarterly Report on Form 10-Q filed with the SEC on May 8, 2012).10.18+Amended Form of Nonqualified Stock Option Award Agreement pursuant to the 2010 Equity Incentive Plan (incorporated by reference to Exhibit10.4 of the Quarterly Report on Form 10-Q filed with the SEC on May 8, 2012).10.19+Amended Form of Restricted Stock Award Agreement with accelerated vesting pursuant to the 2010 Equity Incentive Plan (incorporated byreference to Exhibit 10.5 of the Quarterly Report on Form 10-Q filed with the SEC on May 8, 2012).10.20Form of Generac Holdings Inc. Director Indemnification Agreement for Stephen Murray and Timothy Walsh (incorporated by reference toExhibit 10.50 of the Registration Statement on Form S-1 filed with the SEC on January 11, 2010).10.21Form of Generac Holdings Inc. Director Indemnification Agreement for Barry Goldstein, John D. Bowlin, Robert Dixon, David Ramon, andTimothy W. Sullivan (incorporated by reference to Exhibit 10.51 of the Registration Statement on Form S-1 filed with the SEC on January 11,2010).10.22Form 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).10.23Form of Generac Power Systems, Inc. Director Indemnification Agreement for Stephen Murray and Timothy Walsh (incorporated by reference toExhibit 10.53 of the Registration Statement on Form S-1 filed with the SEC on January 25, 2010).10.24Form of Generac Power Systems, Inc. Indemnification Agreement for Barry Goldstein, John D. Bowlin, Aaron Jagdfeld, David Ramon, YorkA. Ragen, Dawn Tabat, Allen Gillette, Roger Schaus, Jr., Roger Pascavis and Russell S. Minick (incorporated by reference to Exhibit 10.54 ofthe Registration Statement on Form S-1 filed with the SEC on January 25, 2010).10.25+Amendment to Employment Agreement with Dawn Tabat (incorporated by reference to Exhibit 10.1 of the Quarterly Report on Form 10-Q filedwith the SEC on November 14, 2011).10.26+Amendment to Employment Agreement with Dawn Tabat (incorporated by reference to Exhibit 10.1 of the Quarterly Report on Form 10-Q filedwith the SEC on November 6, 2012).10.27+Offer letter to Russ Minick (incorporated by reference to Exhibit 10.2 of the quarterly report filed with the SEC on November 14, 2011).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 to section 302of 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 to section 302of the Sarbanes-Oxley Act of 2002.32.1**Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002.32.2**Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002.101*The following financial information from the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012, filed withthe SEC on March 13, 2013, formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets at December 31,2012 and December 31, 2011; (ii) Consolidated Statements of Operations for the Fiscal Years Ended December 31, 2012, December 31, 2011and December 31, 2010; (iii) Consolidated Statements of Redeemable Stock and Stockholders' Equity (Deficit) for the Fiscal Years EndedDecember 31, 2012, December 31, 2011 and December 31, 2010; (iv) Consolidated Statements of Cash Flows for the Fiscal Years EndedDecember 31, 2012, December 31, 2011 and December 31, 2010; (v) Notes to Consolidated Financial Statements.*Filed herewith.**Furnished herewith. +Indicates management contract or compensatory plan or arrangement. 80   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, LLCMagnum Power Products, LLC Georgia, U.S.Wisconsin, U.S. Warehouse Development Group LLC Wisconsin, U.S.Generac Power Systems UK Limited United KingdomOttomotores UK Ltd. United KingdomOttomotores Nominees Ltd. (UK) United KingdomOttomotores S.A de C.V. (Mexico) MexicoOttomotores Comercializadora S.A. de C.V. (Mexico) MexicoOttomotores do Brasil Energia Ltda (Brazil) Brazil    Exhibit 23.1 Consent of Independent Registered Public Accounting Firm We consent to the incorporation by reference in the Registration Statement on Form S-3 (No. 333-185136) and Registration Statements on Form S-8 (Nos. 333-164851 and 333-183109) of Generac Holdings Inc. (the “Company”) of our reports, dated March 13, 2013, with respect to the consolidated financialstatements and the effectiveness of internal control over financial reporting of the Company, included in this Annual Report on Form 10-K for the year endedDecember 31, 2012. /s/ Ernst & Young LLP Milwaukee, WisconsinMarch 13, 2013   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 13, 2013 /s/ Aaron Jagdfeld Name: Aaron Jagdfeld Title: President and 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 for externalpurposes 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 13, 2013 /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, 2012 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, 2012 fairly presents, in all materialrespects, the financial condition and results of operations of the Company. Date: March 13, 2013 /s/ Aaron Jagdfeld Name: Aaron Jagdfeld Title: President and 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, 2012 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, 2012 fairly presents, in all materialrespects, the financial condition and results of operations of the Company. Date: March 13, 2013 /s/ York A. Ragen Name: York A. Ragen Title: Chief Financial Officer  

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