2 0 1 8 G E N E R A C A N N U A L R E P O R T 156747COV_r1_GEN AR 2017_V4.indd 1-34/18/19 9:31 AMGenerac Holdings Inc.S45 W29290 Hwy. 59 Waukesha, WI 531891-888-GENERAC (1-888-436-3722) ©2019 Generac Holdings Inc. All rights reserved.Generac Holdings Inc.S45 W29290 Hwy. 59 Waukesha, WI 531891-888-GENERAC (1-888-436-3722) ©2019 Generac Holdings Inc. All rights reserved.2018GENERAC ANNUAL REPORT 156747COV_r1_GEN AR 2017_V4.indd 4-64/18/19 9:36 AMFounded in 1959. A leading designer and manufacturer of a wide range of power generation equipment and other power products serving residential, light commercial and industrial markets. Products are available globally through a broad network of independent dealers, distributors, retailers, wholesalers and equipment rental companies, as well as sold direct to certain end users. Thirteen acquisitions completed since 2011. Approximately 5,700 employees as of 1/1/2019. Global manufacturing, distribution, fulfillment and commercial footprint with facilities located in the U.S., Latin America, Europe and Asia.ABOUT GENERACJohn D. Bowlin (2) Director since 2006Former President and Chief ExecutiveOfficer, Miller Brewing CompanyRobert D. Dixon (1) (3) Director since 2012Former Chief Executive Officer,Natural Systems Utilities LLC Aaron P. Jagdfeld (4)President and Chief Executive Officer,Generac Holdings Inc.Director since 2006 William “BJ” Jenkins (2)President and Chief Executive Officer,Barracuda NetworksDirector since 2017Andrew G. Lampereur (1)Director since 2014Former Executive Vice President and ChiefFinancial Officer, Actuant CorporationBennett Morgan (2) (3) (5)Director since 2013Former President and Chief Operating Officer,Polaris Industries Inc.David A. Ramon (1)Chief Executive Officer,Diversified MaintenanceDirector since 2010Kathryn Roedel (3)Director since 2016Former Executive Vice President andChief Services and Fulfillment Officer,Select Comfort CorporationDominick Zarcone (1)President and Chief Executive Officer,LKQ CorporationDirector since 2017(1) Member of Audit Committee(2) Member of Compensation Committee(3) Member of Nominating and Corporate Governance Committee(4) Executive Chairman(5) Lead DirectorGENERAC HOLDINGS INC. - BOARD OF DIRECTORSFORWARD-LOOKING STATEMENTSThis annual report contains forward-looking statements that are subject to risks and uncertainties. For important information about our use of forward-looking statements and limitations thereof, please see Part I of our Annual Report on Form 10-K for the year ended December 31, 2018, which is included with this annual report.GENERAC HOLDINGS INC. - SHAREHOLDER INFORMATIONANNUAL MEETINGThe 2019 annual meetingof stockholders of GeneracHoldings Inc. will be held onThursday, June 13, 2019,at 9:00 a.m. central time, at Generac’s corporate office.CORPORATE OFFICEGenerac Holdings Inc.S45 W29290 Hwy. 59Waukesha, WI 53189262-544-4811www.generac.comTRANSFER AGENT AND REGISTRARComputershare, Inc. P.O. Box 43078Providence, RI 02940-3078United States of AmericaTelephone: 1-800-942-5909Fax: (312) 601-2312https://www-us.computershare.com/investor/Contact www.computershare.com/investorINVESTOR RELATIONSCONTACTYork RagenChief Financial Officer Generac Holdings Inc.S45 W29290 Hwy. 59Waukesha, WI 53189262-506-6064investorrelations@generac.comINDEPENDENT AUDITORSDeloitte & Touche LLP 555 East Wells Street, Suite 1400Milwaukee, WI 53202 FORM 10-KOur annual report on Form 10-Kwas filed with the Securities andExchange Commission and isavailable online, or upon writtenrequest to Generac Holdings Inc.Investor Relations.STOCK EXCHANGEGenerac Holdings Inc. commonstock is listed on the New YorkStock Exchange under the tickersymbol GNRC.EXECUTIVE OFFICERSAaron P. Jagdfeld – 24 years of serviceChairman, President and Chief Executive Officer York A. Ragen – 13 years of serviceChief Financial OfficerRussell Minick – 8 years of serviceChief Marketing Officer Jeffrey Mueller – 2 years of servicePresident, Consumer PowerErik Wilde – 3 years of serviceExecutive Vice President, Industrial – AmericasRoger Pascavis – 22 years of serviceExecutive Vice President, Strategic Global Sourcing Patrick Forsythe – 11 years of serviceExecutive Vice President, Global Engineering Dear Shareholders,2018 will go down as a record year for Generac, but to understand the source of our success last year, you need to know that our journey truly started almost 10 years ago with our Powering Ahead strategy as our roadmap. With our team’s tremendous execution of this plan, Generac has grown from a small Wisconsin-based business to a global power equipment company with over 5,500 employees. We ended the year with sales of more than $2 billion and increased our Adjusted EBITDA margins to 21%. We served over 150 countries around the world through our manufacturing facilities located in the US, Italy, Spain, Germany, Poland, Brazil, Mexico and China. With the kind of success we have had, it would be easy to simply continue doing what we are doing – right?However, what we have to realize is that the world is changing quickly with new technologies and new markets all presenting challenges and opportunities for many companies. Standing still is not an option, and with this in mind, I am excited to tell you about some important changes to our Vision and Mission statements as well as our corporate Strategy that I am confident will enable our next phase of growth. The changes start with an update to our Vision for Generac that is based on the belief that connecting more deeply with customers in the future will help us drive innovative solutions based on their feedback. The change to our Mission statement reflects the higher purpose that we all have here of making the world safer, brighter and more productive. Alongside our updated vision and mission, we are also making important changes to our Strategy which will be known going forward as Powering Our Future and will have four key strategic elements of Grow, Gain, Lead and Connect. As the creator of the category and the clear leader in home standby generators with more than 75% market share in North America, “Grow” emphasizes our opportunity to further expand this fast growing market and align our future actions and investments to solidify our leadership position. With less than 5% of American households owning a standby generator, we believe there is enormous growth potential in the U.S., and we are also finding significant interest for these products internationally as we have dramatically expanded our global presence. With “Gain,” we continue to put a strong focus on improving our share of the power equipment markets in which we participate around the world by emphasizing our innovation and continually expanding our product lines and services. We design and build a wide range of products from portable and stationary generators, mobile equipment such as lighting towers, pumps and heaters, and a variety of other chore products such as power washers, brush mowers and trimmers, and being a leader in all of these categories globally is our goal. We have many advantages over our competitors with strengths in our engineering and operations capabilities as well as a global distribution network that we believe can be leveraged further for continued market share gains and entrances into new markets.VISIONTo be the global leader in power products through meaningful customer connections that result in innovative solutions.MISSIONGenerac’s mission is to ensure peace of mind by developing power products and solutions that make the world safer, brighter and more productive.POWERING OUR FUTURE156747INSERT_r1_Letter 2018_V2.indd 14/18/19 9:48 AM Originally introduced in 2017, the strategic element “Lead Gas” will remain an important focus for Generac as the world continues to shift to cleaner burning natural gas for the majority of its energy needs. With the industry’s broadest product line and key competitive advantages, we have positioned Generac as one of the largest manufacturers of gas generators used for emergency standby power globally and we have put ourselves in a great position to capitalize on the many new market opportunities for this technology that we believe are beginning to form outside traditional backup power. New to our strategy this year is the “Connect” strategic element. As you may well know from your own experiences, technology has rapidly given us the ability to uniquely connect to our homes and businesses in a way not possible just a few years ago. It has become almost commonplace to use a smart phone or tablet to adjust temperature, control lights, or see who is at the front door – and this is just the beginning. As connectivity continues to grow in popularity, we know this will provide a tremendous opportunity for Generac when it comes to connecting our customers and distribution partners to our products. With this in mind, we have been investing heavily over the last several years to develop connectivity related technologies and platforms and this year we became the first company in our industry to offer home standby generators with Wi-Fi capability as a standard feature to the market.Generac has an incredibly bright future ahead of it and these strategic enhancements are aimed at making sure we continue to focus on emerging opportunities in new markets while also building on the strengths we have created in existing markets that we serve. As a shareholder, I would like to thank you for your continued support and interest in our Company.Sincerely,Aaron P. Jagdfeld President & CEO Generac Holdings Inc.156747INSERT_r1_Letter 2018_V2.indd 24/18/19 9:48 AM K FORM 10-K [ 2018 ]156747INSERT_r1_Letter 2018_V2.indd 34/18/19 9:48 AM [ THIS PAGE HAS BEEN LEFT BLANK INTENTIONALLY. ]156747INSERT_r1_Letter 2018_V2.indd 44/18/19 9:48 AM UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) (cid:2) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FORM 10-K For the fiscal year ended December 31, 2018 Or (cid:3) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 001-34627 GENERAC HOLDINGS INC. (Exact name of registrant as specified in its charter) DELAWARE (State or other jurisdiction of incorporation or organization) S45 W29290 Hwy 59, Waukesha, WI (Address of principal executive offices) 20-5654756 (IRS Employer Identification No.) 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 (cid:2) No (cid:3) 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 (cid:3) No (cid:2) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (cid:2) No (cid:3) Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes (cid:2) No (cid:3) Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (cid:3) Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of ‘‘large accelerated filer,’’ ‘‘accelerated filer,’’ ‘‘smaller reporting company,’’ and ‘‘emerging growth company’’ in Rule 12b-2 of the Exchange Act. Large accelerated filer (cid:2) Smaller reporting company (cid:3) Emerging growth company (cid:3) If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for Non-accelerated filer (cid:3) Accelerated filer (cid:3) complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. (cid:3) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes (cid:3) No (cid:2) The aggregate market value of the voting common equity held by non-affiliates of the registrant on June 29, 2018, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $3,115,194,826 based upon the closing price reported for such date on the New York Stock Exchange. As of February 19, 2019, 62,129,621 shares of registrant’s common stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant’s Annual Report to Stockholders for the year ended December 31, 2018 furnished to the Securities and Exchange Commission are incorporated by reference into Part II of this Form 10-K. Portions of the registrant’s Proxy Statement for the 2019 Annual Meeting of Stockholders (the ‘‘2019 Proxy Statement’’), which will be filed by the registrant on or prior to 120 days following the end of the registrant’s fiscal year ended December 31, 2018, are incorporated by reference into Part III of this Form 10-K. 2018 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS PART I Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 2. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 3. Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 4. PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Item 6. Item 7. Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Item 9. Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PART III Item 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Item 12. Item 13. Item 14. Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Certain Relationships and Related Transactions, and Director Independence . . . . . . . Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PART IV Page 2 10 20 21 21 22 22 24 33 48 51 100 100 101 101 101 101 101 101 Item 15. Item 16. Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Form 10-K Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102 106 Forward-Looking Statements This annual report contains forward-looking statements that are subject to risks and uncertainties. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as ‘‘anticipate,’’ ‘‘estimate,’’ ‘‘expect,’’ ‘‘forecast,’’ ‘‘project,’’ ‘‘plan,’’ ‘‘intend,’’ ‘‘believe,’’ ‘‘confident,’’ ‘‘may,’’ ‘‘should,’’ ‘‘can have,’’ ‘‘likely,’’ ‘‘future,’’ ‘‘optimistic’’ and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. The forward-looking statements contained in this annual report are based on assumptions that we have made in light of our industry experience and on our perceptions of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the circumstances. As you read and consider this report, you should understand that these statements are not guarantees of performance or results. They involve risks, uncertainties (some of which are beyond our control) and assumptions. Although we believe that these forward-looking statements are based on reasonable assumptions, you should be aware that many factors could affect our actual financial results and cause them to differ materially from those anticipated in the forward-looking statements. The forward-looking statements contained in this annual report include estimates regarding: (cid:129) our business, financial and operating results, and future economic performance; (cid:129) proposed new product and service offerings; and (cid:129) management’s goals, expectations and objectives and other similar expressions concerning matters that are not historical facts. Factors that could affect our actual financial results and cause them to differ materially from those anticipated in the forward-looking statements include: (cid:129) frequency and duration of power outages impacting demand for our products; (cid:129) availability, cost and quality of raw materials and key components and labor needed in producing our products; (cid:129) the impact on our results of possible fluctuations in interest rates, foreign currency exchange rates, commodities, product mix and regulatory tariffs; (cid:129) the possibility that the expected synergies, efficiencies and cost savings of our acquisitions will not be realized, or will not be realized within the expected time period; (cid:129) the risk that our acquisitions will not be integrated successfully; (cid:129) difficulties we may encounter as our business expands globally; (cid:129) our dependence on our distribution network; (cid:129) our ability to invest in, develop or adapt to changing technologies and manufacturing techniques; (cid:129) loss of our key management and employees; (cid:129) increase in product and other liability claims or recalls; (cid:129) failures or security breaches of our networks or information technology systems; and (cid:129) changes in environmental, health and safety, or product compliance laws and regulations affecting our products or operations. Should one or more of these risks or uncertainties materialize, or should any of these assumptions prove incorrect, our actual results may vary in material respects from those projected in any forward- looking statements. A detailed discussion of these and other factors that may affect future results is contained in Item 1A of this Annual Report on Form 10-K. Stockholders, potential investors and other readers should consider these factors carefully in evaluating the forward-looking statements. Any forward-looking statement made by us in this report speaks only as of the date on which it is made. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to update any forward- looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law. Item 1. Business PART I Founded in 1959, Generac Holdings Inc. (the Company or Generac) is a leading global designer and manufacturer of a wide range of power generation equipment and other power products serving the residential, light commercial and industrial markets. Power generation is our primary focus, which differentiates us from our main competitors that also have broad operations outside of the power equipment market. As the only significant market participant focused predominantly on these products, we have one of the leading market positions in the power equipment market in North America and an expanding presence internationally. We believe we have one of the widest ranges of products in the marketplace, including residential, commercial and industrial standby generators; as well as portable and mobile generators used in a variety of applications. Other engine powered products that we design and manufacture include light towers which provide temporary lighting for various end markets; commercial and industrial mobile heaters and pumps used in the oil & gas, construction and other industrial markets; and a broad product line of outdoor power equipment for residential and commercial use. We design, manufacture, source and modify engines, alternators, transfer switches and other components necessary for our products, which are fueled by natural gas, liquid propane, gasoline, diesel and Bi-Fuel(cid:4). Our products are available globally through a broad network of independent dealers, distributors, retailers, wholesalers and equipment rental companies under a variety of brand names. We also sell direct to certain national and regional account customers, as well as to individual consumers, that are the end users of our products. We have a significant market share in the residential and light commercial markets for automatic standby generators, which we believe remain under-penetrated in the marketplace. We also have a leading market position for portable generators used in residential, light construction and recreational applications. We believe that our leading market position is largely attributable to our strategy of providing a broad product line of high-quality, innovative and affordable products through our extensive and multi-layered distribution network to whom we offer comprehensive support and programs from the factory. In addition, we are a leading provider of light towers, mobile generators, flameless heaters, outdoor power equipment and industrial diesel generators ranging in sizes up to 3,250kW. Over the years, we have executed a number of acquisitions that support our strategic plan. A summary of recent acquisitions can be found in Note 1, ‘‘Description of Business,’’ to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K. Products We design and manufacture stationary, portable and mobile generators with single-engine outputs ranging between 800W and 3,250kW. We have the ability to expand the power range for certain stationary generator solutions to much larger multi-megawatt systems through an integrated paralleling configuration called Modular Power Systems (MPS). Other engine powered products that we design 2 and manufacture include light towers, mobile heaters, power washers and water pumps, along with a broad line of outdoor power equipment. We classify our products into three categories based on similar range of power output geared for varying end customer uses: Residential products, Commercial & Industrial (C&I) products and Other products. The following summary outlines our portfolio of products, including their key attributes and customer applications. Residential Products Our residential automatic standby generators range in output from 6kW to 60kW, operate on natural gas, liquid propane or diesel, and are permanently installed with an automatic transfer switch, which we also manufacture. Air-cooled engine residential standby generators range in outputs from 6kW to 22kW, are available in steel and aluminum enclosures and serve as an emergency backup for small to medium-sized homes. Liquid-cooled engine generators serve as emergency backup for larger homes and small businesses and range in output from 22kW to 60kW. We also provide a remote monitoring system for home standby generators called Mobile Link(cid:4), which allows our customers to check the status of their generator conveniently from a desktop PC, tablet computer or smartphone, and also provides the capability to receive maintenance and service alerts. We provide a broad product line of portable and inverter generators that are fueled predominantly by gasoline, with certain models running on propane and diesel fuel, which range in size from 800W to 17.5kW. These products serve as an emergency home backup source of electricity and are also used for construction and recreational purposes. Our portable generators are targeted at homeowners, with price points ranging between the consumer value end of the market through the premium homeowner market; at professional contractors, starting at the value end through the premium contractor segment; and at the recreational market with our inverter product line. In addition, we offer manual transfer switches to supplement our portable generator product offering. We provide a broad product line of engine driven power washers for residential and commercial use, fueled by gasoline, which range in pressure from 2,500 to 4,200 PSI. Additionally, we offer a product line of water pumps built to meet the water removal needs of homeowners, farmers, construction crews and other end-user applications. Further, we provide a broad product line of outdoor power equipment that includes trimmer & brush mowers, log splitters, lawn & leaf vacuums, and chipper shredders for the property maintenance needs of larger-acreage residences, commercial properties, municipalities and farms. These products are largely sold in North America through on-line catalogs, retail hardware stores and outdoor power equipment dealers primarily under the DR(cid:5) brand name. Residential products comprised 51.5%, 51.8% and 53.1%, respectively, of total net sales in 2018, 2017 and 2016. Commercial & Industrial Products We offer a full line of C&I generators fueled by diesel, natural gas, liquid propane and Bi-Fuel(cid:4). We believe we have one of the broadest product offerings in the industry with power outputs ranging from 10kW up to 3,250kW. Our light-commercial standby generators include a full range of affordable systems from 22kW to 150kW and related transfer switches, providing three-phase power sufficient for most small and mid-sized businesses such as grocery stores, convenience stores, restaurants, gas stations, pharmacies, retail banks, small health care facilities and other small-footprint retail applications. Our light- commercial generators run on natural gas, liquid propane and diesel fuel. We manufacture a broad product line of standard and configured stationary generators and related transfer switches for various industrial standby, continuous-duty and prime rated applications. Our 3 single-engine industrial generators range in output from 10kW up to 3,250kW, which includes stationary and containerized packages, with our MPS technology extending our product range up to much larger multi-megawatt systems through an integrated paralleling configuration. We offer four fuel options for our industrial generators, including diesel, natural gas, liquid propane or Bi-Fuel(cid:4). Bi-Fuel(cid:4) generators operate on a combination of both diesel and natural gas to allow our customers the advantage of multiple fuel sources and extended run times. Our industrial standby generators are primarily used as emergency backup for larger applications in the healthcare, telecom, datacom, commercial office, municipal and manufacturing markets. Our MPS technology combines the power of several smaller generators to produce the output of a larger generator, providing our customers with redundancy and scalability in a cost-effective manner. For larger industrial applications, our MPS products offer customers an efficient, affordable way to scale their standby power needs, and also offer superior reliability given their built-in redundancy which allows individual units to be taken off-line for routine maintenance while retaining coverage for critical circuits. We provide a broad product line of light towers, mobile generators and mobile heaters, which provide temporary lighting, power and heat for various end markets, such as road and commercial construction, energy, mining, military and special events. We manufacture commercial mobile pumps which utilize wet and dry-priming pump systems for a wide variety of wastewater applications. We also manufacture various gaseous-engine control systems and accessories, which are sold to gas-engine manufacturers and aftermarket customers. The acquisition of Selmec in June 2018 increased our industrial generator market share within the Latin American markets, as well as added specialized engineering capabilities. C&I products comprised 40.6%, 40.8% and 38.6% respectively, of total net sales in 2018, 2017 and 2016. Other Products Our ‘‘Other Products’’ category primarily consists of aftermarket service parts and product accessories sold to our dealers, and the amortization of extended warranty deferred revenue. The acquisition of Selmec added a service platform, including robust integration, project management and remote monitoring services. Other products comprised 7.9%, 7.4% and 8.3%, respectively, of total net sales in 2018, 2017 and 2016. Distribution Channels and Customers We distribute our products through a variety of different distribution channels to increase awareness of our product categories and brands, and to ensure our products reach a broad customer base. This distribution network includes independent residential dealers, industrial distributors and dealers, national and regional retailers, e-commerce partners, electrical and HVAC wholesalers (including certain private label arrangements), catalogs, equipment rental companies and equipment distributors. We also sell direct to certain national and regional account customers, as well as to individual consumers, who are the end users of our products. We believe our distribution network is a competitive advantage that has strengthened over the years as a result of adding, expanding and developing the various distribution channels through which we sell our products. We offer a broad set of tools, programs and factory support to help our distribution partners be successful. Our network is well balanced with no customer providing more than 6% of our sales in 2018. 4 Our overall dealer network located around the world. We have the industry’s largest network of factory direct independent generator contractors in North America. Our residential/light commercial dealer network sells, installs and services our residential and light commercial products to end users. We have increased our level of investment in recent years by focusing on a variety of initiatives to more effectively market and sell our home standby products and better align our dealer network with Generac. Our industrial network consists of a combination of primary distributors as well as a support network of dealers serving the global market. Over the past several years, we have been expanding our dealer network globally through acquisitions and organic means, in order to expand our international sales opportunities. The industrial distributors and dealers provide industrial and commercial end users with ongoing sales, installation and product support. Our industrial distributors and dealers maintain the local relationships with commercial electrical contractors, specifying engineers and national account regional buying offices. Our retail distribution network includes thousands of locations across the globe and includes a variety of regional and national home improvement chains, retailers, clubs, buying groups and farm supply stores. These physical retail locations are supplemented by a growing presence of e-commerce retailers, along with a number of catalog retailers. This network primarily sells our residential standby, portable and light-commercial generators, as well as our other engine powered tools. The placement of our products at retail locations drives significant awareness for our brands and the automatic home standby product category. Our wholesaler network distributes our residential and light-commercial generators, and consists of selling branches of both national and local distribution houses for electrical and HVAC products on a wholesale basis. They typically sell to electrical contractors who are not in our dealer network. On a selective basis, we have established private label and licensing arrangements with third party partners to provide residential, light-commercial and industrial generators. These partners include leading home equipment, electrical equipment and construction machinery companies, each of which provides access to incremental channels of distribution for our products. The distribution for our C&I mobile products includes international, national, regional and specialty equipment rental companies, equipment distributors and construction companies, which primarily serve non-residential building construction, road construction, energy markets and special events. In addition, international acquisitions over the years have provided access to numerous independent distributors in over 150 countries. We sell direct to certain national and regional account customers that are the end users of our products covering a number of end market verticals, including telecommunication, retail, banking, convenience stores, grocery stores and other light commercial applications. Additionally, our residential products are also sold direct to individual consumers, who are the end users of the product. Business Strategy We have been executing on our strategic plan, which serves as the framework for the significant investments we have made to capitalize on the long-term growth prospects of Generac. As we continue to move our strategic plan into the future, we are focused on a number of initiatives that are driven by the following four key objectives, which are now called ‘‘Powering Our Future’’: Growing the residential standby generator market. As the leader in the home standby generator market, it is incumbent upon us to continue to drive growth and increase the penetration rate of these products in households across the world. Central to this strategy is to increase the awareness, availability and affordability of home standby generators. Ongoing power outage activity, combined with 5 expanding our residential/light commercial dealer base and overall distribution in affected regions, are key drivers in elevating the awareness of home standby generators over the long term. We intend to continue to supplement these key growth drivers by focusing on a variety of strategic initiatives targeted toward generating more sales leads, improving close rates and reducing the total overall cost of a home standby system. In addition, we intend to continue to focus on innovation in this growing product category and introduce new products into the marketplace. With only approximately 4.5% penetration of the addressable market of homes in the United States (which we define as single-family detached, owner-occupied households with a home value of over $100,000, as defined by the U.S. Census Bureau’s 2017 American Housing Survey for the United States), we believe there are opportunities to further penetrate the residential standby generator market both domestically and internationally. Gaining market share. We continue to put a strong focus on improving our share of the power equipment markets in which we participate around the world by emphasizing our innovation and continually expanding our product lines and services. We design and build a wide range of products from portable, stationary and mobile generators, power washers, light towers, mobile heaters, pumps, brush mowers and trimmers, and other engine powered equipment. Being number one or number two in all of these categories globally is our goal. We have many advantages over our competitors with strengths in our engineering and operations capabilities as well as a global distribution network that we believe can be leveraged further for continued market share gains in the markets we serve around the world. Lead with gas power generation products. We will attempt to gain incremental market share within commercial and industrial markets through our leading position in the growing market for cleaner burning, more cost effective natural gas fueled standby power solutions. While still a smaller portion of the overall C&I market, we believe demand for these products continues to increase at a faster rate than traditional diesel fueled generators as a result of their lower capital investment and operating costs. We also intend to explore new gaseous generator related market opportunities, including increasing our product capabilities for continuous-duty and prime rated applications, by leveraging our deep technical capabilities for gaseous-fueled products, leading position for natural gas standby generators and growing market acceptance for these products. As part of this strategy, we plan to continue to expand our natural gas product offering into larger power nodes to take advantage of the continuing shift from diesel to natural gas generators. Connect with customers, partners and product. We will work to diversify our business model from solely ‘‘equipment centric’’ to a systems and services provider through connectivity solutions and subscription based applications deployed enterprise wide. The first step is increasing connection with our products to unlock opportunities and revenue streams. We will develop tools and programs that add value to dealers and end-users that will result in recurring revenue from subscriptions and parts. We will leverage data obtained from connected devices by developing predictive analytics that result in continuously improving product quality, sales processes and tools, energy optimization, aftermarket penetration, customer experience and alignment with dealers. Finally, we will build or acquire energy management capabilities to monetize an ecosystem of devices that relate to energy use, storage, generation, control and optimization. While expansion globally is no longer one of the four key objectives in the Powering Our Future strategic plan, it becomes a core piece to the success of each of the objectives. The recent acquisitions that now comprise our International segment have significantly increased our global presence by adding product, manufacturing and distribution capabilities that serve local markets around the world, and have resulted in us becoming a leading global player in the markets for backup power and mobile power equipment. As we look forward, we intend to leverage our increased international footprint attained from these acquisitions to serve the over $13 billion annual market for power generation equipment outside the U.S. and Canada through each of the key objectives discussed above. 6 See ‘‘Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Drivers and Trends’’ for additional drivers that influence demand for our products and other trends affecting the markets that we serve. Manufacturing We operate numerous manufacturing plants, distribution facilities and inventory warehouses located throughout the world. We store finished goods at third-party logistics providers in the United States that accommodate material storage and rapid response requirements of our customers. See ‘‘Item 2—Properties’’ for additional details regarding the locations and activities of our principal operations. In recent years, we have added manufacturing capacity through investments in automation, improved utilization and the expansion of our manufacturing footprint through organic means as well as through acquisitions. We believe we have sufficient capacity to achieve our business goals for the near-to-intermediate term. Research and Development Our primary focus on power generation equipment and other power products drives technological innovation, specialized engineering and manufacturing competencies. Research and development (R&D) is a core competency and includes a staff of over 400 engineers working on numerous projects at various facilities worldwide. These activities are focused on developing new technologies and product enhancements as well as maintaining product competitiveness by improving manufacturing costs, safety characteristics, reliability and performance while ensuring compliance with regulatory standards. We have over 35 years of experience using natural gas engines and have developed specific expertise with fuel systems and emissions technology. In the residential and light commercial markets, we have developed proprietary engines, cooling packages, controls, fuel systems and emissions systems. We believe that our expertise in power equipment gives us the capability to develop new products that will allow continued diversification in our end markets. Intellectual Property We are committed to research and development, and we rely on a combination of patents and trademarks to establish and protect our proprietary rights. Our patents protect certain features and technologies we have developed for use in our products including fuel systems, air flow, electronics and controls, noise reduction and air-cooled engines. We believe the existence of these patents and trademarks, along with our ongoing processes to register additional patents and trademarks, protect our intellectual property rights and enhance our competitive position. We also use proprietary manufacturing processes that require customized equipment. With our continuous focus on research and development, we expect to develop new intellectual property on an ongoing basis. Suppliers of Raw Materials Our primary raw material inputs are steel, copper and aluminum, all of which are purchased from third parties and, in many cases, as part of machined or manufactured components. We have developed an extensive network of reliable suppliers in the United States and internationally. Our Strategic Global Sourcing function continuously evaluates the quality and cost structure of our purchased components and assesses the capabilities of our supply chain. Components are sourced accordingly based on this evaluation. Our supplier quality engineers conduct on-site audits of major supply chain partners and help to maintain the reliability of critical sourced components. 7 Competition The market for power generation equipment and other engine powered products is competitive. We face competition from a variety of large diversified industrial companies as well as smaller generator manufacturers, along with mobile equipment and engine powered tools providers, both domestic and internationally. However, specifically in the generator market, most of the traditional participants compete on a more specialized basis, focused on specific applications within their larger diversified product mix. We are the only significant market participant with a primary focus on power equipment with a core emphasis on standby, portable and mobile generators with broad capabilities across the residential, light-commercial and industrial markets. We believe that our engineering capabilities and core focus on generators provide us with manufacturing flexibility and enables us to maintain a first-mover advantage over our competition for product innovation. We also believe our broad product offering, diverse omni-channel distribution model and strong factory support provide additional advantages as well. A summary of the primary competitors across our main product classes are as follows: Residential products—Kohler, Briggs & Stratton, Cummins, Honda, Champion, Techtronics International, Husqvarna and Ariens, along with a number of smaller domestic and foreign competitors; certain of which also have broad operations in other manufacturing businesses. C&I products—Caterpillar, Cummins, Kohler, MTU, Stemac, IGSA, Wacker, MultiQuip, Terex, Doosan, Briggs & Stratton (Allmand), Atlas Copco and Himonisa; certain of which focus on the market for diesel generators as they are also diesel engine manufacturers. Also, we compete against other regional packagers that serve local markets throughout the world. In a continuously evolving market, we believe our scale and broad capabilities make us well positioned to remain competitive. We compete primarily on the basis of brand reputation, quality, reliability, pricing, innovative features, breadth of product offering, product availability and factory support. Employees As of December 31, 2018, we had 5,664 employees (5,046 full time and 618 part-time and temporary employees). Of those, 3,154 employees were directly involved in manufacturing at our manufacturing facilities. Domestically, we have had an ‘‘open shop’’ bargaining agreement for the past 50 years. The current agreement, which expires October 17, 2021, covers our Eagle, Wisconsin facility. Additionally, our plants in Mexico, Italy and Brazil are operated under various local or national union groups. Our other facilities are not unionized. Regulation, including Environmental Matters As a manufacturing company, our operations are subject to a variety of federal, state, local and foreign laws and regulations covering environmental, health and safety matters. Applicable laws and regulations include those governing, among other things, emissions to air, discharges to water, noise and employee safety, as well as the generation, handling, storage, transportation, treatment, and disposal of waste and other materials. In addition, our products are subject to various laws and regulations relating to, among other things, emissions and fuel requirements, as well as labeling and marketing. Our products sold in the United States are regulated by the U.S. Environmental Protection Agency (EPA), California Air Resources Board (CARB) and various other state and local air quality management districts. These governing bodies continue to pass regulations that require us to meet 8 more stringent emission standards, and all of our engines and engine-driven products are regulated within the United States and its territories. In addition, certain products in the United States are subject to safety standards as established by various other standards and rule making bodies, or state and local agencies, including the U.S. Consumer Product Safety Commission (CPSC). Similarly, other countries have varying degrees of regulation for our products, depending upon product application and fuel types. Available Information The Company’s principal executive offices are located at S45 W29290 Highway 59, Waukesha, Wisconsin, 53189 and the Company’s telephone number is (262) 544-4811. The Company’s website is www.generac.com. The Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports are available free of charge through the ‘‘Investor Relations’’ portion of the Company’s web site, www.generac.com, as soon as reasonably practical after they are filed with the Securities and Exchange Commission (SEC). The information provided on these websites is not part of this report and is therefore not incorporated herein by reference. Executive Officers The following table sets forth information regarding our executive officers: Name Age Position Aaron P. Jagdfeld . . . . . . . . . . . . . . . . . . . York A. Ragen . . . . . . . . . . . . . . . . . . . . . Russell S. Minick . . . . . . . . . . . . . . . . . . . Jeffrey Mueller . . . . . . . . . . . . . . . . . . . . . Erik Wilde . . . . . . . . . . . . . . . . . . . . . . . . Roger F. Pascavis . . . . . . . . . . . . . . . . . . . Patrick Forsythe . . . . . . . . . . . . . . . . . . . . President, Chief Executive Officer and Chairman 47 47 Chief Financial Officer 58 Chief Marketing Officer 50 44 Executive Vice President, Industrial, Americas 58 Executive Vice President, Strategic Global Sourcing 51 Executive Vice President, Global Engineering President / General Manager—Consumer Power Aaron P. Jagdfeld has served as our Chief Executive Officer since September 2008, as a director since November 2006 and was named Chairman in February 2016. Prior to becoming Chief Executive Officer, Mr. Jagdfeld worked for Generac for 15 years. He began his career in the finance department in 1994 and became our Chief Financial Officer in 2002. In 2007, he was appointed President and was responsible for sales, marketing, engineering and product development. Prior to joining Generac, Mr. Jagdfeld worked in the audit practice of the Milwaukee, Wisconsin office of Deloitte and Touche. Mr. Jagdfeld holds a Bachelor of Business Administration in Accounting from the University of Wisconsin-Whitewater. York A. Ragen has served as our Chief Financial Officer since September 2008. Prior to becoming Chief Financial Officer, Mr. Ragen held Director of Finance and Vice President of Finance positions at Generac. Prior to joining Generac in 2005, Mr. Ragen was Vice President, Corporate Controller at APW Ltd., a spin-off from Applied Power Inc., now known as Actuant Corporation. Mr. Ragen began his career in the audit practice of Arthur Andersen’s Milwaukee, Wisconsin office. Mr. Ragen holds a Bachelor of Business Administration in Accounting from the University of Wisconsin-Whitewater. Russell S. Minick began serving as our Chief Marketing Officer in August 2016. Prior to his appointment, he served as our Executive Vice President, Residential Products since October 2011, with this responsibility being expanded in January 2014 to Executive Vice President, Global Residential Products and to Executive Vice President, North America in September 2014. Prior to joining Generac, Mr. Minick was President & CEO of Home Care Products for Electrolux from 2006 to 2011, President of The Gunlocke Company at HNI Corporation from 2003 to 2006, Senior Vice President of Sales, 9 Marketing and Product Development at True Temper Sports from 2002 to 2003, and General Manager of Extended Warranty Operations for Ford Motor Company from 1998 to 2002. Mr. Minick is a graduate of the University of Northern Iowa, and holds a degree in marketing. Jeffrey Mueller joined Generac as our President / General Manager—Consumer Power in November 2017. Mr. Mueller was Group President for Broan-Nutone, a producer of residential ventilation and air quality products, from 2014 prior to joining Generac. Prior to his time at Broan, Mr. Mueller was at Kohler Company, a manufacturer of bath and kitchen equipment, from 1991 where he held various U.S. and international executive-level positions in the Kitchen & Bath & Interiors Group, including President of Kohler’s faucet business globally. He is a Marquette University alumnus where he earned an Executive MBA with an international focus and a Bachelor of Science degree in Mechanical Engineering. Erik Wilde began serving as our Executive Vice President, Industrial, Americas in July 2016. Mr. Wilde was Vice President and General Manager of the Mining Division for Komatsu America Corp., a manufacturer of construction, mining, and compact construction equipment, from 2013 until he joined Generac. Prior to that role, he held leadership positions as Vice President of the ICT Business Division and Product Marketing at Komatsu America Corp. beginning in 2005. Mr. Wilde holds a Bachelor of Business Administration in Management from Boise State University and an M.B.A. from Keller Graduate School of Management. Roger Pascavis has served as our Executive Vice President, Strategic Global Sourcing since March 2013. Prior to becoming Executive Vice President of Strategic Global Sourcing, he served as the Senior Vice President of Operations since January 2008. Mr. Pascavis joined Generac in 1995 and has served as Director of Materials and Vice President of Operations. Prior to joining Generac, Mr. Pascavis was a Plant Manager for MTI Electronics in Waukesha, Wisconsin. Mr. Pascavis holds a B.S. in Industrial Technology from the University of Wisconsin-Stout and an M.B.A. from Lake Forest Graduate School of Management. Patrick Forsythe has served as our Executive Vice President of Global Engineering since re-joining Generac in July 2015. Mr. Forsythe was Vice President, Global Engineering & Technology of Hayward Industries, a producer of residential and commercial pool and spa equipment, from 2008 to 2015, Vice President, Global Engineering at Ingersoll Rand Company (and the acquired Doosan Infracore International) from 2004 to 2008, and Director of Engineering at Ingersoll Rand Company from 2002 to 2004. Prior to 2002, Mr. Forsythe worked in various engineering management capacities with Generac from 1995 to 2002. Mr. Forsythe holds a Higher National Diploma (HND) in Mechanical Engineering from the University of Ulster (United Kingdom), a B.S. in Mechanical Engineering, and an M.S. in Manufacturing Management & Technology from The Open University (United Kingdom). Item 1A. Risk Factors You should carefully consider the following risks. These risks could materially affect our business, results of operations or financial condition, cause the trading price of our common stock to decline materially or cause our actual results to differ materially from those expected or those expressed in any forward-looking statements made by us. These risks are not exclusive, and additional risks to which we are subject include, but are not limited to, the factors mentioned under ‘‘Forward-Looking Statements’’ and the risks of our businesses described elsewhere in this Annual Report. 10 Risk factors related to our business and industry Demand for the majority of our products is significantly affected by unpredictable power-outage activity that can lead to substantial variations in, and uncertainties regarding, our financial results from period to period. Sales of our products are subject to consumer buying patterns, and demand for the majority of our products is affected by power outage events caused by thunderstorms, hurricanes, ice storms, blackouts and other power grid reliability issues. The impact of these outage events on our sales can vary depending on the location, frequency and severity of the outages. Sustained periods without major power disruptions can lead to reduced consumer awareness of the benefits of standby and portable generator products and can result in reduced sales growth rates and excess inventory. There are smaller, more localized power outages that occur frequently that drive a baseline level of demand for back-up power solutions. The lack of major power-outage events and fluctuations to the baseline levels of power-outage activity are part of managing our business, and these fluctuations could have an adverse effect on our net sales and profits. Despite their unpredictable nature, we believe power disruptions create awareness and accelerate adoption for our home standby products. Demand for our products is significantly affected by durable goods spending by consumers and businesses, and other macroeconomic conditions. Our business is affected by general economic conditions, and uncertainty or adverse changes such as the prolonged downturn in U.S. residential investment and the impact of more stringent credit standards could lead to a decline in demand for our products and pressure to reduce our prices. Our sales of light-commercial and industrial generators are affected by conditions in the non-residential construction sector and by the capital investment trends for small and large businesses and municipalities. If these businesses and municipalities cannot access credit markets or do not utilize discretionary funds to purchase our products as a result of the economy or other factors, our business could suffer and our ability to realize benefits from our strategy of increasing sales in the light- commercial and industrial sectors through, among other things, our focus on innovation and product development, including natural gas engine and modular technology, could be adversely affected. In addition, consumer confidence and home remodeling expenditures have a significant impact on sales of our residential products, and prolonged periods of weakness in consumer durable goods spending could have a material impact on our business. Typically, we do not have contracts with our customers which call for committed volume, and we cannot guarantee that our current customers will continue to purchase our products at the same level, if at all. If general economic conditions or consumer confidence were to worsen, or if the non-residential construction sector or rate of capital investments were to decline, our net sales and profits would likely be adversely affected. Additionally, timing of capital spending by our national account customers can vary from quarter-to-quarter based on capital availability and internal capital spending budgets. Decreases in the availability and quality, or increases in the cost, of raw materials, key components and labor we use could materially reduce our earnings. The principal raw materials that we use to produce our products are steel, copper and aluminum. We also source a significant number of component parts from third parties that we utilize to manufacture our products. The prices of those raw materials and components are susceptible to significant fluctuations due to trends in supply and demand, commodity prices, currencies, transportation costs, government regulations and tariffs, price controls, economic conditions and other unforeseen circumstances beyond our control. We do not have long-term supply contracts in place to ensure the raw materials and components we use are available in necessary amounts or at fixed prices. If we are unable to mitigate raw material or component price increases through product design improvements, price increases to our customers, manufacturing productivity improvements, or hedging transactions, our profitability could be adversely affected. Also, our ability to continue to obtain quality 11 materials and components is subject to the continued reliability and viability of our suppliers, including in some cases, suppliers who are the sole source of certain important components. If we are unable to obtain adequate, cost efficient or timely deliveries of required raw materials and components, or sufficient labor resources, we may be unable to manufacture sufficient quantities of products on a timely basis. This could cause us to lose sales, incur additional costs, delay new product introductions or suffer harm to our reputation. The industry in which we compete is highly competitive, and our failure to compete successfully could adversely affect our results of operations and financial condition. We operate in markets that are highly competitive. Some of our competitors have established brands and are larger in size or are divisions of large diversified companies which have substantially greater financial resources than we do. Some of our competitors may be willing to reduce prices and accept lower margins in order to compete with us. In addition, we could face new competition from large international or domestic companies with established industrial brands that enter our end markets. Demand for our products may also be affected by our ability to respond to changes in design and functionality, to respond to downward pricing pressure, and to provide shorter lead times for our products than our competitors. If we are unable to respond successfully to these competitive pressures, we could lose market share, which could have an adverse impact on our results. For further information, see ‘‘Item 1—Business—Competition’’. Our industry is subject to technological change, and our failure to continue developing new and improved products and to bring these products rapidly to market could have an adverse impact on our business. New products, or refinements and improvements of existing products, may have technical failures, delayed introductions, higher than expected production costs or may not be well accepted by our customers. If we are not able to anticipate, identify, develop and market high quality products in line with technological advancements that respond to changes in customer preferences, demand for our products could decline and our operating results could be adversely affected. We rely on independent dealers and distribution partners, and the loss of these dealers and distribution partners, or of any of our sales arrangements with significant private label, national, retail or equipment rental customers, would adversely affect our business. In addition to our direct sales force and manufacturer sales representatives, we depend on the services of independent distributors and dealers to sell our products and provide service and aftermarket support to our end customers. We also rely upon our distribution channels to drive awareness for our product categories and our brands. In addition, we sell our products to end users through private label arrangements with leading home equipment, electrical equipment and construction machinery companies; arrangements with top retailers and equipment rental companies; and our direct national accounts with telecommunications and industrial customers. Our distribution agreements and any contracts we have with large national, retail and other customers are typically not exclusive, and many of the distributors with whom we do business offer competitors’ products and services. Impairment of our relationships with our distributors, dealers or large customers, loss of a substantial number of these distributors or dealers or of one or more large customers, or an increase in our distributors’ or dealers’ sales of our competitors’ products to our customers or of our large customers’ purchases of our competitors’ products could materially reduce our sales and profits. Also, our ability to successfully realize our growth strategy is dependent in part on our ability to identify, attract and retain new distributors at all layers of our distribution platform, and we cannot be certain that we will be successful in these efforts. For further information, see ‘‘Item 1—Business—Distribution Channels and Customers’’. 12 Our business could be negatively impacted if we fail to adequately protect our intellectual property rights or if third parties claim that we are in violation of their intellectual property rights. We consider our intellectual property rights to be important assets, and seek to protect them through a combination of patent, trademark, copyright and trade secret laws, as well as licensing and confidentiality agreements. These protections may not be adequate to prevent third parties from using our intellectual property without our authorization, breaching any confidentiality agreements with us, copying or reverse engineering our products, or developing and marketing products that are substantially equivalent to or superior to our own. The unauthorized use of our intellectual property by others could reduce our competitive advantage and harm our business. Not only are intellectual property-related proceedings burdensome and costly, but they could span years to resolve and we might not ultimately prevail. We cannot guarantee that any patents, issued or pending, will provide us with any competitive advantage or will not be challenged by third parties. Moreover, the expiration of our patents may lead to increased competition with respect to certain products. In addition, we cannot be certain that we do not or will not infringe third parties’ intellectual property rights. Any such claim, even if it is without merit, may be expensive and time-consuming to defend, subject us to damages, cause us to cease making, using or selling certain products that incorporate the disputed intellectual property, require us to redesign our products, divert management time and attention, and/or require us to enter into costly royalty or licensing arrangements. Our operations are subject to various environmental, health and safety laws and regulations, and non-compliance with or liabilities under such laws and regulations could result in substantial costs, fines, sanctions and claims. Our operations are subject to a variety of foreign, federal, state and local environmental, health and safety laws and regulations including those governing, among other things, emissions to air; discharges to water; noise; and the generation, handling, storage, transportation, treatment and disposal of waste and other materials. In addition, under federal and state environmental laws, we could be required to investigate, remediate and/or monitor the effects of the release or disposal of materials both at sites associated with past and present operations and at third-party sites where wastes generated by our operations were disposed. This liability may be imposed retroactively and whether or not we caused, or had any knowledge of, the existence of these materials and may result in our paying more than our fair share of the related costs. We could also be subject to a recall action by regulatory authorities. Violations of or liabilities under such laws and regulations could result in substantial costs, fines and civil or criminal proceedings or personal injury and workers’ compensation claims. Our products are subject to substantial government regulation. Our products are subject to extensive statutory and regulatory requirements governing, among other things, emissions, noise, and product content, including standards imposed by the EPA, CARB and other regulatory agencies around the world. These laws are constantly evolving and many are becoming increasingly stringent. Changes in applicable laws or regulations, or in the enforcement thereof, could require us to redesign our products and could adversely affect our business or financial condition in the future. Developing and marketing products to meet such new requirements could result in substantial additional costs that may be difficult to recover in some markets. In some cases, we may be required to modify our products or develop new products to comply with new regulations, particularly those relating to air emissions and carbon monoxide. Typically, additional costs associated with significant compliance modifications are passed on to the market. While we have been able to meet previous deadlines and requirements, failure to comply with other existing and future regulatory standards could adversely affect our position in the markets we serve. 13 We may incur costs and liabilities as a result of product liability claims. We face a risk of exposure to product liability claims in the event that the use of our products is alleged to have resulted in injury or other damage. Although we currently maintain product liability insurance coverage, we may not be able to obtain such insurance on acceptable terms in the future, if at all, or obtain insurance that will provide adequate coverage against potential claims. Product liability claims can be expensive to defend and can divert the attention of management and other personnel for long periods of time, regardless of the ultimate outcome. A significant unsuccessful product liability defense could have a material adverse effect on our financial condition and results of operations. In addition, we believe our business depends on the strong brand reputation we have developed. If our reputation is damaged, we may face difficulty in maintaining our market share and pricing with respect to some of our products, which could reduce our sales and profitability. The loss of any key members of our senior management team or key employees could disrupt our operations and harm our business. Our success depends, in part, on the efforts of certain key individuals, including the members of our senior management team, who have significant experience in the power products industry. If, for any reason, our senior executives do not continue to be active in management, or if our key employees leave our company, our business, financial condition or results of operations could be adversely affected. Failure to continue to attract these individuals at reasonable compensation levels could have a material adverse effect on our business, liquidity and results of operations. Although we do not anticipate that we will have to replace any of these individuals in the near future, the loss of the services of any of our key employees could disrupt our operations and have a material adverse effect on our business. Disruptions caused by labor disputes or organized labor activities could harm our business. We may from time to time experience union organizing activities in our non-union facilities. Disputes with the current labor union or new union organizing activities could lead to work slowdowns or stoppages and make it difficult or impossible for us to meet scheduled delivery times for product shipments to our customers, which could result in loss of business. In addition, union activity could result in higher labor costs, which could harm our financial condition, results of operations and competitive position. A work stoppage or limitations on production at our facilities for any reason could have an adverse effect on our business, results of operations and financial condition. In addition, many of our suppliers have unionized work forces. Strikes or work stoppages experienced by our customers or suppliers could have an adverse effect on our business, results of operations and financial condition. We may experience material disruptions to our manufacturing operations. While we seek to operate our facilities in compliance with applicable rules and regulations and take measures to minimize the risks of disruption at our facilities, a material disruption at one of our manufacturing facilities could prevent us from meeting customer demand, reduce our sales and/or negatively impact our financial results. Any of our manufacturing facilities, or any of our equipment within an otherwise operational facility, could cease operations unexpectedly due to a number of events, including: (cid:129) equipment or information technology infrastructure failure; (cid:129) disruptions in the transportation infrastructure including roads, bridges, railroad tracks and container ports; (cid:129) fires, floods, tornadoes, earthquakes, or other catastrophes; and 14 (cid:129) other operational problems. In addition, a significant portion of our manufacturing and production facilities are located in Wisconsin within a 100-mile radius of each other. We could experience prolonged periods of reduced production due to unforeseen events occurring in or around our manufacturing facilities in Wisconsin. In the event of a business interruption at our facilities, in particular our Wisconsin facilities, we may be unable to shift manufacturing capabilities to alternate locations, accept materials from suppliers or meet customer shipment needs, among other severe consequences. Such an event could have a material and adverse impact on our financial condition and results of our operations. A significant portion of our purchased components are sourced in foreign countries, exposing us to additional risks that may not exist in the United States. We source a significant portion of our purchased components overseas, primarily in Asia and Europe. Our international sourcing subjects us to a number of potential risks in addition to the risks associated with third-party sourcing generally. Such risks include: (cid:129) inflation or changes in political and economic conditions; (cid:129) unstable regulatory environments; (cid:129) changes in import and export duties; (cid:129) domestic and foreign customs and tariffs; (cid:129) currency rate fluctuations; (cid:129) trade restrictions; (cid:129) labor unrest; (cid:129) logistical challenges, including extended container port congestion, and higher logistics costs; (cid:129) communications challenges; and (cid:129) other restraints and burdensome taxes. These factors may have an adverse effect on our ability to efficiently and cost effectively source our purchased components overseas. In particular, if the U.S. dollar were to depreciate significantly against the currencies in which we purchase raw materials from foreign suppliers, our cost of goods sold could increase materially, which would adversely affect our results of operations. We are vulnerable to supply disruptions from single-sourced suppliers. We single-source certain types of parts in our product designs. Any delay in our suppliers’ deliveries may impair our ability to deliver products to our customers. A wide variety of factors could cause such delays including, but not limited to, lack of capacity, economic downturns, availability of credit, logistical challenges, weather events or natural disasters. As a U.S. corporation that conducts business in a variety of foreign countries, we are subject to the Foreign Corrupt Practices Act and a variety of anti-corruption laws worldwide. A determination that we violated any of these laws may affect our business and operations adversely. The U.S. Foreign Corrupt Practices Act (FCPA) generally prohibits U.S. companies and their intermediaries from making improper payments to foreign officials for the purpose of obtaining or keeping business. The United Kingdom Bribery Act (UKBA) prohibits domestic and foreign bribery of the private sector as well as public officials. Any determination that we have violated any 15 anti-corruption laws could have a material adverse effect on our financial position, operating results and cash flows. Policy changes affecting international trade could adversely impact the demand for our products and our competitive position. Changes in government policies on foreign trade and investment can affect the demand for our products, impact the competitive position of our products or prevent us from being able to sell products in certain countries. Our business benefits from free trade agreements, and efforts to withdraw from, or substantially modify such agreements, in addition to the implementation of more restrictive trade policies, such as more detailed inspections, higher tariffs, import or export licensing requirements, exchange controls or new barriers to entry, could have a material adverse effect on our results of operations, financial condition or cash flows. Additionally, the United Kingdom’s status on EU membership, and discussions regarding its exit from the EU, has caused and may continue to cause significant volatility in global stock markets, currency exchange rate fluctuations and global economic uncertainty. Although it is unknown what the terms of the United Kingdom’s future relationship with the EU will be, it is possible that there will be greater restrictions on imports and exports between the United Kingdom and EU and increased regulatory complexities. Any of these factors could adversely impact customer demand, our relationships with customers and suppliers and our results of operations. Our total assets include goodwill and other indefinite-lived intangibles. If we determine these have become impaired, net income could be materially adversely affected. Goodwill represents the excess of cost over the fair market value of net assets acquired in business combinations. Indefinite-lived intangibles are comprised of certain tradenames. At December 31, 2018, goodwill and other indefinite-lived intangibles totaled $891.8 million. We review goodwill and other intangibles at least annually for impairment and any excess in carrying value over the estimated fair value is charged to the statement of comprehensive income. Future impairment may result from, among other things, deterioration in the performance of an acquired business or product line, adverse market conditions and changes in the competitive landscape, adverse changes in applicable laws or regulations, including changes that restrict the activities of an acquired business or product line, and a variety of other circumstances. A reduction in net income resulting from the write-down or impairment of goodwill or indefinite-lived intangibles could have a material adverse effect on our financial statements. We are unable to determine the specific impact of changes in selling prices or changes in volumes or mix of our products on our net sales. Because of the wide range of products that we sell, the level of customization for many of our products, the frequent rollout of new products, the different accounting systems utilized, and the fact that we do not apply pricing changes uniformly across our entire portfolio of products, we are unable to determine with specificity the effect of volume or mix changes or changes in selling prices on our net sales. We may not realize all of the anticipated benefits of our acquisitions or those benefits may take longer to realize than expected. We may also encounter significant unexpected difficulties in integrating acquired businesses. Our ability to realize the anticipated benefits of our acquisitions will depend, to a large extent, on our ability to integrate the acquired businesses with our business. The integration of independent businesses is a complex, costly and time-consuming process. Further, integrating and managing businesses with international operations may pose challenges not previously experienced by our 16 management. As a result, we may be required to devote significant management attention and resources to integrating the business practices and operations of any acquired businesses with ours. The integration process may disrupt our business and, if implemented ineffectively, could preclude realization of the full benefits expected by us. Our failure to meet the challenges involved in integrating an acquired business into our existing operations or otherwise to realize the anticipated benefits of the transaction could cause an interruption of, or a loss of momentum in, our activities and could adversely affect our results of operations. In addition, the overall integration of our acquired businesses may result in material unanticipated problems, expenses, liabilities, competitive responses, loss of customer relationships, and diversion of management’s attention, and may cause our stock price to decline. The difficulties of combining the operations of acquired businesses with ours include, among others: (cid:129) managing a larger company; (cid:129) maintaining employee morale and retaining key management and other employees; (cid:129) complying with newly applicable foreign regulations; (cid:129) integrating two business cultures, which may prove to be incompatible; (cid:129) the possibility of faulty assumptions underlying expectations regarding the integration process; (cid:129) retaining existing customers and attracting new customers; (cid:129) consolidating corporate and administrative infrastructures and eliminating duplicative operations; (cid:129) the diversion of management’s attention from ongoing business concerns and performance shortfalls as a result of the diversion of management’s attention to the acquisition; (cid:129) unanticipated issues in integrating information technology, communications and other systems; (cid:129) unanticipated changes in applicable laws and regulations; (cid:129) managing tax costs or inefficiencies associated with integrating the operations of the combined company; (cid:129) unforeseen expenses or delays associated with the acquisition; (cid:129) difficulty comparing financial reports due to differing financial and/or internal reporting systems; and (cid:129) making any necessary modifications to internal financial control standards to comply with the Sarbanes-Oxley Act of 2002 and the rules and regulations promulgated thereunder. Many of these factors will be outside of our control and any one of them could result in increased costs, decreases in the amount of expected revenues and diversion of management’s time and energy, which could materially impact our business, financial condition and results of operations. In addition, even if the operations of our acquired businesses are integrated successfully with our operations, we may not realize the full benefits of the transaction, including the synergies, cost savings or sales or growth opportunities that we expect. These benefits may not be achieved within the anticipated time frame, or at all. Or, additional unanticipated costs may be incurred in the integration of our businesses. All of these factors could cause dilution to our earnings per share, decrease or delay the expected accretive effect of the acquisition, and cause a decrease in the price of our common stock. As a result, we cannot assure you that the combination of our acquisitions with our business will result in the realization of the full benefits anticipated from the transaction. 17 We may encounter difficulties in operating or implementing a new enterprise resource planning (ERP) system across our subsidiaries, which may adversely affect our operations and financial reporting. Over the past three years, we have implemented a new ERP system for a majority of our business as part of our ongoing efforts to improve and strengthen our operational and financial processes and our reporting systems. We expect to implement the new ERP system at our other locations in future years. The ERP system may not provide the benefits anticipated, could add costs and complications to ongoing operations, and may impact our ability to process transactions efficiently, all of which may have a material adverse effect on the Company’s business and results of operations. Failures or security breaches of our networks or information technology systems could have an adverse effect on our business. We rely heavily on information technology (IT) both in our products and services for customers and in our IT systems. Further, we collect and store sensitive information in our data centers and on our networks. Government agencies and security experts have warned about growing risks of hackers, cyber-criminals, malicious insiders and other actors targeting confidential information and all types of IT systems. These actors may engage in fraudulent activities, theft of confidential or proprietary information and sabotage. Our IT systems and our confidential information may be vulnerable to damage or intrusion from a variety of attacks including computer viruses, worms or other malicious software programs. The risk of such attacks may increase as we integrate newly acquired companies. These attacks pose a risk to the security of the products, systems and networks of our customers, suppliers and third-party service providers, as well as to the confidentiality of our information and the integrity and availability of our data. While we attempt to mitigate these risks through board oversight, controls, due diligence, employee training and communication, third party intrusion testing, system hardening, email and web filters, regular patching, surveillance and other measures, we remain vulnerable to information security threats. Despite the precautions we take, an intrusion or infection of our systems could result in the disruption of our business, or a loss of proprietary or confidential information. Similarly, an attack on our IT systems could result in theft or disclosure of trade secrets or other intellectual property or a breach of confidential customer or employee information. Any such events could have an adverse impact on sales, harm our reputation and cause us to incur legal liability and increased costs to address such events and related security concerns. As the threats evolve and become more potent, we may incur additional costs to secure the products that we sell, as well as our data and infrastructure of networks and devices. Risks related to our common stock If securities or industry analysts do not publish research or reports about our business, if they adversely change their recommendations regarding our common stock or if our results of operations do not meet their expectations, our common stock price and trading volume could decline. The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline. Moreover, if one or more of the analysts who cover us downgrade recommendations regarding our stock, or if our results of operations do not meet their expectations, our stock price could decline and such decline could be material. 18 Anti-takeover provisions in our amended and restated certificate of incorporation and by-laws could prohibit a change of control that our stockholders may favor and could negatively affect our stock price. Provisions in our amended and restated certificate of incorporation and by-laws may make it more difficult and expensive for a third party to acquire control of us even if a change of control would be beneficial to the interests of our stockholders. These provisions could discourage potential takeover attempts and could adversely affect the market price of our common stock. These provisions may also prevent or frustrate attempts by our stockholders to replace or remove our management. For example, our amended and restated certificate of incorporation and by-laws: (cid:129) permit our Board of Directors to issue preferred stock with such terms as they determine, without stockholder approval; (cid:129) provide that only one-third of the members of the Board of Directors are elected at each stockholders meeting and prohibit removal without cause; (cid:129) require advance notice for stockholder proposals and director nominations; and (cid:129) contain limitations on convening stockholder meetings. These provisions make it more difficult for stockholders or potential acquirers to acquire us without negotiation and could discourage potential takeover attempts and could adversely affect the market price of our common stock. We do not have plans to pay dividends on our common stock in the foreseeable future. We currently do not have plans to pay dividends in the foreseeable future on our common stock. We intend to use future earnings for the operation and expansion of our business, as well as for repayment of outstanding debt, acquisitions, and for share repurchases. In addition, the terms of our senior secured credit facilities limit our ability to pay dividends on our common stock. As a result, capital appreciation, if any, of our common stock will be the sole source of gain for the foreseeable future. While we may change this policy at some point in the future, we cannot assure that we will make such a change. Risks related to our capital structure We have indebtedness which could adversely affect our cash flow and our ability to make payments on our indebtedness. As of December 31, 2018 we had total indebtedness of $924.0 million. Our level of indebtedness increases the possibility that we may be unable to generate cash sufficient to pay, when due, the principal of, interest on or other amounts due in respect of our indebtedness. While we maintain interest rate swaps covering a portion of our outstanding debt, our interest expense could increase if interest rates increase because debt under our credit facilities bears interest at a variable rate once above a certain LIBOR floor. If we do not have sufficient earnings to service our debt, we may be required to refinance all or part of our existing debt, sell assets, borrow more money or sell securities, none of which we can guarantee we will be able to do. The terms of our credit facilities restrict our current and future operations, particularly our ability to respond to changes in our business or to take certain actions. Our credit facilities contain, and any future indebtedness of ours or our subsidiaries would likely contain, a number of restrictive covenants that impose significant operating and financial restrictions on 19 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: (cid:129) incur liens; (cid:129) incur or assume additional debt or guarantees or issue preferred stock; (cid:129) pay dividends, or make redemptions and repurchases, with respect to capital stock; (cid:129) prepay, or make redemptions and repurchases of, subordinated debt; (cid:129) make loans and investments; (cid:129) make capital expenditures; (cid:129) engage in mergers, acquisitions, asset sales, sale/leaseback transactions and transactions with affiliates; (cid:129) change the business conducted by us or our subsidiaries; and (cid:129) amend the terms of subordinated debt. The operating and financial restrictions in our credit facilities and any future financing agreements may adversely affect our ability to finance future operations or capital needs or to engage in other business activities. A breach of any of the restrictive covenants in our credit facilities would result in a default. If any such default occurs, the lenders under our credit facilities may elect to declare all outstanding borrowings, together with accrued interest and other fees, to be immediately due and payable, or enforce their security interest, any of which would result in an event of default. The lenders will also have the right in these circumstances to terminate any commitments they have to provide further borrowings. Our existing credit facilities do not contain any financial maintenance covenants. We may need additional capital to finance our growth strategy or to refinance our existing credit facilities, and we may not be able to obtain it on acceptable terms, or at all, which may limit our ability to grow. We may require additional financing to expand our business. Financing may not be available to us or may be available to us only on terms that are not favorable. The terms of our senior secured credit facilities limit our ability to incur additional debt. In addition, economic conditions, including a downturn in the credit markets, could impact our ability to finance our growth on acceptable terms or at all. If we are unable to raise additional funds or obtain capital on acceptable terms, we may have to delay, modify or abandon some or all of our growth strategies. In the future, if we are unable to refinance our credit facilities on acceptable terms, our liquidity could be adversely affected. Item 1B. Unresolved Staff Comments None. 20 Item 2. Properties We own or lease manufacturing, distribution and office facilities globally totaling over five million square feet. We also have inventory warehouses that accommodate material storage and rapid response requirements of our customers. The following table provides information about our principal facilities exceeding 20,000 square feet: Location Owned/ Leased Activities . . . . . . . . . . . Owned Corporate headquarters, R&D Waukesha, WI Eagle, WI . . . . . . . . . . . . . . . Owned Manufacturing, office, training Whitewater, WI . . . . . . . . . . Owned Manufacturing, office, distribution Oshkosh, WI . . . . . . . . . . . . . Owned Manufacturing, office, warehouse, R&D Berlin, WI . . . . . . . . . . . . . . Owned Manufacturing, office, warehouse, R&D Jefferson, WI . . . . . . . . . . . . Owned Manufacturing, distribution, R&D Janesville, WI . . . . . . . . . . . . Leased Distribution Various WI . . . . . . . . . . . . . . Leased Warehouse Maquoketa, IA . . . . . . . . . . . Owned South Burlington, VT . . . . . . Leased Office Vergennes, VT . . . . . . . . . . . Leased Office Winooski, VT . . . . . . . . . . . . Leased Distribution, storage Charlotte, VT . . . . . . . . . . . . Leased Distribution, storage Mexico City, Mexico . . . . . . . Owned Manufacturing, sales, distribution, warehouse, Storage, rental property Segment Domestic Domestic Domestic Domestic Domestic Domestic Domestic Domestic Domestic Domestic Domestic Domestic Domestic International Mexico City, Mexico . . . . . . . Leased Office, manufacturing, warehouse Guadalajara, Mexico . . . . . . . Owned Milan, Italy . . . . . . . . . . . . . . Leased Manufacturing, sales, distribution, warehouse, Sales, office International International International office, R&D office, R&D Casole d’Elsa, Italy . . . . . . . . Leased Manufacturing, office, warehouse, R&D Balsicas, Spain . . . . . . . . . . . Leased Manufacturing, office, warehouse, R&D Foshan, China . . . . . . . . . . . . Owned Manufacturing, office, warehouse, R&D Changzhou, China . . . . . . . . . Leased Manufacturing, office, warehouse, R&D Saint-Nizier-sous-Charlieu, France . . . . . . . . . . . . . . . Leased Sales, office, warehouse Ribeirao Preto, Brazil . . . . . . Leased Manufacturing, office, warehouse Stoke-on-Trent, United Kingdom . . . . . . . . . . . . . . Leased Sydney, Australia . . . . . . . . . Leased Celle, Germany . . . . . . . . . . . Owned Manufacturing, office, warehouse, R&D Charzyno, Poland . . . . . . . . . Owned Manufacturing Sales, office, warehouse Sales, office, warehouse International International International International International International International International International International In addition to the countries represented above, the Company has other operations or sales offices in the United Arab Emirates, India, Singapore and the Dominican Republic, as well as several other countries throughout Europe. As of December 31, 2018, substantially all of our domestically-owned and a portion of our internationally-owned properties are subject to collateral provisions under our senior secured credit facilities. Item 3. Legal Proceedings From time to time, we are involved in legal proceedings primarily involving product liability, employment matters and general commercial disputes arising in the ordinary course of our business. As 21 of December 31, 2018, we believe that there is no litigation pending that would have a material effect on our results of operations or financial condition. Item 4. Mine Safety Disclosures Not Applicable. PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Shares of our common stock are traded on the New York Stock Exchange (NYSE) under the symbol ‘‘GNRC.’’ Purchases of Equity Securities By the Issuer and Affiliated Purchasers The following table summarizes the stock repurchase activity for the three months ended December 31, 2018, which consisted of the withholding of shares upon the vesting of restricted stock awards to pay related withholding taxes on behalf of the recipient: Total Number of Shares Purchased Average Price Paid per Share Total Number Of Shares Purchased As Part Of Publicly Announced Plans Or Programs 10/01/18 - 10/31/18 . . . . . . . . . . . . 11/01/18 - 11/30/18 . . . . . . . . . . . . 12/01/18 - 12/31/18 . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . — 1,213 170 1,383 — $55.05 52.79 $54.77 — — — Approximate Dollar Value Of Shares That May Yet Be Purchased Under The Plans Or Programs $144,453,228 $250,000,000 $250,000,000 For equity compensation plan information, refer to Note 15, ‘‘Share Plans,’’ to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K. For information on the Company’s stock repurchase plans, refer to Note 11, ‘‘Stock Repurchase Program,’’ to the consolidated financial statements. Stock Performance Graph The line graph below compares the cumulative total stockholder return on our common stock with the cumulative total return of the Standard & Poor’s S&P 500 Index, the S&P 500 Industrials Index and the Russell 2000 Index for the five-year period ended December 31, 2018. The graph and table assume that $100 was invested on December 31, 2013 in each of our common stock, the S&P 500 Index, the S&P 500 Industrials Index and the Russell 2000 Index, and that all dividends were 22 reinvested. Cumulative total stockholder returns for our common stock, the S&P 500 Index, the S&P 500 Industrials Index and the Russell 2000 Index are based on our fiscal year. COMPARISON OF CUMULATIVE TOTAL RETURN Generac Holdings Inc. S&P 500 Index - Total Return S&P 500 Industrials Index Russell 2000 Index $200 $150 $100 $50 $0 12/31/2013 12/31/2014 12/31/2015 12/31/2016 12/31/2017 12/31/2018 ASSUMES $100 INVESTED ON DEC. 31, 2013 ASSUMES DIVIDEND REINVESTED FISCAL YEAR ENDING DEC. 31, 2018 2APR201910291743 Company / Market / Peer Group 12/31/2013 12/31/2014 12/31/2015 12/31/2016 12/31/2017 12/31/2018 . . . . . . . . . . . Generac Holdings Inc. S&P 500 Index—Total Returns . . . . . S&P 500 Industrials Index . . . . . . . . Russell 2000 Index . . . . . . . . . . . . . . $100.00 100.00 100.00 100.00 $ 82.56 113.69 109.83 104.89 $ 52.56 115.26 107.04 100.26 $ 71.93 129.05 127.23 121.63 $ 87.43 157.22 153.99 139.44 $ 87.75 150.33 133.53 124.09 Holders As of February 19, 2019, there were 194 registered holders of record of Generac’s common stock. A substantially greater number of holders of Generac common stock are ‘‘street name’’ or beneficial holders, whose shares are held of record by banks, brokers and other financial institutions. Dividends We do not have plans to pay dividends on our common stock in the foreseeable future. However, in the future, subject to factors such as general economic and business conditions, our financial condition and results of operations, our capital requirements, our future liquidity and capitalization, and other such factors that our Board of Directors may deem relevant, we may change this policy and choose to pay dividends. Our ability to pay dividends on our common stock is currently limited by the terms of our senior secured credit facilities and may be further restricted by any future indebtedness we incur. Dividends from, and cash generated by our subsidiaries will be our principal sources of cash to repay indebtedness, fund operations, repurchase shares of common stock and pay dividends. Accordingly, our ability to pay dividends to our stockholders is dependent on the earnings and distributions of funds from our subsidiaries. 23 Securities Authorized for Issuance Under Equity Compensation Plans For information on securities authorized for issuance under our equity compensation plans, refer to ‘‘Item 12—Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters,’’ which is incorporated herein by reference. Recent Sales of Unregistered Securities None. Use of Proceeds from Registered Securities Not applicable. Item 6. Selected Financial Data The following table sets forth our selected historical consolidated financial data for the periods and at the dates indicated. The selected historical consolidated financial data for the years ended December 31, 2018, 2017 and 2016 are derived from our audited consolidated financial statements included elsewhere in this annual report. The selected historical consolidated financial data for the years ended December 31, 2015 and 2014 is derived from our audited historical consolidated financial statements not included in this annual report. The results indicated below and elsewhere in this annual report are not necessarily indicative of our future performance. This information should be read together with ‘‘Item 7—Management’s 24 Discussion and Analysis of Financial Condition and Results of Operations’’ and our consolidated financial statements and related notes thereto in Item 8 of this Annual Report on Form 10-K. (U.S. Dollars in thousands, except per share data) Statement of Operations Data: Net sales . . . . . . . . . . . . . . . . . . . . . . Costs of goods sold . . . . . . . . . . . . . . Gross profit . . . . . . . . . . . . . . . . . . . . Operating expenses: Selling and service . . . . . . . . . . . . . . . Research and development . . . . . . . . . General and administrative . . . . . . . . . Amortization of intangibles(1) . . . . . . Tradename and goodwill impairment(2) . . . . . . . . . . . . . . . . Gain on remeasurement of contingent consideration(3) . . . . . . . . . . . . . . . Total operating expenses . . . . . . . . . . Income from operations . . . . . . . . . . . Other (expense) income: Interest expense . . . . . . . . . . . . . . . . Investment income . . . . . . . . . . . . . . . Loss on extinguishment of debt(4) . . . Gain (loss) on change in contractual interest rate(5) . . . . . . . . . . . . . . . . Other, net . . . . . . . . . . . . . . . . . . . . . 2018 2017 2016 2015 2014 Year Ended December 31, $2,023,464 1,298,424 $1,679,373 1,094,587 $1,447,743 935,322 $1,317,299 857,349 $1,460,919 944,700 725,040 584,786 512,421 459,950 516,219 191,887 50,019 103,841 22,112 — — 367,859 357,181 (40,956) 1,893 (1,332) — (5,710) 174,841 42,869 87,581 28,861 — — 334,152 250,634 (42,667) 298 — — (4,566) 164,860 37,163 74,693 32,953 — — 309,669 202,752 (44,568) 44 (574) (2,957) (1,000) 130,242 32,922 52,947 23,591 40,687 120,408 31,494 54,795 21,024 — — (4,877) 280,389 179,561 (42,843) 123 (4,795) (2,381) (6,682) 222,844 293,375 (47,215) 130 (2,084) 16,014 (1,858) Total other expense, net . . . . . . . . . . . (46,105) (46,935) (49,055) (56,578) (35,013) Income before provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . Provision for income taxes(6) . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . Net income attributable to noncontrolling interests . . . . . . . . . . Net income attributable to Generac 311,076 69,856 241,220 203,699 44,142 159,557 153,697 56,519 97,178 122,983 45,236 77,747 258,362 83,749 174,613 2,963 1,749 24 — — Holdings Inc. . . . . . . . . . . . . . . . . $ 238,257 $ 157,808 $ 97,154 $ 77,747 $ 174,613 Net income attributable to common shareholders per common share— diluted: . . . . . . . . . . . . . . . . . . . . . Statement of Cash Flows data: Depreciation . . . . . . . . . . . . . . . . . . . Amortization of intangible assets . . . . Expenditures for property and $ $ 3.54 25,296 22,112 $ $ 2.53 23,127 28,861 $ $ 1.47 21,465 32,953 $ $ 1.12 16,742 23,591 $ $ 2.49 13,706 21,024 equipment . . . . . . . . . . . . . . . . . . . (47,601) (33,261) (30,467) (30,651) (34,689) Other Financial Data: Adjusted EBITDA attributable to Generac Holdings Inc.(7) . . . . . . . . $ 416,793 $ 311,225 $ 272,738 $ 270,816 $ 337,283 Adjusted net income attributable to Generac Holdings Inc.(8) . . . . . . . . 292,213 211,869 195,572 198,436 234,165 25 As of December 31, (U.S. Dollars in thousands) 2018 2017 2016 2015 2014 Balance Sheet Data: Current assets . . . . . . . . . . . . . . . . . . . . . . . . . Property and equipment, net Goodwill . . . . . . . . . . . . . . . . . . . . . . Other intangibles and other assets . . . $1,120,769 278,929 764,655 261,961 $ 824,557 230,380 721,523 249,505 $ 687,794 212,793 704,640 260,742 $ 632,017 184,213 669,719 292,686 $ 707,637 168,821 635,565 352,396 Total assets . . . . . . . . . . . . . . . . . . . . $2,426,314 $2,025,965 $1,865,969 $1,778,635 $1,864,419 Total current liabilities . . . . . . . . . . . . Long-term borrowings, less current portion . . . . . . . . . . . . . . . . . . . . . Other long-term liabilities . . . . . . . . . Redeemable noncontrolling interests . . Total stockholders’ equity . . . . . . . . . . Total liabilities and stockholders’ $ 560,706 $ 396,423 $ 347,926 $ 213,224 $ 240,522 876,396 166,947 61,004 761,261 906,548 124,745 43,929 554,320 1,006,758 80,968 33,138 397,179 1,037,132 62,408 — 465,871 1,065,858 68,240 — 489,799 equity . . . . . . . . . . . . . . . . . . . . . . $2,426,314 $2,025,965 $1,865,969 $1,778,635 $1,864,419 (1) Our amortization of intangibles expense includes the straight-line amortization of customer lists, patents, certain tradenames and other finite-lived intangible assets. (2) During the fourth quarter of 2015, our Board of Directors approved a plan to strategically transition and consolidate certain of our brands acquired through acquisitions to the Generac(cid:5) tradename. This brand strategy change resulted in a reclassification to a two year remaining useful life and a $36.1 million non-cash charge to write-down the impacted tradenames to net realizable value. Additionally, during the fourth quarter of 2015, a $4.6 million goodwill impairment charge was recorded related to the write-down of the Ottomotores reporting unit goodwill. (3) During the second quarter of 2014, we recorded a gain of $4.9 million related to an adjustment to a certain earn-out obligation in connection with the Tower Light acquisition. (4) Represents the non-cash write-off of original issue discount and deferred financing costs due to voluntary debt prepayments. Refer to Note 10, ‘‘Credit Agreements,’’ to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K for further information on the losses on extinguishment of debt. (5) For the year ended December 31, 2016, represents a non-cash loss in the third quarter 2016 relating to the continued 25 basis point increase in borrowing costs as a result of the credit agreement leverage ratio remaining above 3.0 times based on projections at that time. For the year ended December 31, 2015, represents a non-cash loss relating to a 25 basis point increase in borrowing costs as a result of the credit agreement leverage ratio rising above 3.0 times effective in the third quarter 2015 and expected to remain above 3.0 times based on projections at that time. For the year ended December 31, 2014, represents a non-cash gain relating to a 25 basis point reduction in borrowing costs as a result of the credit agreement leverage ratio falling below 3.0 times effective in the second quarter 2014 and expected to remain below 3.0 times based on projections at that time. Following the May 2017 Term Loan amendment, which removed the pricing grid based on leverage ratio achieved, gains or losses on changes in contractual interest rate will no longer be recorded in the statements of comprehensive income. Refer to Note 10, ‘‘Credit Agreements,’’ to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K for further information on the gains and losses on changes in the contractual interest rate. 26 (6) On December 22, 2017, the U.S. Government enacted a comprehensive tax reform bill commonly referred to as the Tax Cuts and Jobs Act (the Tax Act, or Tax Reform). As a result of the Tax Act, we recognized a one-time, non-cash benefit of $28.4 million in the fourth quarter of 2017 primarily from the impact of the revaluation of the Company’s net deferred tax liabilities. Refer to Note 13, ‘‘Income Taxes,’’ to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K for further information on the Tax Act and its impact. (7) Adjusted EBITDA represents net income before noncontrolling interests, interest expense, taxes, depreciation and amortization, as further adjusted for the other items reflected in the reconciliation table set forth below. The computation of adjusted EBITDA is based on the definition of EBITDA contained in the Term Loan and ABL Facility (terms defined in Note 10, ‘‘Credit Agreements,’’ to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K). We view Adjusted EBITDA as a key measure of our performance. We present Adjusted EBITDA not only due to its importance for purposes of our credit agreements, but also because it assists us in comparing our performance across reporting periods on a consistent basis as it excludes items that we do not believe are indicative of our core operating performance. Our management uses Adjusted EBITDA: (cid:129) for planning purposes, including the preparation of our annual operating budget and developing and refining our internal projections for future periods; (cid:129) to allocate resources to enhance the financial performance of our business; (cid:129) as a benchmark for the determination of the bonus component of compensation for our senior executives under our management incentive plan, as described further in our Proxy Statement; (cid:129) to evaluate the effectiveness of our business strategies and as a supplemental tool in evaluating our performance against our budget for each period; and (cid:129) in communications with our Board of Directors and investors concerning our financial performance. We believe Adjusted EBITDA is used by securities analysts, investors and other interested parties in the evaluation of the Company. Management believes the disclosure of Adjusted EBITDA offers an additional financial metric that, when coupled with results prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) and the reconciliation to U.S. GAAP results, provides a more complete understanding of our results of operations and the factors and trends affecting our business. We believe Adjusted EBITDA is useful to investors for the following reasons: (cid:129) Adjusted EBITDA and similar non-GAAP measures are widely used by investors to measure a company’s operating performance without regard to items that can vary substantially from company to company depending upon financing and accounting methods, book values of assets, tax jurisdictions, capital structures and the methods by which assets were acquired; (cid:129) investors can use Adjusted EBITDA as a supplemental measure to evaluate the overall operating performance of our company, including our ability to service our debt and other cash needs; and (cid:129) by comparing our Adjusted EBITDA in different historical periods, our investors can evaluate our operating performance excluding the impact of items described below. 27 The adjustments included in the reconciliation table listed below are provided for under our Term Loan and ABL Facility, and also are presented to illustrate the operating performance of our business in a manner consistent with the presentation used by our management and Board of Directors. These adjustments eliminate the impact of a number of items that: (cid:129) we do not consider indicative of our ongoing operating performance, such as non-cash write-downs and other charges, non-cash gains, write-offs relating to the retirement of debt, severance costs and other restructuring-related business optimization expenses; (cid:129) we believe to be akin to, or associated with, interest expense, such as administrative agent fees, revolving credit facility commitment fees and letter of credit fees; or (cid:129) are non-cash in nature, such as share-based compensation expense. We explain in more detail in footnotes (a) through (h) below why we believe these adjustments are useful in calculating Adjusted EBITDA as a measure of our operating performance. Adjusted EBITDA does not represent, and should not be a substitute for, net income or cash flows from operations as determined in accordance with U.S. GAAP. Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under U.S. GAAP. Some of the limitations are: (cid:129) Adjusted EBITDA does not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments; (cid:129) Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; (cid:129) Adjusted EBITDA does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments on our debt; (cid:129) 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; (cid:129) several of the adjustments that we use in calculating Adjusted EBITDA, such as non-cash write-downs and other charges, while not involving cash expense, do have a negative impact on the value of our assets as reflected in our consolidated balance sheet prepared in accordance with U.S. GAAP; and (cid:129) other companies may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure. Furthermore, as noted above, one of our uses of Adjusted EBITDA is as a benchmark for determining elements of compensation for our senior executives. At the same time, some or all of these senior executives have responsibility for monitoring our financial results, generally including the adjustments in calculating Adjusted EBITDA (subject ultimately to review by our Board of Directors in the context of the Board’s review of our financial statements). While many of the adjustments (for example, transaction costs and credit facility fees), involve mathematical application of items reflected in our financial statements, others involve a degree of judgment and discretion. While we believe all of these adjustments are appropriate, and while the calculations are subject to review by our Board of Directors in the context of the Board’s review of our financial statements, and certification by our Chief Financial Officer in a compliance certificate provided to the lenders under our Term Loan and ABL Facility, this discretion may be viewed as an additional limitation on the use of Adjusted EBITDA as an analytical tool. 28 Because of these limitations, Adjusted EBITDA should not be considered as a measure of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our U.S. GAAP results and using Adjusted EBITDA only supplementally. The following table presents a reconciliation of net income to Adjusted EBITDA attributable to Generac Holdings Inc.: (U.S. Dollars in thousands) 2018 2017 2016 2015 2014 Year Ended December 31, Net income attributable to Generac Holdings Inc. Net income attributable to . . . $238,257 $157,808 $ 97,154 $ 77,747 $174,613 noncontrolling interests(a) 2,963 1,749 Net income . . . . . . . . . . . . . Interest expense . . . . . . . . . Depreciation and amortization . . . . . . . . . . Provision for income taxes . . Non-cash write-down and 241,220 40,956 159,557 42,667 47,408 69,856 51,988 44,142 24 97,178 44,568 54,418 56,519 — 77,747 42,843 40,333 45,236 — 174,613 47,215 34,730 83,749 other adjustments(b) . . . . 3,532 2,923 357 3,892 (3,853) Non-cash share-based compensation expense(c) . 14,563 10,205 9,493 8,241 12,612 Tradename and goodwill impairment(d) . . . . . . . . . — Loss on extinguishment of debt(e) . . . . . . . . . . . . . . 1,332 (Gain) loss on change in contractual interest rate(f) Transaction costs and credit — — — — — 40,687 — 574 4,795 2,084 2,957 2,381 (16,014) facility fees(g) . . . . . . . . . 3,883 2,145 2,442 2,249 1,851 Business optimization expenses(h) . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . Adjusted EBITDA . . . . . . . . Adjusted EBITDA attributable to noncontrolling interests . . Adjusted EBITDA attributable to Generac Holdings Inc. . . . . . . . . . 952 850 2,912 761 7,316 700 1,947 465 — 296 424,552 317,300 276,522 270,816 337,283 7,759 6,075 3,784 — — $416,793 $311,225 $272,738 $270,816 $337,283 (a) Includes the noncontrolling interests’ share of expenses related to Pramac purchase accounting, including the step-up in value of inventories and intangible amortization of $4.6 million, $4.7 million and $8.0 million for the years ended December 31, 2018, 2017 and 2016, respectively. (b) Represents the following non-cash charges: gains/losses on disposal of assets, unrealized mark-to-market adjustments on commodity contracts, transactional foreign currency gains/ losses and certain purchase accounting related adjustments. Additionally, the year ended 29 December 31, 2014 includes a gain of $4.9 million related to an adjustment to an earn-out obligation in connection with the Tower Light acquisition. We believe that adjusting net income for these non-cash charges is useful for the following reasons: (cid:129) The gains/losses on disposals of assets result from the sale of assets that are no longer useful in our business and therefore represent gains or losses that are not from our core operations; (cid:129) The adjustments for unrealized mark-to-market gains and losses on commodity contracts represent non-cash items to reflect changes in the fair value of forward contracts that have not been settled or terminated. We believe it is useful to adjust net income for these items because the charges do not represent a cash outlay in the period in which the charge is incurred, although Adjusted EBITDA must always be used together with our U.S. GAAP statements of comprehensive income and cash flows to capture the full effect of these contracts on our operating performance; (cid:129) The purchase accounting adjustments represent non-cash items to reflect fair value at the date of acquisition, and therefore do not reflect our ongoing operations; and (cid:129) The adjustment to a certain earn-out obligation in connection with the Tower Light acquisition recorded in the year ended December 31, 2014, is a one-time adjustment that we believe does not reflect our ongoing operations. (c) Represents share-based compensation expense to account for stock options, restricted stock and other stock awards over their respective vesting period. (d) During the fourth quarter of 2015, our Board of Directors approved a plan to strategically transition and consolidate certain of our brands acquired through acquisitions to the Generac(cid:5) tradename. This brand strategy change resulted in a reclassification to a two year remaining useful life and a $36.1 million non-cash charge to write-down the impacted tradenames to net realizable value. Additionally, during the fourth quarter of 2015, a $4.6 million goodwill impairment charge was recorded related to the write-down of the Ottomotores reporting unit goodwill. (e) Represents the non-cash write-off of original issue discount and deferred financing costs due to voluntary prepayments of Term Loan debt. Refer to Note 10, ‘‘Credit Agreements,’’ to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K for further information on the losses on extinguishment of debt. (f) For the year ended December 31, 2016, represents a non-cash loss relating to the continued 25 basis point increase in borrowing costs as a result of the credit agreement leverage ratio remaining above 3.0 times based on projections at that time. For the year ended December 31, 2015, represents a non-cash loss relating to a 25 basis point increase in borrowing costs as a result of the credit agreement leverage ratio rising above 3.0 times and expected to remain above 3.0 times based on projections at that time. For the year ended December 31, 2014, represents a non-cash gain relating to a 25 basis point reduction in borrowing costs as a result of the credit agreement leverage ratio falling below 3.0 times and expected to remain below 3.0 times based on projections at that time. Following the May 2017 Term Loan amendment, which removed the pricing grid based on leverage ratio achieved, gains or losses on changes in contractual interest rate will no longer be recorded in the statements of comprehensive income. Refer to Note 10, ‘‘Credit Agreements,’’ to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K for further information on the gains and losses on changes in the contractual interest rate. 30 (g) Represents transaction costs incurred directly in connection with any investment, as defined in our credit agreement, equity issuance, or debt issuance or refinancing, together with certain fees relating to our senior secured credit facilities, such as administrative agent fees and credit facility commitment fees under our Term Loan and ABL Facility, which we believe to be akin to, or associated with, interest expense and whose inclusion in Adjusted EBITDA is therefore similar to the inclusion of interest expense in that calculation, and transaction costs relating to the acquisition of businesses. (h) Represents severance and non-recurring plant consolidation costs. Additionally, the year ended December 31, 2016 primarily represents charges relating to business optimization and restructuring costs to address the significant and extended downturn for capital spending within the oil & gas industry. These charges represent expenses that are not from our core operations and do not reflect our ongoing operations. (8) Adjusted Net Income is defined as net income before noncontrolling interests and provision for income taxes adjusted for the following items: cash income tax expense, amortization of intangible assets, amortization of deferred financing costs and original issue discount related to our debt, intangible impairment charges, certain transaction costs and other purchase accounting adjustments, losses on extinguishment of debt, business optimization expenses, certain other non-cash gains and losses, and adjusted net income attributable to noncontrolling interests, as set forth in the reconciliation table below. We believe Adjusted Net Income is used by securities analysts, investors and other interested parties in the evaluation of our company’s operations. Management believes the disclosure of Adjusted Net Income offers an additional financial metric that, when used in conjunction with U.S. GAAP results and the reconciliation to U.S. GAAP results, provides a more complete understanding of our ongoing results of operations, and the factors and trends affecting our business. The adjustments included in the reconciliation table listed below are presented to illustrate the operating performance of our business in a manner consistent with the presentation used by investors and securities analysts. Similar to the Adjusted EBITDA reconciliation, these adjustments eliminate the impact of a number of items we do not consider indicative of our ongoing operating performance or cash flows, such as amortization costs, transaction costs and write-offs relating to the retirement of debt. We also make adjustments to present cash taxes paid as a result of our favorable tax attributes, causing our cash tax rate to be lower than our U.S GAAP tax rate. Similar to Adjusted EBITDA, Adjusted Net Income does not represent, and should not be a substitute for, net income or cash flows from operations as determined in accordance with U.S. GAAP. Adjusted Net Income has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under U.S. GAAP. Some of the limitations are: (cid:129) Adjusted Net Income does not reflect changes in, or cash requirements for, our working capital needs; (cid:129) although amortization is a non-cash charge, the assets being amortized may have to be replaced in the future, and Adjusted Net Income does not reflect any cash requirements for such replacements; and (cid:129) other companies may calculate Adjusted Net Income differently than we do, limiting its usefulness as a comparative measure. 31 The following table presents a reconciliation of net income to Adjusted Net Income attributable to Generac Holdings Inc.: Year Ended December 31, (U.S. Dollars in thousands) 2018 2017 2016 2015 2014 Net income attributable to Generac Holdings Inc. . . . . . . . . . . . . . . . . . . . . . . . $238,257 $157,808 $ 97,154 $ 77,747 $174,613 Net income attributable to noncontrolling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,963 1,749 24 — — Net income . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for income taxes . . . . . . . . . . . . . . . Income before provision for income taxes . . . . Amortization of intangible assets . . . . . . . . . . . Amortization of deferred finance costs and original issue discount . . . . . . . . . . . . . . . . . Tradename and goodwill impairment . . . . . . . . Loss on extinguishment of debt . . . . . . . . . . . . (Gain) loss on change in contractual interest 241,220 69,856 311,076 22,112 4,749 — 1,332 159,557 44,142 203,699 28,861 3,516 — — 97,178 56,519 153,697 32,953 3,940 — 574 77,747 45,236 122,983 23,591 5,429 40,687 4,795 174,613 83,749 258,362 21,024 6,615 — 2,084 rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 2,957 2,381 (16,014) Transaction costs and other purchase accounting adjustments(a) . . . . . . . . . . . . . . Business optimization expenses . . . . . . . . . . . . 2,578 952 1,706 2,912 5,653 7,316 2,710 1,947 (3,623) — Adjusted net income before provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . Cash income tax expense(b) . . . . . . . . . . . . . . 342,799 (47,064) 240,694 (25,624) 207,090 (9,299) 204,523 (6,087) 268,448 (34,283) Adjusted net income . . . . . . . . . . . . . . . . . . . Adjusted net income attributable to 295,735 215,070 197,791 198,436 234,165 noncontrolling interests . . . . . . . . . . . . . . . . 3,522 3,201 2,219 — — Adjusted net income attributable to Generac Holdings Inc. . . . . . . . . . . . . . . . . . . . . . . . $292,213 $211,869 $195,572 $198,436 $234,165 (a) Represents transaction costs incurred directly in connection with any investment, as defined in our credit agreement, equity issuance or debt issuance or refinancing, and certain purchase accounting adjustments. Additionally, the year ended December 31, 2014 includes a gain of $4.9 million related to an adjustment to an earn-out obligation in connection with the Tower Light acquisition. (b) For the years ended December 31, 2018, 2017 and 2016, the amount is based on a cash income tax rate of 15.1%, 12.5% and 5.9%, respectively. Cash income tax expense for 2018, 2017 and 2016 is based on the projected taxable income and corresponding cash taxes payable for the full year after considering the effects of current and deferred income tax items, and is calculated by applying the derived cash tax rate to the period’s pretax income. For the years ended December 31, 2015 and 2014, amounts are based on actual cash income taxes paid each year. 32 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of our financial condition and results of operations should be read together with ‘‘Item 1—Business,’’ ‘‘Item 6—Selected Financial Data’’ and the consolidated financial statements and the related notes thereto in Item 8 of this Annual Report on Form 10-K. This discussion contains forward-looking statements, based on current expectations and related to future events and our future financial performance, that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those set forth under ‘‘Item 1A—Risk Factors.’’ Overview We are a leading global designer and manufacturer of a wide range of power generation equipment and other power products serving the residential, light commercial and industrial markets. Power generation is our primary focus, which differentiates us from our main competitors that also have broad operations outside of the power equipment market. As the only significant market participant focused predominantly on these products, we have one of the leading market positions in the power equipment market in North America and an expanding presence internationally. We believe we have one of the widest ranges of products in the marketplace, including residential, commercial and industrial standby generators, as well as portable and mobile generators used in a variety of applications. Other power products that we design and manufacture include light towers which provide temporary lighting for various end markets; commercial and industrial mobile heaters and pumps used in the oil & gas, construction and other industrial markets; and a broad product line of outdoor power equipment for residential and commercial use. Business Drivers and Operational Factors In operating our business and monitoring its performance, we pay attention to a number of business drivers and trends as well as operational factors. The statements in this section are based on our current expectations. Business Drivers and Trends Our performance is affected by the demand for reliable power generation products, mobile product solutions and other power products by our customer base. This demand is influenced by several important drivers and trends affecting our industry, including the following: Increasing penetration opportunity. Many potential customers are still not aware of the costs and benefits of automatic backup power solutions. We estimate that penetration rates for home standby generators are only approximately 4.5% of U.S. single-family detached, owner-occupied households with a home value of over $100,000, as defined by the U.S. Census Bureau’s 2017 American Housing Survey for the United States. The decision to purchase backup power for many light-commercial buildings such as convenience stores, restaurants and gas stations is more return-on-investment driven and as a result these applications have relatively lower penetration rates as compared to buildings used in code-driven or mission critical applications such as hospitals, wastewater treatment facilities, 911 call centers, data centers and certain industrial locations. The emergence of lower cost, cleaner burning natural gas fueled generators has helped to increase the penetration of standby generators over the past decade in the light-commercial market. In addition, the installed base of backup power for telecommunications infrastructure is still increasing due to the growing importance for uninterrupted voice and data services. We believe by expanding our distribution network, continuing to develop our product line, and targeting our marketing efforts, we can continue to build awareness and increase penetration for our standby generators for residential, commercial and industrial purposes. 33 Effect of large scale and baseline power disruptions. Power disruptions are an important driver of customer awareness for back-up power and have historically influenced demand for generators, both in the United States and internationally. Increased frequency and duration of major power outage events, that have a broader impact beyond a localized level, increases product awareness and may drive consumers to accelerate their purchase of a standby or portable generator during the immediate and subsequent period, which we believe may last for six to twelve months following a major power outage event for standby generators. For example, the major outage events that occurred during the second half of 2017 drove strong demand for portable and home standby generators, and the increased awareness of these products contributed to strong revenue growth in both 2017 and 2018. Major power disruptions are unpredictable by nature and, as a result, our sales levels and profitability may fluctuate from period to period. In addition, there are smaller, more localized power outages that occur frequently across the United States that drive the baseline level of demand for back-up power solutions. The level of baseline power outage activity occurring across the United States can also fluctuate, and may cause our financial results to fluctuate from year to year. Impact of residential investment cycle. The market for residential generators is also affected by the residential investment cycle and overall consumer confidence and sentiment. When homeowners are confident of their household income, the value of their home and overall net worth, they are more likely to invest in their home. These trends can have an impact on demand for residential generators. Trends in the new housing market highlighted by residential housing starts can also impact demand for our residential generators. Demand for outdoor power equipment is also impacted by several of these factors, as well as weather precipitation patterns. Impact of business capital investment cycles. The global market for our commercial and industrial products is affected by different capital investment cycles, which can vary across the numerous regions around the world in which we participate. These markets include non-residential building construction, durable goods and infrastructure spending as well as investments in the exploration and production of oil & gas, as businesses or organizations either add new locations or make investments to upgrade existing locations or equipment. These trends can have a material impact on demand for these products. The capital investment cycle may differ for the various commercial and industrial end markets that we serve including light commercial, retail, office, telecommunications, industrial, data centers, healthcare, construction, oil & gas and municipal infrastructure, among others. The market for these products is also affected by general economic and geopolitical conditions as well as credit availability in the geographic regions that we serve. In addition, we believe demand for our mobile power products will continue to benefit from a secular shift towards renting versus buying this type of equipment. We believe the passage of the Tax Act in 2017 will continue to have a favorable impact on future demand within many of the end markets that we serve, as the improved cash flow, liquidity and business sentiment may lead to further investments in equipment, facilities and infrastructure in the United States. Factors Affecting Results of Operations We are subject to various factors that can affect our results of operations, which we attempt to mitigate through factors we can control, including continued product development, expanded distribution, pricing, cost control and hedging. Certain operational and other factors that affect our business include the following: Effect of commodity, currency and component price fluctuations. Industry-wide price fluctuations of key commodities, such as steel, copper and aluminum, along with other components we use in our products, as well as changes in labor costs required to produce our products, can have a material impact on our results of operations. Also, acquisitions in recent years have further expanded our commercial and operational presence outside of the United States. These international acquisitions, 34 along with our existing global supply chain, expose us to fluctuations in foreign currency exchange rates and regulatory tariffs that can have a material impact on our results of operations. We have historically attempted to mitigate the impact of any inflationary pressures through improved product design and sourcing, manufacturing efficiencies, price increases and select hedging transactions. Our results are also influenced by changes in fuel prices in the form of freight rates, which in some cases are accepted by our customers and in other cases are paid by us. Seasonality. Although there is demand for our products throughout the year, in each of the past five years approximately 20% to 24% of our net sales occurred in the first quarter, 22% to 25% in the second quarter, 24% to 28% in the third quarter and 27% to 29% in the fourth quarter, with different seasonality depending on the occurrence, timing and severity of major power outage activity in each year. Major outage activity is unpredictable by nature and, as a result, our sales levels and profitability may fluctuate from period to period. The seasonality experienced during a major power outage, and for the subsequent quarters following the event, will vary relative to other periods where no major outage events occurred. We maintain a flexible production and supply chain infrastructure in order to respond to outage-driven peak demand. Factors influencing interest expense and cash interest expense. Interest expense can be impacted by a variety of factors, including market fluctuations in LIBOR, interest rate election periods, interest rate swap agreements, repayments or borrowings of indebtedness, and amendments to our credit agreements. Interest expense decreased during 2018 compared to 2017, primarily due to lower interest rate spreads resulting from Term Loan and ABL Facility amendments, new interest rate swaps beginning in 2018, and the repayments of Term Loan and ABL Facility borrowings. These factors are partially offset by an increase in the market LIBOR rate. Refer to Note 10, ‘‘Credit Agreements,’’ to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K for further information. Factors influencing provision for income taxes and cash income taxes paid. On December 22, 2017, the U.S. government enacted the Tax Act, which significantly changes how the U.S. taxes corporations. During 2018, the U.S. Treasury Department (Treasury) issued several new regulations and other guidance which we have incorporated into our final tax calculations. At December 31, 2018, we consider the tax expense recorded for Tax Reform to be complete. It is possible additional regulations or guidance could be issued by Treasury or by a state which may create an additional tax expense or benefit. We will update our future tax provisions based on new regulations or guidance accordingly. As a result of the Tax Act, we recognized a one-time, non-cash benefit of $28.4 million in the fourth quarter of 2017 primarily from the impact of the revaluation of our net deferred tax liabilities. This non-cash benefit resulted primarily from the Federal rate reduction from 35% to 21%. As of December 31, 2018, we had approximately $347 million of tax-deductible goodwill and intangible asset amortization remaining from our acquisition by CCMP Capital Advisors, LLC in 2006 that we expect to generate aggregate cash tax savings of approximately $90 million through 2021, assuming continued profitability of our U.S. business and a combined federal and state tax rate of 26%. The recognition of the tax benefit associated with these assets for tax purposes is expected to be $122 million annually through 2020 and $102 million in 2021, which generates annual cash tax savings of $32 million through 2020 and $26 million in 2021. Based on current business plans, we believe that our cash tax obligations through 2021 will be significantly reduced by these tax attributes, after which our cash tax obligation will increase. Other domestic acquisitions have resulted in additional tax deductible goodwill and intangible assets that will generate tax savings, but are not material to the Company’s consolidated financial statements. 35 Acquisitions. Over the years, we have executed a number of acquisitions that supported our strategic plan. A summary of the recent acquisitions can be found in Note 1, ‘‘Description of Business,’’ to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K. Components of Net Sales and Expenses Net Sales Our net sales primarily consist of product sales to our customers. This includes sales of our power generation equipment and other power products to the residential, light commercial and industrial markets, as well as service parts to our dealer network. Net sales also include shipping and handling charges billed to customers, with the related freight costs included in cost of goods sold. Additionally, we offer other services, including extended warranties, remote monitoring, installation and maintenance services. However, these services accounted for less than two percent of our net sales for the year ended December 31, 2018. Refer to Note 2, ‘‘Significant Accounting Policies—Revenue Recognition,’’ to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K for further information on our revenue streams and related revenue recognition accounting policies. We are not dependent on any one channel or customer for our net sales, with no single customer representing more than 6% of our sales, and our top ten customers representing less than 22% of our net sales for the year ended December 31, 2018. Costs of Goods Sold The principal elements of costs of goods sold in our manufacturing operations are component parts, raw materials, factory overhead and labor. Component parts and raw materials comprised approximately 77% of costs of goods sold for the year ended December 31, 2018. The principal component parts are engines and alternators. We design and manufacture air-cooled engines for certain of our generators up to 22kW, along with certain liquid-cooled engines. We source engines for certain of our smaller products and all of our diesel products. For certain natural gas engines, we source the base engine block, and then add a significant amount of value engineering, sub-systems and other content to the point that we are recognized as the OEM of those engines. We design many of the alternators for our units and either manufacture or source alternators for certain of our units. We also manufacture other generator components where we believe we have a design and cost advantage. We source component parts from an extensive global network of reliable, high quality suppliers. In some cases, these relationships are proprietary. The principal raw materials used in the manufacturing process that are sourced are steel, copper and aluminum. We are susceptible to fluctuations in the cost of these commodities, impacting our costs of goods sold. We seek to mitigate the impact of commodity prices on our business through a continued focus on global sourcing, product design improvements, manufacturing efficiencies, price increases and select hedging transactions. We are also impacted by foreign currency fluctuations. There is typically a lag between raw material price fluctuations and their effect on our costs of goods sold. Other sources of costs include our manufacturing and warehousing facilities, factory overhead, labor and shipping costs. Factory overhead includes utilities, support personnel, depreciation, general supplies, support and maintenance. Although we attempt to maintain a flexible manufacturing cost structure, our margins can be impacted when we cannot timely adjust labor and manufacturing costs to match fluctuations in net sales. Operating Expenses Our operating expenses consist of costs incurred to support our sales, marketing, distribution, service parts, engineering, information systems, human resources, accounting, finance, risk management, 36 legal and tax functions, among others. These expenses include personnel costs such as salaries, bonuses, employee benefit costs and taxes, and are classified into three categories: selling and service, research and development, and general and administrative. Additionally, the amortization expense related to our finite-lived intangible assets is included within operating expenses. Selling and service. Our selling and service expenses consist primarily of personnel expense, marketing expense, standard warranty expense and other sales expenses. Our personnel expense recorded in selling and services expenses includes the expense of our sales force responsible for our broad customer base and other personnel involved in the marketing, sales and service of our products. Standard warranty expense, which is recorded at the time of sale, is estimated based on historical trends. Our marketing expenses include direct mail costs, printed material costs, product display costs, market research expenses, trade show expenses, media advertising, promotional expenses and co-op advertising costs. Marketing expenses are generally related to the launch of new product offerings, participation in trade shows and other events, and opportunities to create market awareness for home standby generators in areas impacted by heightened power outage activity. Research and development. Our research and development expenses support numerous projects covering all of our product lines. We operate engineering facilities with extensive capabilities at many locations globally and employ over 400 personnel with focus on new product development, existing product improvement and cost containment. We are committed to research and development, and rely on a combination of patents and trademarks to establish and protect our proprietary rights. Our research and development costs are expensed as incurred. General and administrative. Our general and administrative expenses include personnel costs for general and administrative employees; accounting, legal and professional services fees; information technology costs; insurance; travel and entertainment expense; and other corporate expenses. Amortization of intangibles. Our amortization of intangibles expense includes the straight-line amortization of finite-lived tradenames, customer lists, patents and other intangibles assets. Other (Expense) Income Other (expense) income includes the interest expense on our outstanding borrowings, amortization of debt financing costs and original issue discount, and cash flows related to interest rate swap agreements. Other (expense) income also includes other financial items such as losses on extinguishment of debt, gains (losses) on changes in contractual interest rate, and interest income earned on our cash and cash equivalents. 37 Results of Operations Year ended December 31, 2018 compared to year ended December 31, 2017 The following table sets forth our consolidated statement of operations data for the periods indicated: (U.S. Dollars in thousands) Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating expenses: Selling and service . . . . . . . . . . . . . . . . . . . . . . . . . . Research and development . . . . . . . . . . . . . . . . . . . . General and administrative . . . . . . . . . . . . . . . . . . . . Amortization of intangible assets . . . . . . . . . . . . . . . . Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . Income from operations . . . . . . . . . . . . . . . . . . . . . . . . Total other expense, net . . . . . . . . . . . . . . . . . . . . . . . . Income before provision for income taxes . . . . . . . . . . . Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income attributable to noncontrolling interests . . . . Year Ended December 31, 2018 2017 $ Change % Change $2,023,464 1,298,424 $1,679,373 1,094,587 344,091 203,837 725,040 584,786 140,254 20.5% 18.6% 24.0% 191,887 50,019 103,841 22,112 367,859 357,181 (46,105) 311,076 69,856 241,220 2,963 174,841 42,869 87,581 28,861 334,152 9.7% 17,046 16.7% 7,150 16,260 18.6% (6,749) (cid:6)23.4% 10.1% 33,707 250,634 (46,935) 106,547 830 203,699 44,142 159,557 1,749 107,377 25,714 81,663 1,214 80,449 42.5% (cid:6)1.8% 52.7% 58.3% 51.2% N/A 51.0% Net income attributable to Generac Holdings Inc. . . . . . $ 238,257 $ 157,808 The following sets forth our reportable segment information for the periods indicated: (U.S. Dollars in thousands) Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . International . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,580,325 443,139 $1,303,506 375,867 276,819 67,272 Total net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,023,464 $1,679,373 344,091 21.2% 17.9% 20.5% Net Sales Year Ended December 31, 2018 2017 $ Change % Change Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . International . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $388,685 35,867 $290,290 27,010 98,395 8,857 Total Adjusted EBITDA . . . . . . . . . . . . . . . . . . . . . . . . $424,552 $317,300 107,252 33.9% 32.8% 33.8% Adjusted EBITDA Year Ended December 31, 2018 2017 $ Change % Change 38 The following table sets forth our product class information for the periods indicated: Year Ended December 31, 2018 2017 $ Change % Change (U.S. Dollars in thousands) Residential products . . . . . . . . . . . . . Commercial & industrial products . . . Other . . . . . . . . . . . . . . . . . . . . . . . . $1,042,739 820,270 160,455 $ 870,491 684,352 124,530 172,248 135,918 35,925 Total net sales . . . . . . . . . . . . . . . . . . $2,023,464 $1,679,373 344,091 19.8% 19.9% 28.8% 20.5% Net sales. The increase in Domestic sales for the year ended December 31, 2018 was primarily due to strong broad-based growth in shipments of home standby generators, portable generators, outdoor power equipment and service parts. Shipments of residential products were particularly strong with demand climbing from the recent elevated outage environment which continued to drive awareness around the home standby category and the need for homeowners to have back-up power. Sales of our C&I mobile and stationary products were also strong during the year with rental, telecom, and healthcare market verticals experiencing growth. The increase in International sales for the year ended December 31, 2018 was primarily due to the $30.7 million contribution from the Selmec acquisition, and broad-based core growth from the Pramac, Ottomotores and Motortech businesses as we continue to drive market penetration across the globe. Gross profit. Gross profit margin for the year ended December 31, 2018 was 35.8% compared to 34.8% for the year ended December 31, 2017. The increase reflected a favorable mix of home standby generators, better leverage of fixed manufacturing costs on the increase in sales, favorable pricing environment, and focused initiatives to improve margins. These items were partially offset by general inflationary pressures from higher commodities, currencies, wages and logistics costs. Operating expenses. The increase in operating expenses was primarily driven by an increase in employee and incentive compensation costs, higher selling-related variable operating expenses given the higher sales volumes, and the recurring operating expenses from the Selmec acquisition. These items were partially offset by lower promotion, marketing and intangible amortization expenses. Other expense. The decrease in other expense, net was primarily due to lower interest expense and higher investment income, partially offset by the $1.3 million loss on extinguishment of debt resulting from a $50.0 million voluntary prepayment of Term Loan debt. Provision for income taxes. The effective income tax rates for the years ended December 31, 2018 and 2017 were 22.5% and 21.3%, respectively. The reduction of the U.S. federal statutory tax rate from 35% to 21% as a result of the Tax Act was more than offset by the prior year one-time, non-cash benefit of $28.4 million that was recorded primarily to revalue our net deferred tax liabilities in accordance with the Tax Act. Net income attributable to Generac Holdings Inc. The increase in net income attributable to Generac Holdings Inc. was primarily due to the factors outlined above, partially offset by an increase in net income attributable to noncontrolling interests. Adjusted EBITDA. Adjusted EBITDA margins for the Domestic segment for the year ended December 31, 2018 were 24.6% of net sales as compared to 22.3% of net sales for the year ended December 31, 2017. Adjusted EBITDA margin in the current year benefitted from improved operating leverage, favorable sales mix from higher shipments of home standby generators, a favorable pricing environment, lower promotional costs, and focused margin improvement initiatives. These benefits were partially offset by an increase in employee costs and general inflationary pressures. 39 Adjusted EBITDA margins for the International segment, before deducting for non-controlling interests, for the year ended December 31, 2018 were 8.1% of net sales as compared to 7.2% of net sales for the year ended December 31, 2017. The improvement was primarily due to increased leverage of fixed operating costs on the higher organic sales, and favorable mix. Adjusted net income. Adjusted Net Income of $292.2 million for the year ended December 31, 2018 increased 37.9% from $211.9 million for the year ended December 31, 2017, due to the factors outlined above, partially offset by an increase in cash income tax expense. Year ended December 31, 2017 compared to year ended December 31, 2016 The following table sets forth our consolidated statement of operations data for the periods indicated: (U.S. Dollars in thousands) Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating expenses: Selling and service . . . . . . . . . . . . . . . . . . . . . . . . . . Research and development . . . . . . . . . . . . . . . . . . . . General and administrative . . . . . . . . . . . . . . . . . . . . Amortization of intangible assets . . . . . . . . . . . . . . . . Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . Income from operations . . . . . . . . . . . . . . . . . . . . . . . . Total other expense, net . . . . . . . . . . . . . . . . . . . . . . . . Income before provision for income taxes . . . . . . . . . . . Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income attributable to noncontrolling interests . . . . Year Ended December 31, 2017 2016 $ Change % Change $1,679,373 1,094,587 $1,447,743 935,322 231,630 159,265 584,786 512,421 72,365 16.0% 17.0% 14.1% 174,841 42,869 87,581 28,861 334,152 250,634 (46,935) 203,699 44,142 159,557 1,749 164,860 37,163 74,693 32,953 309,669 202,752 (49,055) 153,697 56,519 97,178 24 6.1% 9,981 15.4% 5,706 12,888 17.3% (4,092) (cid:6)12.4% 7.9% 24,483 47,882 2,120 23.6% (cid:6)4.3% 50,002 32.5% (12,377) (cid:6)21.9% 64.2% 62,379 N/A 1,725 Net income attributable to Generac Holdings Inc. . . . . . $ 157,808 $ 97,154 60,654 62.4% The following table sets forth our reportable segment information for the periods indicated: Net Sales Year Ended December 31, 2017 2016 $ Change % Change 10.8% 38.8% 16.0% (U.S. Dollars in thousands) Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . International . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,303,506 375,867 $1,176,849 270,894 126,657 104,973 Total net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,679,373 $1,447,743 231,630 40 Adjusted EBITDA Year Ended December 31, 2017 2016 $ Change % Change Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . International $290,290 27,010 $259,563 16,959 30,727 10,051 Total Adjusted EBITDA . . . . . . . . . . . . . $317,300 $276,522 40,778 11.8% 59.3% 14.7% The following table sets forth our product class information for the periods indicated: Year Ended December 31, 2017 2016 $ Change % Change (U.S. Dollars in thousands) Residential products . . . . . . . . . . . . . Commercial & industrial products . . . Other . . . . . . . . . . . . . . . . . . . . . . . . $ 870,491 684,352 124,530 $ 769,176 558,468 120,099 101,315 125,884 4,431 Total net sales . . . . . . . . . . . . . . . . . . $1,679,373 $1,447,743 231,630 13.2% 22.5% 3.7% 16.0% Net sales. The increase in Domestic sales for the year ended December 31, 2017 was primarily due to strong growth in shipments of home standby and portable generators driven by increased power outage activity, along with strong growth for mobile products due to recovery in the general rental and oil & gas markets given the continued replacement cycle by our rental customers. The increase in International sales for the year ended December 31, 2017 was due to the contribution from the recent acquisitions of Pramac and Motortech. The growth was also due to increased organic shipments of both C&I and residential products within the European and Latin America regions. The total contribution from non-annualized recent acquisitions for the year ended December 31, 2017 was $69.7 million. Gross profit. Gross profit margin for the year ended December 31, 2017 was 34.8% compared to 35.4% for the year ended December 31, 2016, which included $2.7 million of business optimization and restructuring costs classified within cost of goods sold to address the significant and extended downturn for capital spending within the oil & gas industry, as well as $4.2 million of expense relating to the purchase accounting adjustment for the step-up in value of inventories relating to the Pramac acquisition. The year ended December 31, 2017 included $2.0 million of business optimization and non-recurring plant consolidation costs. Excluding the impact of these charges, pro-forma gross margins were 34.9% and 35.9% in 2017 and 2016, respectively. The pro-forma decrease in gross margins was primarily due to unfavorable sales mix attributable to higher organic sales within the International segment and of mobile products relative to 2016, which carry lower gross margins relative to the consolidated average. Additionally, the mix impact from the Pramac and Motortech acquisitions, and higher commodity prices negatively impacted gross margin. These impacts were partially offset by improved leverage of fixed manufacturing costs on the higher organic sales volumes and net favorable pricing impacts. Operating expenses. The 2016 operating expenses included $4.4 million of business optimization and restructuring costs classified within operating expenses to address the downturn for capital spending within the oil & gas industry. Excluding the impact of these charges, operating expenses increased $28.9 million, or 9.5%, as compared to 2016. The increase was primarily due to the addition of recurring operating expenses associated with the Pramac and Motortech acquisitions, and an increase in personnel costs including higher incentive compensation accrued during 2017, partially offset by a decline in amortization of intangibles. 41 Other expense. The decrease in other expense was primarily due to a 2016 $3.0 million non-cash loss on change in contractual interest rate not repeating in 2017 and a 2016 $0.6 million loss on extinguishment of debt resulting from a $25.0 million voluntary prepayment of Term Loan debt. Additionally, interest expense decreased in 2017 due to the $25.0 million Term Loan prepayment in November 2016, Term Loan repricings in May and December 2017, and decreased borrowings at other subsidiaries. These impacts were partially offset by an increase in LIBOR rates and foreign currency transactional losses. Provision for income taxes. The effective income tax rates for the years ended December 31, 2017 and 2016 were 21.7% and 36.8%, respectively. The decrease in the effective income tax rate is primarily due to the provisional favorable effect of the Tax Act, including a one-time, non-cash benefit of $28.4 million recorded in the fourth quarter of 2017, as well as excess tax benefits from share-based compensation. Net income attributable to Generac Holdings Inc. The increase in net income attributable to Generac Holdings Inc. was primarily due to the factors outlined above partially offset by an increase in net income attributable to noncontrolling interests. Adjusted EBITDA. Adjusted EBITDA margins for the Domestic segment for the year ended December 31, 2017 were 22.3% of net sales as compared to 22.1% of net sales for the year ended December 31, 2016. This increase was primarily due to improved overall leverage of fixed operating expenses on the organic increase in sales, and the net favorable impact of pricing. These impacts were partially offset by higher commodity prices and an increase in personnel costs including higher incentive compensation accrued during 2017. Adjusted EBITDA margins for the International segment for the year ended December 31, 2017 were 7.2% of net sales as compared to 6.3% of net sales for the year ended December 31, 2016. The increase was primarily due to improved overall leverage of fixed manufacturing and operating expenses on the organic increase in sales, the addition of the Motortech acquisition and cost reduction actions. These impacts were partially offset by higher commodity prices and increased operating expenses associated with the expansion of certain branch operations. Adjusted net income. Adjusted Net Income of $211.9 million for the year ended December 31, 2017 increased 8.3% from $195.6 million for the year ended December 31, 2016, due to the factors outlined above, partially offset by an increase in cash income tax expense. Liquidity and Financial Position Our primary cash requirements include payment for our raw material and component supplies, salaries & benefits, facility and lease costs, operating expenses, interest and principal payments on our debt and capital expenditures. We finance our operations primarily through cash flow generated from operations and, if necessary, borrowings under our ABL Facility. Our credit agreements originally provided for a $1.2 billion term loan B credit facility (Term Loan) and include a $300.0 million uncommitted incremental term loan facility. The Term Loan matures on May 31, 2023, and bears interest at rates based upon either a base rate plus an applicable margin of 0.75% or adjusted LIBOR rate plus an applicable margin of 1.75%, subject to a LIBOR floor of 0.75%. The Term Loan does not require an Excess Cash Flow payment if our secured leverage ratio is maintained below 3.75 to 1.00 times. As of December 31, 2018, our secured leverage ratio was 1.66 to 1.00 times, and we were in compliance with all covenants of the Term Loan. There are no financial maintenance covenants on the Term Loan. Our credit agreements also provide for the $300.0 million ABL Facility. The maturity date of the ABL Facility is June 12, 2023. As of December 31, 2018, there were $18.5 million of borrowings 42 outstanding and $276.6 million of availability under the ABL Facility, net of outstanding letters of credit. We are in compliance with all covenants of the ABL Facility as of December 31, 2018. In August 2015, our Board of Directors approved a $200.0 million stock repurchase program, which we completed in the third quarter of 2016. In October 2016, our Board of Directors approved a new $250.0 million stock repurchase program, which expired in the fourth quarter of 2018. In September 2018, the Board of Directors approved another stock repurchase program, which commenced in October 2018, and under which we may repurchase an additional $250.0 million of common stock over 24 months from time to time, in amounts and at prices we deem appropriate, subject to market conditions and other considerations. During the year ended December 31, 2018, we repurchased 560,000 shares of our common stock for $25.7 million. Since the inception of all programs, we have repurchased 8,676,706 shares of our common stock for $305.5 million, all funded with cash on hand. Long-term Liquidity We believe that our cash flow from operations and availability under our ABL Facility and other short-term lines of credit, combined with our favorable tax attributes (which result in a lower cash tax rate as compared to the U.S. statutory tax rate) provide us with sufficient capital to continue to grow our business in the future. We may use a portion of our cash flow to pay interest and principal on our outstanding debt as well as repurchase shares of our common stock, impacting the amount available for working capital, capital expenditures and other general corporate purposes. As we continue to expand our business, we may require additional capital to fund working capital, capital expenditures or acquisitions. Cash Flow Year ended December 31, 2018 compared to year ended December 31, 2017 The following table summarizes our cash flows by category for the periods presented: Year Ended December 31, 2018 2017 Change % Change (U.S. Dollars in thousands) Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . Net cash used in investing activities . . . Net cash used in financing activities . . $ 247,227 (108,894) (52,034) $ 257,322 (28,128) (160,143) $ (10,095) (cid:6)3.9% 287.1% (80,766) 108,109 (cid:6)67.5% The decrease in net cash provided by operating activities was primarily driven by increased working capital investment due to strong organic growth and incremental inventory purchases ahead of expected tariff changes, which was partially offset by an increase in operating earnings. Net cash used in investing activities for the year ended December 31, 2018 primarily represents cash payments of $65.4 million related to the acquisition of businesses and $47.6 million for the purchase of property and equipment. Net cash used in investing activities for the year ended December 31, 2017 primarily consisted of cash payments for the purchase of property and equipment. Net cash used in financing activities for the year ended December 31, 2018 primarily consisted of $129.7 million of debt repayments ($101.8 million of long-term borrowings and $27.9 million of short-term borrowings), $25.7 million for the repurchase of the Company’s common stock, and $5.7 million of taxes paid related to equity awards. These payments were partially offset by $105.4 million cash proceeds from borrowings ($54.0 million for short-term borrowings and $51.4 million for long-term borrowings) and $5.6 million of proceeds from the exercise of stock options. 43 Net cash used in financing activities for the year ended December 31, 2017 primarily consisted of $232.4 million of debt repayments ($117.5 million of long-term borrowings and $114.9 million of short-term borrowings), $30.0 million for the repurchase of the Company’s common stock, $5.9 million of taxes paid related to equity awards and $3.9 million of payments for debt issuance costs. These payments were partially offset by $105.1 million cash proceeds from borrowings ($102.0 million for short-term borrowings and $3.1 million for long-term borrowings) and $7.0 million of proceeds from the exercise of stock options. Year ended December 31, 2017 compared to year ended December 31, 2016 The following table summarizes our cash flows by category for the periods presented: (U.S. Dollars in thousands) Net cash provided by operating Year Ended December 31, 2017 2016 Change % Change activities . . . . . . . . . . . . . . . . . . . . . Net cash used in investing activities . . . . Net cash used in financing activities . . . $ 257,322 (28,128) (160,143) $ 241,122 (93,535) (195,705) $16,200 6.7% 65,407 (cid:6)69.9% 35,562 (cid:6)18.2% The 6.7% increase in net cash provided by operating activities was primarily driven by an overall increase in operating earnings, partially offset by a lesser benefit from working capital reductions during 2017, which was primarily due to replenishing inventory levels in the first quarter of 2017 following Hurricane Matthew, and ramping up production in the second half of 2017 in response to Hurricanes Harvey, Irma and Maria. Net cash used in investing activities for the year ended December 31, 2017 primarily consisted of cash payments for the purchase of property and equipment. Net cash used in investing activities for the year ended December 31, 2016 primarily represents cash payments of $76.7 million related to the acquisition of businesses and $30.5 million for the purchase of property and equipment. Net cash used in financing activities for the year ended December 31, 2017 primarily consisted of $232.4 million of debt repayments ($117.5 million of long-term borrowings and $114.9 million of short-term borrowings), $30.0 million for the repurchase of the Company’s common stock, $5.9 million of taxes paid related to equity awards and $3.9 million of payments for debt issuance costs. These payments were partially offset by $105.1 million cash proceeds from borrowings ($102.0 million for short-term borrowings and $3.1 million for long-term borrowings) and $7.0 million of proceeds from the exercise of stock options. Net cash used in financing activities for the year ended December 31, 2016 primarily consisted of $149.9 million for the repurchase of the Company’s common stock, $65.4 million of debt repayments ($37.6 million of long-term borrowings and $27.8 million of short-term borrowings) and $14.0 million of taxes paid related to equity awards. These payments were partially offset by $28.7 million cash proceeds from short-term borrowings and $7.9 million of excess tax benefits from equity awards. Senior Secured Credit Facilities Refer to Note 10, ‘‘Credit Agreements,’’ to the consolidated financial statements in Item 8 and the ‘‘Liquidity and Financial Position’’ section included in Item 7 of this Annual Report on Form 10-K for information on the senior secured credit facilities. Covenant Compliance The Term Loan contains restrictions on the Company’s ability to pay distributions and dividends. Payments can be made to the Company or other parent companies for certain expenses such as 44 operating expenses in the ordinary course, fees and expenses related to any debt or equity offering and to pay franchise or similar taxes. Dividends can be used to repurchase equity interests, subject to limitations in certain circumstances. Additionally, the Term Loan restricts the aggregate amount of dividends and distributions that can be paid and, in certain circumstances, requires pro forma compliance with certain fixed charge coverage ratios or gross leverage ratios, as applicable, in order to pay certain dividends and distributions. The Term Loan also contains other affirmative and negative covenants that, among other things, limit the incurrence of additional indebtedness, liens on property, sale and leaseback transactions, investments, loans and advances, mergers or consolidations, asset sales, acquisitions, transactions with affiliates, prepayments of certain other indebtedness and modifications of our organizational documents. The Term Loan does not contain any financial maintenance covenants. The Term Loan contains customary events of default, including, among others, nonpayment of principal, interest or other amounts, failure to perform covenants, inaccuracy of representations or warranties in any material respect, cross-defaults with other material indebtedness, certain undischarged judgments, the occurrence of certain ERISA, bankruptcy or insolvency events, or the occurrence of a change in control (as defined in the Term Loan). A bankruptcy or insolvency event of default will cause the obligations under the Term Loan to automatically become immediately due and payable. The ABL Facility also contains covenants and events of default substantially similar to those in the Term Loan, as described above. Contractual Obligations The following table summarizes our expected payments for significant contractual obligations as of December 31, 2018, using the interest rates in effect as of that date: (U.S. Dollars in thousands) Long-term debt, including current Total Less than 1 Year 2 - 3 Years 4 - 5 Years After 5 Years portion(1) . . . . . . . . . . . . . . . . . . . $ 880,642 $ 1,075 $ 567 $ — $879,000 Capital lease obligations, including current portion . . . . . . . . . . . . . . . . Interest on long-term debt and capital lease obligations . . . . . . . . . . . . . . . Operating leases . . . . . . . . . . . . . . . . 20,171 852 2,470 2,974 13,875 167,652 50,919 37,046 8,914 73,968 13,954 52,476 9,437 4,162 18,614 Total contractual cash obligations(2) . . $1,119,384 $47,887 $90,959 $64,887 $915,651 (1) The Term Loan originally provided for a $1.2 billion credit facility and includes a $300.0 million uncommitted incremental term loan facility. The Term Loan matures on May 31, 2023. The ABL Facility provides for a $300.0 million senior secured ABL revolving credit facility, which matures on June 12, 2023. There was no outstanding balance on the ABL Facility classified as long-term as of December 31, 2018. (2) Pension obligations are excluded from this table as we are unable to estimate the timing of payment due to the inherent assumptions underlying the obligation. However, there are no minimum required contributions due to our pension plan in 2019. Capital Expenditures Our operations require capital expenditures for technology, tooling, equipment, capacity expansion, systems and upgrades. Capital expenditures were $47.6 million, $33.3 million and $30.5 million for the years ended December 31, 2018, 2017 and 2016, respectively, and were funded through cash from operations. 45 Off-Balance Sheet Arrangements We have an arrangement with a finance company to provide floor plan financing for selected dealers. This arrangement provides liquidity for our dealers by financing dealer purchases of products with credit availability from the finance company. We receive payment from the finance company after shipment of product to the dealer and our dealers are given a longer period of time to pay the finance company. If our dealers do not pay the finance company, we may be required to repurchase the applicable inventory held by the dealer. We do not indemnify the finance company for any credit losses they may incur. Total inventory financed under this arrangement accounted for approximately 10% and 9% of net sales for the years ended December 31, 2018 and 2017, respectively. The amount financed by dealers which remained outstanding was $47.2 million and $36.5 million as of December 31, 2018 and 2017, respectively. Critical Accounting Policies In preparing the financial statements in accordance with U.S. GAAP, management is required to make estimates and assumptions that have an impact on the asset, liability, revenue and expense amounts reported. These estimates can also affect our supplemental information disclosures, including information about contingencies, risk and financial condition. We believe, given current facts and circumstances, that our estimates and assumptions are reasonable, adhere to U.S. GAAP, and are consistently applied. Inherent in the nature of an estimate or assumption is the fact that actual results may differ from estimates and estimates may vary as new facts and circumstances arise. We make routine estimates and judgments in determining net realizable value of accounts receivable, inventories, property and equipment, prepaid expenses, product warranties and other reserves. Management believes our most critical accounting estimates and assumptions are in the following areas: goodwill and other indefinite-lived intangible asset impairment assessment; business combinations and purchase accounting; defined benefit pension obligations and income taxes. Goodwill and Other Indefinite-Lived Intangible Assets Refer to Note 2, ‘‘Significant Accounting Policies—Goodwill and Other Indefinite-Lived Intangible Assets,’’ to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K for further information on the Company’s policy regarding the accounting for goodwill and other intangible assets. The Company performed the required annual impairment tests for goodwill and other indefinite- lived intangible assets for the fiscal years 2018, 2017 and 2016, and found no impairment. There were no reporting units with a carrying value at-risk of exceeding fair value as of the October 31, 2018 impairment test date. When preparing a discounted cash flow analysis for purposes of our annual impairment test, we make a number of key estimates and assumptions. We estimate the future cash flows of the business based on historical and forecasted revenues and operating costs. This, in turn, involves further estimates, such as estimates of future growth rates and inflation rates. In addition, we apply a discount rate to the estimated future cash flows for the purpose of the valuation. This discount rate is based on the estimated weighted average cost of capital for the business and may change from year to year. Weighted average cost of capital includes certain assumptions such as market capital structures, market betas, risk-free rate of return and estimated costs of borrowing. As noted above, a considerable amount of management judgment and assumptions are required in performing the goodwill and indefinite-lived intangible asset impairment tests. While we believe our judgments and assumptions are reasonable, different assumptions could change the estimated fair 46 values. A number of factors, many of which we have no ability to control, could cause actual results to differ from the estimates and assumptions we employed. These factors include: (cid:129) a prolonged global or regional economic downturn; (cid:129) a significant decrease in the demand for our products; (cid:129) the inability to develop new and enhanced products and services in a timely manner; (cid:129) a significant adverse change in legal factors or in the business climate; (cid:129) an adverse action or assessment by a regulator; (cid:129) successful efforts by our competitors to gain market share in our markets; (cid:129) disruptions to the Company’s business; (cid:129) inability to effectively integrate acquired businesses; (cid:129) unexpected or planned changes in the use of assets or entity structure; and (cid:129) business divestitures. If management’s estimates of future operating results change or if there are changes to other assumptions due to these factors, the estimate of the fair values may change significantly. Such change could result in impairment charges in future periods, which could have a significant impact on our operating results and financial condition. Business Combinations and Purchase Accounting We account for business combinations using the acquisition method of accounting, and accordingly, the assets and liabilities of the acquired business are recorded at their respective fair values. The excess of the purchase price over the estimated fair value of assets and liabilities is recorded as goodwill. Assigning fair market values to the assets acquired and liabilities assumed at the date of an acquisition requires knowledge of current market values, the values of assets in use, and often requires the application of judgment regarding estimates and assumptions. While the ultimate responsibility resides with management, for material acquisitions we retain the services of certified valuation specialists to assist with assigning estimated values to certain acquired assets and assumed liabilities, including intangible assets and tangible long-lived assets. Acquired intangible assets, excluding goodwill, are valued using certain discounted cash flow methodologies based on future cash flows specific to the type of intangible asset purchased. This methodology incorporates various estimates and assumptions, the most significant being projected revenue growth rates, earnings margins, and forecasted cash flows based on the discount rate and terminal growth rate. Refer to Note 1, ‘‘Description of Business,’’ to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K for further information on the Company’s business acquisitions. Defined Benefit Pension Obligations The Company’s pension benefit obligation and related pension expense or income are calculated in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 715-30, Defined Benefit Plans—Pension, and are impacted by certain actuarial assumptions, including the discount rate and the expected rate of return on plan assets. Such rates are evaluated on an annual basis considering factors including market interest rates and historical asset performance. Actuarial valuations for fiscal year 2018 used a discount rate of 4.24%. Our discount rate was selected using a methodology that matches plan cash flows with a selection of ‘‘Aa’’ or higher rated bonds, resulting in a discount rate that better matches a bond yield curve with comparable cash flows. In estimating the expected return on plan assets, we study historical markets and preserve the long-term 47 historical relationships between equities and fixed-income securities. We evaluate current market factors such as inflation and interest rates before we determine long-term capital market assumptions and review peer data and historical returns to check for reasonableness and appropriateness. Changes in the discount rate and return on assets can have a significant effect on the funded status of our pension plans, stockholders’ equity and related expense. We cannot predict these changes in discount rates or investment returns and, therefore, cannot reasonably estimate whether the impact in subsequent years will be significant. The funded status of our pension plans is the difference between the projected benefit obligation and the fair value of its plan assets. The projected benefit obligation is the actuarial present value of all benefits expected to be earned by the employees’ service. No compensation increase is assumed in the calculation of the projected benefit obligation, as the plans were frozen effective December 31, 2008. Further information regarding the funded status of our pension plans can be found in Note 14, ‘‘Benefit Plans,’’ to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K. Our funding policy for our pension plans is to contribute amounts at least equal to the minimum annual amount required by applicable regulations. There is no minimum required contribution due to our pension plan in 2019. Income Taxes We account for income taxes in accordance with ASC 740, Income Taxes. Our estimate of income taxes payable, deferred income taxes and the effective tax rate is based on an analysis of many factors including interpretations of federal, state and international income tax laws; the difference between tax and financial reporting bases of assets and liabilities; estimates of amounts currently due or owed in various jurisdictions; and current accounting standards. We review and update our estimates on a quarterly basis as facts and circumstances change and actual results are known. In assessing the realizability of the deferred tax assets on our balance sheet, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the years in which those temporary differences become deductible. We consider the taxable income in prior carryback years, scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Refer to Note 13, ‘‘Income Taxes’’ to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K for further information on the Company’s income taxes. New Accounting Standards For information with respect to new accounting pronouncements and the impact of these pronouncements on our consolidated financial statements, refer to Note 2, ‘‘Significant Accounting Policies—New Accounting Pronouncements,’’ to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K. Item 7A. Quantitative and Qualitative Disclosures About Market Risk We are exposed to market risk from changes in foreign currency exchange rates, commodity prices and interest rates. To reduce the risk from these changes, we use financial instruments from time to time. We do not hold or issue financial instruments for trading purposes. 48 Foreign Currency We are exposed to foreign currency exchange risk as a result of transactions denominated in currencies other than the U.S. Dollar, as well as operating businesses in foreign countries. Periodically, we utilize foreign currency forward purchase and sales contracts to manage the volatility associated with certain foreign currency purchases and sales in the normal course of business. Contracts typically have maturities of twelve months or less. Realized gains and losses on transactions denominated in foreign currency are recorded as a component of cost of goods sold on the statements of comprehensive income. The following is a summary of the forty foreign currency contracts outstanding as of December 31, 2018 (notional amount in thousands): Currency Denomination Trade Dates Effective Dates Notional Amount Expiration Date GBP . . . . . . . . . . . . . . . USD . . . . . . . . . . . . . . . AUD . . . . . . . . . . . . . . . 11/12/18 - 12/17/18 11/12/18 - 12/14/18 11/12/18 - 11/19/18 11/12/18 - 12/17/18 11/12/18 - 12/14/18 11/12/18 - 11/19/18 4,066 10,165 1,900 1/16/19 - 6/19/19 1/16/19 - 3/6/19 1/16/19 - 1/23/19 Commodity Prices We are a purchaser of commodities and components manufactured from commodities including steel, aluminum, copper and others. As a result, we are exposed to fluctuating market prices for those commodities. While such materials are typically available from numerous suppliers, commodity raw materials are subject to price fluctuations. We generally buy these commodities and components based upon market prices that are established with the supplier as part of the purchase process. Depending on the supplier, these market prices may reset on a periodic basis based on negotiated lags and calculations. To the extent that commodity prices increase and we do not have firm pricing from our suppliers, or our suppliers are not able to honor such prices, we may experience a decline in our gross margins to the extent we are not able to increase selling prices of our products or obtain manufacturing efficiencies or supply chain savings to offset increases in commodity costs. Periodically, we engage in certain commodity risk management activities to mitigate the impact of potential price fluctuations on our financial results. These derivatives typically have maturities of less than eighteen months. As of December 31, 2018, we had the following commodity forward contracts outstanding (notional amount in thousands): Hedged Item Contract Date Effective Date Notional Amount Fixed Price Expiration Date Copper . . . . . . . . . . February 12, 2018 February 1, 2018 $3,776 $3.114 per LB December 31, 2018 March 8, 2018 March 9, 2018 $3,427 $3.109 per LB December 31, 2018 Copper . . . . . . . . . . March 20, 2018 March 21, 2018 $3,418 $3.101 per LB December 31, 2018 Copper . . . . . . . . . . March 20, 2018 March 21, 2018 $1,697 $3.079 per LB December 31, 2018 Copper . . . . . . . . . . April 1, 2018 $3,003 $3.027 per LB December 31, 2018 March 26, 2018 Copper . . . . . . . . . . 49 Interest Rates As of December 31, 2018, all of the outstanding debt under our Term Loan and ABL Facility was subject to floating interest rate risk. As of December 31, 2018, we had the following interest rate swap contracts outstanding (notional amount in thousands): Hedged Item Contract Date Effective Date Notional Amount Fixed LIBOR Rate Expiration Date June 19, 2017 Interest Rate . . . . . June 19, 2017 Interest Rate . . . . . June 19, 2017 Interest Rate . . . . . June 19, 2017 Interest Rate . . . . . June 19, 2017 Interest Rate . . . . . June 30, 2017 Interest Rate . . . . . June 30, 2017 Interest Rate . . . . . June 30, 2017 Interest Rate . . . . . June 30, 2017 Interest Rate . . . . . June 30, 2017 Interest Rate . . . . . August 9, 2017 Interest Rate . . . . . August 9, 2017 Interest Rate . . . . . August 9, 2017 Interest Rate . . . . . August 9, 2017 Interest Rate . . . . . August 9, 2017 Interest Rate . . . . . Interest Rate . . . . . August 30, 2017 Interest Rate . . . . . August 30, 2017 Interest Rate . . . . . August 30, 2017 Interest Rate . . . . . August 30, 2017 Interest Rate . . . . . August 30, 2017 July 2, 2018 July 1, 2019 July 1, 2020 July 1, 2021 July 1, 2022 July 1, 2018 July 1, 2019 July 1, 2020 July 1, 2021 July 1, 2022 July 1, 2018 July 1, 2019 July 1, 2020 July 1, 2021 July 1, 2022 July 1, 2018 July 1, 2019 July 1, 2020 July 1, 2021 July 1, 2022 125,000 125,000 125,000 125,000 125,000 125,000 125,000 125,000 125,000 125,000 125,000 125,000 125,000 125,000 125,000 125,000 125,000 125,000 125,000 125,000 1.6543% 1.9053% 2.1328% 2.3453% 2.4828% 1.7090% 1.9750% 2.2170% 2.4360% 2.5910% 1.6298% 1.8598% 2.0848% 2.3010% 2.4848% 1.5503% 1.7553% 1.9803% 2.2228% 2.4153% July 1, 2019 July 1, 2020 July 1, 2021 July 1, 2022 May 31, 2023 July 1, 2019 July 1, 2020 July 1, 2021 July 1, 2022 May 31, 2023 July 1, 2019 July 1, 2020 July 1, 2021 July 1, 2022 May 31, 2023 July 1, 2019 July 1, 2020 July 1, 2021 July 1, 2022 May 31, 2023 At December 31, 2018, the fair value of these interest rate swaps was an asset of $8.4 million. Even after giving effect to these swaps, we are exposed to risks due to changes in interest rates with respect to the portion of our Term Loan and ABL Facility that is not covered by the swaps. A hypothetical change in the LIBOR interest rate of 100 basis points would have changed annual cash interest expense by approximately $3.8 million (or, without the swaps in place, $8.8 million) in 2018. For additional information on the Company’s foreign currency and commodity forward contracts, and interest rate swaps, including amounts charged to the statement of comprehensive income during 2018, 2017, and 2016, refer to Note 4, ‘‘Derivative Instruments and Hedging Activities,’’ and Note 5, ‘‘Accumulated Other Comprehensive Loss,’’ to our consolidated financial statements in Item 8 of this Annual Report on Form 10-K. 50 Item 8. Financial Statements and Supplementary Data Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors of Generac Holdings Inc. Waukesha, Wisconsin Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Generac Holdings Inc. and subsidiaries (the ‘‘Company’’) as of December 31, 2018 and 2017, the related consolidated statements of comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2018, and the related notes, collectively referred to as the ‘‘financial statements’’. In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 26, 2019, expressed an unqualified opinion on the Company’s internal control over financial reporting. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ Deloitte & Touche LLP Milwaukee, Wisconsin February 26, 2019 We have served as the Company’s auditor since 2016. 51 Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors of Generac Holdings Inc. Waukesha, Wisconsin Opinion on Internal Control over Financial Reporting We have audited the internal control over financial reporting of Generac Holdings Inc. and its subsidiaries (the ‘‘Company’’) as of December 31, 2018, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control—Integrated Framework (2013) issued by COSO. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2018, of the Company and our report dated February 26, 2019, expressed an unqualified opinion on those financial statements. As described in Management’s Report on Internal Control over Financial Reporting, management excluded from its assessment the internal control over financial reporting at the Selmec Equipos Industriales, S.A. de C.V. (‘‘Selmec’’), which was acquired on June 1, 2018 and whose financial statements constitute 11.1% and 5.3% of net and total assets, respectively, 1.5% of net sales, and 0.04% of net income of the consolidated financial statement amounts as of and for the year ended December 31, 2018. Accordingly, our audit did not include the internal control over financial reporting at Selmec. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally 52 accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Deloitte & Touche LLP Milwaukee, Wisconsin February 26, 2019 53 Generac Holdings Inc. Consolidated Balance Sheets (U.S. Dollars in Thousands, Except Share and Per Share Data) December 31, 2018 2017 $ 224,482 $ 138,472 Current assets: Assets Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts receivable, less allowance for doubtful accounts of $4,873 and $4,805 at December 31, 2018 and 2017, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid expenses and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 326,133 544,750 25,404 Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,120,769 Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Customer lists, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Patents, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tradenames, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets 278,929 61,194 29,970 3,043 152,283 764,655 163 15,308 279,295 387,049 19,741 824,557 230,380 41,064 39,617 2,401 152,683 721,523 3,238 10,502 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,426,314 $2,025,965 Current liabilities: Liabilities and stockholders’ equity Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued wages and employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Current portion of long-term borrowings and capital lease obligations . . . . . . . . . . . . $ Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term borrowings and capital lease obligations . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,583 328,091 40,819 144,236 1,977 560,706 876,396 71,300 95,647 $ 20,602 233,639 27,992 112,618 1,572 396,423 906,548 41,852 82,893 Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,604,049 1,427,716 Redeemable noncontrolling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61,004 43,929 Stockholders’ equity: Common stock, par value $0.01, 500,000,000 shares authorized, 71,186,418 and 70,820,173 shares issued at December 31, 2018 and 2017, respectively . . . . . . . . . . Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Treasury stock, at cost, 9,047,060 and 8,448,874 shares at December 31, 2018 and 2017, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Excess purchase price over predecessor basis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stockholders’ equity attributable to Generac Holdings Inc. . . . . . . . . . . . . . . . . . . . . Noncontrolling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 712 476,116 708 459,816 (321,473) (202,116) 831,123 (23,813) 760,549 712 761,261 (294,005) (202,116) 610,836 (21,198) 554,041 279 554,320 Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,426,314 $2,025,965 See notes to consolidated financial statements. 54 Generac Holdings Inc. Consolidated Statements of Comprehensive Income (U.S. Dollars in Thousands, Except Share and Per Share Data) Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Costs of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,023,464 1,298,424 $ 1,679,373 1,094,587 $ 1,447,743 935,322 Year Ended December 31, 2018 2017 2016 725,040 584,786 512,421 Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating expenses: Selling and service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Research and development . . . . . . . . . . . . . . . . . . . . . . . General and administrative . . . . . . . . . . . . . . . . . . . . . . . Amortization of intangibles . . . . . . . . . . . . . . . . . . . . . . . Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . Other (expense) income: Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loss on extinguishment of debt . . . . . . . . . . . . . . . . . . . . Loss on change in contractual interest rate . . . . . . . . . . . . Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total other expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . Income before provision for income taxes . . . . . . . . . . . . . . Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income attributable to noncontrolling interests . . . . . . . . 191,887 50,019 103,841 22,112 367,859 357,181 (40,956) 1,893 (1,332) — (5,710) (46,105) 311,076 69,856 241,220 2,963 174,841 42,869 87,581 28,861 334,152 250,634 (42,667) 298 — — (4,566) (46,935) 203,699 44,142 159,557 1,749 164,860 37,163 74,693 32,953 309,669 202,752 (44,568) 44 (574) (2,957) (1,000) (49,055) 153,697 56,519 97,178 24 97,154 Net income attributable to Generac Holdings Inc. . . . . . . . . $ 238,257 $ 157,808 $ Net income attributable to common shareholders per common share—basic: . . . . . . . . . . . . . . . . . . . . . . . . . . Weighted average common shares outstanding—basic: Net income attributable to common shareholders per $ 3.57 61,662,031 $ 2.56 62,040,704 $ 1.48 64,905,793 common share—diluted: . . . . . . . . . . . . . . . . . . . . . . Weighted average common shares outstanding—diluted: . $ 3.54 62,233,225 $ 2.53 62,642,872 $ 1.47 65,382,774 Other comprehensive income (loss): Foreign currency translation adjustment . . . . . . . . . . . . . . Net unrealized gain on derivatives . . . . . . . . . . . . . . . . . . Pension liability adjustment . . . . . . . . . . . . . . . . . . . . . . . $ (5,976) $ 2,924 437 Other comprehensive income (loss) . . . . . . . . . . . . . . . . . (2,615) $ 15,191 3,712 62 18,965 Total comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . Comprehensive income (loss) attributable to noncontrolling 238,605 178,522 (18,545) 535 322 (17,688) 79,490 interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,647 5,549 (973) Comprehensive income attributable to Generac Holdings Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 236,958 $ 172,973 $ 80,463 See notes to consolidated financial statements. 55 . c n I s g n i d l o H c a r e n e G y t i u q E ’ s r e d l o h k c o t S f o s t n e m e t a t S d e t a d i l o s n o C ) a t a D e r a h S t p e c x E , s d n a s u o h T n i s r a l l o D . . S U ( l a t o T t s e r e t n I y t i u q E g n i l l o r t n o c n o N ’ s r e d l o h k c o t S e v i s n e h e r p m o C ) s s o L ( e m o c n I d e n i a t e R s g n i n r a E l a t o T d e t a l u m u c c A r e h t O . c n I s g n i d l o H c a r e n e G s s e c x E e c i r P e s a h c r u P r e v O k c o t S y r u s a e r T s i s a B r o s s e c e d e r P t n u o m A s e r a h S l a n o i t i d d A n I - d i a P l a t i p a C t n u o m A s e r a h S k c o t S n o m m o C ) 9 9 2 , 2 ( 1 7 8 , 5 6 4 $ 2 7 5 , 3 6 4 $ 3 5 5 3 5 ) 2 3 5 , 8 1 ( ) 9 4 9 ( ) 7 6 4 , 1 1 ( ) 7 3 9 , 9 4 1 ( 0 2 9 , 7 3 9 4 , 9 2 2 3 ) 9 0 9 ( 8 7 0 , 7 9 — — — 3 5 — 3 1 — — — — — — — ) 6 7 ( $ $ ) 9 9 2 , 2 ( 1 7 8 , 5 6 4 $ — ) 5 7 4 , 2 2 ( $ ) 9 9 2 , 2 ( 3 7 1 , 8 5 3 $ — — — — ) 6 1 1 , 2 0 2 ( $ ) 6 1 5 , 1 1 1 ( $ ) 5 7 5 , 7 6 5 , 3 ( 9 0 1 , 3 4 4 $ 2 7 5 , 3 6 4 $ ) 5 7 4 , 2 2 ( $ 4 7 8 , 5 5 3 $ ) 6 1 1 , 2 0 2 ( $ ) 6 1 5 , 1 1 1 ( $ ) 5 7 5 , 7 6 5 , 3 ( 9 0 1 , 3 4 4 $ — 6 9 6 $ 6 9 6 $ 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1 8 , 3 2 ( $ 3 2 1 , 1 3 8 $ ) 6 1 1 , 2 0 2 ( $ ) 3 7 4 , 1 2 3 ( $ ) 0 6 0 , 7 4 0 , 9 ( 6 1 1 , 6 7 4 $ 2 1 7 $ 8 1 4 , 6 8 1 , 1 7 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . r o f d l e h h t i w . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . r o f d l e h h t i w . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . r o f d l e h h t i w . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ) d e t r o p e r y l s u o i v e r p ( 5 1 0 2 , 1 3 r e b m e c e D t a e c n a l a B ) 2 e t o N ( s d r a d n a t s g n i t n u o c c a n i a t r e c f o n o i t p o d a f o t c a p m I 1 4 3 $ f o x a t f o t e n , s p a w s e t a r t s e r e t n i n o n i a g d e z i l a e r n U . . . . . . . . . t n e m t s u d a j n o i t a l s n a r t y c n e r r u c n g i e r o F . . . . . . . . . . . . . . . . . . . . . . . . . . s s e n i s u b f o n o i t i s i u q c A ) d e t s u j d a s a ( 5 1 0 2 , 1 3 r e b m e c e D t a e c n a l a B s e r a h s f o t e n , s n a l p e v i t n e c n i y t i u q e r e d n u d e u s s i k c o t s n o m m o C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . e c i r p e k i r t s d n a s e x a t e e y o p m e l s d r a w a k c o t s d e t c i r t s e r f o t n e m e l t t e s e r a h s t e N . . . . . . . . . . . . . . . . . . . . . . . s e s a h c r u p e r k c o t S s d r a w a y t i u q e m o r f s t i f e n e b x a t s s e c x E . . . . . . n o i t a s n e p m o c d e s a b - e r a h S 7 0 2 $ f o x a t f o t e n , t n e m t s u d a j y t i l i b a i l n o i s n e P . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . t n e m t s u d a j e u l a v n o i t p m e d e R . . . . . . . . . . e m o c n i t e N 6 1 0 2 , 1 3 r e b m e c e D t a e c n a l a B e r a h s t s e r e t n i g n i l l o r t n o c n o n n i e g n a h C 4 8 3 , 2 $ f o x a t f o t e n , s p a w s e t a r t s e r e t n i n o n i a g d e z i l a e r n U . . . . . . . . . t n e m t s u d a j n o i t a l s n a r t y c n e r r u c n g i e r o F s e r a h s f o t e n , s n a l p e v i t n e c n i y t i u q e r e d n u d e u s s i k c o t s n o m m o C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . e c i r p e k i r t s d n a s e x a t e e y o p m e l s d r a w a k c o t s d e t c i r t s e r f o t n e m e l t t e s e r a h s t e N . . . . . . . . . . . . . . . . . . . . . . . . . . . . s e s a h c r u p e r k c o t S n o i t a s n e p m o c d e s a b - e r a h S 1 2 $ f o x a t f o t e n , t n e m t s u d a j y t i l i b a i l n o i s n e P . . . . . . . . . . . . . . . . . . . . . . . . t n e m t s u d a j e u l a v n o i t p m e d e R . . . . . . . . . . e m o c n i t e N 7 1 0 2 , 1 3 r e b m e c e D t a e c n a l a B 7 2 0 , 1 $ f o x a t f o t e n , s p a w s e t a r t s e r e t n i n o n i a g d e z i l a e r n U . . . . . . . . . t n e m t s u d a j n o i t a l s n a r t y c n e r r u c n g i e r o F s e r a h s f o t e n , s n a l p e v i t n e c n i y t i u q e r e d n u d e u s s i k c o t s n o m m o C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . e c i r p e k i r t s d n a s e x a t e e y o p m e l s d r a w a k c o t s d e t c i r t s e r f o t n e m e l t t e s e r a h s t e N . . . . . . . . . . . . . . . s e s a h c r u p e r k c o t S y r a i d i s b u s f o t s e r e t n i g n i l l o r t n o c n o n o t d i a p s d n e d i v i d h s a C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . n o i t a s n e p m o c d e s a b - e r a h S 4 5 1 $ f o x a t f o t e n , t n e m t s u d a j y t i l i b a i l n o i s n e P . . . . . . . . . . . . . . . . . . . . . . . . . . . t n e m t s u d a j e u l a v n o i t p m e d e R . . . . . . . . . . e m o c n i t e N 8 1 0 2 , 1 3 r e b m e c e D t a e c n a l a B 56 . s t n e m e t a t s l a i c n a n i f d e t a d i l o s n o c o t s e t o n e e S Generac Holdings Inc. Consolidated Statements of Cash Flows (U.S. Dollars in Thousands) Operating activities Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjustment to reconcile net income to net cash provided by operating activities: Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of original issue discount and deferred financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loss on extinguishment of debt Loss on change in contractual interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Share-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net changes in operating assets and liabilities, net of acquisitions: Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued wages and employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Excess tax benefits from equity awards . . . . . . . . . . . . . . . . . . . . . . . . . . . Year Ended December 31, 2018 2017 2016 $ 241,220 $ 159,557 $ 97,178 25,296 22,112 4,749 1,332 — 23,600 14,563 2,474 (43,243) (152,594) (6,362) 86,359 12,626 16,972 (1,877) 23,127 28,861 3,516 — — 19,502 10,205 410 (32,857) (22,986) (14,783) 42,788 6,105 37,029 (3,152) 21,465 32,953 3,940 574 2,957 38,297 9,493 127 (21,223) 14,680 406 32,908 5,196 10,091 (7,920) Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 247,227 257,322 241,122 Investing activities Proceeds from sale of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from beneficial interest in securitization transactions . . . . . . . . . . . . . . . Expenditures for property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acquisition of business, net of cash acquired . . . . . . . . . . . . . . . . . . . . . . . . . . Deposit paid related to acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 214 3,933 (47,601) (65,440) — 82 3,794 (33,261) 1,257 — 1,360 12,287 (30,467) (61,386) (15,329) Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (108,894) (28,128) (93,535) Financing activities Proceeds from short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Repayments of short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Repayments of long-term borrowings and capital lease obligations . . . . . . . . . . . . Stock repurchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Payment of debt issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash dividends paid to noncontrolling interest of subsidiary . . . . . . . . . . . . . . . . Taxes paid related to equity awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from the exercise of stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . Excess tax benefits from equity awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53,965 51,425 (27,880) (101,827) (25,656) (1,702) — (314) (5,659) 5,614 — 101,991 3,069 (114,874) (117,475) (30,012) (3,901) — — (5,892) 6,951 — 28,712 — (27,755) (37,627) (149,937) (4,557) (76) — (14,008) 1,623 7,920 Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (52,034) (160,143) (195,705) Effect of exchange rate changes on cash and cash equivalents . . . . . . . . . . . . . . . Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . . . . . . . . (289) 86,010 138,472 2,149 71,200 67,272 (467) (48,585) 115,857 Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 224,482 $ 138,472 $ 67,272 Supplemental disclosure of cash flow information Cash paid during the period Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 41,007 41,044 $ 41,105 23,836 $ 42,456 8,889 See notes to consolidated financial statements. 57 Generac Holdings Inc. Notes to Consolidated Financial Statements Years Ended December 31, 2018, 2017, and 2016 (U.S. Dollars in Thousands, Except Share and Per Share Data) 1. Description of Business Founded in 1959, Generac Holdings Inc. (the Company) is a leading global designer and manufacturer of a wide range of power generation equipment and other power products serving the residential, light-commercial and industrial markets. Generac’s power products are available globally through a broad network of independent dealers, distributors, retailers, wholesalers, equipment rental companies, and e-commerce partners, as well as sold direct to certain end user customers. Over the years, the Company has executed a number of acquisitions that support its strategic plan (refer to Item 1 in this Annual Report on Form 10-K for discussion of our Powering Our Future strategic plan). A summary of acquisitions affecting the reporting periods presented include: (cid:129) In September 2014, the Company acquired the equity of Pramac America LLC (Powermate), resulting in the ownership of the Powermate trade name and the right to license the DeWalt brand name for certain residential engine powered tools. This acquisition expanded Generac’s residential product portfolio in the portable generator category. (cid:129) In October 2014, the Company acquired MAC, Inc. (MAC). MAC is a leading manufacturer of premium-grade commercial and industrial mobile heaters for the United States and Canadian markets. The acquisition expanded the Company’s portfolio of mobile power products and provides increased access to the oil & gas market. (cid:129) In August 2015, the Company acquired Country Home Products and its subsidiaries (CHP). CHP is a leading manufacturer of high-quality, innovative, professional-grade engine powered equipment used in a wide variety of property maintenance applications, which are primarily sold in North America under the DR(cid:5) Power Equipment brand. The acquisition provided an expanded product lineup and additional scale to the Company’s residential engine powered products. (cid:129) In March 2016, the Company acquired a majority ownership interest in PR Industrial S.r.l and its subsidiaries (Pramac). Headquartered in Siena, Italy, Pramac is a leading global manufacturer of stationary, mobile and portable generators primarily sold under the Pramac(cid:5) brand. Pramac products are sold in over 150 countries through a broad distribution network. (cid:129) In January 2017, the Company acquired Motortech GmbH (Motortech), headquartered in Celle, Germany. Motortech is a leading manufacturer of gaseous-engine control systems and accessories, which are sold primarily to European gas-engine manufacturers and to aftermarket customers. While the Motortech acquisition was completed in January 2017, it was funded in the fourth quarter of 2016. (cid:129) In June 2018, the Company acquired Selmec Equipos Industriales, S.A. de C.V. (Selmec), headquartered in Mexico City, Mexico. Selmec is a designer and manufacturer of industrial generators ranging from 10kW to 2,750kW. Selmec offers a market-leading service platform and specialized engineering capabilities, together with robust integration, project management and remote monitoring services. 58 Generac Holdings Inc. Notes to Consolidated Financial Statements (Continued) Years Ended December 31, 2018, 2017, and 2016 (U.S. Dollars in Thousands, Except Share and Per Share Data) 2. Summary of Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries that are consolidated in conformity with U.S. GAAP. All intercompany amounts and transactions have been eliminated in consolidation. Cash and Cash Equivalents The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Concentration of Credit Risk The Company maintains the majority of its domestic cash in one commercial bank in multiple operating and investment accounts. Balances on deposit are insured by the Federal Deposit Insurance Corporation (FDIC) up to specified limits. Balances in excess of FDIC limits are uninsured. One customer accounted for approximately 11% and 7% of accounts receivable at December 31, 2018 and 2017, respectively. No one customer accounted for greater than 6%, 6% and 7%, of net sales during the years ended December 31, 2018, 2017, or 2016, respectively. Accounts Receivable Receivables are recorded at their face value amount less an allowance for doubtful accounts. The Company estimates and records an allowance for doubtful accounts based on specific identification and historical experience. The Company writes off uncollectible accounts against the allowance for doubtful accounts after all collection efforts have been exhausted. Sales are generally made on an unsecured basis, and certain balances are protected by credit insurance. Inventories Inventories are stated at the lower of cost or market, with cost determined generally using the first-in, first-out method. Property and Equipment Property and equipment are recorded at cost and are being depreciated using the straight-line method over the estimated useful lives of the assets, which are summarized below (in years). Costs of 59 Generac Holdings Inc. Notes to Consolidated Financial Statements (Continued) Years Ended December 31, 2018, 2017, and 2016 (U.S. Dollars in Thousands, Except Share and Per Share Data) 2. Summary of Accounting Policies (Continued) leasehold improvements are amortized over the lesser of the term of the lease (including renewal option periods) or the estimated useful lives of the improvements. Land improvements . . . . . . . . . . . . . . . Buildings and improvements . . . . . . . . . Machinery and equipment . . . . . . . . . . . Dies and tools . . . . . . . . . . . . . . . . . . . Vehicles . . . . . . . . . . . . . . . . . . . . . . . . Office equipment and systems . . . . . . . . Leasehold improvements . . . . . . . . . . . . 8 - 20 10 - 40 3 - 15 3 - 10 3 - 6 3 - 15 2 - 20 Total depreciation expense was $25,296, $23,127, and $21,465 for the years ended December 31, 2018, 2017, and 2016, respectively. Goodwill and Other Indefinite-Lived Intangible Assets Goodwill represents the excess of the purchase price over fair value of identifiable net assets acquired from business acquisitions. Goodwill is not amortized, but is reviewed for impairment on an annual basis and between annual tests if indicators of impairment are present. The Company evaluates goodwill for impairment annually as of October 31 or more frequently when an event occurs or circumstances change that indicates the carrying value may not be recoverable. The Company has the option to assess goodwill for impairment by performing either a qualitative assessment or quantitative test. The qualitative assessment determines whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the Company determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then the quantitative test is not required to be performed. If the Company determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company is required to perform the quantitative test. In the quantitative test, the calculated fair value of the reporting unit is compared to its book value including goodwill. If the fair value of the reporting unit is in excess of its book value, the related goodwill is not impaired. If the fair value of the reporting unit is less than its book value, an impairment loss is recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. Other indefinite-lived intangible assets consist of certain tradenames. The Company tests the carrying value of these tradenames annually as of October 31 or more frequently when an event occurs or circumstances change that indicates the carrying value may not be recoverable by comparing the assets’ fair value to its carrying value. Fair value is measured using a relief-from-royalty approach, which assumes the fair value of the tradename is the discounted cash flows of the amount that would be paid had the Company not owned the tradename and instead licensed the tradename from another company. The Company performed the required annual impairment tests for goodwill and other indefinite- lived intangible assets for the fiscal years 2018, 2017 and 2016, and found no impairment. There were 60 Generac Holdings Inc. Notes to Consolidated Financial Statements (Continued) Years Ended December 31, 2018, 2017, and 2016 (U.S. Dollars in Thousands, Except Share and Per Share Data) 2. Summary of Accounting Policies (Continued) no reporting units with a carrying value at-risk of exceeding fair value as of the October 31, 2018 impairment test date. Impairment of Long-Lived Assets The Company periodically evaluates the carrying value of long-lived assets (excluding goodwill and indefinite-lived tradenames). Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the sum of the expected future undiscounted cash flows is less than the carrying amount of an asset, a loss is recognized for the difference between the fair value and carrying value of the asset. Debt Issuance Costs Debt discounts and direct costs incurred in connection with the issuance of long-term debt are deferred and recorded as a reduction of outstanding debt and amortized to interest expense using the effective interest method over the terms of the related credit agreements. $4,749, $3,516, and $3,939 of deferred financing costs and original issue discount were amortized to interest expense during fiscal years 2018, 2017 and 2016, respectively. Excluding the impact of any future long-term debt issuances or prepayments, estimated amortization to interest expense for the next five years is as follows: 2019— $4,828; 2020—$4,985; 2021—$5,120; 2022—$5,272; 2023—$2,236. Income Taxes The Company is a C Corporation and therefore accounts for income taxes pursuant to the liability method. Accordingly, the current or deferred tax consequences of a transaction are measured by applying the provision of enacted tax laws to determine the amount of taxes payable currently or in future years. Deferred income taxes are provided for temporary differences between the income tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the years in which those temporary differences become deductible. The Company considers taxable income in prior carryback years, the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies, as appropriate, in making this assessment. Revenue Recognition The Company’s revenues primarily consist of product sales to its customers. The Company considers the purchase orders, which in some cases are governed by master sales agreements, to be the contracts with the customers. For each contract, the Company considers the commitment to transfer products, each of which is distinct, to be the identified performance obligations. Revenue is measured as the amount of consideration the Company expects to be entitled in exchange for the transfer of product, which is generally the price stated in the contract specific for each item sold, adjusted for the value of expected returns, discounts, rebates, or other promotional incentives or allowances offered to 61 Generac Holdings Inc. Notes to Consolidated Financial Statements (Continued) Years Ended December 31, 2018, 2017, and 2016 (U.S. Dollars in Thousands, Except Share and Per Share Data) 2. Summary of Accounting Policies (Continued) our customers. Expected returns for damaged or defective product are estimated using the expected value method based upon historical product return experience. Discounts and rebates offered to customers are typically defined in the master sales agreements with customers and, therefore, are recorded using the most likely amount method based on the terms of the contract. Promotional incentives are defined programs offered for short, specific periods of time and are estimated using the expected value method based upon historical experience. The Company does not expect the transaction price for revenue recognized will be subject to a significant revenue reversal. As the Company’s product sale contracts and standard payment terms have a duration of less than one year, it uses the practical expedient applicable to such contracts and does not consider the time value of money. Sales, use, value add and other similar taxes assessed by governmental authorities and collected concurrent with revenue-producing activities are excluded from revenue. The Company has elected to recognize the cost for freight activities when control of the product has transferred to the customer as an expense within cost of goods sold in the consolidated statements of comprehensive income. Product revenues are recognized at the point in time when control of the product is transferred to the customer, which typically occurs upon shipment or delivery to the customer. To determine when control has transferred, the Company considers if there is a present right to payment and if legal title, physical possession, and the significant risks and rewards of ownership of the asset has transferred to the customer. As substantially all of the Company’s product revenues are recognized at a point in time, the amount of unsatisfied performance obligations at each period end is not material. The Company’s contracts have an original expected duration of one year or less. As a result, the Company has elected to use the practical expedient to not disclose its remaining performance obligations. At the request of certain customers, the Company will warehouse inventory billed to the customer but not delivered. Unless all revenue recognition criteria have been met, the Company does not recognize revenue on these transactions until the customer takes possession of the product. While the Company’s standard payment terms are less than one year, the specific payment terms and conditions in its customer contracts vary. In some cases, customers prepay for their goods; in other cases, after appropriate credit evaluation, an open credit line is granted and payment is due in arrears. Contracts with payment in arrears are recognized in the consolidated balance sheets as accounts receivable upon revenue recognition, while contracts where customers pay in advance are recognized as customer deposits and recorded in other accrued liabilities in the consolidated balance sheets until revenue is recognized. The balance of customer deposits (contract liabilities) was $14,174 and $4,594 at December 31, 2018 and December 31, 2017, respectively. During the year ended December 31, 2018, the Company recognized revenue of $4,592 related to amounts included in the December 31, 2017 customer deposit balance. The Company typically recognizes revenue within one year of the receipt of the customer deposit. The Company offers standard warranty coverage on substantially all products that it sells and accounts for this standard warranty coverage as an assurance warranty. As such, no transaction price is allocated to the standard warranty, and the Company records a liability for product warranty obligations at the time of sale to a customer based upon historical warranty experience. Refer to Note 9, ‘‘Product Warranty Obligations,’’ to the consolidated financial statements for further information regarding the Company’s standard warranties. 62 Generac Holdings Inc. Notes to Consolidated Financial Statements (Continued) Years Ended December 31, 2018, 2017, and 2016 (U.S. Dollars in Thousands, Except Share and Per Share Data) 2. Summary of Accounting Policies (Continued) The Company also sells extended warranty coverage for certain products, which it accounts for as service warranties. In most cases, the extended warranty is sold as a separate contract. As such, extended warranty sales are considered a separate performance obligation, and the extended warranty transaction price is separate and distinct from the product. The extended warranty transaction price is initially recorded as deferred revenue in the consolidated balance sheets and amortized on a straight-line basis to net sales in the consolidated statements of comprehensive income over the life of the contracts following the standard warranty period. For extended warranty contracts that the Company sells under a third-party marketing agreement, it is required to pay fees to the third-party service provider and classifies these fees as costs to obtain a contract. The contract costs are deferred and recorded as other assets in the consolidated balance sheets. The deferred contract costs are amortized to net sales in the consolidated statements of comprehensive income consistent with how the related deferred revenue is recognized. Refer to Note 9, ‘‘Product Warranty Obligations,’’ to the consolidated financial statements for further information regarding the Company’s extended warranties. In addition to extended warranties, the Company offers other services, including remote monitoring, installation and maintenance services in limited circumstances. Total service revenues account for less than two percent of revenue during the year ended December 31, 2018. Refer to Note 6, ‘‘Segment Reporting,’’ to the consolidated financial statements for the Company’s disaggregated revenue disclosure. The information discussed above is applicable to each of the Company’s product classes. Advertising and Co-Op Advertising Expenditures for advertising, included in selling and service expenses in the consolidated statements of comprehensive income, are expensed as incurred. Total expenditures for advertising were $34,792, $45,926, and $45,488 for the years ended December 31, 2018, 2017, and 2016, respectively. Research and Development The Company expenses research and development costs as incurred. Total expenditures incurred for research and development were $50,019, $42,869, and $37,163 for the years ended December 31, 2018, 2017, and 2016, respectively. Foreign Currency Translation and Transactions Balance sheet amounts for non-U.S. Dollar functional currency businesses are translated into U.S. Dollars at the rates of exchange in effect at the end of the fiscal year. Income and expenses incurred in a foreign currency are translated at the average rates of exchange in effect during the year. The related translation adjustments are made directly to accumulated other comprehensive loss, a component of stockholders’ equity, in the consolidated balance sheets. Gains and losses from foreign currency transactions are recognized as incurred in the consolidated statements of comprehensive income. 63 Generac Holdings Inc. Notes to Consolidated Financial Statements (Continued) Years Ended December 31, 2018, 2017, and 2016 (U.S. Dollars in Thousands, Except Share and Per Share Data) 2. Summary of Accounting Policies (Continued) Fair Value of Financial Instruments ASC 820-10, Fair Value Measurement, defines fair value, establishes a consistent framework for measuring fair value, and expands disclosure for each major asset and liability category measured at fair value on either a recurring basis or nonrecurring basis. ASC 820-10 clarifies that fair value is an exit price, representing the amount that would be received in the sale of an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the pronouncement establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows: (Level 1) observable inputs such as quoted prices in active markets; (Level 2) inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and (Level 3) unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions. The Company believes the carrying amount of its financial instruments (cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, short-term borrowings and ABL facility borrowings), excluding Term Loan borrowings, approximates the fair value of these instruments based upon their short-term nature. The fair value of Term Loan borrowings, which have an aggregate carrying value of $857,851, was approximately $849,809 (Level 2) at December 31, 2018, as calculated based on independent valuations whose inputs and significant value drivers are observable. For the fair value of the assets and liabilities measured on a recurring basis, refer to the fair value table in Note 4, ‘‘Derivative Instruments and Hedging Activities,’’ to the consolidated financial statements. The fair value of all derivative contracts is classified as Level 2. The valuation techniques used to measure the fair value of derivative contracts, all of which have counterparties with high credit ratings, were based on quoted market prices or model driven valuations using significant inputs derived from or corroborated by observable market data. The fair value of derivative contracts considers the Company’s credit risk in accordance with ASC 820-10. Use of Estimates The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Derivative Instruments and Hedging Activities The Company records all derivatives in accordance with ASC 815, Derivatives and Hedging, which requires derivative instruments be reported in the consolidated balance sheets at fair value and establishes criteria for designation and effectiveness of hedging relationships. The Company is exposed to market risk such as changes in commodity prices, foreign currencies and interest rates. The 64 Generac Holdings Inc. Notes to Consolidated Financial Statements (Continued) Years Ended December 31, 2018, 2017, and 2016 (U.S. Dollars in Thousands, Except Share and Per Share Data) 2. Summary of Accounting Policies (Continued) Company does not hold or issue derivative financial instruments for trading purposes. Refer to Item 7A of this Annual Report on Form 10-K for further information on the Company’s derivatives. Share-Based Compensation Share-based compensation expense, including stock options and restricted stock awards, is generally recognized on a straight-line basis over the vesting period based on the fair value of awards which are expected to vest. The fair value of all share-based awards is estimated on the date of grant. Refer to Note 15, ‘‘Share Plans,’’ to the consolidated financial statements for further information on the Company’s share-based compensation plans and accounting. New Accounting Pronouncements New Accounting Standards Not Yet Adopted In February 2016, the FASB issued ASU 2016-02, Leases. This guidance was issued to increase transparency and comparability among organizations by requiring the recognition of lease assets and lease liabilities in the balance sheet and by disclosing key information about leasing arrangements. The Company developed a comprehensive project plan and established a cross-functional implementation team to evaluate the impact of the standard, which included evaluating the Company’s lease portfolio, analyzing the standard’s impact on the Company’s various types of lease contracts, and identifying the reporting requirements of the standard. The Company has completed its assessment of the impacts the standard will have on its financial statements, and determined that the impact to the statement of comprehensive income is not material. However, the Company is anticipating to record a total right of use asset and lease liability of approximately $65,000 to $75,000 in its balance sheet, which represents both the finance and operating lease assets and liabilities. The Company adopted the standard January 1, 2019 using the modified retrospective approach as of the adoption date, elected the package of practical expedients (lease classification, embedded leases, and initial direct costs for existing leases need not be reassessed), and determined it would combine lease and nonlease components. However, the Company did not elect to apply the recognition exception for short-term leases. In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging—Targeted Improvements to Accounting for Hedging Activities. This guidance was issued to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements and to make certain targeted improvements to simplify the application of the hedge accounting guidance. The standard is effective for the Company in 2019. The Company does not believe that the adoption of this guidance will have a significant impact on its consolidated financial statements or its derivative and hedging strategies. In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract. This guidance was issued to address the diversity in practice related to the accounting for costs of implementation activities performed in a cloud computing arrangement that is a service contract. The guidance can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption, and is effective for the Company in 2020. 65 Generac Holdings Inc. Notes to Consolidated Financial Statements (Continued) Years Ended December 31, 2018, 2017, and 2016 (U.S. Dollars in Thousands, Except Share and Per Share Data) 2. Summary of Accounting Policies (Continued) The Company is currently assessing the impact the adoption of this guidance will have on the Company’s results of operations and financial position. There are several other new accounting pronouncements issued by the FASB. Each of these pronouncements, as applicable, has been or will be adopted by the Company. Management does not believe any of these accounting pronouncements has had or will have a material impact on the Company’s consolidated financial statements. Recently Adopted Accounting Standards On January 1, 2018, the Company adopted ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The new standard requires presentation of certain components of net periodic pension cost as non-operating expense. The adoption of this new standard did not have a significant impact on the Company’s financial statements. The changes in presentation of the components of net periodic pension cost were applied retrospectively to all periods presented. On January 1, 2018, the Company adopted ASU 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments. The changes in presentation of the proceeds from beneficial interests in securitization transactions were applied retrospectively to all periods presented. On January 1, 2018, the Company adopted ASU 2014-09, Revenue from Contracts with Customers, and all related amendments (the ‘‘new revenue recognition standard’’) using the full retrospective method, which requires application to all periods presented. The impact of adopting the above standards on the Company’s previously reported consolidated financial statements is as follows: Consolidated Balance Sheets December 31, 2017 As Reported Impact of Adoption As Adjusted Accounts receivable . . . . . . . . . . . . . . . . Inventories . . . . . . . . . . . . . . . . . . . . . . . Other accrued liabilities . . . . . . . . . . . . . Deferred income taxes . . . . . . . . . . . . . . Other long-term liabilities . . . . . . . . . . . . Retained earnings . . . . . . . . . . . . . . . . . . $280,002 380,341 105,067 43,789 76,995 $616,347 $ (707) 6,708 7,551 (1,937) 5,898 $(5,511) $279,295 387,049 112,618 41,852 82,893 $610,836 66 Generac Holdings Inc. Notes to Consolidated Financial Statements (Continued) Years Ended December 31, 2018, 2017, and 2016 (U.S. Dollars in Thousands, Except Share and Per Share Data) 2. Summary of Accounting Policies (Continued) Consolidated Statements of Comprehensive Income Year Ended December 31, 2017 As Reported Impact of Adoption As Adjusted Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Selling and service expenses . . . . . . . . . . . . . . . . . . . . . . . Research and development expenses . . . . . . . . . . . . . . . . . General and administrative expenses . . . . . . . . . . . . . . . . . Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . Net income attributable to Generac Holdings Inc. . . . . . . . Earnings per share $1,672,445 1,090,328 171,755 42,925 87,512 (4,007) 43,553 $ 159,386 Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ 2.58 2.56 Comprehensive income attributable to Generac $ 6,928 4,259 3,086 (56) 69 (559) 589 $(1,578) $ (0.02) $ (0.03) $1,679,373 1,094,587 174,841 42,869 87,581 (4,566) 44,142 $ 157,808 $ $ 2.56 2.53 Holdings Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 174,551 $(1,578) $ 172,973 Year Ended December 31, 2016 As Reported Impact of Adoption As Adjusted Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Selling and service expenses . . . . . . . . . . . . . . . . . . . . . . . Research and development expenses . . . . . . . . . . . . . . . . . General and administrative expenses . . . . . . . . . . . . . . . . . Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . Net income attributable to Generac Holdings Inc. . . . . . . . Earnings per share Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Comprehensive income attributable to Generac Holdings Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statement of Stock holders’ Equity $1,444,453 930,347 164,607 37,229 74,700 (180) 57,570 98,788 $ 1.51 1.50 $ $ $ $ 3,290 4,975 253 (66) (7) (820) (1,051) $(1,634) $ (0.03) $ (0.03) $1,447,743 935,322 164,860 37,163 74,693 (1,000) 56,519 97,154 $ $ $ $ 1.48 1.47 80,463 82,097 $(1,634) Retained earnings at December 31, 2016 . . . . . . . . . . . . . . . Net income attributable to Generac Holdings Inc. . . . . . . . Retained earnings at December 31, 2017 . . . . . . . . . . . . . . . $456,052 159,386 $616,347 $(3,933) (1,578) $(5,511) $452,119 157,808 $610,836 Year Ended December 31, 2017 As Reported Impact of Adoption As Adjusted 67 Generac Holdings Inc. Notes to Consolidated Financial Statements (Continued) Years Ended December 31, 2018, 2017, and 2016 (U.S. Dollars in Thousands, Except Share and Per Share Data) 2. Summary of Accounting Policies (Continued) Year Ended December 31, 2016 As Reported Impact of Adoption As Adjusted Retained earnings at December 31, 2015 . . . . . . . . . . . . . . . Net income attributable to Generac Holdings Inc. . . . . . . . Retained earnings at December 31, 2016 . . . . . . . . . . . . . . . $358,173 98,788 $456,052 $(2,299) (1,634) $(3,933) $355,874 97,154 $452,119 Consolidated Statement of Cash Flows Year Ended December 31, 2017 As Reported Impact of Adoption As Adjusted Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash provided by operating activities . . . . . . . . . . . . . . . Proceeds from beneficial interests in securitization $161,135 21,439 (29,771) (16,278) 27,514 $261,116 transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash used in investing activities . . . . . . . . . . . . . . . . . . $ — $ (31,922) $(1,578) (1,937) (3,086) (6,708) 9,515 $(3,794) $ 3,794 $ 3,794 $159,557 19,502 (32,857) (22,986) 37,029 $257,322 $ 3,794 $ (28,128) Year Ended December 31, 2016 As Reported Impact of Adoption As Adjusted Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash provided by operating activities . . . . . . . . . . . . . . . Proceeds from beneficial interests in securitization $ 98,812 39,347 (9,082) 15,514 6,719 $ 253,409 $ (1,634) (1,050) (12,141) (834) 3,372 $(12,287) transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash used in investing activities . . . . . . . . . . . . . . . . . . $ — $(105,822) $ 12,287 $ 12,287 $ 97,178 38,297 (21,223) 14,680 10,091 $241,122 $ 12,287 $ (93,535) 3. Acquisitions Acquisition of Selmec On June 1, 2018, the Company acquired Selmec for a purchase price of $79,972, net of cash acquired and inclusive of estimated earnout payments of $14,902. To date, the acquisition purchase price was funded solely through cash on hand. 68 Generac Holdings Inc. Notes to Consolidated Financial Statements (Continued) Years Ended December 31, 2018, 2017, and 2016 (U.S. Dollars in Thousands, Except Share and Per Share Data) 3. Acquisitions (Continued) The Company recorded a preliminary purchase price allocation during 2018 based upon its estimates of the fair value of the acquired assets and assumed liabilities. As a result, the Company recorded approximately $80,418 of intangible assets, including approximately $46,788 of goodwill recorded in the International segment, as of the acquisition date. The goodwill ascribed to the acquisition is not deductible for tax purposes. The accompanying consolidated financial statements include the results of Selmec from the date of acquisition through December 31, 2018. Acquisition of Pramac On March 1, 2016, the Company acquired a 65% ownership interest in Pramac for a purchase price, net of cash acquired, of $60,250. The acquisition purchase price was funded solely through cash on hand. The 35% noncontrolling interest in Pramac had an acquisition date fair value of $34,253, and was recorded as a redeemable noncontrolling interest in the consolidated balance sheet, as the noncontrolling interest holder had within its control the right to require the Company to redeem its interest in Pramac. The noncontrolling interest holder had a put option to sell his interest to the Company any time within five years from the date of acquisition. Within the first two years from the date of acquisition, the put option price was based on a fixed amount if voluntarily exercised. Subsequently, the put option price is based on the greater of the fixed amount or a multiple of earnings, subject to the terms of the acquisition. Additionally, the Company held a call option that it may redeem commencing five years from the date of acquisition, or earlier upon the occurrence of certain circumstances. The call option price is based on a multiple of earnings that is subject to the terms of the acquisition. The redeemable noncontrolling interest is recorded at the greater of the initial fair value, increased or decreased for the noncontrolling interests’ share of comprehensive net income (loss), or the estimated redemption value, with any adjustment to the redemption value impacting retained earnings, but not net income. However, the redemption value adjustments are reflected in the earnings per share calculation, as detailed in Note 12, ‘‘Earnings Per Share,’’ to the consolidated financial statements. The following table presents the changes in the redeemable noncontrolling interest: Year Ended December 31, 2018 2017 2016 Balance at beginning of period . . . . . . . . . . . . . . . . . Noncontrolling interest of Pramac . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign currency translation . . . . . . . . . . . . . . . . . Redemption value adjustment . . . . . . . . . . . . . . . . $43,929 — 2,214 (3,109) 17,970 $33,138 1,540(1) 1,631 8,529 (909) $ — 34,253 100 (2,124) 909 Balance at end of period . . . . . . . . . . . . . . . . . . . . . $61,004 $43,929 $33,138 (1) Represents the additional noncontrolling interest of Pramac resulting from a common control transaction between the Generac Mobile Products S.r.l. and Pramac UK Limited legal entities. 69 Generac Holdings Inc. Notes to Consolidated Financial Statements (Continued) Years Ended December 31, 2018, 2017, and 2016 (U.S. Dollars in Thousands, Except Share and Per Share Data) 3. Acquisitions (Continued) On February 7, 2019, the Company amended its Quotaholders’ Agreement with the noncontrolling interest holder of Pramac. As of the date of signing, the noncontrolling interest holder no longer holds the right to put its shares to the Company until April 1, 2021. As a result, the noncontrolling interest will no longer be considered redeemable until the put option right returns on April 1, 2021. Additionally, the Company still holds a call option right that it may redeem; however, it may only call a portion of the remaining 35% interest each year from 2021 through 2026. The Company finalized the Pramac purchase price allocation during the first quarter of 2017. The final purchase price allocation as of the March 1, 2016 opening balance sheet date was as follows: Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March 1, 2016 $ 50,716 39,889 19,138 34,471 46,775 7,698 Total assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 198,687 Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term debt and capital lease obligations (including current portion) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Redeemable noncontrolling interest . . . . . . . . . . . . . . . . . . . . . . . . . . Noncontrolling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,741 40,270 18,599 23,521 34,253 53 Net assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 60,250 The goodwill ascribed to this acquisition is not deductible for tax purposes. The accompanying consolidated financial statements include the results of Pramac from the date of acquisition through December 31, 2018. 70 Generac Holdings Inc. Notes to Consolidated Financial Statements (Continued) Years Ended December 31, 2018, 2017, and 2016 (U.S. Dollars in Thousands, Except Share and Per Share Data) 3. Acquisitions (Continued) Pro Forma Information The following unaudited pro forma information of the Company gives effect to all acquisitions as though the transactions had occurred on January 1, 2016. Year Ended December 31, 2018 2017 2016 Net Sales: As reported . . . . . . . . . . . . . . . . . . . . . . . . Pro forma . . . . . . . . . . . . . . . . . . . . . . . . . $2,023,464 2,038,739 $1,679,373 1,742,453 $1,447,743 1,581,699 Net income attributable to Generac Holdings Inc.: As reported . . . . . . . . . . . . . . . . . . . . . . . . Pro forma . . . . . . . . . . . . . . . . . . . . . . . . . $ 238,257 238,362 $ 157,808 161,854 Net income attributable to Generac Holdings Inc. per common share—diluted As reported . . . . . . . . . . . . . . . . . . . . . . . . Pro forma . . . . . . . . . . . . . . . . . . . . . . . . . $ $ 3.54 3.54 2.53 2.60 $ $ 97,154 103,193 1.47 1.56 This unaudited pro forma information is presented for informational purposes only and is not necessarily indicative of the results of operations that actually would have been achieved had the acquisitions been consummated on January 1, 2016. 4. Derivative Instruments and Hedging Activities Commodities The Company is exposed to price fluctuations in commodities it uses as raw materials; primarily steel, copper and aluminum; and periodically utilizes commodity derivatives to mitigate the impact of these potential price fluctuations on its financial results. These derivatives typically have maturities of less than eighteen months. At December 31, 2018 and 2017, the Company had five and one commodity contracts outstanding, respectively, covering the purchases of copper. Because these contracts do not qualify for hedge accounting, the related gains and losses are recorded in cost of goods sold in the Company’s consolidated statements of comprehensive income. Net pre-tax gains (losses) recognized were $(874), $377, and $739 for the years ended December 31, 2018, 2017, and 2016, respectively. Foreign Currencies The Company is exposed to foreign currency exchange risk as a result of transactions denominated in currencies other than the U.S. Dollar. The Company periodically utilizes foreign currency forward purchase and sales contracts to manage the volatility associated with certain foreign currency purchases and sales in the normal course of business. Contracts typically have maturities of twelve months or less. 71 Generac Holdings Inc. Notes to Consolidated Financial Statements (Continued) Years Ended December 31, 2018, 2017, and 2016 (U.S. Dollars in Thousands, Except Share and Per Share Data) 4. Derivative Instruments and Hedging Activities (Continued) As of December 31, 2018 and 2017, the Company had forty and twenty-eight foreign currency contracts outstanding, respectively. Because these contracts do not qualify for hedge accounting, the related gains and losses are recorded in other, net in the Company’s consolidated statements of comprehensive income. Net pre-tax gains (losses) recognized for the years ended December 31, 2018, 2017, and 2016 were $(653), $697, and $(385), respectively. Interest Rate Swaps In October 2013, the Company entered into two interest rate swap agreements. In May 2014, the Company entered into one interest rate swap agreement. In 2017, the Company entered into twenty additional interest rate swap agreements. The Company formally documented all relationships between interest rate hedging instruments and the related hedged items, as well as its risk-management objectives and strategies for undertaking these hedge transactions. These interest rate swap agreements qualify as cash flow hedges and therefore, the effective portions of the gains or losses are reported as a component of accumulated other comprehensive loss (AOCL) in the consolidated balance sheets. The amount of gains recognized for the years ended December 31, 2018, 2017, and 2016 were $2,924, $3,712, and $535, respectively. The cash flows of the swaps are recognized as adjustments to interest expense each period. The ineffective portions of the derivatives’ changes in fair value, if any, are immediately recognized in earnings. Fair Value The following table presents the fair value of the Company’s derivatives: December 31, 2018 December 31, 2017 Commodity contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign currency contracts . . . . . . . . . . . . . . . . . . . . . . . Interest rate swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (160) (117) 8,307 $ 107 167 4,356 The fair value of the commodity and foreign currency contracts are included in other accrued liabilities, and the fair value of the interest rate swaps are included in other assets in the consolidated balance sheet as of December 31, 2018. The fair value of the commodity and foreign currency contracts are included in prepaid expenses and other assets, and the fair value of the interest rate swaps are included in other assets in the consolidated balance sheet as of December 31, 2017. Excluding the impact of credit risk, the fair value of the derivative contracts as of December 31, 2018 and 2017 is an asset of $8,220 and $4,703, respectively, which represents the amount the Company would receive upon exit of the agreements on those dates. 72 Generac Holdings Inc. Notes to Consolidated Financial Statements (Continued) Years Ended December 31, 2018, 2017, and 2016 (U.S. Dollars in Thousands, Except Share and Per Share Data) 5. Accumulated Other Comprehensive Loss The following presents a tabular disclosure of changes in AOCL during the years ended December 31, 2018 and 2017, net of tax: Foreign Currency Translation Adjustments Defined Benefit Pension Plan Unrealized Gain on Cash Flow Hedges Total Beginning Balance—January 1, 2018 . . . . . . . . . . . . $(12,856) $(10,978) $2,636 $(21,198) Other comprehensive income (loss) before reclassifications . . . . . . . . . . . . . . . . . . . . . . . . Amounts reclassified from AOCL . . . . . . . . . . . . (5,976) — (156)(1) 593(3) 2,924(2) — (3,208) 593 Net current-period other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,976) 437 Ending Balance—December 31, 2018 . . . . . . . . . . . . $(18,832) $(10,541) 2,924 $5,560 (2,615) $(23,813) Foreign Currency Translation Adjustments Defined Benefit Pension Plan Unrealized Gain (Loss) on Cash Flow Hedges Total Beginning Balance—January 1, 2017 . . . . . . . . . . . $(28,047) $(11,040) $(1,076) $(40,163) Other comprehensive income (loss) before reclassifications . . . . . . . . . . . . . . . . . . . . . . . Amounts reclassified from AOCL . . . . . . . . . . . . Net current-period other comprehensive income . . . 15,191 — 15,191 (591)(4) 653(6) 62 3,712(5) — 3,712 18,312 653 18,965 Ending Balance—December 31, 2017 . . . . . . . . . . . $(12,856) $(10,978) $ 2,636 $(21,198) (1) Represents unrecognized actuarial losses of $(211), net of tax benefit of $55, included in the computation of net periodic pension cost for the year ended December 31, 2018. Refer to Note 14, ‘‘Benefit Plans,’’ to the consolidated financial statements for additional information. (2) Represents unrealized gains of $3,951, net of tax effect of $(1,027) for the year ended December 31, 2018. (3) Represents actuarial losses of $802, net of tax effect of $(209), amortized to net periodic pension cost for the year ended December 31, 2018. Refer to Note 14, ‘‘Benefit Plans,’’ to the consolidated financial statements for additional information. (4) Represents unrecognized actuarial losses of $(800), net of tax benefit of $209, included in the computation of net periodic pension cost for the year ended December 31, 2017. Refer to Note 14, ‘‘Benefit Plans,’’ to the consolidated financial statements for additional information. (5) Represents unrealized gains of $6,096, net of tax effect of $(2,384) for the year ended December 31, 2017. 73 Generac Holdings Inc. Notes to Consolidated Financial Statements (Continued) Years Ended December 31, 2018, 2017, and 2016 (U.S. Dollars in Thousands, Except Share and Per Share Data) 5. Accumulated Other Comprehensive Loss (Continued) (6) Represents actuarial losses of $883, net of tax effect of $(230), amortized to net periodic pension cost for the year ended December 31, 2017. Refer to Note 14, ‘‘Benefit Plans,’’ to the consolidated financial statements for additional information. 6. Segment Reporting The Company has two reportable segments for financial reporting purposes—Domestic and International. The Domestic segment includes the legacy Generac business and the impact of acquisitions that are based in the United States, all of which have revenues that are substantially derived from the U.S. and Canada. The International segment includes the Ottomotores, Tower Light, Pramac, Motortech and Selmec businesses, all of which have revenues that are substantially derived from outside of the U.S and Canada. Both reportable segments design and manufacture a wide range of power generation equipment and other power products. The Company has multiple operating segments, which it aggregates into the two reportable segments, based on materially similar economic characteristics, products, production processes, classes of customers and distribution methods. The Company’s product offerings consist primarily of power generation equipment and other power products geared for varying end customer uses. Residential products and commercial & industrial (C&I) products are each a similar class of products based on similar power output and end customer. The breakout of net sales between residential, C&I, and other products by reportable segment is as follows: Net Sales by Segment Year Ended December 31, 2018 Domestic International Total Product Classes Residential products . . . . . . . . . . . . . . . . . . . Commercial & industrial products . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 990,631 464,066 125,628 $ 52,108 356,204 34,827 $1,042,739 820,270 160,455 Total net sales . . . . . . . . . . . . . . . . . . . . . . $1,580,325 $443,139 $2,023,464 Year Ended December 31, 2017 Domestic International Total Product Classes Residential products . . . . . . . . . . . . . . . . . . . Commercial & industrial products . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 815,125 385,575 102,806 $ 55,365 298,778 21,724 $ 870,490 684,353 124,530 Total net sales . . . . . . . . . . . . . . . . . . . . . . $1,303,506 $375,867 $1,679,373 74 Generac Holdings Inc. Notes to Consolidated Financial Statements (Continued) Years Ended December 31, 2018, 2017, and 2016 (U.S. Dollars in Thousands, Except Share and Per Share Data) 6. Segment Reporting (Continued) Year Ended December 31, 2016 Domestic International Total Product Classes Residential products . . . . . . . . . . . . . . . . . . . Commercial & industrial products . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 730,288 346,094 100,467 $ 38,888 212,374 19,632 $ 769,176 558,468 120,099 Total net sales . . . . . . . . . . . . . . . . . . . . . . $1,176,849 $270,894 $1,447,743 Residential products consist primarily of automatic home standby generators ranging in output from 6kW to 60kW, portable generators, power washers and other outdoor power equipment. These products are sold through independent residential dealers, national and regional retailers, e-commerce merchants, electrical and HVAC wholesalers and outdoor power equipment dealers. The residential products revenue consists of the sale of the product to our distribution partners, which in turn sell or rent the product to the end consumer, including installation and maintenance services. In some cases, residential products are sold direct to the end consumer. Substantially all of the residential products revenues are transferred to the customer at a point in time. C&I products consist of larger output stationary generators used in C&I applications and fueled by diesel, natural gas, liquid propane and bi-fuel, with power outputs ranging from 10kW up to 3,250kW. Also included in C&I products are mobile generators, light towers, mobile heaters and mobile pumps. These products are sold through industrial distributors and dealers, equipment rental companies and equipment distributors. The C&I products revenue consists of the sale of the product to our distribution partners, which in turn sell or rent the product to the end customer, including installation and maintenance services. In some cases, C&I products are sold direct to the end customer. Substantially all of the C&I products revenues are transferred to the customer at a point in time. Other products consist primarily of aftermarket service parts and product accessories sold to our dealers, and the amortization of extended warranty deferred revenue. The aftermarket service parts and product accessories are generally transferred to the customer at a point in time, while the extended warranty revenue is recognized over the life of the contract. 75 Generac Holdings Inc. Notes to Consolidated Financial Statements (Continued) Years Ended December 31, 2018, 2017, and 2016 (U.S. Dollars in Thousands, Except Share and Per Share Data) 6. Segment Reporting (Continued) Management evaluates the performance of its segments based primarily on Adjusted EBITDA, which is reconciled to Income before provision for income taxes below. The computation of Adjusted EBITDA is based on the definition that is contained in the Company’s credit agreements. Adjusted EBITDA Year Ended December 31, 2018 2017 2016 Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . International . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $388,685 35,867 $290,290 27,010 $259,563 16,959 Total adjusted EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $424,552 $317,300 $276,522 Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-cash write-down and other adjustments(1) . . . . . . . . . . . . . . . . . Non-cash share-based compensation expense(2) . . . . . . . . . . . . . . . . Loss on extinguishment of debt(3) . . . . . . . . . . . . . . . . . . . . . . . . . . Loss on change in contractual interest rate(4) . . . . . . . . . . . . . . . . . . Transaction costs and credit facility fees(5) . . . . . . . . . . . . . . . . . . . . Business optimization expenses(6) . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (40,956) (47,408) (3,532) (14,563) (1,332) — (3,883) (952) (850) (42,667) (51,988) (2,923) (10,205) — — (2,145) (2,912) (761) (44,568) (54,418) (357) (9,493) (574) (2,957) (2,442) (7,316) (700) Income before provision for income taxes . . . . . . . . . . . . . . . . . . . . . $311,076 $203,699 $153,697 (1) Includes gains/losses on disposal of assets, unrealized mark-to-market adjustments on commodity contracts, and certain foreign currency and purchase accounting related adjustments. (2) Represents share-based compensation expense to account for stock options, restricted stock and other stock awards over their respective vesting periods. (3) Represents the write-off of original issue discount and capitalized debt issuance costs due to voluntary debt prepayments. (4) For the year ended December 31, 2016, represents a non-cash loss relating to the continued 25 basis point increase in borrowing costs as a result of the credit agreement leverage ratio remaining above 3.0 times based on projections at that time. Following the May 2017 Term Loan amendment, which removed the pricing grid based on leverage ratio achieved, gains or losses on changes in contractual interest rate will no longer be recorded in the statements of comprehensive income. Refer to Note 10, ‘‘Credit Agreements,’’ to the consolidated financial statements for further information on the gains and losses on changes in the contractual interest rate. (5) Represents transaction costs incurred directly in connection with any investment, as defined in our credit agreement, equity issuance, debt issuance or refinancing, together with certain fees relating to our senior secured credit facilities. (6) Represents charges relating to business optimization and restructuring costs. 76 Generac Holdings Inc. Notes to Consolidated Financial Statements (Continued) Years Ended December 31, 2018, 2017, and 2016 (U.S. Dollars in Thousands, Except Share and Per Share Data) 6. Segment Reporting (Continued) The following tables summarize additional financial information by reportable segment: Assets Year Ended December 31, 2018 2017 2016 Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . International . . . . . . . . . . . . . . . . . . . . . . . . . $1,868,554 557,760 $1,612,607 413,358 $1,525,950 340,019 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,426,314 $2,025,965 $1,865,969 Depreciation and Amortization Year Ended December 31, Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . International . . . . . . . . . . . . . . . . . . . . . . . . . $35,586 11,822 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $47,408 2018 2017 $37,962 14,026 $51,988 Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . International . . . . . . . . . . . . . . . . . . . . . . . . . $38,242 9,359 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $47,601 2018 Capital Expenditures Year Ended December 31, 2017 $29,258 4,003 $33,261 2016 $42,346 12,072 $54,418 2016 $26,936 3,531 $30,467 The Company’s sales in the United States represent approximately 74%, 74%, and 77% of total sales for the years ended December 31, 2018, 2017 and 2016, respectively. Approximately 80% and 85% of the Company’s identifiable long-lived assets are located in the United States as of December 31, 2018 and 2017, respectively. 7. Balance Sheet Details Inventories consist of the following: December 31, 2018 2017 Raw material . . . . . . . . . . . . . . . . . . . . . . . . . Work-in-process . . . . . . . . . . . . . . . . . . . . . . . Finished goods . . . . . . . . . . . . . . . . . . . . . . . $348,980 6,971 188,799 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $544,750 $242,947 2,544 141,558 $387,049 77 Generac Holdings Inc. Notes to Consolidated Financial Statements (Continued) Years Ended December 31, 2018, 2017, and 2016 (U.S. Dollars in Thousands, Except Share and Per Share Data) 7. Balance Sheet Details (Continued) As of December 31, 2018 and 2017, inventories totaling $8,488 and $6,245, respectively, were on consignment at customer locations. Property and equipment consists of the following: December 31, 2018 2017 Land and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . Buildings and improvements . . . . . . . . . . . . . . . . . . . . . . . . Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . Dies and tools . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vehicles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Office equipment and systems . . . . . . . . . . . . . . . . . . . . . . . Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 15,975 163,161 103,726 28,198 2,070 82,638 2,137 26,543 $ 13,118 132,072 90,487 24,504 1,878 73,254 2,436 18,799 Gross property and equipment . . . . . . . . . . . . . . . . . . . . . Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . 424,448 (145,519) 356,548 (126,168) Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 278,929 $ 230,380 Total property and equipment included capital leases of $20,158 and $4,153 at December 31, 2018 and 2017, respectively, primarily made up of buildings and improvements. Amortization of capital leases is recorded within depreciation expense in the consolidated statements of comprehensive income. The initial measurement of new capital leases is accounted for as a non-cash item in the consolidated statement of cash flows. 8. Goodwill and Intangible Assets The changes in the carrying amount of goodwill by reportable segment for the years ended December 31, 2018 and 2017 are as follows: Balance at December 31, 2016 . . . . . . . . . . . . . . Acquisitions of businesses, net . . . . . . . . . . . . . Foreign currency translation . . . . . . . . . . . . . . Balance at December 31, 2017 . . . . . . . . . . . . . . Acquisitions of businesses, net . . . . . . . . . . . . . Foreign currency translation . . . . . . . . . . . . . . Domestic International Total $621,451 — — 621,451 — — $ 83,189 5,271 11,612 100,072 46,788 (3,656) $704,640 5,271 11,612 721,523 46,788 (3,656) Balance at December 31, 2018 . . . . . . . . . . . . . . $621,451 $143,204 $764,655 78 Generac Holdings Inc. Notes to Consolidated Financial Statements (Continued) Years Ended December 31, 2018, 2017, and 2016 (U.S. Dollars in Thousands, Except Share and Per Share Data) 8. Goodwill and Intangible Assets (Continued) The details of the gross goodwill applicable to each reportable segment at December 31, 2018 and 2017 are as follows: Year Ended December 31, 2018 Year Ended December 31, 2017 Gross Accumulated Impairment Net Gross Accumulated Impairment Net Domestic . . . . . . . . . . . . . . . . . . . . . $1,124,644 $(503,193) $621,451 $1,124,644 $(503,193) $621,451 (4,611) 100,072 International . . . . . . . . . . . . . . . . . . (4,611) 143,204 104,683 147,815 Total . . . . . . . . . . . . . . . . . . . . . . $1,272,459 $(507,804) $764,655 $1,229,327 $(507,804) $721,523 Refer to Note 3, ‘‘Acquisitions,’’ to the consolidated financial statements for further information regarding the Company’s acquisitions. The following table summarizes intangible assets by major category as of December 31, 2018 and 2017: Weighted Average Amortization Years December 31, 2018 December 31, 2017 Gross Accumulated Net Book Amortization Value Gross Accumulated Net Book Amortization Value Finite-lived intangible assets: Tradenames . . . . . . . . . Customer lists . . . . . . . . Patents . . . . . . . . . . . . . Unpatented technology . Software . . . . . . . . . . . . Non-compete/other . . . . Total finite-lived 9 12 14 15 — 7 $ 56,378 $ (32,416) $ 23,962 $ 52,784 $ (28,422) $ 24,362 41,064 39,617 1,254 — 1,147 (299,074) (91,520) (11,915) (1,046) (1,537) (307,149) (101,060) (12,058) (1,046) (1,897) 340,138 131,137 13,169 1,046 2,684 368,343 131,030 13,169 1,046 3,829 61,194 29,970 1,111 — 1,932 intangible assets . . . $ 573,795 $(455,626) $118,169 $ 540,958 $(433,514) $107,444 Indefinite-lived tradenames . . . . . . . . 128,321 — 128,321 128,321 — 128,321 Total intangible assets . . . . $ 702,116 $(455,626) $246,490 $ 669,279 $(433,514) $235,765 Amortization of intangible assets was $22,112, $28,861 and $32,953 in 2018, 2017 and 2016, respectively. Excluding the impact of any future acquisitions, the Company estimates amortization expense for the next five years will be as follows: 2019—$21,542; 2020—$21,451; 2021—$19,653; 2022— $12,339; 2023—$9,975. 9. Product Warranty Obligations The Company records a liability for standard product warranty obligations accounted for as assurance warranties at the time of sale to a customer based upon historical warranty experience. The Company also records a liability for specific warranty matters when they become known and are 79 Generac Holdings Inc. Notes to Consolidated Financial Statements (Continued) Years Ended December 31, 2018, 2017, and 2016 (U.S. Dollars in Thousands, Except Share and Per Share Data) 9. Product Warranty Obligations (Continued) reasonably estimable. The following is a tabular reconciliation of the Company’s standard product warranty liability accounted for as an assurance warranty: Year Ended December 31, 2018 2017 2016 Balance at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Product warranty reserve assumed in acquisition . . . . . . . . . . . . . . . . Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for warranty issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Changes in estimates for pre-existing warranties . . . . . . . . . . . . . . . . . $ 35,422 — (20,029) 26,910 (518) $ 31,695 43 (18,861) 21,347 1,198 $ 30,197 840 (18,691) 19,148 201 Balance at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 41,785 $ 35,422 $ 31,695 Additionally, the Company sells extended warranty coverage for certain products, which it accounts for as a service warranty. The sales of extended warranties are recorded as deferred revenue, and typically have a duration of five to ten years. The deferred revenue related to extended warranty coverage is amortized over the duration of the extended warranty contract period, following the standard warranty period, using the straight-line method. The Company believes the straight-line method is appropriate because the performance obligation is satisfied based on the passage of time. The amortization of deferred revenue is recorded to net sales in the consolidated statements of comprehensive income. The following is a tabular reconciliation of the deferred revenue related to extended warranty coverage: Year Ended December 31, 2018 2017 2016 Balance at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred revenue contracts issued . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of deferred revenue contracts . . . . . . . . . . . . . . . . . . . . $ 57,854 21,440 (10,954) $36,139 29,262(1) (7,547) $31,956 9,797 (5,614) Balance at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 68,340 $57,854 $36,139 (1) The increase in deferred revenue contracts issued during 2017 was largely due to the launch of a post-sale extended warranty marketing program. The timing of recognition of the Company’s deferred revenue balance related to extended warranties at December 31, 2018 is as follows: 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . After 2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $13,438 13,547 12,178 9,756 19,421 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $68,340 80 Generac Holdings Inc. Notes to Consolidated Financial Statements (Continued) Years Ended December 31, 2018, 2017, and 2016 (U.S. Dollars in Thousands, Except Share and Per Share Data) 9. Product Warranty Obligations (Continued) In 2017, the Company launched a post-sale extended warranty marketing program with a third party. In the program’s agreement, the Company is required to pay fees to the third-party service provider based on the number of extended warranty contracts that they sell, which it classifies as costs to obtain a contract. The contract costs are deferred and recorded as other assets in the consolidated balance sheets. The deferred contract costs are amortized to net sales in the consolidated statements of comprehensive income over the same period that the underlying deferred revenue is recognized. The balance of deferred contract costs as of December 31, 2018 and 2017 was $4,782 and $3,346, respectively. Amortization of deferred contract costs recorded during the years ended December 31, 2018 and 2017 was $615 and $193, respectively. Standard product warranty obligations and extended warranty related deferred revenues are included in the consolidated balance sheets as follows: December 31, 2018 2017 Product warranty liability Current portion—other accrued liabilities . . . . . . . . . . . . . . . . Long-term portion—other long-term liabilities . . . . . . . . . . . . $25,396 16,389 $20,576 14,846 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $41,785 $35,422 Deferred revenue related to extended warranties Current portion—other accrued liabilities . . . . . . . . . . . . . . . . Long-term portion—other long-term liabilities . . . . . . . . . . . . $13,646 54,694 $11,017 46,837 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $68,340 $57,854 10. Credit Agreements Short-term borrowings are included in the consolidated balance sheets as follows: ABL facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other lines of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $18,459 27,124 $ — 20,602 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $45,583 $20,602 December 31, 2018 2017 81 Generac Holdings Inc. Notes to Consolidated Financial Statements (Continued) Years Ended December 31, 2018, 2017, and 2016 (U.S. Dollars in Thousands, Except Share and Per Share Data) 10. Credit Agreements (Continued) Long-term borrowings are included in the consolidated balance sheets as follows: December 31, 2018 2017 Term loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Original issue discount and deferred financing costs . . . . . . . . ABL facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital lease obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $879,000 (22,440) — 20,171 1,642 $929,000 (26,937) — 4,690 1,367 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: current portion of debt . . . . . . . . . . . . . . . . . . . . . . . . . Less: current portion of capital lease obligation . . . . . . . . . . . 878,373 1,075 902 908,120 936 636 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $876,396 $906,548 Maturities of long-term borrowings (before considering original issue discount and deferred financing costs) outstanding at December 31, 2018, are as follows: 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . After 2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,927 1,769 1,267 1,814 894,036 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $900,813 The Company’s credit agreements originally provided for a $1,200,000 term loan B credit facility (Term Loan) and currently include a $300,000 uncommitted incremental term loan facility. The maturity date of the Term Loan is May 31, 2023. The Term Loan is guaranteed by all of the Company’s wholly-owned domestic restricted subsidiaries, and is secured by associated collateral agreements which pledge a first priority lien on virtually all of the Company’s assets, including fixed assets and intangibles, other than all cash, trade accounts receivable, inventory, and other current assets and proceeds thereof, which are secured by a second priority lien. The Term Loan initially bore interest at rates based upon either a base rate plus an applicable margin of 1.75% or adjusted LIBOR rate plus an applicable margin of 2.75%, subject to a LIBOR floor of 0.75%. Beginning in the second quarter of 2014, and measured each quarterly period thereafter, the applicable margin related to base rate loans was reduced to 1.50% and the applicable margin related to LIBOR rate loans is reduced to 2.50%, in each case, if the Company’s net debt leverage ratio, as defined in the Term Loan, falls below 3.00 to 1.00 for that measurement period. As the Company’s net debt leverage ratio continued to be above 3.00 to 1.00 on July 1, 2016, the Company recorded a cumulative catch-up loss of $2,957 in the third quarter of 2016, which represented the additional cash interest expected to be paid while the net debt leverage ratio was expected to be above 3.00 to 1.00 using current forecasts at that time. The loss was recorded against original issue 82 Generac Holdings Inc. Notes to Consolidated Financial Statements (Continued) Years Ended December 31, 2018, 2017, and 2016 (U.S. Dollars in Thousands, Except Share and Per Share Data) 10. Credit Agreements (Continued) discount and deferred financing costs on long-term borrowings in the consolidated balance sheets and as a loss on change in contractual interest rate in the consolidated statements of comprehensive income. In November 2016, the Company amended its Term Loan to extend the maturity date from May 31, 2020 to May 31, 2023. In connection with this amendment and in accordance with ASC 470-50, the Company capitalized $4,242 of fees paid to creditors as original issue discount and deferred financing costs on long-term borrowings and expensed $315 of transaction fees in 2016. In May 2017, the Company amended its Term Loan, modifying the pricing of the facility by reducing the applicable margin rates to base rate plus a fixed applicable margin of 1.25% or adjusted LIBOR rate plus a fixed applicable margin of 2.25%. Further, the amendment removed the pricing grid that would reduce the applicable margin if a net debt leverage ratio of 3.00 to 1.00 was achieved. As a result, the Company does not anticipate any future catch-up gains or losses resulting from changes in contractual interest rates to be recorded in the statements of comprehensive income. The amended Term Loan pricing is still subject to the 0.75% LIBOR floor. In connection with this amendment and in accordance with ASC 470-50, the Company capitalized $1,432 of fees paid to creditors as deferred financing costs on long-term borrowings and expensed $85 of transaction fees in the second quarter of 2017. In December 2017, the Company amended the Term Loan, which further reduced the applicable margin rates to base rate plus a fixed applicable margin of 1.00% or adjusted LIBOR rate plus a fixed applicable margin of 2.00%. Additionally, the amendment eliminated the Excess Cash Flow payment requirement for 2017, and will eliminate future requirements if the Company’s secured leverage ratio is maintained below 3.75 to 1.00 times. In connection with this amendment and in accordance with ASC 470-50, the Company capitalized $2,346 of fees paid to creditors as original issue discount and deferred financing costs on long-term borrowings and expensed $38 of transaction fees in the fourth quarter of 2017. In June 2018, the Company amended the Term Loan, which further reduced the applicable margin rates to base rate plus a fixed applicable margin of 0.75% or adjusted LIBOR rate plus a fixed applicable margin of 1.75%. In connection with this amendment and in accordance with ASC 470-50, the Company capitalized $829 of fees paid to creditors as deferred financing costs on long-term borrowings and expensed $118 of transaction fees in 2018. As of December 31, 2018, the Company’s net secured leverage ratio was 1.66 to 1.00 times, and the Company was in compliance with all covenants of the Term Loan. There are no financial maintenance covenants on the Term Loan. The Company’s credit agreements also originally provided for a senior secured ABL revolving credit facility (ABL Facility). The maturity date of the ABL Facility is now June 12, 2023. Borrowings under the ABL Facility are guaranteed by all of the Company’s wholly-owned domestic restricted subsidiaries, and are secured by associated collateral agreements which pledge a first priority lien on all cash, trade accounts receivable, inventory, and other current assets and proceeds thereof, and a second priority lien on all other assets, including fixed assets and intangibles of the Company and certain 83 Generac Holdings Inc. Notes to Consolidated Financial Statements (Continued) Years Ended December 31, 2018, 2017, and 2016 (U.S. Dollars in Thousands, Except Share and Per Share Data) 10. Credit Agreements (Continued) domestic subsidiaries. ABL Facility borrowings initially bore interest at rates based upon either a base rate plus an applicable margin of 1.00% or adjusted LIBOR rate plus an applicable margin of 2.00%, in each case, subject to adjustments based upon average availability under the ABL Facility. In June 2018, the Company amended the ABL Facility; increasing it from $250,000 to $300,000 and extending the maturity date to June 12, 2023. In addition, the ABL Facility amendment modified the pricing by reducing certain applicable interest rates to either a base rate plus an applicable margin of 0.375% or an adjusted LIBOR rate plus an applicable margin of 1.375%. In connection with this amendment and in accordance with ASC 470-50, the Company capitalized $755 of new debt issuance costs as deferred financing costs on long-term borrowings and wrote-off $34 of capitalized debt issuance costs as a loss on extinguishment of debt in the second quarter of 2018. In June 2018, the Company borrowed $50,000 under the ABL Facility, the proceeds of which were used as a voluntary prepayment of the Term Loan. As a result of the prepayment of the Term Loan, the Company wrote-off $1,298 of original issue discount and capitalized debt issuance costs during the second quarter of 2018 as a loss on extinguishment of debt in the consolidated statements of comprehensive income. In October 2018, the Company repaid the $50,000 outstanding ABL Facility balance with cash on hand. As of December 31, 2018, there was $18,459 outstanding under the ABL Facility, leaving $276,572 of availability, net of outstanding letters of credit. As of December 31, 2018 and December 31, 2017, short-term borrowings consisted of borrowings by the Company’s foreign subsidiaries on local lines of credit and the ABL Facility, which totaled $45,583 and $20,602, respectively. 11. Stock Repurchase Program In August 2015, the Company’s Board of Directors approved a $200,000 stock repurchase program, which the Company completed in the third quarter of 2016. In October 2016, the Company’s Board of Directors approved a $250,000 stock repurchase program, which expired in the fourth quarter of 2018. In September 2018, the Company’s Board of Directors approved another stock repurchase program, which commenced in October 2018, and under which the Company may repurchase an additional $250,000 of its common stock over the following 24 months. The Company may repurchase its common stock from time to time, in amounts and at prices the Company deems appropriate, subject to market conditions and other considerations. The repurchases may be executed using open market purchases, privately negotiated agreements or other transactions. The actual timing, number and value of shares repurchased under the program will be determined by management at its discretion and will depend on a number of factors, including the market price of the Company’s common stock and general market and economic conditions, applicable legal requirements, and compliance with the terms of the Company’s outstanding indebtedness. The repurchases may be funded with cash on hand, available borrowings or proceeds from potential debt or other capital markets sources. The stock repurchase program may be suspended or discontinued at any time without prior notice. During the years ended December 31, 2018, 2017 and 2016, the Company repurchased 560,000, 844,500 and 3,968,706 shares of its common stock, respectively, for $25,656, $30,012 and $149,937, respectively, all funded with cash on 84 Generac Holdings Inc. Notes to Consolidated Financial Statements (Continued) Years Ended December 31, 2018, 2017, and 2016 (U.S. Dollars in Thousands, Except Share and Per Share Data) 11. Stock Repurchase Program (Continued) hand. Since the inception of the above noted programs, the Company has repurchased 8,676,706 shares of its common stock for $305,547, all funded with cash on hand. 12. Earnings Per Share Basic earnings per share is calculated by dividing net income attributable to the common shareholders of the Company by the weighted average number of common shares outstanding during the period, exclusive of restricted shares. Except where the result would be anti-dilutive, diluted earnings per share is calculated by assuming the vesting of unvested restricted stock and the exercise of stock options. Refer to Note 3, ‘‘Acquisitions,’’ to the consolidated financial statements for further information regarding the accounting for redeemable noncontrolling interests. The following table reconciles the numerator and the denominator used to calculate basic and diluted earnings per share: Numerator Net income attributable to Generac Holdings Inc. Redeemable noncontrolling interest redemption value . . . . . . . . Year Ended December 31, 2018 2017 2016 $ 238,257 $ 157,808 $ 97,154 adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (17,970) 909 (909) Net income attributable to common shareholders . . . . . . . . . $ 220,287 $ 158,717 $ 96,245 Denominator Weighted average shares, basic . . . . . . . . . . . . . . . . . . . . . . Dilutive effect of stock compensation awards(1) . . . . . . . . . . 61,662,031 571,194 62,040,704 602,168 64,905,793 476,981 Diluted shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62,233,225 62,642,872 65,382,774 Net income attributable to common shareholders per share Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ 3.57 3.54 $ $ 2.56 2.53 $ $ 1.48 1.47 (1) Excludes approximately 26,100, 147,400 and 15,800 stock options for the years ended December 31, 2018, 2017 and 2016, respectively, as the impact of such awards was anti-dilutive. 85 Generac Holdings Inc. Notes to Consolidated Financial Statements (Continued) Years Ended December 31, 2018, 2017, and 2016 (U.S. Dollars in Thousands, Except Share and Per Share Data) 13. Income Taxes The Company’s provision for income taxes consists of the following: Year Ended December 31, 2018 2017 2016 Current: Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $32,072 9,639 4,546 $15,753 1,775 4,585 $11,717 2,047 4,460 Deferred: Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in valuation allowance . . . . . . . . . . . . . . . . . . 46,257 22,113 18,224 22,225 1,910 479 24,614 (1,015) 18,213 4,139 (2,777) 19,575 2,454 40,213 3,029 (5,585) 37,657 638 Provision for income taxes . . . . . . . . . . . . . . . . . . . . . $69,856 $44,142 $56,519 The Company files U.S federal, U.S. state and foreign jurisdiction tax returns which are subject to examination up to the expiration of the statute of limitations. We believe the tax positions taken on our returns would be sustained upon an exam, or where a position is uncertain, adequate reserves have been recorded. As of December 31, 2018, the Company is no longer subject to income tax examinations for United States federal income taxes for tax years prior to 2015. Due to the carryforward of net operating losses and research & development credits, the Company’s Wisconsin state income tax returns for tax years 2007 through 2017 remain open. In addition, the Company is subject to audit by various foreign taxing jurisdictions for the tax years 2012 through 2017. The Company is regularly under examination in the various jurisdictions we operate. We are actively managing the examinations and working to address any open matters. While the Company does not believe any material taxes or penalties are due, there is a possibility that the ultimate tax outcome of an examination may result in differences from what was recorded. Such differences may affect the provision for income taxes in the period in which the determination is made, and could impact the Company’s financial results. On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the ‘‘Tax Act’’). The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to, reducing the U.S. federal corporate tax rate from 35% to 21%, requiring companies to pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries, eliminating certain deductions, introducing new tax regimes, changing how foreign earnings are subject to U.S. tax, and enhancing and extending through 2026 the option to claim accelerated depreciation deductions on qualified property. 86 Generac Holdings Inc. Notes to Consolidated Financial Statements (Continued) Years Ended December 31, 2018, 2017, and 2016 (U.S. Dollars in Thousands, Except Share and Per Share Data) 13. Income Taxes (Continued) In December 2017, the SEC staff issued SAB 118, which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, the Company considers the tax expense recorded for the Tax Act to be complete at December 31, 2018. Significant components of deferred tax assets and liabilities are as follows: December 31, 2018 2017 Deferred tax assets: Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pension obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . Operating loss and credit carryforwards . . . . . . . . . . . . . . . . Bad debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 16,745 12,418 8,500 1,062 5,960 25,585 1,363 2,516 (5,802) $ 15,075 9,983 7,933 3,795 5,522 23,771 1,101 40 (6,817) Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68,347 60,403 Deferred tax liabilitites: Goodwill and intangible assets . . . . . . . . . . . . . . . . . . . . . . Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Debt refinancing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108,899 25,429 4,206 950 Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 139,484 70,556 22,563 5,189 709 99,017 Net deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (71,137) $(38,614) As of December 31, 2018 and 2017, deferred tax assets of $163 and $3,238, and deferred tax liabilities of $71,300 and $41,852, respectively, were reflected on the consolidated balance sheets. The Company maintains a valuation allowance against the deferred tax assets of an entity when it is uncertain the entity will generate sufficient taxable income to utilize the asset. During 2018, the valuation allowance decreased by $1,015 primarily due to an increase in income allowing for a utilization of tax credits, partially offset by current losses in certain foreign subsidiaries. At December 31, 2018, the Company had various state research & development and state manufacturing tax credit carryforwards of approximately $10,349 and $9,254, respectively, which expire between 2019 and 2033. The Company believes it will generate sufficient taxable income in these jurisdictions to fully utilize the credits prior to their expiration. 87 Generac Holdings Inc. Notes to Consolidated Financial Statements (Continued) Years Ended December 31, 2018, 2017, and 2016 (U.S. Dollars in Thousands, Except Share and Per Share Data) 13. Income Taxes (Continued) Changes in the Company’s gross liability for unrecognized tax benefits, excluding interest and penalties, were as follows: Unrecognized tax benefit, beginning of period . . . . . . . . . . . . . . Increase in unrecognized tax benefit for positions taken in December 31, 2018 2017 $ 7,122 $ 7,943 current period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Statute of limitation expirations . . . . . . . . . . . . . . . . . . . . . . . . . Settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 580 (1,818) (249) 251 (1,072) — Unrecognized tax benefit, end of period . . . . . . . . . . . . . . . . . . . $ 5,635 $ 7,122 The unrecognized tax benefit as of December 31, 2018 and 2017, if recognized, would favorably impact the effective tax rate. As of December 31, 2018, 2017 and 2016, total accrued interest of approximately $37, $131 and $272, respectively, and accrued penalties of approximately $136, $220 and $425, respectively, associated with net unrecognized tax benefits are included in the consolidated balance sheets. Interest and penalties are recorded as a component of income tax expense. The Company does not expect a significant increase or decrease to the total amounts of unrecognized tax benefits related to continuing operations during the fiscal year ending December 31, 2019. The Tax Act includes a mandatory one-time tax on accumulated earnings of foreign subsidiaries, and as a result, all previously unremitted earnings for which no U.S. deferred tax liability had been accrued have now been subject to U.S. tax. Notwithstanding the U.S. taxation of these amounts, the Company intends to continue to invest these earnings, as well as the capital in these subsidiaries, indefinitely outside of the U.S. and do not expect to incur any significant additional taxes related to such amounts. 88 Generac Holdings Inc. Notes to Consolidated Financial Statements (Continued) Years Ended December 31, 2018, 2017, and 2016 (U.S. Dollars in Thousands, Except Share and Per Share Data) 13. Income Taxes (Continued) A reconciliation of the statutory tax rates and the effective tax rates for the years ended December 31, 2018, 2017 and 2016 are as follows: Year Ended December 31, 2018 2017 2016 U.S. statutory rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Research and development credits . . . . . . . . . . . . . . . . . . . . State credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Share-based compensation(1) . . . . . . . . . . . . . . . . . . . . . . . . Tax Act impact . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21.0% 35.0% 35.0% 4.1 (1.4) (0.2) (1.4) (13.9) (0.9) 4.7 (1.3) (1.0) (0.5) (0.2) (0.2) 4.1 (1.0) (0.2) — — (1.1) Effective tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22.5% 21.3% 36.8% (1) With the adoption of ASU 2016-09 in 2017, excess tax benefits from equity awards are reflected within the provision for income taxes rather than within the consolidated balance sheet. 14. Benefit Plans Medical and Dental Plan The Company maintains medical and dental benefit plans covering its full-time domestic employees and their dependents. Certain plans are partially or fully self-funded under which participant claims are obligations of the plan. These plans are funded through employer and employee contributions at a level sufficient to pay for the benefits provided by the plan. The Company’s contributions to the plans were $14,660, $14,992, and $15,019 for the years ended December 31, 2018, 2017, and 2016, respectively. The Company’s foreign subsidiaries participate in government sponsored medical benefit plans. In certain cases, the Company purchases supplemental medical coverage for certain employees at these foreign locations. The expenses related to these plans are not material to the Company’s consolidated financial statements. Savings Plan The Company maintains a defined-contribution 401(k) savings plan for eligible domestic employees. Under the plan, employees may defer receipt of a portion of their eligible compensation. The Company may contribute a matching contribution of 50% of the first 6% of eligible compensation of employees. The Company may also contribute a non-elective contribution for eligible employees employed on December 31, 2008 that were impacted by the freezing of the Company’s pension plans. The Company’s matching contributions are subject to vesting. Forfeitures may be applied against plan 89 Generac Holdings Inc. Notes to Consolidated Financial Statements (Continued) Years Ended December 31, 2018, 2017, and 2016 (U.S. Dollars in Thousands, Except Share and Per Share Data) 14. Benefit Plans (Continued) expenses and company contributions. The Company recognized $4,193, $3,600 and $3,400 of expense related to these plans in 2018, 2017 and 2016, respectively. Pension Plans The Company has frozen noncontributory salaried and hourly pension plans (Pension Plans) covering certain domestic employees. The Pension Plans were frozen effective December 31, 2008. Effective December 31, 2018, the Pension Plans were merged into the same plan, resulting in no change to benefits for participants. The benefits under the salaried plan were based upon years of service and the participants’ defined final average monthly compensation. The benefits under the hourly plan were based on a unit amount at the date of termination multiplied by the participant’s years of credited service. The Company’s funding policy for the Pension Plans is to contribute amounts at least equal to the minimum annual amount required by applicable regulations. In the years ended December 31, 2018 and 2017, the Company made voluntary pension prepayments of $9,400 and $4,675, respectively. The Company uses a December 31 measurement date for the Pension Plans. The accumulated benefit obligation, reconciliation of the changes in projected benefit obligation, changes in plan assets and the funded status of the Pension Plans are as follows: Year Ended December 31, 2018 2017 Accumulated benefit obligation at end of period . . . . . . . . . . . . . . . . . . . . . . . . $ 65,978 $ 72,631 Change in projected benefit obligation Projected benefit obligation at beginning of period . . . . . . . . . . . . . . . . . . . . . . . Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net actuarial (gain) loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 72,631 2,575 (6,820) (2,408) $ 65,956 2,688 6,170 (2,183) Projected benefit obligation at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 65,978 $ 72,631 Change in plan assets Fair value of plan assets at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . Actual return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Company contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 58,014 (3,507) 9,771 (2,408) $ 46,488 8,382 5,327 (2,183) Fair value of plan assets at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 61,870 $ 58,014 Funded status: accrued pension liability included in other long-term liabilities . . . $ (4,108) $(14,617) Amounts recognized in accumulated other comprehensive loss Net actuarial loss, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(10,571) $(10,978) 90 Generac Holdings Inc. Notes to Consolidated Financial Statements (Continued) Years Ended December 31, 2018, 2017, and 2016 (U.S. Dollars in Thousands, Except Share and Per Share Data) 14. Benefit Plans (Continued) The actuarial loss for the Pension Plans that was amortized from AOCL into net periodic (benefit) cost during 2018 is $802. The amount in AOCL as of December 31, 2018 that is expected to be recognized as a component of net periodic pension expense during the next fiscal year is $963. The components of net periodic pension cost (benefit) are as follows: Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected return on plan assets . . . . . . . . . . . . . . . . . . Amortization of net loss . . . . . . . . . . . . . . . . . . . . . . . $ 2,575 (3,525) 802 $ 2,688 (3,011) 883 $ 2,747 (2,868) 941 Net periodic pension cost (benefit) . . . . . . . . . . . . . . . $ (148) $ 560 $ 820 Year Ended December 31, 2018 2017 2016 The weighted-average discount rate used in 2018 to determine the benefit obligations was 4.24%. For 2017, the weighted-average discount rate used for the salaried and hourly pension plans were 3.60% and 3.62%, respectively. There is no compensation increase assumed as the plan was frozen effective December 31, 2008. Weighted-average assumptions used to determine net periodic pension cost (benefit) are as follows: Year Ended December 31, 2018 2017 2016 Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected long-term rate of return on plan assets . . . . . . . . . . . Rate of compensation increase(1) . . . . . . . . . . . . . . . . . . . . . . 3.60% 4.14% 4.39% 6.19% 6.58% 6.62% n/a n/a n/a (1) No compensation increase was assumed as the plan was frozen effective December 31, 2008. To determine the long-term rate of return assumption for the plans’ assets, the Company studies historical markets and preserves the long-term historical relationships between equities and fixed- income securities consistent with the widely accepted capital market principle that assets with higher volatility generate a greater return over the long run. The Company evaluates current market factors such as inflation and interest rates before it determines long-term capital market assumptions and reviews peer data and historical returns to check for reasonableness and appropriateness. 91 Generac Holdings Inc. Notes to Consolidated Financial Statements (Continued) Years Ended December 31, 2018, 2017, and 2016 (U.S. Dollars in Thousands, Except Share and Per Share Data) 14. Benefit Plans (Continued) The Pension Plans’ weighted-average asset allocation at December 31, 2018 and 2017, by asset category, is as follows: Asset Category Target Allocation December 31, 2018 December 31, 2017 Minimum Maximum Dollars % Dollars % Fixed income . . . . . . . . . . . . . . . . . . . . . . . . . . Domestic equity . . . . . . . . . . . . . . . . . . . . . . . . International equity . . . . . . . . . . . . . . . . . . . . . Real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.0% 36.5% 17.0% 7.0% 25.0% $12,257 61.5% 30,731 25.0% 12,380 6,502 15.0% 20% $10,637 50% 25,151 20% 16,093 10% 6,133 18% 43% 28% 11% Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61,870 100% 58,014 100% The fair values of the Pension Plans’ assets at December 31, 2018 are as follows: Quoted Prices in Active Markets for Identical Asset (Level 1) Significant Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total Mutual funds . . . . . . . . . . . . . . Other investments . . . . . . . . . . . $51,736 10,134 Total . . . . . . . . . . . . . . . . . . . $61,870 $51,736 — $51,736 $— — $— $ — 10,134 $10,134 The fair values of the Pension Plans’ assets at December 31, 2017 are as follows: Quoted Prices in Active Markets for Identical Asset (Level 1) Significant Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total Mutual funds . . . . . . . . . . . . . . Other investments . . . . . . . . . . . $48,314 9,700 Total . . . . . . . . . . . . . . . . . . . $58,014 $48,314 — $48,314 $— — $— $ — 9,700 $9,700 A reconciliation of beginning and ending balances for Level 3 assets for the years ended December 31, 2018 and 2017 is as follows: Balance at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Redemptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,700 3,805 (3,795) 424 $8,628 — — 1,072 Balance at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,134 $9,700 Year Ended December 31, 2018 2017 92 Generac Holdings Inc. Notes to Consolidated Financial Statements (Continued) Years Ended December 31, 2018, 2017, and 2016 (U.S. Dollars in Thousands, Except Share and Per Share Data) 14. Benefit Plans (Continued) Mutual Funds—This category includes investments in mutual funds that encompass both equity and fixed income securities that are designed to provide a diverse portfolio. The plans’ mutual funds are designed to track exchange indices, and invest in diverse industries. Some mutual funds are classified as regulated investment companies. Investment managers have the ability to shift investments from value to growth strategies, from small to large capitalization funds, and from U.S. to international investments. These investments are valued at the closing price reported on the active market on which the individual securities are traded. These investments are classified within Level 1 of the fair value hierarchy. Other Investments—This category includes investments in limited partnerships and are valued at estimated fair value, as determined with the assistance of each respective limited partnership, based on the net asset value of the investment as of the balance sheet date, which is subject to judgment, and therefore is classified within Level 3 of the fair value hierarchy. The Company’s target allocation for equity securities and real estate is generally between 75% - 85%, with the remainder allocated primarily to fixed income (bonds). The Company regularly reviews its actual asset allocation and periodically rebalances its investments to the targeted allocation when considered appropriate. There is no minimum required contribution due to the Pension Plan in 2019. The following benefit payments are expected to be paid from the Pension Plans: 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2024 - 2028 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,527 2,707 2,844 3,007 3,190 17,831 Certain of the Company’s foreign subsidiaries participate in local statutory defined benefit or other post-employment benefit plans. These plans provide benefits that are generally based on years of credited service and a percentage of the employee’s eligible compensation earned throughout the applicable service period. Liabilities recorded under these plans are included in accrued wages and employee benefits in the Company’s consolidated balance sheets and are not material. 15. Share Plans The Company adopted an equity incentive plan (Plan) on February 10, 2010 in connection with its initial public offering. The Plan, as amended, allows for granting of up to 9.1 million share-based awards to executives, directors and employees. Awards available for grant under the Plan include stock options, stock appreciation rights, restricted stock, other share-based awards and performance-based compensation awards. Total share-based compensation expense related to the Plan, net of estimated forfeitures, was $14,563, $10,205 and $9,493 for the years ended December 31, 2018, 2017 and 2016, 93 Generac Holdings Inc. Notes to Consolidated Financial Statements (Continued) Years Ended December 31, 2018, 2017, and 2016 (U.S. Dollars in Thousands, Except Share and Per Share Data) 15. Share Plans (Continued) respectively, which is recorded in operating expenses in the consolidated statements of comprehensive income. Stock Options—Stock options granted in 2018 have an exercise price between $43.88 per share and $45.29 per share; stock options granted in 2017 have an exercise price between $40.12 per share and $48.98 per share; and stock options granted in 2016 have an exercise price between $33.23 per share and $35.37 per share. Stock options vest in equal installments over four years, subject to the grantee’s continued employment or service and expire ten years after the date of grant. Stock option exercises can be net-share settled such that the Company withholds shares with value equivalent to the exercise price of the stock option awards plus the employees’ minimum statutory obligation for the applicable income and other employment taxes. Total shares withheld were 63,817, 9,033 and 473,743 in 2018, 2017 and 2016, respectively, and were based on the value of the stock on the exercise dates. The net-share settlement has the effect of share repurchases by the Company as they reduce the number of shares that would have otherwise been issued. Employees can also utilize a cashless for cash exercise of stock options, such that all exercised shares will be sold in the market immediately. Cash equivalent to the exercise price of the awards plus the employees’ minimum statutory tax obligations is remitted to the Company, with the remaining cash being transferred to the employee. Total net proceeds from the cashless for cash exercise of stock options were $5,614, $6,951 and $1,623 in 2018, 2017 and 2016, respectively, and are reflected as a financing activity in the consolidated statement of cash flows. Total payments made by the Company for the employees’ tax obligations to the taxing authorities were $3,846, $4,301 and $13,056 in 2018, 2017 and 2016, respectively, and are reflected as a financing activity in the consolidated statements of cash flows. The grant-date fair value of each option grant is estimated using the Black-Scholes-Merton option pricing model. The fair value is then amortized on a straight-line basis over the requisite service period of the awards, which is generally the vesting period. Use of a valuation model requires management to make certain assumptions with respect to selected model inputs. Expected volatility is calculated based on an analysis of historic volatility of the Company’s stock price. The average expected life is based on the contractual term of the option using the simplified method. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with a remaining term equal to the expected life assumed at the date of grant. The compensation expense recognized is net of estimated forfeitures. Forfeitures are estimated based on actual share option forfeiture history. 94 Generac Holdings Inc. Notes to Consolidated Financial Statements (Continued) Years Ended December 31, 2018, 2017, and 2016 (U.S. Dollars in Thousands, Except Share and Per Share Data) 15. Share Plans (Continued) The weighted-average assumptions used in the Black-Scholes-Merton option pricing model for 2018, 2017 and 2016 are as follows: 2018 2017 2016 Weighted average grant date fair value . . . . . . . . . . . . . $17.86 $16.84 $13.77 Assumptions: Expected stock price volatility . . . . . . . . . . . . . . . . . . . Risk free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . Expected annual dividend per share . . . . . . . . . . . . . . . Expected life of options (years) . . . . . . . . . . . . . . . . . . 37% 41% 40% 2.60% 1.92% 1.31% $ — $ — $ — 6.25 6.25 6.25 A summary of the Company’s stock option activity and related information for the years ended December 31, 2018, 2017 and 2016 is as follows: Outstanding as of December 31, 2015 . . . . . . . Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . Number of Options 2,128,014 398,313 (995,469) (47,894) Outstanding as of December 31, 2016 . . . . . . . 1,482,964 Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . 346,421 (287,375) (69,880) Outstanding as of December 31, 2017 . . . . . . . 1,472,130 Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . 366,231 (267,909) (49,285) Outstanding as of December 31, 2018 . . . . . . . 1,521,167 Exercisable as of December 31, 2018 . . . . . . . 696,954 Weighted- Average Exercise Price Weighted- Average Remaining Contractual Term (in years) Aggregate Intrinsic Value ($ in thousands) 15.15 33.24 2.89 37.41 27.49 40.13 10.58 41.12 33.11 43.88 19.90 43.34 37.70 34.16 7.7 $40,271 7.5 $23,840 7.3 $25,281 7.0 5.6 $19,212 $11,779 As of December 31, 2018, there was $9,538 of total unrecognized compensation cost, net of expected forfeitures, related to unvested options. The cost is expected to be recognized over the remaining service period, having a weighted-average period of 2.5 years. Total share-based compensation cost related to the stock options for 2018, 2017 and 2016 was $4,998, $4,503 and $4,366, respectively, which is recorded in operating expenses in the consolidated statements of comprehensive income. 95 Generac Holdings Inc. Notes to Consolidated Financial Statements (Continued) Years Ended December 31, 2018, 2017, and 2016 (U.S. Dollars in Thousands, Except Share and Per Share Data) 15. Share Plans (Continued) Restricted Stock—Restricted stock awards vest in equal installments over three years, subject to the grantee’s continued employment or service. Certain restricted stock awards also include performance shares, which were awarded in the years 2014 through 2018. The number of performance shares that can be earned are contingent upon Company performance measures over a three-year period. Performance measures are based on a weighting of revenue growth and EBITDA margin, from which grantees may earn from 0% to 200% of their target performance share award. The performance period for the 2016 awards covers the years 2016 through 2018, the performance period for the 2017 awards covers the years 2017 through 2019, and the performance period for the 2018 awards covers the years 2018 through 2020. The Company estimates the number of performance shares that will vest based on projected financial performance. The fair value of restricted awards is determined based on the market value of the Company’s shares on the grant date. The fair market value of the restricted awards at the time of the grant is amortized to expense over the period of vesting. The compensation expense recognized for restricted share awards is net of estimated forfeitures. Restricted stock vesting is net-share settled such that, upon vesting, the Company withholds shares with value equivalent to the employees’ minimum statutory tax obligation, and then pays the cash to the taxing authorities on behalf of the employees. In effect, the Company repurchases these shares and classifies them as treasury stock. Total shares withheld were 38,186, 39,500 and 28,593 in 2018, 2017 and 2016, respectively, and were based on the value of the stock on the vesting dates. Total payments made by the Company for the employees’ tax obligations to the taxing authorities were $1,812, $1,591 and $952 in 2018, 2017 and 2016, respectively, and are reflected as a financing activity within the consolidated statements of cash flows. A summary of the Company’s restricted stock activity for the years ended December 31, 2018, 2017 and 2016 is as follows: Non-vested as of December 31, 2015 . . . . . . . . . . . . . . . . Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shares 243,040 232,295 (95,858) (18,074) Non-vested as of December 31, 2016 . . . . . . . . . . . . . . . . 361,403 Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 211,769 (133,796) (47,100) Non-vested as of December 31, 2017 . . . . . . . . . . . . . . . . 392,276 Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 208,803 (128,433) (46,650) Non-vested as of December 31, 2018 . . . . . . . . . . . . . . . . 425,996 Weighted- Average Grant- Date Fair Value 44.16 33.56 41.93 38.30 38.18 39.91 40.60 42.48 37.77 44.49 39.03 39.43 40.50 96 Generac Holdings Inc. Notes to Consolidated Financial Statements (Continued) Years Ended December 31, 2018, 2017, and 2016 (U.S. Dollars in Thousands, Except Share and Per Share Data) 15. Share Plans (Continued) As of December 31, 2018, there was $9,210 of unrecognized compensation cost, net of expected forfeitures, related to non-vested restricted stock awards. That cost is expected to be recognized over the remaining service period, having a weighted-average period of 1.8 years. Total share-based compensation cost related to the restricted stock for 2018, 2017 and 2016, inclusive of performance shares, was $9,565, $5,702 and $5,127, respectively, which is recorded in operating expenses in the consolidated statements of comprehensive income. During 2018, 2017 and 2016, 33,419, 34,095 and 19,326 shares, respectively, of stock were granted to certain members of the Company’s Board of Directors as a component of their compensation for their service on the Board, of which 33,419, 22,762 and 19,326 shares, respectively, were fully vested. Total share-based compensation cost for these share grants in 2018, 2017 and 2016 was $1,718, $1,133 and $670, respectively, which is recorded in operating expenses in the consolidated statements of comprehensive income. 16. Commitments and Contingencies The Company leases certain manufacturing, distribution and office facilities, machinery and computer equipment, automobiles and warehouse space under both capital and operating leases. The future minimum capital and operating lease commitments and related present value of capital lease commitments at December 31, 2018, are as follows: Capital Leases Operating Leases 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . After 2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,166 2,477 2,053 1,995 1,889 18,108 $ 8,914 7,575 6,379 4,955 4,482 18,614 Total minimum lease payments . . . . . . . . . . . . . . . . . . . . . . . . . 28,688 $50,919 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8,517) Present value of minimum lease payments . . . . . . . . . . . . . . . . . $20,171 Total rent expense related to operating leases for the years ended December 31, 2018, 2017 and 2016, was approximately $10,739, $10,845 and $9,146, respectively. The Company has an arrangement with a finance company to provide floor plan financing for certain dealers. The Company receives payment from the finance company after shipment of product to the dealer. The Company participates in the cost of dealer financing up to certain limits and has agreed to repurchase products repossessed by the finance company, but does not indemnify the finance company for any credit losses they incur. The amount financed by dealers which remained outstanding under this arrangement at December 31, 2018 and 2017 was approximately $47,200 and $36,500, respectively. 97 Generac Holdings Inc. Notes to Consolidated Financial Statements (Continued) Years Ended December 31, 2018, 2017, and 2016 (U.S. Dollars in Thousands, Except Share and Per Share Data) 16. Commitments and Contingencies (Continued) In the normal course of business, the Company is named as a defendant in various lawsuits in which claims are asserted against the Company. In the opinion of management, the liabilities, if any, which may result from such lawsuits are not expected to have a material adverse effect on the financial position, results of operations, or cash flows of the Company. 17. Quarterly Financial Information (Unaudited) Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income attributable to Generac Holdings Inc. $400,091 141,927 56,347 33,645 $497,581 178,473 85,467 53,261 $562,388 200,334 106,519 75,776 $563,404 204,306 108,848 75,575 Quarters Ended 2018 Q1 Q2 Q3 Q4 Net income attributable to common shareholders per common share—basic: . . . . . . . . . . . . . . . . . . . . . . . Net income attributable to common shareholders per common share—diluted: . . . . . . . . . . . . . . . . . . . . . . $ $ 0.42 0.42 $ $ 0.83 0.82 $ $ 1.12 1.11 $ $ 1.21 1.20 Quarters Ended 2017 Q1 Q2 Q3 Q4 Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income attributable to Generac Holdings Inc. $332,056 109,954 30,890 12,175 $396,523 134,224 51,822 25,291 $457,747 157,680 72,548 39,435 $493,047 182,928 95,374 80,907 Net income attributable to common shareholders per common share—basic: . . . . . . . . . . . . . . . . . . . . . . . Net income attributable to common shareholders per common share—diluted: . . . . . . . . . . . . . . . . . . . . . . $ $ 0.21 0.20 $ $ 0.41 0.41 $ $ 0.64 0.63 $ $ 1.31 1.30 In accordance with the new revenue recognition standard, extended warranty revenues are reported within net sales in the consolidated statements of comprehensive income. Previously, these amounts were reported net within selling and service expense on the consolidated statements of comprehensive income, in amounts that were not material. The net sales and gross profit amounts shown above for the first three quarters of 2018 and 2017 have been revised from amounts previously reported in the Company’s 2018 quarterly reports on Form 10-Q, pursuant to the full retrospective adoption of the new revenue recognition standard on January 1, 2018. The revisions impacted the Domestic segment and the Other product class, and resulted in an increase to net sales and gross profit, with an equal offset to selling and service expenses. For the first, second and third quarters ended in 2018, net sales increased by $2,457, $2,632, and $2,873, and gross profit by $1,938, $2,217, and $2,449, respectively. For the first, second and third quarters ended in 2017, net sales increased by $1,571, $1,648, and $1,908, and gross profit by $1,154, $1,303, and $1,449, respectively. There was no impact to income from operations, net income or comprehensive income, earnings per share, the 98 Generac Holdings Inc. Notes to Consolidated Financial Statements (Continued) Years Ended December 31, 2018, 2017, and 2016 (U.S. Dollars in Thousands, Except Share and Per Share Data) 17. Quarterly Financial Information (Unaudited) (Continued) consolidated balance sheets, the consolidated statement of stockholders’ equity, or the consolidated statements of cash flows. 18. Valuation and Qualifying Accounts For the years ended December 31, 2018, 2017 and 2016: Balance at Beginning of Year Additions Charged to Earnings Charges to Reserve, Net(1) Reserves Established for Acquisitions Balance at End of Year Year ended December 31, 2018 Allowance for doubtful accounts . . Reserves for inventory . . . . . . . . . Valuation of deferred tax assets . . $ 4,805 15,987 6,817 Year ended December 31, 2017 Allowance for doubtful accounts . . Reserves for inventory . . . . . . . . . Valuation of deferred tax assets . . $ 5,642 13,031 4,362 Year ended December 31, 2016 Allowance for doubtful accounts . . Reserves for inventory . . . . . . . . . Valuation of deferred tax assets . . $ 2,494 10,582 1,523 $ 1,941 10,004 478 $ 346 6,164 2,455 $ 1,654 5,359 638 $(2,123) (3,720) — $(1,842) (4,036) — $(1,110) (5,357) — $ 250 869 (1,493) $ 659 828 — $ 2,604 2,447 2,201 $ 4,873 23,140 5,802 $ 4,805 15,987 6,817 $ 5,642 13,031 4,362 (1) Deductions from the allowance for doubtful accounts equal accounts receivable written off against the allowance, less recoveries. Deductions from the reserves for inventory excess and obsolete items equal inventory written off against the reserve as items were disposed of. 19. Subsequent Events On February 1, 2019, the Company acquired a majority share of Captiva Energy Solutions Private Limited (Captiva). Captiva, founded in 2010 and headquartered in Kolkata, India, specializes in customized industrial generators. Captiva has seven sales locations throughout India and has over 100 employees. 99 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There were no changes in, or disagreements with, accountants reportable herein. Item 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by us in reports we file or submit under the Securities Exchange Act of 1934 (Exchange Act), is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, has conducted an evaluation of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act as of the end of the period covered by this report on Form 10-K. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective in providing reasonable assurance that the information required to be disclosed in this report on Form 10-K has been recorded, processed, summarized and reported as of the end of the period covered by this report on Form 10-K. Management’s Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed under the supervision of our Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the consolidated financial statements in accordance with U.S. GAAP. Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of the financial statements in accordance with U.S. GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the Company’s financial statements. There are inherent limitations to the effectiveness of any internal control over financial reporting, including the possibility of human error or the circumvention or overriding of the controls. Accordingly, even an effective internal control over financial reporting can provide only reasonable assurance of achieving its objective. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate, because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, our management conducted an assessment of the effectiveness of internal control over financial reporting as of December 31, 2018 based on the criteria established in the 2013 Internal Control—Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway 100 Commission (COSO). Based on this assessment, our management has concluded that our internal control over financial reporting was effective as of December 31, 2018. In conducting this assessment, our management excluded the Selmec Equipos Industriales, S.A. de C.V. business, which was acquired on June 1, 2018 and whose financial statements constitute 11.1% and 5.3% of net and total assets, respectively, 1.5% of net sales, and 0.04% of net income of the total consolidated financial statement amounts as of and for the year ended December 31, 2018. Deloitte & Touche LLP, the Company’s independent registered public accounting firm, issued an attestation report on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2018, which is included herein. Changes in Internal Control Over Financial Reporting In January 2019, we implemented ASU 2016-02, Leases. As a result of the adoption, we implemented changes to our controls related to leases. These included the development of new policies related to the capitalization of leases, enhanced lease terms and contract review requirements, and other ongoing monitoring activities. These controls were designed to provide assurance at a reasonable level of the fair presentation of our consolidated financial statements and related disclosures. Other than the implementation of the new leases standard noted above, there have been no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Item 9B. Other Information None. PART III Item 10. Directors, Executive Officers and Corporate Governance The information required by Item 10 not already provided herein under ‘‘Item 1—Business— Executive Officers’’, will be included in our 2019 Proxy Statement and is incorporated herein by reference. Item 11. Executive Compensation The information required by this item will be included in our 2019 Proxy Statement and is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required by this item, including under the heading ‘‘Securities Authorized for Issuance Under Equity Compensation Plans,’’ will be included in our 2019 Proxy Statement and is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions, and Director Independence The information required by this item will be included in our 2019 Proxy Statement and is incorporated herein by reference. Item 14. Principal Accountant Fees and Services The information required by this item will be included in our 2019 Proxy Statement and is incorporated herein by reference. 101 PART IV Item 15. Exhibits and Financial Statement Schedules (a)(1) Financial Statements Included in Part II of this report: Reports of Independent Registered Public Accounting Firms . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated balance sheets as of December 31, 2018 and 2017 . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated statements of comprehensive income for years ended December 31, 2018, 2017 and 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated statements of stockholders’ equity for years ended December 31, 2018, 2017 and 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated statements of cash flows for the years ended December 31, 2018, 2017 and 2016 . . . Notes to consolidated financial statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 51 54 55 56 57 58 (a)(2) Financial Statement Schedules All financial statement schedules have been omitted, since the required information is not applicable or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements and notes thereto. (a)(3) Exhibits The below exhibits index is the list of the exhibits being filed or furnished with or incorporated by reference into this Annual Report on Form 10-K: Exhibits Number 3.1 3.2 4.1 10.1 10.2 Description Third Amended and Restated Certificate of Incorporation of Generac Holdings Inc. (incorporated by reference to Exhibit 3.1 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009). Amended and Restated Bylaws of Generac Holdings Inc. (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed with the SEC on February 16, 2016). Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 of the Registration Statement on Form S-1 filed with the SEC on January 25, 2010). Credit Agreement, Dated as of February 9, 2012, As Amended and Restated as of May 30, 2012, As Further Amended and Restated as of May 31, 2013, among Generac Power Systems, Inc., Generac Acquisition Corp., the lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent and Bank of America, N.A. and Goldman Sachs Bank USA, as syndication agent (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on June 4, 2013), as amended by the First Amendment dated as of May 18, 2015. Replacement Term Loan Amendment dated as of November 2, 2016, among Generac Power Systems, Inc., Generac Acquisition Corp., the lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, and the other agents named therein (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on November 3, 2016). 102 Exhibits Number 10.3 10.4 10.5 10.6 10.7 10.8 10.9 10.10 Description 2017 Replacement Term Loan Amendment dated as of May 11, 2017, among Generac Power Systems, Inc., Generac Acquisition Corp., the lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, and the other agents named therein (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on May 15, 2017). 2017-2 Replacement Term Loan Amendment dated as of December 8, 2017, among Generac Power Systems, Inc., Generac Acquisition Corp., the lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, and the other agents named therein (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on December 11, 2017). 2018 Replacement Term Loan Amendment, dated as of June 8, 2018, among Generac Power Systems, Inc., Generac Acquisition Corp., the lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, and the other agents named therein (incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed with the SEC on June 14, 2018). Restatement Agreement, dated as of May 31, 2013, to that certain Credit Agreement, dated as of February 9, 2012, as amended and restated as of May 30, 2012, among Generac Power Systems, Inc., Generac Acquisition Corp., the lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, and Bank of America, N.A. and Goldman Sachs Bank USA, as syndication agents (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on June 4, 2013). Guarantee and Collateral Agreement, dated as of February 9, 2012, as amended and restated as of May 30, 2012, among Generac Holdings Inc., Generac Acquisition Corp., Generac Power Systems, Inc., certain subsidiaries of Generac Power Systems, Inc. and JPMorgan Chase Bank, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed with the SEC on May 31, 2012). First Amendment to Guarantee and Collateral Agreement dated as of May 31, 2013, among Generac Holdings Inc., Generac Acquisition Corp., Generac Power Systems, Inc., certain subsidiaries of Generac Power Systems, Inc. and JPMorgan Chase Bank, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the SEC on June 4, 2013). Credit Agreement, dated as of May 30, 2012, among Generac Power Systems, Inc., its Domestic Subsidiaries listed as Borrowers on the signature pages thereto, Generac Acquisition Corp., the lenders party thereto, Bank of America, N.A. as Administrative Agent, JPMorgan Chase Bank, N.A. and Goldman Sachs Bank USA, as syndication agents, and Wells Fargo Bank, National Association, as Documentation Agent (incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K filed with the SEC on May 31, 2012). Amendment No. 1 dated as of May 31, 2013, among Generac Power Systems, Inc., its Domestic Subsidiaries listed as Borrowers on the signature pages thereto, Generac Acquisition Corp., the lenders party thereto, Bank of America, N.A. as Administrative Agent, JPMorgan Chase Bank, N.A. and Goldman Sachs Bank USA, as syndication agents, and Wells Fargo Bank, National Association, as Documentation Agent (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the SEC on June 4, 2013). 103 Exhibits Number 10.11 10.12 10.13 10.14 Description Amendment No. 2 dated as of May 29, 2015, among Generac Power Systems, Inc., its Domestic Subsidiaries listed as Borrowers on the signature pages thereto, Generac Acquisition Corp., the lenders party thereto, Bank of America, N.A. as Administrative Agent, and the other agents named therein (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the SEC on June 1, 2015). Second Amended and Restated Credit Agreement, dated as of June 12, 2018, among Generac Power Systems, Inc., its Subsidiaries listed as Borrowers on the signature pages thereto, Generac Acquisition Corp., the lenders party thereto, Bank of America, N.A. as Administrative Agent, JPMorgan Chase Bank, N.A., as Syndication Agent, and Wells Fargo Bank, National Association, as Documentation Agent (incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K filed with the SEC on June 14, 2018). Guarantee and Collateral Agreement, dated as of May 30, 2012, among Generac Holdings Inc., Generac Acquisition Corp., Generac Power Systems, Inc., certain subsidiaries of Generac Power Systems, Inc. and Bank of America, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.4 of the Company’s Current Report on Form 8-K filed with the SEC on May 31, 2012). First Amendment to Guarantee and Collateral Agreement dated as of May 31, 2013, among Generac Holdings Inc., Generac Acquisition Corp., Generac Power Systems, Inc., certain subsidiaries of Generac Power Systems, Inc. and Bank of America, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed with the SEC on June 4, 2013). 10.15+ 2009 Executive Management Incentive Compensation Program (incorporated by reference to Exhibit 10.46 of the Registration Statement on Form S-1 filed with the SEC on December 17, 2009). 10.16+ Generac Holdings Inc. Amended and Restated 2010 Equity Incentive Plan (incorporated by reference to Appendix A to the Definitive Proxy Statement on Schedule 14A of the Company filed with the SEC on April 27, 2012) 10.17+ Generac Holdings Inc. Annual Performance Bonus Plan (incorporated by reference to Exhibit 10.63 of the Registration Statement on Form S-1 filed with the SEC on January 25, 2010). 10.18+ Amended and Restated Employment Agreement, dated November 5, 2018, between Generac and Aaron Jagdfeld (incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q filed with the SEC on November 6, 2018). 10.19 Form of Confidentiality, Non-Competition and Intellectual Property Agreement (incorporated by reference to Exhibit 10.40 of the Registration Statement on Form S-1 filed with the SEC on November 24, 2009). 10.20+ Form of Nonqualified Stock Option Award Agreement (incorporated by reference to Exhibit 10.45 of the Registration Statement on Form S-1 filed with the SEC on January 25, 2010). 10.21+ Amended Form of Restricted Stock Award Agreement pursuant to the 2010 Equity Incentive Plan (incorporated by reference to Exhibit 10.3 of the Quarterly Report on Form 10-Q filed with the SEC on May 8, 2012). 104 Exhibits Number Description 10.22+ Amended Form of Nonqualified Stock Option Award Agreement pursuant to the 2010 Equity Incentive Plan (incorporated by reference to Exhibit 10.4 of the Quarterly Report on Form 10-Q filed with the SEC on May 8, 2012). 10.23+ Amended Form of Restricted Stock Award Agreement with accelerated vesting pursuant to the 2010 Equity Incentive Plan (incorporated by reference to Exhibit 10.5 of the Quarterly Report on Form 10-Q filed with the SEC on May 8, 2012). 10.24+* Amended Form of Nonqualified Stock Option Award Agreement pursuant to the 2010 Equity Incentive Plan. 10.25+* Amended Form of Restricted Stock Award Agreement pursuant to the 2010 Equity Incentive Plan. 10.26 10.27 Form of Director Indemnification Agreement (incorporated by reference to Exhibit 10.51 of the Registration Statement on Form S-1 filed with the SEC on January 11, 2010). Form of Officer Indemnification Agreement (incorporated by reference to Exhibit 10.52 of the Registration Statement on Form S-1 filed with the SEC on January 11, 2010). 10.28+ Form of Performance Share Award Agreement (incorporated by reference to Exhibit 10.1 of the Quarterly Report on Form 10-Q filed with the SEC on May 8, 2014). 10.29+* Amended Form of Performance Share Award Agreement pursuant to the 2010 Equity Incentive Plan. 10.30+ Summary of Employment Arrangement with Jeffrey Mueller, President / General Manager— Consumer Power, as set forth in the Offer of Employment Letter dated November 13, 2017 (incorporated by reference to Exhibit 10.27 of the Annual Report on Form 10-K filed with the SEC on February 26, 2018). 10.31+ Generac Holdings Inc. Non-Employee Director Compensation Policy (incorporated by reference to Exhibit 10.3 of the Quarterly Report on Form 10-Q filed with the SEC on August 7, 2018). 10.32+ Generac Power Systems, Inc. Executive Change in Control Policy, effective November 5, 2018 (incorporated by reference to Exhibit 10.2 of the Quarterly Report on Form 10-Q filed with the SEC on November 6, 2018). 21.1* List of Subsidiaries of Generac Holdings Inc. 23.1* Consent of Deloitte & Touche LLP, Independent Registered Public Accounting Firm. 31.1* 31.2* Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1** Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002. 32.2** Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002. 105 Exhibits Number 101* Description The following financial information from the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018, filed with the SEC on February 26, 2019, formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets at December 31, 2018 and December 31, 2017; (ii) Consolidated Statements of Comprehensive Income for the Fiscal Years Ended December 31, 2018, December 31, 2017 and December 31, 2016; (iii) Consolidated Statements of Stockholders’ Equity for the Fiscal Years Ended December 31, 2018, December 31, 2017 and December 31, 2016; (iv) Consolidated Statements of Cash Flows for the Fiscal Years Ended December 31, 2018, December 31, 2017 and December 31, 2016; (v) Notes to Consolidated Financial Statements. * Filed herewith. ** Furnished herewith. + Indicates management contract or compensatory plan or arrangement. Item 16. Form 10-K Summary None. 106 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SIGNATURES GENERAC HOLDINGS INC. By: /s/ AARON JAGDFELD Aaron Jagdfeld Chairman, President and Chief Executive Officer Dated: February 26, 2019 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons and on behalf of the Registrant in the capacities and on the dates indicated. Signature Title Date /s/ AARON JAGDFELD Aaron Jagdfeld Chairman, President and Chief Executive Officer February 26, 2019 /s/ YORK A. RAGEN York A. Ragen Chief Financial Officer and Chief Accounting Officer February 26, 2019 /s/ BENNETT MORGAN Bennett Morgan /s/ TODD A. ADAMS Todd A. Adams /s/ JOHN D. BOWLIN John D. Bowlin /s/ ROBERT D. DIXON Robert D. Dixon /s/ WILLIAM JENKINS William Jenkins Lead Director February 26, 2019 Director February 26, 2019 Director February 26, 2019 Director February 26, 2019 Director February 26, 2019 107 Signature Title Date /s/ ANDREW G. LAMPEREUR Andrew G. Lampereur Director February 26, 2019 /s/ DAVID A. RAMON David A. Ramon /s/ KATHRYN ROEDEL Kathryn Roedel /s/ DOMINICK ZARCONE Dominick Zarcone Director February 26, 2019 Director February 26, 2019 Director February 26, 2019 108 (This page has been left blank intentionally.) (This page has been left blank intentionally.) A B O U T G E N E R A C Founded in 1959. A leading designer and manufacturer of a wide range of power generation equipment and other power products serving residential, light commercial and industrial markets. Products are available globally through a broad network of independent dealers, distributors, retailers, wholesalers and equipment rental companies, as well as sold direct to certain end users. Thirteen acquisitions completed since 2011. Approximately 5,700 employees as of 1/1/2019. Global manufacturing, distribution, fulfillment and commercial footprint with facilities located in the U.S., Latin America, Europe and Asia. GENERAC HOLDINGS INC. - BOARD OF DIRECTORS John D. Bowlin (2) Former President and Chief Executive Officer, Miller Brewing Company Director since 2006 William “BJ” Jenkins (2) President and Chief Executive Officer, Barracuda Networks Director since 2017 Robert D. Dixon (1) (3) Former Chief Executive Officer, Natural Systems Utilities LLC Director since 2012 Aaron P. Jagdfeld (4) President and Chief Executive Officer, Generac Holdings Inc. Director since 2006 Andrew G. Lampereur (1) Former Executive Vice President and Chief Financial Officer, Actuant Corporation Director since 2014 Bennett Morgan (2) (3) (5) Former President and Chief Operating Officer, Polaris Industries Inc. Director since 2013 David A. Ramon (1) Chief Executive Officer, Diversified Maintenance Director since 2010 EXECUTIVE OFFICERS Aaron P. Jagdfeld – 24 years of service Chairman, President and Chief Executive Officer Russell Minick – 8 years of service Chief Marketing Officer York A. Ragen – 13 years of service Chief Financial Officer Jeffrey Mueller – 2 years of service President, Consumer Power Erik Wilde – 3 years of service Executive Vice President, Industrial – Americas Kathryn Roedel (3) Former Executive Vice President and Chief Services and Fulfillment Officer, Select Comfort Corporation Director since 2016 Dominick Zarcone (1) President and Chief Executive Officer, LKQ Corporation Director since 2017 (1) Member of Audit Committee (2) Member of Compensation Committee (3) Member of Nominating and Corporate Governance Committee (4) Executive Chairman (5) Lead Director Roger Pascavis – 22 years of service Executive Vice President, Strategic Global Sourcing Patrick Forsythe – 11 years of service Executive Vice President, Global Engineering GENERAC HOLDINGS INC. - SHAREHOLDER INFORMATION STOCK EXCHANGE Generac Holdings Inc. common stock is listed on the New York Stock Exchange under the ticker symbol GNRC. FORWARD- LOOKING STATEMENTS This annual report contains forward- looking statements that are subject to risks and uncertainties. For important information about our use of forward-looking statements and limitations thereof, please see Part I of our Annual Report on Form 10-K for the year ended December 31, 2018, which is included with this annual report. ANNUAL MEETING The 2019 annual meeting of stockholders of Generac Holdings Inc. will be held on Thursday, June 13, 2019, at 9:00 a.m. central time, at Generac’s corporate office. CORPORATE OFFICE Generac Holdings Inc. S45 W29290 Hwy. 59 Waukesha, WI 53189 262-544-4811 www.generac.com TRANSFER AGENT AND REGISTRAR Computershare, Inc. P.O. Box 43078 Providence, RI 02940-3078 United States of America Telephone: 1-800-942-5909 Fax: (312) 601-2312 https://www-us.computershare. com/investor/Contact www.computershare.com/investor INVESTOR RELATIONS CONTACT York Ragen Chief Financial Officer Generac Holdings Inc. S45 W29290 Hwy. 59 Waukesha, WI 53189 262-506-6064 investorrelations@generac.com INDEPENDENT AUDITORS Deloitte & Touche LLP 555 East Wells Street, Suite 1400 Milwaukee, WI 53202 FORM 10-K Our annual report on Form 10-K was filed with the Securities and Exchange Commission and is available online, or upon written request to Generac Holdings Inc. Investor Relations. 156747COV_r2_GEN AR 2017_V4.indd 4-6 4/22/19 9:18 PM GENERAC ANNUAL REPORT20 18GENERAC ANNUAL REPORT20 18156747COV_r1_GEN AR 2017_V4.indd 1-34/18/19 9:31 AMGenerac Holdings Inc.S45 W29290 Hwy. 59 Waukesha, WI 531891-888-GENERAC (1-888-436-3722) ©2019 Generac Holdings Inc. All rights reserved.Generac Holdings Inc.S45 W29290 Hwy. 59 Waukesha, WI 531891-888-GENERAC (1-888-436-3722) ©2019 Generac Holdings Inc. All rights reserved.2018GENERAC ANNUAL REPORT