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, 2014, 2013 and 2012 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, 2011 and 2010 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 Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes thereto included in Item 8 of this Annual Report on Form 10-K.
| (Dollars in thousands, except per share data) | | Year Ended December 31, 2014 | | | | Year Ended December 31, 2013 | | | | Year Ended December 31, 2012 | | | | Year Ended December 31, 2011 | | | | Year Ended December 31, 2010 | | |
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| Statement of Operations Data: | | | | | | | | | | | | | | | | | | | | |
| Net sales | | $ | 1,460,919 | | | $ | 1,485,765 | | | $ | 1,176,306 | | | $ | 791,976 | | | $ | 592,880 | |
| Costs of goods sold | | | 944,700 | | | | 916,205 | | | | 735,906 | | | | 497,322 | | | | 355,523 | |
| Gross profit | | | 516,219 | | | | 569,560 | | | | 440,400 | | | | 294,654 | | | | 237,357 | |
| Operating expenses: | | | | | | | | | | | | | | | | | | | | |
| Selling and service | | | 120,408 | | | | 107,515 | | | | 101,448 | | | | 77,776 | | | | 57,954 | |
| Research and development | | | 31,494 | | | | 29,271 | | | | 23,499 | | | | 16,476 | | | | 14,700 | |
| General and administrative | | | 54,795 | | | | 55,490 | | | | 46,031 | | | | 30,012 | | | | 22,599 | |
| Amortization of intangibles (1) | | | 21,024 | | | | 25,819 | | | | 45,867 | | | | 48,020 | | | | 51,808 | |
| Trade name write-down (2) | | | - | | | | - | | | | - | | | | 9,389 | | | | - | |
| Gain on remeasurement of contingent consideration (3) | | | (4,877 | ) | | | - | | | | - | | | | - | | | | - | |
| Total operating expenses | | | 222,844 | | | | 218,095 | | | | 216,845 | | | | 181,673 | | | | 147,061 | |
| Income from operations | | | 293,375 | | | | 351,465 | | | | 223,555 | | | | 112,981 | | | | 90,296 | |
| Other income (expense): | | | | | | | | | | | | | | | | | | | | |
| Interest expense | | | (47,215 | ) | | | (54,435 | ) | | | (49,114 | ) | | | (23,718 | ) | | | (27,397 | ) |
| Investment income | | | 130 | | | | 91 | | | | 79 | | | | 110 | | | | 235 | |
| Loss on extinguishment of debt (4) | | | (2,084 | ) | | | (15,336 | ) | | | (14,308 | ) | | | (377 | ) | | | (4,809 | ) |
| Gain on change in contractual interest rate (4) | | | 16,014 | | | | - | | | | - | | | | - | | | | - | |
| Costs related to acquisition | | | (396 | ) | | | (1,086 | ) | | | (1,062 | ) | | | (875 | ) | | | - | |
| Other, net | | | (1,462 | ) | | | (1,983 | ) | | | (2,798 | ) | | | (1,155 | ) | | | (1,105 | ) |
| Total other expense, net | | | (35,013 | ) | | | (72,749 | ) | | | (67,203 | ) | | | (26,015 | ) | | | (33,076 | ) |
| Income before provision for income taxes | | | 258,362 | | | | 278,716 | | | | 156,352 | | | | 86,966 | | | | 57,220 | |
| Provision (benefit) for income taxes (5) | | | 83,749 | | | | 104,177 | | | | 63,129 | | | | (237,677 | ) | | | 307 | |
| Net income | | $ | 174,613 | | | $ | 174,539 | | | $ | 93,223 | | | $ | 324,643 | | | $ | 56,913 | |
| Income (loss) per share - diluted: | | | | | | | | | | | | | | | | | | | | |
| Common Stock (formerly Class A non-voting common stock) (6) | | $ | 2.49 | | | $ | 2.51 | | | $ | 1.35 | | | $ | 4.79 | | | $ | (1.65 | ) |
| Class B Common Stock (6) | | n/a | | | | n/a | | | | n/a | | | | n/a | | | | | 505.00 | |
| | | | | | | | | | | | | | | | | | | | |
| Statement of Cash Flows data: | | | | | | | | | | | | | | | | | | | | |
| Depreciation | | $ | 13,706 | | | $ | 10,955 | | | $ | 8,293 | | | $ | 8,103 | | | $ | 7,632 | |
| Amortization of intangible assets | | | 21,024 | | | | 25,819 | | | | 45,867 | | | | 48,020 | | | | 51,808 | |
| Expenditures for property and equipment | | | (34,689 | ) | | | (30,770 | ) | | | (22,392 | ) | | | (12,060 | ) | | | (9,631 | ) |
| | | | | | | | | | | | | | | | | | | | |
| Other Financial Data: | | | | | | | | | | | | | | | | | | | | |
| Adjusted EBITDA (7) | | $ | 337,283 | | | $ | 402,613 | | | $ | 289,809 | | | $ | 188,476 | | | $ | 156,249 | |
| Adjusted Net Income (8) | | | 234,165 | | | | 301,664 | | | | 220,792 | | | | 147,176 | | | | 115,954 | |
| (Dollars in thousands) | | As of December 31, 2014 | | | | As of December 31, 2013 | | | | As of December 31, 2012 | | | | As of December 31, 2011 | | | | As of December 31, 2010 | | |
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| Balance Sheet Data: | | | | | | | | | | | | | | | | | | | | |
| Current assets | | $ | 730,478 | | | $ | 654,179 | | | $ | 522,553 | | | $ | 383,265 | | | $ | 272,519 | |
| Property, plant and equipment, net | | | 168,821 | | | | 146,390 | | | | 104,718 | | | | 84,384 | | | | 75,287 | |
| Goodwill | | | 635,565 | | | | 608,287 | | | | 552,943 | | | | 547,473 | | | | 527,148 | |
| Other intangibles and other assets | | | 347,678 | | | | 389,349 | | | | 423,633 | | | | 537,671 | | | | 334,929 | |
| Total assets | | $ | 1,882,542 | | | $ | 1,798,205 | | | $ | 1,603,847 | | | $ | 1,552,793 | | | $ | 1,209,883 | |
| | | | | | | | | | | | | | | | | | | | |
| Total current liabilities | | $ | 240,522 | | | $ | 250,845 | | | $ | 294,859 | | | $ | 165,390 | | | $ | 86,685 | |
| Long-term borrowings, less current portion | | | 1,082,101 | | | | 1,175,349 | | | | 799,018 | | | | 575,000 | | | | 657,229 | |
| Other long-term liabilities | | | 70,120 | | | | 54,940 | | | | 46,342 | | | | 43,514 | | | | 24,902 | |
| Stockholders' equity | | | 489,799 | | | | 317,071 | | | | 463,628 | | | | 768,889 | | | | 441,067 | |
| Total liabilities and stockholders' equity | | $ | 1,882,542 | | | $ | 1,798,205 | | | $ | 1,603,847 | | | $ | 1,552,793 | | | $ | 1,209,883 | |
(1) Our amortization of intangibles expense includes the straight-line amortization of customer lists, patents and other finite-lived intangibles assets.
(2) During the fourth quarter of 2011, we decided to strategically transition certain products to their more widely known Generac brand. Based on this decision, we recorded a $9.4 million non-cash charge which primarily related to the write down of the impacted trade name to net realizable value.
(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 a recent acquisition.
(4) For the years ended December 31, 2014, 2013 and 2012, represents the losses on extinguishment of debt and gain on change in contractual interest rate as described in Note 11, “Credit Agreements,” to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K. For the years ended December 31, 2011 and 2010, represents the losses on extinguishment of debt related to the write-off of a portion of deferred financing costs related to accelerated repayments of debt.
(5) The 2011 net tax benefit of $237.7 million includes a tax benefit of $271.4 million recorded due to the reversal of valuation allowances recorded on our net deferred tax assets. Refer to Note 13, “Income Taxes,” to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K for additional details on the tax provision for the years ended December 31, 2014, 2013 and 2012.
(6) Diluted earnings per share reflects the impact of a reverse stock split which occurred immediately prior to the initial public offering (IPO). At the time of the IPO on February 17, 2010, all shares of Class B common stock were converted into shares of Class A common stock, and the Class A common stock became the one class of outstanding common stock.
(7) Adjusted EBITDA represents net income before 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 Generac's New Term Loan Credit Agreement and New ABL Credit Agreement (terms defined in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Financial Position” and Note 11, “Credit Agreements,” to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K), dated as of May 31, 2013, which is substantially the same definition that was contained in the Company’s previous credit agreements.
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 because it excludes items that we do not believe are indicative of our core operating performance. Our management uses Adjusted EBITDA:
| ● | for planning purposes, including the preparation of our annual operating budget and developing and refining our internal projections for future periods; |
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| ● | to allocate resources to enhance the financial performance of our business; |
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| ● | 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; |
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| ● | to evaluate the effectiveness of our business strategies and as a supplemental tool in evaluating our performance against our budget for each period; and |
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| ● | in communications with our board of directors and investors concerning our financial performance. |
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We believe Adjusted EBITDA is used by securities analysts, investors and other interested parties in the evaluation of our company. Management believes the disclosure of Adjusted EBITDA offers an additional financial metric that, when coupled with results prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) and the reconciliation to U.S. GAAP results, provides a more complete understanding of our results of operations and the factors and trends affecting our business. We believe Adjusted EBITDA is useful to investors for the following reasons:
| ● | Adjusted EBITDA and similar non-GAAP measures are widely used by investors to measure a company's operating performance without regard to items that can vary substantially from company to company depending upon financing and accounting methods, book values of assets, tax jurisdictions, capital structures and the methods by which assets were acquired; |
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| ● | 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 |
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| ● | by comparing our Adjusted EBITDA in different historical periods, our investors can evaluate our operating performance excluding the impact of items described below. |
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The adjustments included in the reconciliation table listed below are provided for under our New Term Loan Credit Agreement and New ABL Credit Agreement and also are presented to illustrate the operating performance of our business in a manner consistent with the presentation used by our management and board of directors. These adjustments eliminate the impact of a number of items that:
| ● | we do not consider indicative of our ongoing operating performance, such as non-cash write-down and other charges, non-cash gains and write-offs relating to the retirement of debt, severance costs and other restructuring-related business optimization expenses; |
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| ● | 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; |
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| ● | are non-cash in nature, such as share-based compensation; or |
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| ● | were eliminated following the consummation of our initial public offering. |
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We explain in more detail in footnotes (a) through (d) below why we believe these adjustments are useful in calculating Adjusted EBITDA as a measure of our operating performance.
Adjusted EBITDA does not represent, and should not be a substitute for, net income or cash flows from operations as determined in accordance with U.S. GAAP. Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under U.S. GAAP. Some of the limitations are:
| ● | Adjusted EBITDA does not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments; |
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| ● | Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; |
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| ● | Adjusted EBITDA does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debt; |
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| ● | 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; |
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| ● | 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 our assets as reflected in our consolidated balance sheet prepared in accordance with U.S. GAAP; and |
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| ● | other companies may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure. |
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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 items that are included as 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 that 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 New Term Loan Credit Agreement and New ABL Credit Agreement, this discretion may be viewed as an additional limitation on the use of Adjusted EBITDA as an analytical tool.
Because of these limitations, Adjusted EBITDA should not be considered as a measure of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our U.S. GAAP results and using Adjusted EBITDA only supplementally.
The following table presents a reconciliation of net income to Adjusted EBITDA:
| (Dollars in thousands) | | Year Ended December 31, 2014 | | | | Year Ended December 31, 2013 | | | | Year Ended December 31, 2012 | | | | Year Ended December 31, 2011 | | | | Year Ended December 31, 2010 | | |
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| Net income | | $ | 174,613 | | | $ | 174,539 | | | $ | 93,223 | | | $ | 324,643 | | | $ | 56,913 | |
| Interest expense | | | 47,215 | | | | 54,435 | | | | 49,114 | | | | 23,718 | | | | 27,397 | |
| Depreciation and amortization | | | 34,730 | | | | 36,774 | | | | 54,160 | | | | 56,123 | | | | 59,440 | |
| Income taxes provision (benefit) | | | 83,749 | | | | 104,177 | | | | 63,129 | | | | (237,677 | ) | | | 307 | |
| Non-cash write-down and other adjustments (a) | | | (3,853 | ) | | | 78 | | | | 247 | | | | 10,400 | | | | (361 | ) |
| Non-cash share-based compensation expense (b) | | | 12,612 | | | | 12,368 | | | | 10,780 | | | | 8,646 | | | | 6,363 | |
| Loss on extinguishment of debt (c) | | | 2,084 | | | | 15,336 | | | | 14,308 | | | | 377 | | | | 4,809 | |
| Gain on change in contractual interest rate (c) | | | (16,014 | ) | | | - | | | | - | | | | - | | | | - | |
| Transaction costs and credit facility fees (d) | | | 1,851 | | | | 3,863 | | | | 4,117 | | | | 1,719 | | | | 1,019 | |
| Other | | | 296 | | | | 1,043 | | | | 731 | | | | 527 | | | | 362 | |
| Adjusted EBITDA | | $ | 337,283 | | | $ | 402,613 | | | $ | 289,809 | | | $ | 188,476 | | | $ | 156,249 | |
(a) Represents the following non-cash charges:
| ● | for the year ended December 31, 2014, primarily $4.9 million adjustment to a certain earn-out obligation in connection with a recent acquisition. Also includes loss on disposal of assets and unrealized mark-to-market adjustments on commodity contracts; |
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| ● | for the years ended December 31, 2013 and 2012, includes loss on disposals of assets, unrealized mark-to-market adjustments on commodity contracts and adjustments to an earn-out obligation in connection with a permitted business acquisition, as defined in our credit agreement; |
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| ● | for the year ended December 31, 2011, primarily $9.4 million trade name write-down relating to the Company’s decision to strategically transition certain products to their more widely known Generac brand. Also includes loss on disposal of assets and unrealized mark-to-market adjustments on commodity contracts; |
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| ● | for the year ended December 31, 2010, primarily unrealized mark-to-market adjustments on commodity and Euro forward contracts and loss on disposal of assets; |
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We believe that adjusting net income for these non-cash charges is useful for the following reasons:
| ● | The loss on disposals of assets described above result from the sale of assets that are no longer useful in our business and therefore represent losses that are not from our core operations; |
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| ● | The adjustments for unrealized mark-to-market gains and losses on commodity and Euro forward 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; |
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| ● | The adjustment to a certain earn-out obligation in connection with a recent acquisition recorded in the year ended December 31, 2014, and the trade name write-down recorded in the year ended December 31, 2011, are one-time charges that we believe do not reflect our ongoing operations; |
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(b) Represents share-based compensation expense to account for stock options, restricted stock and other stock awards over their vesting period.
(c) For the years ended December 31, 2014, 2013 and 2012, represents the losses on extinguishment of debt and gain on change in contractual interest rate as described in Note 11, “Credit Agreements,” to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K. For the years ended December 31, 2011 and 2010, represents the losses on extinguishment of debt related to the write-off of a portion of deferred financing costs related to accelerated repayments of debt.
(d) 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 revolving credit facility commitment fees under our New Term Loan Credit Agreement and New ABL Credit Agreement, 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; |
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| ● | transaction costs relating to the acquisition of a business; |
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| ● | other financing costs incurred relating to the dividend recapitalization transactions completed in May 2012 and 2013; and |
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| ● | pre-2011 transaction costs relating to repurchases of debt under our first and second lien credit facilities by affiliates of CCMP, who contributed the repurchased debt to our company in exchange for the issuances of securities, which repurchases we do not expect to recur; |
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(8) Adjusted Net Income is defined as net income before provision (benefit) for income taxes adjusted for the following items: cash income tax expense, amortization of intangible assets, amortization of deferred financing costs and original issue discount related to our debt, gains and losses on changes in cash flows related to our debt, intangible asset impairment charges, transaction costs and other purchase accounting adjustments, and certain non-cash gains and losses as reflected in the reconciliation table set forth below.
We believe Adjusted Net Income is used by securities analysts, investors and other interested parties in the evaluation of our company 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 results of operations, our cash flows, 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.
Similar to Adjusted EBITDA, Adjusted Net Income does not represent, and should not be a substitute for, net income or cash flows from operations as determined in accordance with U.S. GAAP. Adjusted Net Income has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under U.S. GAAP. Some of the limitations are:
| ● | Adjusted Net Income does not reflect changes in, or cash requirements for, our working capital needs; |
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| ● | 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; |
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| ● | other companies may calculate Adjusted Net Income differently than we do, limiting its usefulness as a comparative measure. |
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The following table presents a reconciliation of net income to Adjusted Net Income:
| (Dollars in thousands) | | Year Ended December 31, 2014 | | | | Year Ended December 31, 2013 | | | | Year Ended December 31, 2012 | | | | Year Ended December 31, 2011 | | | | Year Ended December 31, 2010 | | |
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| Net income | | $ | 174,613 | | | $ | 174,539 | | | $ | 93,223 | | | $ | 324,643 | | | $ | 56,913 | |
| Provision (benefit) for income taxes | | | 83,749 | | | | 104,177 | | | | 63,129 | | | | (237,677 | ) | | | 307 | |
| Income before provision (benefit) for income taxes | | | 258,362 | | | | 278,716 | | | | 156,352 | | | | 86,966 | | | | 57,220 | |
| | | | | | | | | | | | | | | | | | | | |
| Amortization of intangible assets | | | 21,024 | | | | 25,819 | | | | 45,867 | | | | 48,020 | | | | 51,808 | |
| Amortization of deferred finance costs and original issue discount | | | 6,615 | | | | 4,772 | | | | 3,759 | | | | 1,986 | | | | 2,439 | |
| Loss on extinguishment of debt | | | 2,084 | | | | 15,336 | | | | 14,308 | | | | 377 | | | | 4,809 | |
| Gain on change in contractual interest rate | | | (16,014 | ) | | | - | | | | - | | | | - | | | | - | |
| Trade name write-down | | | - | | | | - | | | | - | | | | 9,389 | | | | - | |
| Transaction costs and other purchase accounting adjustments (a) | | | (3,623 | ) | | | 2,842 | | | | 3,317 | | | | 875 | | | | - | |
| Adjusted net income before provision for income taxes | | | 268,448 | | | | 327,485 | | | | 223,603 | | | | 147,613 | | | | 116,276 | |
| Cash income tax expense (b) | | | (34,283 | ) | | | (25,821 | ) | | | (2,811 | ) | | | (437 | ) | | | (322 | ) |
| Adjusted net income | | $ | 234,165 | | | $ | 301,664 | | | $ | 220,792 | | | $ | 147,176 | | | $ | 115,954 | |
(a) Represents transaction costs incurred directly in connection with any investment, as defined in our credit agreement, equity issuance or debt issuance or refinancing. The year ended December 31, 2014 also includes certain purchase accounting adjustments and adjustments to certain earn-out obligations in connection with acquisitions ($4.9 million).
(b) Amounts are based on actual cash income taxes paid during each year.
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