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 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.

		Year Ended December 31,
(U.S. Dollars in thousands, except per share data)		2018				2017				2016				2015				2014
Statement of Operations Data:
Net sales		$	2,023,464			$	1,679,373			$	1,447,743			$	1,317,299			$	1,460,919
Costs of goods sold			1,298,424				1,094,587				935,322				857,349				944,700
Gross profit			725,040				584,786				512,421				459,950				516,219
Operating expenses:
Selling and service			191,887				174,841				164,860				130,242				120,408
Research and development			50,019				42,869				37,163				32,922				31,494
General and administrative			103,841				87,581				74,693				52,947				54,795
Amortization of intangibles (1)			22,112				28,861				32,953				23,591				21,024
Tradename and goodwill impairment (2)			-				-				-				40,687				-
Gain on remeasurement of contingent consideration (3)			-				-				-				-				(4,877	)
Total operating expenses			367,859				334,152				309,669				280,389				222,844
Income from operations			357,181				250,634				202,752				179,561				293,375
Other (expense) income:
Interest expense			(40,956	)			(42,667	)			(44,568	)			(42,843	)			(47,215	)
Investment income			1,893				298				44				123				130
Loss on extinguishment of debt (4)			(1,332	)			-				(574	)			(4,795	)			(2,084	)
Gain (loss) on change in contractual interest rate (5)			-				-				(2,957	)			(2,381	)			16,014
Other, net			(5,710	)			(4,566	)			(1,000	)			(6,682	)			(1,858	)
Total other expense, net			(46,105	)			(46,935	)			(49,055	)			(56,578	)			(35,013	)
Income before provision for income taxes			311,076				203,699				153,697				122,983				258,362
Provision for income taxes (6)			69,856				44,142				56,519				45,236				83,749
Net income			241,220				159,557				97,178				77,747				174,613
Net income attributable to noncontrolling interests			2,963				1,749				24				-				-
Net income attributable to Generac Holdings Inc.		$	238,257			$	157,808			$	97,154			$	77,747			$	174,613
Net income attributable to common shareholders per common share - diluted:		$	3.54			$	2.53			$	1.47			$	1.12			$	2.49
Statement of Cash Flows data:
Depreciation		$	25,296			$	23,127			$	21,465			$	16,742			$	13,706
Amortization of intangible assets			22,112				28,861				32,953				23,591				21,024
Expenditures for property and 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

		As of December 31,
(U.S. Dollars in thousands)		2018				2017				2016				2015				2014
Balance Sheet Data:
Current assets		$	1,120,769			$	824,557			$	687,794			$	632,017			$	707,637
Property and equipment, net			278,929				230,380				212,793				184,213				168,821
Goodwill			764,655				721,523				704,640				669,719				635,565
Other intangibles and other assets			261,961				249,505				260,742				292,686				352,396
Total assets		$	2,426,314			$	2,025,965			$	1,865,969			$	1,778,635			$	1,864,419
Total current liabilities		$	560,706			$	396,423			$	347,926			$	213,224			$	240,522
Long-term borrowings, less current portion			876,396				906,548				1,006,758				1,037,132				1,065,858
Other long-term liabilities			166,947				124,745				80,968				62,408				68,240
Redeemable noncontrolling interests			61,004				43,929				33,138				-				-
Total stockholders' equity			761,261				554,320				397,179				465,871				489,799
Total liabilities and stockholders' 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® 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.

(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:

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

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

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

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

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

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

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

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

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

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

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

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

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

We explain in more detail in footnotes (a) through (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:

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

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

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

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

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

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

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

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

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

		Year Ended December 31,
(U.S. Dollars in thousands)		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 (a)			2,963				1,749				24				-				-
Net income			241,220				159,557				97,178				77,747				174,613
Interest expense			40,956				42,667				44,568				42,843				47,215
Depreciation and amortization			47,408				51,988				54,418				40,333				34,730
Provision for income taxes			69,856				44,142				56,519				45,236				83,749
Non-cash write-down and 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)			-				-				-				40,687				-
Loss on extinguishment of debt (e)			1,332				-				574				4,795				2,084
(Gain) loss on change in contractual interest rate (f)			-				-				2,957				2,381				(16,014	)
Transaction costs and credit facility fees (g)			3,883				2,145				2,442				2,249				1,851
Business optimization expenses (h)			952				2,912				7,316				1,947				-
Other			850				761				700				465				296
Adjusted EBITDA			424,552				317,300				276,522				270,816				337,283
Adjusted EBITDA attributable to noncontrolling interests			7,759				6,075				3,784				-				-
Adjusted EBITDA attributable to Generac Holdings Inc.		$	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 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:

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

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

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

	●	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® 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.

(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:

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

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

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

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

		Year Ended December 31,
(U.S. Dollars in thousands)		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			241,220				159,557				97,178				77,747				174,613
Provision for income taxes			69,856				44,142				56,519				45,236				83,749
Income before provision for income taxes			311,076				203,699				153,697				122,983				258,362
Amortization of intangible assets			22,112				28,861				32,953				23,591				21,024
Amortization of deferred finance costs and original issue discount			4,749				3,516				3,940				5,429				6,615
Tradename and goodwill impairment			-				-				-				40,687				-
Loss on extinguishment of debt			1,332				-				574				4,795				2,084
(Gain) loss on change in contractual interest rate			-				-				2,957				2,381				(16,014	)
Transaction costs and other purchase accounting adjustments (a)			2,578				1,706				5,653				2,710				(3,623	)
Business optimization expenses			952				2,912				7,316				1,947				-
Adjusted net income before provision for income taxes			342,799				240,694				207,090				204,523				268,448
Cash income tax expense (b)			(47,064	)			(25,624	)			(9,299	)			(6,087	)			(34,283	)
Adjusted net income			295,735				215,070				197,791				198,436				234,165
Adjusted net income attributable to 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.