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 o****n 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.

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 Cont****rol 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 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

Generac Holdings Inc.
Consolidated Balance Sheets
(U.S. Dollars in Thousands, Except Share and Per Share Data)

		December 31,
		2018				2017
Assets
Current assets:
Cash and cash equivalents		$	224,482			$	138,472
Accounts receivable, less allowance for doubtful accounts of $4,873 and $4,805 at December 31, 2018 and 2017, respectively			326,133				279,295
Inventories			544,750				387,049
Prepaid expenses and other assets			25,404				19,741
Total current assets			1,120,769				824,557
Property and equipment, net			278,929				230,380
Customer lists, net			61,194				41,064
Patents, net			29,970				39,617
Other intangible assets, net			3,043				2,401
Tradenames, net			152,283				152,683
Goodwill			764,655				721,523
Deferred income taxes			163				3,238
Other assets			15,308				10,502
Total assets		$	2,426,314			$	2,025,965
Liabilities and stockholders’ equity
Current liabilities:
Short-term borrowings		$	45,583			$	20,602
Accounts payable			328,091				233,639
Accrued wages and employee benefits			40,819				27,992
Other accrued liabilities			144,236				112,618
Current portion of long-term borrowings and capital lease obligations			1,977				1,572
Total current liabilities			560,706				396,423
Long-term borrowings and capital lease obligations			876,396				906,548
Deferred income taxes			71,300				41,852
Other long-term liabilities			95,647				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			712				708
Additional paid-in capital			476,116				459,816
Treasury stock, at cost, 9,047,060 and 8,448,874 shares at December 31, 2018 and 2017, respectively			(321,473	)			(294,005	)
Excess purchase price over predecessor basis			(202,116	)			(202,116	)
Retained earnings			831,123				610,836
Accumulated other comprehensive loss			(23,813	)			(21,198	)
Stockholders’ equity attributable to Generac Holdings Inc.			760,549				554,041
Noncontrolling interests			712				279
Total stockholders’ equity			761,261				554,320
Total liabilities and stockholders’ equity		$	2,426,314			$	2,025,965

See notes to consolidated financial statements.

Generac Holdings Inc.
Consolidated Statements of Comprehensive Income
(U.S. Dollars in Thousands, Except Share and Per Share Data)

		Year Ended December 31,
		2018				2017				2016
Net sales		$	2,023,464			$	1,679,373			$	1,447,743
Costs of goods sold			1,298,424				1,094,587				935,322
Gross profit			725,040				584,786				512,421
Operating expenses:
Selling and service			191,887				174,841				164,860
Research and development			50,019				42,869				37,163
General and administrative			103,841				87,581				74,693
Amortization of intangibles			22,112				28,861				32,953
Total operating expenses			367,859				334,152				309,669
Income from operations			357,181				250,634				202,752
Other (expense) income:
Interest expense			(40,956	)			(42,667	)			(44,568	)
Investment income			1,893				298				44
Loss on extinguishment of debt			(1,332	)			–				(574	)
Loss on change in contractual interest rate			–				–				(2,957	)
Other, net			(5,710	)			(4,566	)			(1,000	)
Total other expense, net			(46,105	)			(46,935	)			(49,055	)
Income before provision for income taxes			311,076				203,699				153,697
Provision for income taxes			69,856				44,142				56,519
Net income			241,220				159,557				97,178
Net income attributable to noncontrolling interests			2,963				1,749				24
Net income attributable to Generac Holdings Inc.		$	238,257			$	157,808			$	97,154
Net income attributable to common shareholders per common share - basic:		$	3.57			$	2.56			$	1.48
Weighted average common shares outstanding - basic:			61,662,031				62,040,704				64,905,793
Net income attributable to common shareholders per common share - diluted:		$	3.54			$	2.53			$	1.47
Weighted average common shares outstanding - diluted:			62,233,225				62,642,872				65,382,774
Other comprehensive income (loss):
Foreign currency translation adjustment		$	(5,976	)		$	15,191			$	(18,545	)
Net unrealized gain on derivatives			2,924				3,712				535
Pension liability adjustment			437				62				322
Other comprehensive income (loss)			(2,615	)			18,965				(17,688	)
Total comprehensive income			238,605				178,522				79,490
Comprehensive income (loss) attributable to noncontrolling 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.

Generac Holdings Inc.
Consolidated Statements of Stockholders' Equity
(U.S. Dollars in Thousands, Except Share Data)

		Generac Holdings Inc.
		Common Stock								Additional Paid-In				Treasury Stock								Excess Purchase Price Over Predecessor				Retained				Accumulated Other Comprehensive				Total Stockholders'				Noncontrolling
		Shares				Amount				Capital				Shares				Amount				Basis				Earnings				Income (Loss)				Equity				Interest				Total
Balance at December 31, 2015 (previously reported)			69,582,669			$	696			$	443,109				(3,567,575	)		$	(111,516	)		$	(202,116	)		$	358,173			$	(22,475	)		$	465,871			$	-			$	465,871
Impact of adoption of certain accounting standards (Note 2)			–				–				–				–				–				–				(2,299	)			–				(2,299	)			–				(2,299	)
Balance at December 31, 2015 (as adjusted)			69,582,669			$	696			$	443,109				(3,567,575	)		$	(111,516	)		$	(202,116	)		$	355,874			$	(22,475	)		$	463,572			$	-			$	463,572
Acquisition of business			–				–				–				–				–				–				–				–				–				53				53
Unrealized gain on interest rate swaps, net of tax of $341			–				–				–				–				–				–				–				535				535				–				535
Foreign currency translation adjustment			–				–				–				–				–				–				–				(18,545	)			(18,545	)			13				(18,532	)
Common stock issued under equity incentive plans, net of shares withheld for employee taxes and strike price			678,812				6				(11,473	)			–				–				–				–				–				(11,467	)			–				(11,467	)
Net share settlement of restricted stock awards			–				–				–				(28,593	)			(949	)			–				–				–				(949	)			–				(949	)
Stock repurchases			–				–				–				(3,968,706	)			(149,937	)			–				–				–				(149,937	)			–				(149,937	)
Excess tax benefits from equity awards			–				–				7,920				–				–				–				–				–				7,920				–				7,920
Share-based compensation			–				–				9,493				–				–				–				–				–				9,493				–				9,493
Pension liability adjustment, net of tax of $207			–				–				–				–				–				–				–				322				322				–				322
Redemption value adjustment			–				–				–				–				–				–				(909	)			–				(909	)			–				(909	)
Net income			–				–				–				–				–				–				97,154				–				97,154				(76	)			97,078
Balance at December 31, 2016			70,261,481			$	702			$	449,049				(7,564,874	)		$	(262,402	)		$	(202,116	)		$	452,119			$	(40,163	)		$	397,189			$	(10	)		$	397,179
Change in noncontrolling interest share			–				–				(2,124	)			–				–				–				–				–				(2,124	)			184				(1,940	)
Unrealized gain on interest rate swaps, net of tax of $2,384			–				–				–				–				–				–				–				3,712				3,712				–				3,712
Foreign currency translation adjustment			–				–				–				–				–				–				–				15,191				15,191				(14	)			15,177
Common stock issued under equity incentive plans, net of shares withheld for employee taxes and strike price			558,692				6				2,686				–				–				–				–				–				2,692				–				2,692
Net share settlement of restricted stock awards			–				–				–				(39,500	)			(1,591	)			–				–				–				(1,591	)			–				(1,591	)
Stock repurchases			–				–				–				(844,500	)			(30,012	)			–				–				–				(30,012	)			–				(30,012	)
Share-based compensation			–				–				10,205				–				–				–				–				–				10,205				–				10,205
Pension liability adjustment, net of tax of $21			–				–				–				–				–				–				–				62				62				–				62
Redemption value adjustment			–				–				–				–				–				–				909				–				909				–				909
Net income			–				–				–				–				–				–				157,808				–				157,808				119				157,927
Balance at December 31, 2017			70,820,173			$	708			$	459,816				(8,448,874	)		$	(294,005	)		$	(202,116	)		$	610,836			$	(21,198	)		$	554,041			$	279			$	554,320
Unrealized gain on interest rate swaps, net of tax of $1,027			–				–				–				–				–				–				–				2,924				2,924				–				2,924
Foreign currency translation adjustment			–				–				–				–				–				–				–				(5,976	)			(5,976	)			(2	)			(5,978	)
Common stock issued under equity incentive plans, net of shares withheld for employee taxes and strike price			366,245				4				1,737				–				–				–				–				–				1,741				–				1,741
Net share settlement of restricted stock awards			–				–				–				(38,186	)			(1,812	)			–				–				–				(1,812	)			–				(1,812	)
Stock repurchases			–				–				–				(560,000	)			(25,656	)			–				–				–				(25,656	)			–				(25,656	)
Cash dividends paid to noncontrolling interest of subsidiary			–				–				–				–				–				–				–				–				–				(314	)			(314	)
Share-based compensation			–				–				14,563				–				–				–				–				–				14,563				–				14,563
Pension liability adjustment, net of tax of $154			–				–				–				–				–				–				–				437				437				–				437
Redemption value adjustment			–				–				–				–				–				–				(17,970	)			–				(17,970	)			–				(17,970	)
Net income			–				–				–				–				–				–				238,257				–				238,257				749				239,006
Balance at December 31, 2018			71,186,418			$	712			$	476,116				(9,047,060	)		$	(321,473	)		$	(202,116	)		$	831,123			$	(23,813	)		$	760,549			$	712			$	761,261

See notes to consolidated financial statements.

Generac Holdings Inc.
Consolidated Statements of Cash Flows
(U.S. Dollars in Thousands)

		Year Ended December 31,
		2018				2017				2016
Operating activities
Net income		$	241,220			$	159,557			$	97,178
Adjustment to reconcile net income to net cash provided by operating activities:
Depreciation			25,296				23,127				21,465
Amortization of intangible assets			22,112				28,861				32,953
Amortization of original issue discount and deferred financing costs			4,749				3,516				3,940
Loss on extinguishment of debt			1,332				–				574
Loss on change in contractual interest rate			–				–				2,957
Deferred income taxes			23,600				19,502				38,297
Share-based compensation expense			14,563				10,205				9,493
Other			2,474				410				127
Net changes in operating assets and liabilities, net of acquisitions:
Accounts receivable			(43,243	)			(32,857	)			(21,223	)
Inventories			(152,594	)			(22,986	)			14,680
Other assets			(6,362	)			(14,783	)			406
Accounts payable			86,359				42,788				32,908
Accrued wages and employee benefits			12,626				6,105				5,196
Other accrued liabilities			16,972				37,029				10,091
Excess tax benefits from equity awards			(1,877	)			(3,152	)			(7,920	)
Net cash provided by operating activities			247,227				257,322				241,122
Investing activities
Proceeds from sale of property and equipment			214				82				1,360
Proceeds from beneficial interest in securitization transactions			3,933				3,794				12,287
Expenditures for property and equipment			(47,601	)			(33,261	)			(30,467	)
Acquisition of business, net of cash acquired			(65,440	)			1,257				(61,386	)
Deposit paid related to acquisition			–				–				(15,329	)
Net cash used in investing activities			(108,894	)			(28,128	)			(93,535	)
Financing activities
Proceeds from short-term borrowings			53,965				101,991				28,712
Proceeds from long-term borrowings			51,425				3,069				–
Repayments of short-term borrowings			(27,880	)			(114,874	)			(27,755	)
Repayments of long-term borrowings and capital lease obligations			(101,827	)			(117,475	)			(37,627	)
Stock repurchases			(25,656	)			(30,012	)			(149,937	)
Payment of debt issuance costs			(1,702	)			(3,901	)			(4,557	)
Cash dividends paid			–				–				(76	)
Cash dividends paid to noncontrolling interest of subsidiary			(314	)			–				–
Taxes paid related to equity awards			(5,659	)			(5,892	)			(14,008	)
Proceeds from the exercise of stock options			5,614				6,951				1,623
Excess tax benefits from equity awards			–				–				7,920
Net cash used in financing activities			(52,034	)			(160,143	)			(195,705	)
Effect of exchange rate changes on cash and cash equivalents			(289	)			2,149				(467	)
Net increase (decrease) in cash and cash equivalents			86,010				71,200				(48,585	)
Cash and cash equivalents at beginning of period			138,472				67,272				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		$	41,007			$	41,105			$	42,456
Income taxes			41,044				23,836				8,889

See notes to consolidated financial statements.

Generac Holdings Inc. Notes to Consolidated Financial Statements

Years Ended December 31, 2018, 2017, and 201****6

_(_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:

	●	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.

	●	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.

	●	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® Power Equipment brand. The acquisition provided an expanded product lineup and additional scale to the Company’s residential engine powered products.

	●	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® brand. Pramac products are sold in over 150 countries through a broad distribution network.

	●	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.

	●	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.

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 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		8	–	20
Buildings and improvements		10	–	40
Machinery and equipment		3	–	15
Dies and tools		3	–	10
Vehicles		3	–	6
Office equipment and systems		3	–	15
Leasehold improvements		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 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 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.

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.

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 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 right of use asset and lease liability of approximately $65,000 to $75,000 in its balance sheet. which represents both 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. 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		$	280,002			$	(707	)		$	279,295
Inventories			380,341				6,708				387,049
Other accrued liabilities			105,067				7,551				112,618
Deferred income taxes			43,789				(1,937	)			41,852
Other long-term liabilities			76,995				5,898				82,893
Retained earnings		$	616,347			$	(5,511	)		$	610,836

Consolidated Statements of Comprehensive Income		Year Ended December 31, 2017
		As Reported				Impact of Adoption				As Adjusted
Net sales		$	1,672,445			$	6,928			$	1,679,373
Cost of goods sold			1,090,328				4,259				1,094,587
Selling and service expenses			171,755				3,086				174,841
Research and development expenses			42,925				(56	)			42,869
General and administrative expenses			87,512				69				87,581
Other, net			(4,007	)			(559	)			(4,566	)
Provision for income taxes			43,553				589				44,142
Net income attributable to Generac Holdings Inc.		$	159,386			$	(1,578	)		$	157,808
Earnings per share
Basic		$	2.58			$	(0.02	)		$	2.56
Diluted		$	2.56			$	(0.03	)		$	2.53
Comprehensive income attributable to Generac Holdings Inc.		$	174,551			$	(1,578	)		$	172,973

		Year Ended December 31, 2016
		As Reported				Impact of Adoption				As Adjusted
Net sales		$	1,444,453			$	3,290			$	1,447,743
Cost of goods sold			930,347				4,975				935,322
Selling and service expenses			164,607				253				164,860
Research and development expenses			37,229				(66	)			37,163
General and administrative expenses			74,700				(7	)			74,693
Other, net			(180	)			(820	)			(1,000	)
Provision for income taxes			57,570				(1,051	)			56,519
Net income attributable to Generac Holdings Inc.		$	98,788			$	(1,634	)		$	97,154
Earnings per share
Basic		$	1.51			$	(0.03	)		$	1.48
Diluted		$	1.50			$	(0.03	)		$	1.47
Comprehensive income attributable to Generac Holdings Inc.		$	82,097			$	(1,634	)		$	80,463

Consolidated Statement of Stock holders' Equity		Year Ended December 31, 2017
		As Reported				Impact of Adoption				As Adjusted
Retained earnings at December 31, 2016		$	456,052			$	(3,933	)		$	452,119
Net income attributable to Generac Holdings Inc.			159,386				(1,578	)			157,808
Retained earnings at December 31, 2017		$	616,347			$	(5,511	)		$	610,836

		Year Ended December 31, 2016
		As Reported				Impact of Adoption				As Adjusted
Retained earnings at December 31, 2015		$	358,173			$	(2,299	)		$	355,874
Net income attributable to Generac Holdings Inc.			98,788				(1,634	)			97,154
Retained earnings at December 31, 2016		$	456,052			$	(3,933	)		$	452,119

Consolidated Statement of Cash Flows		Year Ended December 31, 2017
		As Reported				Impact of Adoption				As Adjusted
Net income		$	161,135			$	(1,578	)		$	159,557
Deferred income taxes			21,439				(1,937	)			19,502
Accounts receivable			(29,771	)			(3,086	)			(32,857	)
Inventories			(16,278	)			(6,708	)			(22,986	)
Other accrued liabilities			27,514				9,515				37,029
Net cash provided by operating activities		$	261,116			$	(3,794	)		$	257,322
Proceeds from beneficial interests in securitization transactions		$	-			$	3,794			$	3,794
Net cash used in investing activities		$	(31,922	)		$	3,794			$	(28,128	)

		Year Ended December 31, 2016
		As Reported				Impact of Adoption				As Adjusted
Net income		$	98,812			$	(1,634	)		$	97,178
Deferred income taxes			39,347				(1,050	)			38,297
Accounts receivable			(9,082	)			(12,141	)			(21,223	)
Inventories			15,514				(834	)			14,680
Other accrued liabilities			6,719				3,372				10,091
Net cash provided by operating activities		$	253,409			$	(12,287	)		$	241,122
Proceeds from beneficial interests in securitization transactions		$	-			$	12,287			$	12,287
Net cash used in investing activities		$	(105,822	)		$	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.

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		$	43,929			$	33,138			$	-
Noncontrolling interest of Pramac			-				1,540	(1)			34,253
Net income			2,214				1,631				100
Foreign currency translation			(3,109	)			8,529				(2,124	)
Redemption value adjustment			17,970				(909	)			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.

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:

		March 1, 2016
Accounts receivable		$	50,716
Inventories			39,889
Property and equipment			19,138
Intangible assets			34,471
Goodwill			46,775
Other assets			7,698
Total assets acquired			198,687
Short-term borrowings			21,741
Accounts payable			40,270
Long-term debt and capital lease obligations (including current portion)			18,599
Other liabilities			23,521
Redeemable noncontrolling interest			34,253
Noncontrolling interest			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.

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		$	2,023,464			$	1,679,373			$	1,447,743
Pro forma			2,038,739				1,742,453				1,581,699
Net income attributable to Generac Holdings Inc.:
As reported		$	238,257			$	157,808			$	97,154
Pro forma			238,362				161,854				103,193
Net income attributable to Generac Holdings Inc. per common share - diluted
As reported		$	3.54			$	2.53			$	1.47
Pro forma			3.54				2.60				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. 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		$	(160	)		$	107
Foreign currency contracts			(117	)			167
Interest rate swaps			8,307				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.

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			(5,976	)			(156	)	(1)			2,924		(2)			(3,208	)
Amounts reclassified from AOCL			-				593		(3)			-					593
Net current-period other comprehensive income (loss)			(5,976	)			437					2,924					(2,615	)
Ending Balance – December 31, 2018		$	(18,832	)		$	(10,541	)			$	5,560				$	(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			15,191				(591	)	(4)			3,712		(5)			18,312
Amounts reclassified from AOCL			-				653		(6)			-					653
Net current-period other comprehensive income			15,191				62					3,712					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.

	(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
Product Classes		Domestic				International				Total
Residential products		$	990,631			$	52,108			$	1,042,739
Commercial & industrial products			464,066				356,204				820,270
Other			125,628				34,827				160,455
Total net sales		$	1,580,325			$	443,139			$	2,023,464

		Year Ended December 31, 2017
Product Classes		Domestic				International				Total
Residential products		$	815,125			$	55,365			$	870,490
Commercial & industrial products			385,575				298,778				684,353
Other			102,806				21,724				124,530
Total net sales		$	1,303,506			$	375,867			$	1,679,373

		Year Ended December 31, 2016
Product Classes		Domestic				International				Total
Residential products		$	730,288			$	38,888			$	769,176
Commercial & industrial products			346,094				212,374				558,468
Other			100,467				19,632				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.

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		$	388,685			$	290,290			$	259,563
International			35,867				27,010				16,959
Total adjusted EBITDA		$	424,552			$	317,300			$	276,522
Interest expense			(40,956	)			(42,667	)			(44,568	)
Depreciation and amortization			(47,408	)			(51,988	)			(54,418	)
Non-cash write-down and other adjustments (1)			(3,532	)			(2,923	)			(357	)
Non-cash share-based compensation expense (2)			(14,563	)			(10,205	)			(9,493	)
Loss on extinguishment of debt (3)			(1,332	)			-				(574	)
Loss on change in contractual interest rate (4)			-				-				(2,957	)
Transaction costs and credit facility fees (5)			(3,883	)			(2,145	)			(2,442	)
Business optimization expenses (6)			(952	)			(2,912	)			(7,316	)
Other			(850	)			(761	)			(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.

The following tables summarize additional financial information by reportable segment:

		Assets
		Year Ended December 31,
		2018				2017				2016
Domestic		$	1,868,554			$	1,612,607			$	1,525,950
International			557,760				413,358				340,019
Total		$	2,426,314			$	2,025,965			$	1,865,969

		Depreciation and Amortization
		Year Ended December 31,
		2018				2017				2016
Domestic		$	35,586			$	37,962			$	42,346
International			11,822				14,026				12,072
Total		$	47,408			$	51,988			$	54,418

		Capital Expenditures
		Year Ended December 31,
		2018				2017				2016
Domestic		$	38,242			$	29,258			$	26,936
International			9,359				4,003				3,531
Total		$	47,601			$	33,261			$	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		$	348,980			$	242,947
Work-in-process			6,971				2,544
Finished goods			188,799				141,558
Total		$	544,750			$	387,049

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		$	15,975			$	13,118
Buildings and improvements			163,161				132,072
Machinery and equipment			103,726				90,487
Dies and tools			28,198				24,504
Vehicles			2,070				1,878
Office equipment and systems			82,638				73,254
Leasehold improvements			2,137				2,436
Construction in progress			26,543				18,799
Gross property and equipment			424,448				356,548
Accumulated depreciation			(145,519	)			(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:

		Domestic				International				Total
Balance at December 31, 2016		$	621,451			$	83,189			$	704,640
Acquisitions of businesses, net			-				5,271				5,271
Foreign currency translation			-				11,612				11,612
Balance at December 31, 2017			621,451				100,072				721,523
Acquisitions of businesses, net			-				46,788				46,788
Foreign currency translation			-				(3,656	)			(3,656	)
Balance at December 31, 2018		$	621,451			$	143,204			$	764,655

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
International			147,815				(4,611	)			143,204				104,683				(4,611	)			100,072
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				December 31, 2018												December 31, 2017
		Amortization Years				Gross				Accumulated Amortization				Net Book Value				Gross				Accumulated Amortization				Net Book Value
Finite-lived intangible assets:
Tradenames			9			$	56,378			$	(32,416	)		$	23,962			$	52,784			$	(28,422	)		$	24,362
Customer lists			12				368,343				(307,149	)			61,194				340,138				(299,074	)			41,064
Patents			14				131,030				(101,060	)			29,970				131,137				(91,520	)			39,617
Unpatented technology			15				13,169				(12,058	)			1,111				13,169				(11,915	)			1,254
Software			-				1,046				(1,046	)			-				1,046				(1,046	)			-
Non-compete/other			7				3,829				(1,897	)			1,932				2,684				(1,537	)			1,147
Total finite-lived 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 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		$	35,422			$	31,695			$	30,197
Product warranty reserve assumed in acquisition			-				43				840
Payments			(20,029	)			(18,861	)			(18,691	)
Provision for warranty issued			26,910				21,347				19,148
Changes in estimates for pre-existing warranties			(518	)			1,198				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		$	57,854			$	36,139			$	31,956
Deferred revenue contracts issued			21,440				29,262	(1)			9,797
Amortization of deferred revenue contracts			(10,954	)			(7,547	)			(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		$	13,438
2020			13,547
2021			12,178
2022			9,756
After 2022			19,421
Total		$	68,340

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		$	25,396			$	20,576
Long-term portion - other long-term liabilities			16,389				14,846
Total		$	41,785			$	35,422
Deferred revenue related to extended warranties
Current portion - other accrued liabilities		$	13,646			$	11,017
Long-term portion - other long-term liabilities			54,694				46,837
Total		$	68,340			$	57,854

10.	Credit Agreements

Short-term borrowings are included in the consolidated balance sheets as follows:

		December 31,
		2018				2017
ABL facility		$	18,459			$	-
Other lines of credit			27,124				20,602
Total		$	45,583			$	20,602

Long-term borrowings are included in the consolidated balance sheets as follows:

		December 31,
		2018				2017
Term loan		$	879,000			$	929,000
Original issue discount and deferred financing costs			(22,440	)			(26,937	)
ABL facility			-				-
Capital lease obligation			20,171				4,690
Other			1,642				1,367
Total			878,373				908,120
Less: current portion of debt			1,075				936
Less: current portion of capital lease obligation			902				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		$	1,927
2020			1,769
2021			1,267
2022			1,814
After 2022			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 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 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 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:

		Year Ended December 31,
		2018				2017				2016
Numerator
Net income attributable to Generac Holdings Inc.		$	238,257			$	157,808			$	97,154
Redeemable noncontrolling interest redemption value adjustment			(17,970	)			909				(909	)
Net income attributable to common shareholders		$	220,287			$	158,717			$	96,245
Denominator
Weighted average shares, basic			61,662,031				62,040,704				64,905,793
Dilutive effect of stock compensation awards (1)			571,194				602,168				476,981
Diluted shares			62,233,225				62,642,872				65,382,774
Net income attributable to common shareholders per share
Basic		$	3.57			$	2.56			$	1.48
Diluted		$	3.54			$	2.53			$	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.

13.	Income Taxes

The Company’s provision for income taxes consists of the following:

		Year Ended December 31,
		2018				2017				2016
Current:
Federal		$	32,072			$	15,753			$	11,717
State			9,639				1,775				2,047
Foreign			4,546				4,585				4,460
			46,257				22,113				18,224
Deferred:
Federal			22,225				18,213				40,213
State			1,910				4,139				3,029
Foreign			479				(2,777	)			(5,585	)
			24,614				19,575				37,657
Change in valuation allowance			(1,015	)			2,454				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.

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		$	16,745			$	15,075
Deferred revenue			12,418				9,983
Inventories			8,500				7,933
Pension obligations			1,062				3,795
Stock-based compensation			5,960				5,522
Operating loss and credit carryforwards			25,585				23,771
Bad debt			1,363				1,101
Other			2,516				40
Valuation allowance			(5,802	)			(6,817	)
Total deferred tax assets			68,347				60,403
Deferred tax liabilitites:
Goodwill and intangible assets			108,899				70,556
Depreciation			25,429				22,563
Debt refinancing costs			4,206				5,189
Prepaid expenses			950				709
Total deferred tax liabilities			139,484				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.

Changes in the Company’s gross liability for unrecognized tax benefits, excluding interest and penalties, were as follows:

		December 31,
		2018				2017
Unrecognized tax benefit, beginning of period		$	7,122			$	7,943
Increase in unrecognized tax benefit for positions taken in current period			580				251
Statute of limitation expirations			(1,818	)			(1,072	)
Settlements			(249	)			-
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.

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			21.0	%			35.0	%			35.0	%
State taxes			4.7				4.1				4.1
Research and development credits			(1.3	)			(1.4	)			(1.0	)
State credits			(1.0	)			(0.2	)			(0.2	)
Share-based compensation (1)			(0.5	)			(1.4	)			-
Tax Act impact			(0.2	)			(13.9	)			-
Other			(0.2	)			(0.9	)			(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 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,
	201****8			201****7
Accumulated benefit obligation at end of period	$	65,978		$	72,631
Change in projected benefit obligation
Projected benefit obligation at beginning of period	$	72,631		$	65,956
Interest cost		2,575			2,688
Net actuarial (gain) loss		(6,820	)		6,170
Benefits paid		(2,408	)		(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	$	58,014		$	46,488
Actual return on plan assets		(3,507	)		8,382
Company contributions		9,771			5,327
Benefits paid		(2,408	)		(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	)

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:

		Year Ended December 31,
		201****8				201****7				201****6
Interest cost		$	2,575			$	2,688			$	2,747
Expected return on plan assets			(3,525	)			(3,011	)			(2,868	)
Amortization of net loss			802				883				941
Net periodic pension cost (benefit)		$	(148	)		$	560			$	820

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			3.60	%			4.14	%			4.39	%
Expected long-term rate of return on plan assets			6.19	%			6.58	%			6.62	%
Rate of compensation increase (1)			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.

The Pension Plans’ weighted-average asset allocation at December 31, 2018 and 2017, by asset category, is as follows:

		Target Allocation								December 31, 2018								December 31, 2017
Asset Category		Minimum				Maximum				Dollars				%				Dollars				%
Fixed income			15.0	%			25.0	%		$	12,257				20	%		$	10,637				18	%
Domestic equity			36.5	%			61.5	%			30,731				50	%			25,151				43	%
International equity			17.0	%			25.0	%			12,380				20	%			16,093				28	%
Real estate			7.0	%			15.0	%			6,502				10	%			6,133				11	%
Total											61,870				100	%			58,014				100	%

The fair values of the Pension Plans’ assets at December 31, 2018 are as follows:

		Total				Quoted Prices in Active Markets for Identical Asset (Level 1)				Significant Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Mutual funds		$	51,736			$	51,736			$	–			$	–
Other investments			10,134				–				–				10,134
Total		$	61,870			$	51,736			$	–			$	10,134

The fair values of the Pension Plans’ assets at December 31, 2017 are as follows:

		Total				Quoted Prices in Active Markets for Identical Asset**** (Level 1)****				Significant Observable Inputs**** (Level 2)****				Significant Unobservable Inputs**** (Level 3)****
Mutual funds		$	48,314			$	48,314			$	–			$	–
Other investments			9,700				–				–				9,700
Total		$	58,014			$	58,014			$	–			$	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:

		Year Ended December 31,
		2018****				2017****
Balance at beginning of period		$	9,700			$	8,628
Purchases			3,805				-
Redemptions			(3,795	)			-
Realized gains			424				1,072
Balance at end of period		$	10,134			$	9,700

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			$	2,527
2020				2,707
2021				2,844
2022				3,007
2023				3,190
2024– 2028				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, 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.

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			37	%			40	%			41	%
Risk free interest rate			2.60	%			1.92	%			1.31	%
Expected annual dividend per share		$	-			$	-			$	-
Expected life of options (years)			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:

		Number of Options				Weighted- Average Exercise Price				Weighted- Average Remaining Contractual Term (in years)				Aggregate Intrinsic Value ($ in thousands)
Outstanding as of December 31, 2015A			2,128,014				15.15				7.7			$	40,271
Granted			398,313				33.24
Exercised			(995,469	)			2.89
Forfeited			(47,894	)			37.41
Outstanding as of December 31, 2016			1,482,964				27.49				7.5			$	23,840
Granted			346,421				40.13
Exercised			(287,375	)			10.58
Forfeited			(69,880	)			41.12
Outstanding as of December 31, 2017			1,472,130				33.11				7.3			$	25,281
Granted			366,231				43.88
Exercised			(267,909	)			19.90
Forfeited			(49,285	)			43.34
Outstanding as of December 31, 2018			1,521,167				37.70				7.0			$	19,212
Exercisable as of December 31, 2018			696,954				34.16				5.6			$	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.

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:

		Shares				Weighted- Average Grant- Date Fair Value
Non-vested as of December 31, 2015			243,040				44.16
Granted			232,295				33.56
Vested			(95,858	)			41.93
Forfeited			(18,074	)			38.30
Non-vested as of December 31, 2016			361,403				38.18
Granted			211,769				39.91
Vested			(133,796	)			40.60
Forfeited			(47,100	)			42.48
Non-vested as of December 31, 2017			392,276				37.77
Granted			208,803				44.49
Vested			(128,433	)			39.03
Forfeited			(46,650	)			39.43
Non-vested as of December 31, 2018			425,996				40.50

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		$	2,166			$	8,914
2020			2,477				7,575
2021			2,053				6,379
2022			1,995				4,955
2023			1,889				4,482
After 2023			18,108				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.

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)

		Quarters Ended 2018
		Q1				Q2				Q3				Q4
Net sales		$	400,091			$	497,581			$	562,388			$	563,404
Gross profit			141,927				178,473				200,334				204,306
Operating income			56,347				85,467				106,519				108,848
Net income attributable to Generac Holdings Inc.			33,645				53,261				75,776				75,575
Net income attributable to common shareholders per common share - basic:		$	0.42			$	0.83			$	1.12			$	1.21
Net income attributable to common shareholders per common share - diluted:		$	0.42			$	0.82			$	1.11			$	1.20

		Quarters Ended 2017
		Q1				Q2				Q3				Q4
Net sales		$	332,056			$	396,523			$	457,747			$	493,047
Gross profit			109,954				134,224				157,680				182,928
Operating income			30,890				51,822				72,548				95,374
Net income attributable to Generac Holdings Inc.			12,175				25,291				39,435				80,907
Net income attributable to common shareholders per common share - basic:		$	0.21			$	0.41			$	0.64			$	1.31
Net income attributable to common shareholders per common share - diluted:		$	0.20			$	0.41			$	0.63			$	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 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		$	4,805			$	1,941			$	(2,123	)		$	250			$	4,873
Reserves for inventory			15,987				10,004				(3,720	)			869				23,140
Valuation of deferred tax assets			6,817				478				-				(1,493	)			5,802
Year ended December 31, 2017
Allowance for doubtful accounts		$	5,642			$	346			$	(1,842	)		$	659			$	4,805
Reserves for inventory			13,031				6,164				(4,036	)			828				15,987
Valuation of deferred tax assets			4,362				2,455				-				-				6,817
Year ended December 31, 2016
Allowance for doubtful accounts		$	2,494			$	1,654			$	(1,110	)		$	2,604			$	5,642
Reserves for inventory			10,582				5,359				(5,357	)			2,447				13,031
Valuation of deferred tax assets			1,523				638				-				2,201				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.