Item 8. Financial Statements and Supplementary Data

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Item 8. Financial Statements and Supplementary Data

Report of Independent Registered Public Accounting Firm

To the stockholders and the Board of Directors of Generac Holdings Inc.

Waukesha, WI

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Generac Holdings Inc. and subsidiaries (the "Company") as of December 31, 2019 and 2018, the related consolidated statements of comprehensive income, stockholders' equity, and cash flows, for each of the three years in the period ended December 31, 2019, 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, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, 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, 2019, 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 25, 2020, expressed an unqualified opinion on the Company's internal control over financial reporting.

Change in Accounting Principle

As discussed in Note 10 to the financial statements, effective January 1, 2019, the Company adopted FASB Accounting Standards Update 2016-02, Leases (Topic 842), using the modified retrospective approach.

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.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Acquisitions – Neurio and Pika – Intangible Assets — Refer to Note 3 to the consolidated financial statements.

Critical Audit Matter Description

As discussed in Note 3 to the consolidated financial statements, on March 12, 2019, the Company acquired Neurio for a purchase price of $59.1 million. The Company accounted for the acquisition under the acquisition method of accounting for business combinations. Accordingly, the purchase price was allocated based on the estimates of the fair value of the acquired assets and assumed liabilities. As a result, the Company recorded approximately $58.8 million of intangible assets, including $17.9 million of goodwill as of the acquisition date.

On April 26, 2019, the Company acquired Pika for a purchase price of $49.1 million. The Company accounted for the acquisition under the acquisition method of accounting for business combinations. Accordingly, the purchase price was allocated based on the estimates of the fair value of the acquired assets and assumed liabilities. As a result, the Company recorded approximately $58.2 million of intangible assets, including $19.9 million of goodwill as of the acquisition date.

For both acquisitions, acquired intangible assets, excluding goodwill, were valued using certain discounted cash flow methodologies based on future cash flows specific to the type of intangible asset purchased. This methodology incorporated various estimates and assumptions, the most significant being projected revenue growth rates, earnings margins, and forecasted cash flows based on a discount rate and terminal growth rate.

The principle consideration for our determination that the purchase accounting for these acquisitions is a critical audit matter is that there is a high degree of auditor effort, judgment and subjectivity involved in designing and performing procedures to evaluate the reasonableness of management’s estimates and assumptions related to the projected revenue growth rates, earnings margins and forecasted cash flows based on the discount rate and terminal growth rate.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the projected revenue growth rates, earnings margins, and forecasted cash flows and the selection of the discount rate and terminal growth rate for the intangible assets included the following, among others:

	●	We tested the effectiveness of controls over management’s process to estimate the fair value of the intangible assets, including those over projected revenue growth rates, earnings margins and forecasted cash flows based on the discount rate and terminal growth rate.

	●	We assessed the reasonableness of management’s future cash flow projections and terminal growth rate by comparing the projections to historical results and relevant industry data.

	●	With the assistance of our fair value specialists, we evaluated the reasonableness of the (1) valuation methodology and (2) discount rate selected, including testing the source information underlying the determination of the discount rate, testing the mathematical accuracy of the calculation, and developing a range of independent estimates and comparing those to the discount rate selected by management.

	●	We evaluated whether the estimated future cash flows were consistent with evidence obtained in other areas of the audit, including impairment analyses and tax projections.

Goodwill – Refer to Note 9 to the financial statements.

Critical Audit Matter Description

The Company’s evaluation of goodwill for impairment involves the comparison of the fair value of each reporting unit to its carrying value. The Company’s estimate for each reporting unit is based on the present value of estimated future cash flows attributable to the respective reporting unit. This requires management to make significant estimates and assumptions including estimates of future growth rates and inflation rates and discount rates based on the estimated weighted average cost of capital for the business. Changes in the assumptions could have a significant impact on the fair value, which could result in an impairment charge. The Company performed their annual impairment assessment of its reporting units as of October 31, 2019. In the October 31, 2019 impairment test calculation, the Latin America reporting unit had an estimated fair value that exceeded its carrying value by approximately 10%. Because the estimated fair value exceeded the carrying value, no impairment was recorded. The carrying value of the Company’s Latin America reporting unit goodwill was approximately $48.1 million. Key financial assumptions utilized to determine the fair value of the reporting unit include revenue growth levels that reflect recovering end markets, an expanding customer and project pipeline, increased sales of service parts and service contracts, improving profit margins, a 3% terminal growth rate and an 11.1% discount rate.

The principle consideration for our determination that the evaluation of goodwill is a critical audit matter is that there is a high degree of auditor effort, judgment and subjectivity involved in designing and performing procedures to evaluate the reasonableness of management’s key financial assumptions utilized to determine the fair value of the Latin America reporting unit.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the forecasts of future revenue growth rates, improving profit margins, the terminal growth rate and the selection of the discount rate for the Latin America reporting unit included the following, among others:

	●	Evaluated the design and effectiveness of the controls over management’s goodwill impairment evaluation, including those over the determination of the fair value of the reporting unit, such as controls related to management’s forecast and the selection of the discount rate.

	●	Obtained the Company’s discounted cash flow model and evaluated the valuation analysis for mathematical accuracy.

	●	Utilized fair value specialists to evaluate whether the valuation techniques applied by management were appropriate.

	●	Assessed management’s historical ability to accurately forecast the Company’s results of operations.

	●	Assessed management’s intent and/or ability to take specific actions included in the discounted cash flow model.

	●	Evaluated the reasonableness of management’s forecasts by comparing the forecasts to (1) historical results, (2) internal communications to the Board of Directors, and (3) forecasted information included in industry reports.

	●	Independently calculated a discount rate and compared it to the rate utilized by the Company.

/s/ Deloitte & Touche LLP

Milwaukee, Wisconsin

February 25, 2020

We have served as the Company’s auditor since 2016.

Report of Independent Registered Public Accounting Firm

To the stockholders and the 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 subsidiaries (the “Company”) as of December 31, 2019, 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, 2019, 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, 2019, of the Company and our report dated February 25, 2020, expressed an unqualified opinion on those financial statements and included an explanatory paragraph regarding the Company's adoption of FASB Accounting Standards Update 2016-02, Leases (Topic 842), using the modified retrospective approach.

As described in Management’s Report on Internal Control over Financial Reporting, management excluded from its assessment the internal control over financial reporting at Neurio Technology Inc. (Neurio), which was acquired in March 2019, and Pika Energy, Inc (Pika), which was acquired in April 2019, and whose financial statements constitute 5.0% and 2.8% of net and total assets, respectively, 0.4% of net sales, and (2.2)% of net income of the consolidated financial statement amounts as of and for the year ended December 31, 2019. Accordingly, our audit did not include the internal control over financial reporting at Neurio and Pika.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally 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 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 25, 2020

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

	December 31,
	2019			2018
Assets
Current assets:
Cash and cash equivalents	$	322,883		$	224,482
Accounts receivable, less allowance for doubtful accounts of $6,968 and $4,873 at December 31, 2019 and 2018, respectively		319,538			326,133
Inventories		522,024			544,750
Prepaid expenses and other assets		31,384			25,404
Total current assets		1,195,829			1,120,769

Property and equipment, net		316,976			278,929

Customer lists, net		55,552			61,194
Patents and technology, net		85,546			29,970
Other intangible assets, net		8,259			3,043
Tradenames, net		148,377			152,283
Goodwill		805,284			764,655
Deferred income taxes		2,933			163
Operating lease and other assets		46,913			15,308
Total assets	$	2,665,669		$	2,426,314

Liabilities and stockholders’ equity
Current liabilities:
Short-term borrowings	$	58,714		$	45,583
Accounts payable		261,977			328,091
Accrued wages and employee benefits		41,361			40,819
Other accrued liabilities		132,629			144,236
Current portion of long-term borrowings and finance lease obligations		2,383			1,977
Total current liabilities		497,064			560,706

Long-term borrowings and finance lease obligations		837,767			876,396
Deferred income taxes		96,328			71,300
Operating lease and other long-term liabilities		140,432			95,647
Total liabilities		1,571,591			1,604,049

Redeemable noncontrolling interest		61,227			61,004

Stockholders’ equity:
Common stock, par value $0.01, 500,000,000 shares authorized, 71,667,726 and 71,186,418 shares issued at December 31, 2019 and 2018, respectively		717			712
Additional paid-in capital		498,866			476,116
Treasury stock, at cost, 9,103,013 and 9,047,060 shares at December 31, 2019 and 2018, respectively		(324,551	)		(321,473	)
Excess purchase price over predecessor basis		(202,116	)		(202,116	)
Retained earnings		1,084,383			831,123
Accumulated other comprehensive loss		(24,917	)		(23,813	)
Stockholders’ equity attributable to Generac Holdings Inc.		1,032,382			760,549
Noncontrolling interests		469			712
Total stockholders’ equity		1,032,851			761,261
Total liabilities and stockholders’ equity	$	2,665,669		$	2,426,314

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,
	2019			2018			2017

Net sales	$	2,204,336		$	2,023,464		$	1,679,373
Costs of goods sold		1,406,584			1,298,424			1,094,587
Gross profit		797,752			725,040			584,786

Operating expenses:
Selling and service		217,683			191,887			174,841
Research and development		68,394			50,019			42,869
General and administrative		110,868			103,841			87,581
Amortization of intangibles		28,644			22,112			28,861
Total operating expenses		425,589			367,859			334,152
Income from operations		372,163			357,181			250,634

Other (expense) income:
Interest expense		(41,544	)		(40,956	)		(42,667	)
Investment income		2,767			1,893			298
Loss on extinguishment of debt		(926	)		(1,332	)		–
Loss on pension settlement		(10,920	)		–			–
Other, net		(1,933	)		(5,710	)		(4,566	)
Total other expense, net		(52,556	)		(46,105	)		(46,935	)

Income before provision for income taxes		319,607			311,076			203,699
Provision for income taxes		67,299			69,856			44,142
Net income		252,308			241,220			159,557
Net income attributable to noncontrolling interests		301			2,963			1,749
Net income attributable to Generac Holdings Inc.	$	252,007		$	238,257		$	157,808

Other comprehensive income (loss):
Foreign currency translation adjustment	$	2,210		$	(5,976	)	$	15,191
Net unrealized gain (loss) on derivatives		(13,855	)		2,924			3,712
Pension liability adjustment		10,541			437			62
Other comprehensive income (loss)		(1,104	)		(2,615	)		18,965
Total comprehensive income		251,204			238,605			178,522
Comprehensive income (loss) attributable to noncontrolling interests		(635	)		1,647			5,549
Comprehensive income attributable to Generac Holdings Inc.	$	251,839		$	236,958		$	172,973

Net income attributable to common shareholders per common share - basic:	$	4.09		$	3.57		$	2.56
Weighted average common shares outstanding - basic:		61,926,986			61,662,031			62,040,704

Net income attributable to common shareholders per common share - diluted:	$	4.03		$	3.54		$	2.53
Weighted average common shares outstanding - diluted:		62,865,446			62,233,225			62,642,872

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, 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
Change in noncontrolling interest share		–		–		–			–			–			–			–			–			–			(154	)		(154	)
Unrealized loss on interest rate swaps, net of tax of ($4,877)		–		–		–			–			–			–			–			(13,855	)		(13,855	)		–			(13,855	)
Foreign currency translation adjustment		–		–		–			–			–			–			–			2,210			2,210			(30	)		2,180
Common stock issued under equity incentive plans, net of shares withheld for employee taxes and strike price		481,308		5		6,056			–			–			–			–			–			6,061			–			6,061
Net share settlement of restricted stock awards		–		–		–			(55,953	)		(3,078	)		–			–			–			(3,078	)		–			(3,078	)
Cash dividends paid to noncontrolling interest of subsidiary		–		–		–			–			–			–			–			–			–			(285	)		(285	)
Share-based compensation		–		–		16,694			–			–			–			–			–			16,694			–			16,694
Pension liability adjustment and settlement, net of tax		–		–		–			–			–			–			–			10,541			10,541			–			10,541
Redemption value adjustment		–		–		–			–			–			–			1,253			–			1,253			–			1,253
Net income		–		–		–			–			–			–			252,007			–			252,007			226			252,233

Balance at December 31, 2019		71,667,726	$	717	$	498,866			(9,103,013	)	$	(324,551	)	$	(202,116	)	$	1,084,383		$	(24,917	)	$	1,032,382		$	469		$	1,032,851

See notes to consolidated financial statements.

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

	Year Ended December 31,
	2019			2018			2017

Operating activities
Net income	$	252,308		$	241,220		$	159,557
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		32,265			25,296			23,127
Amortization of intangible assets		28,644			22,112			28,861
Amortization of original issue discount and deferred financing costs		4,712			4,749			3,516
Loss on extinguishment of debt		926			1,332			–
Loss on pension settlement		10,920			–			–
Deferred income taxes		18,733			23,600			19,502
Share-based compensation expense		16,694			14,563			10,205
Other		1,086			2,474			410
Net changes in operating assets and liabilities, net of acquisitions:
Accounts receivable		8,231			(43,243	)		(32,857	)
Inventories		26,369			(152,594	)		(22,986	)
Other assets		(358	)		(6,362	)		(14,783	)
Accounts payable		(69,404	)		86,359			42,788
Accrued wages and employee benefits		(3,724	)		12,626			6,105
Other accrued liabilities		(16,252	)		16,972			37,029
Excess tax benefits from equity awards		(2,263	)		(1,877	)		(3,152	)
Net cash provided by operating activities		308,887			247,227			257,322

Investing activities
Proceeds from sale of property and equipment		95			214			82
Proceeds from beneficial interest in securitization transactions		2,630			3,933			3,794
Expenditures for property and equipment		(60,802	)		(47,601	)		(33,261	)
Acquisition of business, net of cash acquired		(112,001	)		(65,440	)		1,257
Net cash used in investing activities		(170,078	)		(108,894	)		(28,128	)

Financing activities
Proceeds from short-term borrowings		73,340			53,965			101,991
Proceeds from long-term borrowings		1,660			51,425			3,069
Repayments of short-term borrowings		(59,518	)		(27,880	)		(114,874	)
Repayments of long-term borrowings and finance lease obligations		(53,049	)		(101,827	)		(117,475	)
Stock repurchases		–			(25,656	)		(30,012	)
Payment of contingent acquisition consideration		(5,550	)		–			–
Payment of debt issuance costs		(1,473	)		(1,702	)		(3,901	)
Cash dividends paid to noncontrolling interest of subsidiary		(285	)		(314	)		–
Taxes paid related to equity awards		(6,438	)		(5,659	)		(5,892	)
Proceeds from the exercise of stock options		9,395			5,614			6,951
Net cash used in financing activities		(41,918	)		(52,034	)		(160,143	)

Effect of exchange rate changes on cash and cash equivalents		1,510			(289	)		2,149

Net increase in cash and cash equivalents		98,401			86,010			71,200
Cash and cash equivalents at beginning of period		224,482			138,472			67,272
Cash and cash equivalents at end of period	$	322,883		$	224,482		$	138,472

Supplemental disclosure of cash flow information
Cash paid during the period
Interest	$	35,465		$	41,007		$	41,105
Income taxes		61,767			41,044			23,836

See notes to consolidated financial statements.

Generac Holdings Inc. Notes to Consolidated Financial Statements

Years Ended December 31, 2019, 2018, and 201****7

_(_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 energy technology solutions. The Company provides power generation equipment, energy storage systems, and other power products serving the residential, light commercial and industrial markets. Generac’s power products and solutions are available globally through a broad network of independent dealers, distributors, retailers, e-commerce partners, wholesalers, and equipment rental companies, 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 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.

	●	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.

	●	In February 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 for the India market.

	●	In March 2019, the Company acquired Neurio Technology Inc. (Neurio), founded in 2005 and headquartered in Vancouver, British Columbia. Neurio is a leading energy data company focused on metering technology and sophisticated analytics to optimize energy use within a home or business.

	●	In April 2019, the Company acquired Pika Energy, Inc. (Pika), founded in 2010 and located in Westbrook, Maine. Pika is a designer and manufacturer of battery storage technologies that capture and store solar or grid power for homeowners and businesses, and is also a manufacturer of advanced power electronics, software and controls for smart energy storage and management.

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 9% and 11% of accounts receivable at December 31, 2019 and 2018, respectively. No one customer accounted for greater than 5%, 6%, and 6%, of net sales during the years ended December 31, 2019, 2018, or 2017, 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. Finance lease right of use assets are included in property and equipment. Refer to Note 10, "Leases," to the consolidated financial statements for the Company's lease disclosure.

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 $32,265, $25,296, and $23,127 for the years ended December 31, 2019, 2018, and 2017, 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 2019, 2018 and 2017, and found no impairment.

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. $4,712, $4,749, and $3,516 of deferred financing costs and original issue discount were amortized to interest expense during fiscal years 2019, 2018 and 2017, 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: 2020 - $2,598; 2021 - $2,640; 2022 - $2,689; 2023 - $2,579; 2024 - $2,508.

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 $9,952 and $14,174 at December 31, 2019 and December 31, 2018, respectively. During the year ended December 31, 2019, the Company recognized revenue of $9,589 related to amounts included in the December 31, 2018 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 11, “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 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 11, “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 three percent of revenue during the year ended December 31, 2019.

Refer to Note 7, “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. Expenditures for advertising production costs are expensed when the related advertisement is first run. Total expenditures for advertising were $44,153, $34,792, and $45,926 for the years ended December 31, 2019, 2018, and 2017, respectively.

Research and Development

The Company expenses research and development costs as incurred. Total expenditures incurred for research and development were $68,394, $50,019, and $42,869 for the years ended December 31, 2019, 2018, and 2017, 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 $812,953, was approximately $833,092 (Level 2) at December 31, 2019, 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 5, “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 17, “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 June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which represents a new credit loss standard that will change the impairment model for most financial assets and certain other financial instruments. Specifically, this guidance will require entities to utilize a new “expected loss” model as it relates to trade and other receivables. In addition, entities will be required to recognize an allowance for estimated credit losses on available-for-sale debt securities, regardless of the length of time that a security has been in an unrealized loss position. This guidance will be effective for annual reporting periods beginning after December 15, 2019, including interim periods within those annual reporting periods, and early adoption is permitted. The Company has established a project plan and an implementation team to adopt and apply the new standard. The Company is in the process of implementing necessary changes to accounting policies, processes, and controls to enable compliance with this new standard. The Company continues to evaluate the impact the adoption of this standard will have on its consolidated financial statements, and does not believe this new standard will have a material impact.

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, 2019, the Company adopted ASU 2016-02, Leases (Topic 842). 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 adopted this standard using the modified retrospective approach as of the date of adoption, meaning no prior period balances were impacted by the adoption. Additionally, the Company elected to adopt the standard using the package of practical expedients permitted under the standard’s transition guidance, which allowed the Company to carry forward its historical lease classifications, and embedded lease and initial direct cost assessments. The adoption of the standard had a material impact on the Company’s consolidated balance sheet primarily related to the recognition of right-of-use (ROU) assets and lease liabilities for operating leases. However, the adoption did not have a material impact on the consolidated statement of comprehensive income and statement of cash flows. Refer to Note 10, “Leases,” for further information regarding the Company’s leases.

On January 1, 2019, the Company adopted ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This guidance was issued to address the impact of the change in the U.S. federal corporate income tax rate from the 2017 U.S. Tax Cuts and Jobs Act (the “Tax Act”) on items recorded as a component of accumulated other comprehensive income (AOCI). This guidance allows companies to reclassify to retained earnings the stranded tax effects lodged in AOCI as a result of the Tax Act. Upon adoption of the ASU, the Company elected to not reclassify the stranded income tax effects from AOCI to retained earnings.

On January 1, 2019, the Company adopted 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 adoption of this standard did not have an impact on the Company’s hedging strategies, and did not have a material impact on the Company’s results of operations and financial position.

On April 1, 2019, the Company adopted 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 Company adopted this standard prospectively, impacting all implementation costs incurred after adoption. The adoption did not have a material impact on the Company’s results of operations and financial position.

3.	Acquisitions

Acquisition of Pika

On April 26, 2019, the Company acquired Pika for a purchase price, net of cash acquired, of $49,068. The acquisition purchase price was funded solely through cash on hand.

The Company recorded a preliminary purchase price allocation during the second quarter of 2019, which was trued-up in the fourth quarter of 2019, based upon its estimates of the fair value of the acquired assets and assumed liabilities. As a result, the Company recorded approximately $58,196 of intangible assets, including $19,896 of goodwill recorded in the Domestic 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 Pika from the date of acquisition through December 31, 2019. The preliminary allocation of the purchase price is based on a preliminary valuation performed to determine the fair value of the net assets as of the acquisition date. The purchase price allocation is subject to further analysis and review, primarily around the review and final valuation of acquired intangible assets.

Acquisition of Neurio

On March 12, 2019, the Company acquired Neurio for a purchase price of $59,071, net of cash acquired and inclusive of a deferred payment of $7,922 which was made during the third quarter of 2019. The acquisition purchase price was funded solely through cash on hand.

The Company recorded a preliminary purchase price allocation in the second quarter of 2019, which was trued-up in the fourth quarter of 2019, based upon its estimates of the fair value of the acquired assets and assumed liabilities. As a result, the Company recorded approximately $58,762 of intangible assets, including $17,862 of goodwill recorded in the Domestic segment, as of the acquisition date. Substantially all of the goodwill and other intangible assets ascribed to this acquisition are deductible for tax purposes. The accompanying consolidated financial statements include the results of Neurio from the date of acquisition through December 31, 2019. The preliminary allocation of the purchase price is based on a preliminary valuation performed to determine the fair value of the net assets as of the acquisition date. The purchase price allocation is subject to further analysis and review, primarily around the review and final valuation of acquired intangible assets.

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 earnout payments of $14,902. Changes in the fair value of the earnout liability during 2019 of $(977), which included interest accretion of $2,740 and other fair value remeasurement adjustments of $(3,717), were recognized as a component of operating income in the Company’s consolidated statements of comprehensive income for the year ended December 31, 2019. The acquisition purchase price was funded solely through cash on hand.

The Company finalized the Selmec purchase price allocation during the second quarter of 2019 based upon its estimates of the fair value of the acquired assets and assumed liabilities. The final purchase price allocation as of the June 1, 2018 opening balance sheet date was as follows:

	June 1, 2018
Accounts receivable	$	14,302
Inventories		8,000
Prepaid expense and other assets		4,323
Property and equipment		5,572
Intangible assets		33,631
Goodwill		46,196
Deferred income taxes		3,252
Other assets		597
Total assets acquired		115,873

Accounts payable		7,216
Accrued wages and employee benefits		397
Other accrued liabilities		13,671
Deferred income taxes		10,974
Other long-term liabilities		3,643
Net assets acquired	$	79,972

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, 2019.

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, 2017. Refer to Note 1, “Description of Business,” for further information on the acquisitions included in the table.

	Year Ended December 31,
	2019		2018		2017
Net Sales:
As reported	$	2,204,336	$	2,023,464	$	1,679,373
Pro forma		2,206,952		2,067,737		1,755,358

Net income attributable to Generac Holdings Inc.:
As reported	$	252,007	$	238,257	$	157,808
Pro forma		248,335		230,379		151,764

Net income attributable to Generac Holdings Inc. per common share - diluted
As reported	$	4.03	$	3.54	$	2.53
Pro forma		3.97		3.41		2.44

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, 2017.

4.	Redeemable Noncontrolling Interest

On March 1, 2016, the Company acquired a 65% ownership interest in PR Industrial S.r.l. and its subsidiaries (Pramac). 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. In February 2019, the Company amended its agreement with the noncontrolling interest holder of Pramac, extending the agreement by five years, allowing the Company to exercise its call option rights in partial increments at certain times during the five year period, and providing that the noncontrolling interest holder no longer holds the right to put its shares to the Company until April 1, 2021.

On February 1, 2019, the Company acquired a 51% ownership interest in Captiva Energy Solutions, Ltd (Captiva). The 49% noncontrolling interest in Captiva has an acquisition date fair value of $3,165, 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 Captiva. The noncontrolling interest holder has a put option to sell his interest to the Company any time after five years from the date of acquisition, or earlier upon the occurrence of certain circumstances. The put option price is based on a multiple of earnings, subject to the terms of the acquisition. Further, the Company has a call option that it may redeem any time after 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, subject to the terms of the acquisition.

For both transactions, the redeemable noncontrolling interest is recorded at the greater of the initial fair value, increased or decreased for the noncontrolling interests’ share of comprehensive income (loss), or the estimated redemption value, with any adjustments 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 14, “Earnings Per Share,” to the consolidated financial statements. The following table presents the changes in the redeemable noncontrolling interest:

	Year Ended December 31,
	2019				2018			2017
Balance at beginning of period	$	61,004			$	43,929		$	33,138
Noncontrolling interest		3,165		(1)		-			1,540		(2)
Net income		75				2,214			1,631
Foreign currency translation		(1,764	)			(3,109	)		8,529
Redemption value adjustment		(1,253	)			17,970			(909	)
Balance at end of period	$	61,227			$	61,004		$	43,929

(1) Represents the noncontrolling interest of Captiva Energy calculated at the date of acquisition, February 1, 2019.
(2) Represents the additional noncontrolling interest of Pramac resulting from a common control transaction between Generac Mobile Products S.r.l. and Pramac UK Limited legal entities.

5.	Derivative Instruments and Hedging Activities

Commodities

The Company is exposed to price fluctuations in commodities including 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, 2019 and 2018, the Company had no commodity contracts outstanding.

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 $(174), $(874), and $377 for the years ended December 31, 2019, 2018, and 2017, 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, 2019 and 2018, the Company had forty-three and forty 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, 2019, 2018, and 2017 were $(1,195), $(653), and $697, respectively.

Interest Rate Swaps

In 2017, the Company entered into twenty interest rate swap agreements. In December 2019, in conjunction with the amendment to its term loan, the Company amended those interest rate swaps to remove the LIBOR floor, which also resulted in minor reductions to the future dated swap fixed rates. 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 (losses) recognized for the years ended December 31, 2019, 2018, and 2017 were $(13,855), $2,924, and $3,712, 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, 2019****			December 31, 2018****
Commodity contracts	$	6		$	(160	)
Foreign currency contracts		31			(117	)
Interest rate swaps		(10,425	)		8,307

The fair value of the commodity and foreign currency contracts are included in prepaid expenses and other current assets, and the fair value of the interest rate swaps are included in other accrued liabilities and other long-term liabilities in the consolidated balance sheet as of December 31, 2019. 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. Excluding the impact of credit risk, the fair value of the derivative contracts as of December 31, 2019 and 2018 is a liability of $10,588 and an asset of $8,220, respectively, which represents the amount the Company would pay or receive upon exit of the agreements on those dates.

6.	Accumulated Other Comprehensive Loss

The following presents a tabular disclosure of changes in AOCL during the years ended December 31, 2019 and 2018, net of tax:

	Foreign Currency Translation Adjustments			Defined Benefit Pension Plan				Unrealized Gain (Loss) on Cash Flow Hedges				Total

Beginning Balance – January 1, 2019	$	(18,832	)	$	(10,541	)		$	5,560			$	(23,813	)
Other comprehensive income (loss) before reclassifications		2,210			1,474		(1)		(13,855	)	(2)		(10,171	)
Amounts reclassified from AOCL		-			9,067		(3)		-				9,067
Net current-period other comprehensive income (loss)		2,210			10,541				(13,855	)			(1,104	)
Ending Balance – December 31, 2019	$	(16,622	)	$	-			$	(8,295	)		$	(24,917	)

	Foreign Currency Translation Adjustments			Defined Benefit Pension Plan				Unrealized Gain (Loss) 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	)	(4)		2,924	(5)		(3,208	)
Amounts reclassified from AOCL		-			593		(6)		-			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	)

	(1)	Represents unrecognized actuarial gains of $1,992 net of tax effect of $(518), included in the computation of net periodic pension cost for the year ended December 31, 2019. Refer to Note 16, “Benefit Plans,” to the consolidated financial statements for additional information.

	(2)	Represents unrealized losses of $(18,732), net of tax effect of $4,877 for the year ended December 31, 2019.

	(3)	Details of reclassifications from AOCL during 2019 are as follows:

	Amounts reclassified from AOCL
Loss on pension settlement	$	10,920
Amortization of net loss		843
Total before tax		11,763
Income tax impact		(2,696	)
Amounts reclassified from AOCL	$	9,067

	(4)	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 16, “Benefit Plans,” to the consolidated financial statements for additional information.

	(5)	Represents unrealized gains of $3,951, net of tax effect of $(1,027) for the year ended December 31, 2018.

	(6)	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 16, “Benefit Plans,” to the consolidated financial statements for additional information.

7.	Segment Reporting

The Company has two reportable segments for financial reporting purposes – Domestic and International. The Domestic segment includes the legacy Generac business, (excluding its traditional Latin American export operations), and the acquisitions that are based in the U.S. and Canada, all of which have revenues that are substantially derived from the U.S. and Canada. The International segment includes the legacy Generac business's Latin American export operations, and the Ottomotores, Tower Light, Pramac, Motortech and Selmec acquisitions, all of which have revenues that are substantially derived from outside the U.S and Canada. Both reportable segments design and manufacture a wide range of power generation equipment, energy technology solutions, 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, distribution methods and regional considerations.

The Company's product offerings consist primarily of power generation equipment, energy technology solutions, 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, 2019
Product Classes	Domestic		International		Total
Residential products	$	1,086,019	$	57,704	$	1,143,723
Commercial & industrial products		513,482		358,113		871,595
Other		143,397		45,621		189,018
Total net sales	$	1,742,898	$	461,438	$	2,204,336

	Year Ended December 31, 2018
Product Classes	Domestic		International		Total
Residential products	$	980,707	$	62,032	$	1,042,739
Commercial & industrial products		461,415		358,855		820,270
Other		124,398		36,057		160,455
Total net sales	$	1,566,520	$	456,944	$	2,023,464

	Year Ended December 31, 2017
Product Classes	Domestic		International		Total
Residential products	$	796,237	$	74,253	$	870,490
Commercial & industrial products		372,635		311,718		684,353
Other		102,806		21,724		124,530
Total net sales	$	1,271,678	$	407,695	$	1,679,373

Residential products consist primarily of automatic home standby generators ranging in output from 6kW to 60kW, portable generators, energy storage and monitoring solutions, and other outdoor power equipment. These products are sold through independent residential dealers, national and regional retailers, e-commerce merchants, electrical/HVAC/solar wholesalers, solar installers, 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, the amortization of extended warranty deferred revenue, and remote monitoring subscription revenue. The aftermarket service parts and product accessories are generally transferred to the customer at a point in time, while the extended warranty and subscription revenue are 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,
	2019			2018			2017
Domestic	$	428,667		$	388,495		$	282,450
International		25,448			36,057			34,850
Total adjusted EBITDA	$	454,115		$	424,552		$	317,300

Interest expense		(41,544	)		(40,956	)		(42,667	)
Depreciation and amortization		(60,767	)		(47,408	)		(51,988	)
Non-cash write-down and other adjustments (1)		(240	)		(3,532	)		(2,923	)
Non-cash share-based compensation expense (2)		(16,694	)		(14,563	)		(10,205	)
Loss on extinguishment of debt (3)		(926	)		(1,332	)		-
Loss on pension settlement (4)		(10,920	)		-			-
Transaction costs and credit facility fees (5)		(2,724	)		(3,883	)		(2,145	)
Business optimization expenses (6)		(1,572	)		(952	)		(2,912	)
Other		879			(850	)		(761	)
Income before provision for income taxes	$	319,607		$	311,076		$	203,699

	(1)	Includes certain foreign currency and purchase accounting related adjustments, gains/losses on disposal of assets and unrealized mark-to-market adjustments on commodity contracts.

	(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 non-cash write-off of original issue discount and deferred financing costs due to a voluntary prepayment of Term Loan debt.

	(4)	Represents pre-tax settlement charges related to the termination of the Company’s domestic pension plan in the fourth quarter of 2019.

	(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 severance and other non-recurring restructuring charges related to the consolidation of certain of our facilities.

In the fourth quarter of 2019, management has determined that the Latin American export operations of the legacy Generac business (GPS LATAM) should have been included in the International reportable segment beginning in 2018. Previously, GPS LATAM was reported in the Domestic segment, in amounts that were not material. This change is to reflect the current leadership structure as well as how the Company makes financial decisions and allocates resources for the overall Latin America reporting unit. To reflect this change, management has chosen to correct the net sales and adjusted EBITDA by segment included in this Form 10-K for the years ended December 31, 2019, 2018, and 2017. The following table details the amounts adjusted from the Domestic segment to the International segment.

	Year Ended December 31,
	2019		2018		2017
Residential Products	$	7,129	$	9,924	$	18,888
Commercial & industrial products		5,724		2,651		12,940
Other		998		1,230		-
Total Net Sales	$	13,851	$	13,805	$	31,828

Adjusted EBITDA	$	984	$	190	$	7,840

There was no impact to the Company’s reporting of total assets, depreciation and amortization, and capital expenditures by segment as a result of this change.

The following tables summarize additional financial information by reportable segment:

	Assets
	Year Ended December 31,
	2019		2018		2017
Domestic	$	2,123,251	$	1,868,554	$	1,612,607
International		542,418		557,760		413,358
Total	$	2,665,669	$	2,426,314	$	2,025,965

	Depreciation and Amortization
	Year Ended December 31,
	2019		2018		2017
Domestic	$	46,145	$	35,586	$	37,962
International		14,764		11,822		14,026
Total	$	60,909	$	47,408	$	51,988

	Capital Expenditures
	Year Ended December 31,
	2019		2018		2017
Domestic	$	36,007	$	38,242	$	29,258
International		24,795		9,359		4,003
Total	$	60,802	$	47,601	$	33,261

The Company’s sales in the United States represent approximately 75%, 74%, and 74% of total sales for the years ended December 31, 2019, 2018 and 2017, respectively. Approximately 80% of the Company’s identifiable long-lived assets are located in the United States as of December 31, 2019 and 2018.

8.	Balance Sheet Details

Inventories consist of the following:

	December 31,
	2019		2018

Raw material	$	328,021	$	348,980
Work-in-process		10,387		6,971
Finished goods		183,616		188,799
Total	$	522,024	$	544,750

As of December 31, 2019 and 2018, inventories totaling $18,684 and $8,488, respectively, were on consignment at customer locations.

Property and equipment consists of the following:

	December 31,
	2019			2018

Land and improvements	$	18,252		$	15,975
Buildings and improvements		177,079			163,161
Machinery and equipment		117,114			103,726
Dies and tools		22,040			28,198
Vehicles		3,955			2,070
Office equipment and systems		99,124			82,638
Leasehold improvements		4,293			2,137
Construction in progress		36,299			26,543
Gross property and equipment		478,156			424,448
Accumulated depreciation		(161,180	)		(145,519	)
Total	$	316,976		$	278,929

Total property and equipment included finance leases of $20,158 at December 31, 2018, primarily made up of buildings and improvements. Amortization of finance lease right of use assets is recorded within depreciation expense in the consolidated statements of comprehensive income. The initial measurement of new finance lease right of use assets is accounted for as a non-cash item in the consolidated statement of cash flows. Refer to Note 10, “Leases,” for further information regarding the Company’s accounting for leases under ASC 842, Leases, in 2019.

9.	Goodwill and Intangible Assets

The changes in the carrying amount of goodwill by reportable segment for the years ended December 31, 2019 and 2018 are as follows:

	Domestic		International			Total
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
Acquisitions of businesses, net		37,758		3,078			40,836
Foreign currency translation		-		(207	)		(207	)
Balance at December 31, 2019	$	659,209	$	146,075		$	805,284

Refer to Note 3, “Acquisitions,” to the consolidated financial statements for further information regarding the Company’s acquisitions.

The details of the gross goodwill applicable to each reportable segment at December 31, 2019 and 2018 are as follows:

	Year Ended December 31, 2019							Year Ended December 31, 2018
	Gross		Accumulated Impairment			Net		Gross		Accumulated Impairment			Net
Domestic	$	1,162,402	$	(503,193	)	$	659,209	$	1,124,644	$	(503,193	)	$	621,451
International		150,686		(4,611	)		146,075		147,815		(4,611	)		143,204
Total	$	1,313,088	$	(507,804	)	$	805,284	$	1,272,459	$	(507,804	)	$	764,655

The following table summarizes intangible assets by major category as of December 31, 2019 and 2018:

	Weighted Average		December 31, 2019							December 31, 2018
	Amortization Years		Gross		Accumulated Amortization			Net Book Value		Gross		Accumulated Amortization			Net Book Value
Finite-lived intangible assets:
Tradenames		9	$	56,669	$	(36,613	)	$	20,056	$	56,378	$	(32,416	)	$	23,962
Customer lists		12		369,932		(314,380	)		55,552		368,343		(307,149	)		61,194
Patents		13		131,086		(110,554	)		20,532		131,030		(101,060	)		29,970
Developed technology		9		82,886		(17,872	)		65,014		13,169		(12,058	)		1,111
Software		-		1,046		(1,046	)		-		1,046		(1,046	)		-
Non-compete/other		4		12,063		(3,804	)		8,259		3,829		(1,897	)		1,932
Total finite-lived intangible assets			$	653,682	$	(484,269	)	$	169,413	$	573,795	$	(455,626	)	$	118,169
Indefinite-lived tradenames				128,321		-			128,321		128,321		-			128,321
Total intangible assets			$	782,003	$	(484,269	)	$	297,734	$	702,116	$	(455,626	)	$	246,490

Amortization of intangible assets was $28,644, $22,112 and $28,861 in 2019, 2018 and 2017, respectively. Excluding the impact of any future acquisitions, the Company estimates amortization expense for the next five years will be as follows: 2020 - $31,237; 2021 - $29,473; 2022 - $22,226; 2023 - $18,344; 2024 - $16,156.

*10.*	Leases

The Company determines if an arrangement is or contains a lease at contract inception. The Company recognizes a right of use (“ROU”) asset and lease liability at the lease commencement date based on the present value of the lease payments over the lease term. As the Company’s leases generally do not provide an implicit rate, the incremental borrowing rate is used to determine the present value of lease payments. The incremental borrowing rate is a collateralized rate determined based on the lease term, the Company’s credit rating, and other market information available at the commencement date. The ROU asset also includes any lease payments made prior to the commencement date and is reduced by any lease incentives. The lease term may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for operating leases is recognized on a straight-line basis over the lease term, while lease expense for finance leases is recognized as depreciation and interest expense using the effective interest method. The Company’s variable lease expense generally consists of property tax and insurance payments that are variable in nature, however, these amounts are immaterial to the consolidated financial statements.

The Company has lease agreements with both lease and nonlease components, which it elected to account for as a single lease component. However, the Company did not elect to apply the recognition exception for short-term leases. The Company is applying these elections to all asset classes.

The Company leases certain manufacturing facilities, distribution centers, office space, warehouses, automobiles, machinery and computer equipment globally under both finance and operating leases. The Company’s leases have remaining lease terms of up to 20 years, of which certain leases, primarily within the buildings and improvements asset class, include options to extend the leases for up to 10 additional years. Further, the Company leases certain buildings from a noncontrolling interest holder, which the Company has determined to be arms’ length transactions.

The Company is a lessor of one building that it leases to a third party. The lease income related to this arrangement is not material to the consolidated financial statements.

The Company records its operating lease cost and amortization of finance lease ROU assets within cost of goods sold or operating expenses in the consolidated statements of comprehensive income depending on the cost center of the underlying asset. The Company records its finance lease interest cost within interest expense in the consolidated statements of comprehensive income.

The components of total lease cost consist of the following:

	Twelve Months Ended December 31, 2019

Operating lease cost	$	9,647
Finance lease cost:
Amortization of ROU assets		2,531
Interest on lease liabilities		2,227
Total lease cost	$	14,405

Prior to the adoption of ASC 842, lease expense consisted of payments on operating leases. Total rent expense related to operating leases for the years ended December 31, 2018 and 2017 was approximately $10,739 and $10,845, respectively.

As of January 1, 2019, the date of the adoption of ASU 2016-02, the Company recognized ROU assets and lease liabilities related to operating leases of $42,024 and $42,056, respectively, and there was no cumulative effect adjustment made to retained earnings. Supplemental balance sheet information related to the Company’s leases is as follows:

	December 31, 2019
Operating Leases
Operating lease ROU assets (1)	$	35,950

Operating lease liabilities - current (2)	$	7,231
Operating lease liabilities - noncurrent (3)		29,778
Total operating lease liabilities	$	37,009

Finance Leases
Finance lease ROU assets, gross	$	29,142
Accumulated depreciation - finance lease ROU assets		(3,079	)
Finance lease ROU assets, net (4)	$	26,063

Finance lease liabilities - current (5)	$	1,830
Finance lease liabilities - noncurrent (6)		24,132
Total finance lease liabilities	$	25,962

	(1)	Recorded in the operating lease and other assets line within the consolidated balance sheets

	(2)	Recorded in the other accrued liabilities line within the consolidated balance sheets

	(3)	Recorded in the operating lease and other long-term liabilities line within the consolidated balance sheets

	(4)	Recorded in the property and equipment, net line within the consolidated balance sheets

	(5)	Recorded in the current portion of long-term borrowings and finance lease obligations line within the consolidated balance sheets

	(6)	Recorded in the long-term borrowings and finance lease obligations line within the consolidated balance sheets

Supplemental cash flow information related to the Company’s leases is as follows:

	Three Months Ended December 31, 2019		Twelve Months Ended December 31, 2019
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	2,174	$	10,125
Operating cash flows from finance leases		471		1,864
Financing cash flows from finance leases		976		3,237

ROU assets obtained in exchange for lease liabilities
Operating leases		239		4,021
Finance leases		632		8,797

Weighted average remaining lease term and discount rate information related to the Company’s leases is as follows:


Weighted average remaining lease term (in years)
Operating Leases	6.90
Finance Leases	13.87

Weighted average discount rate
Operating Leases	4.59	%
Finance Leases	7.83	%

The maturities of the Company’s lease liabilities are as follows:

	As of December 31, 2019
	Finance Leases			Operating Leases
2020	$	3,769		$	9,086
2021		3,352			7,029
2022		3,536			5,472
2023		2,659			4,629
2024		2,650			4,288
After 2024		29,371			14,232
Total minimum lease payments		45,337			44,736
Interest component		(19,375	)		(7,727	)
Present value of minimum lease payments	$	25,962		$	37,009

*11.*	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,
	2019			2018			2017
Balance at beginning of period	$	41,785		$	35,422		$	31,695
Product warranty reserve assumed in acquisition		1,062			-			43
Payments		(26,096	)		(20,029	)		(18,861	)
Provision for warranty issued		32,060			26,910			21,347
Changes in estimates for pre-existing warranties		505			(518	)		1,198
Balance at end of period	$	49,316		$	41,785		$	35,422

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,
	2019			2018			2017
Balance at beginning of period	$	68,340		$	57,854		$	36,139
Deferred revenue contracts issued		24,483			21,440			29,262
Amortization of deferred revenue contracts		(14,085	)		(10,954	)		(7,547	)
Balance at end of period	$	78,738		$	68,340		$	57,854

The timing of recognition of the Company’s deferred revenue balance related to extended warranties at December 31, 2019 is as follows:

2020	$	15,535
2021		16,798
2022		14,705
2023		11,367
After 2023		20,333
Total	$	78,738

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, 2019 and 2018 was $6,190 and $4,782, respectively. Amortization of deferred contract costs recorded during the years ended December 31, 2019, 2018 and 2017 was $869, $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,
	2019		2018
Product warranty liability
Current portion - other accrued liabilities	$	27,885	$	25,396
Long-term portion - other long-term liabilities		21,431		16,389
Total	$	49,316	$	41,785

Deferred revenue related to extended warranties
Current portion - other accrued liabilities	$	15,519	$	13,646
Long-term portion - other long-term liabilities		63,219		54,694
Total	$	78,738	$	68,340

*12.*	Credit Agreements

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

	December 31,
	2019		2018
ABL facility	$	30,961	$	18,459
Other lines of credit		27,753		27,124
Total	$	58,714	$	45,583

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

	December 31,
	2019			2018
Term loan	$	830,000		$	879,000
Original issue discount and deferred financing costs		(18,048	)		(22,440	)
ABL facility		-			-
Finance lease obligation		25,962			20,171
Other		2,236			1,642
Total		840,150			878,373
Less: current portion of debt		553			1,075
Less: current portion of finance lease obligation		1,830			902
Total	$	837,767		$	876,396

Maturities of long-term borrowings outstanding at December 31, 2019, excluding finance lease obligations as their maturities are disclosed in Note 10, “Leases,” and before considering original issue discount and deferred financing costs, are as follows:

2020	$	553
2021		1,683
2022		-
2023		-
After 2023		830,000
Total	$	832,236

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 currently December 13, 2026. 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 was reduced to 2.50%, in each case, if the Company’s net debt leverage ratio, as defined in the Term Loan, fell below 3.00 to 1.00 for that measurement period.

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. At the time, the amended Term Loan pricing was still subject to the 0.75% LIBOR floor. In connection with this amendment and in accordance with ASC 470-50, Debt Modifications and Extinguishments, 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 the second quarter of 2018.

In December 2019, the Company amended its Term Loan to extend the maturity date from May 31, 2023 to December 13, 2026, as well as removed the LIBOR floor of 0.75% from the adjusted LIBOR rate. In connection with this amendment and in accordance with ASC 470-50, the Company capitalized $1,247 of fees paid to creditors as deferred financing costs on long-term borrowings and expensed $432 of transaction fees in the fourth quarter of 2019. Additionally, the Company made a voluntary prepayment of $49,000 on the term loan, which resulted in the write-off of $926 of original issue discount and capitalized debt issuance costs as a loss on extinguishment of debt in the consolidated statements of comprehensive income.

The Term Loan does not require an Excess Cash Flow payment if the Company’s net secured leverage ratio is maintained below 3.75 to 1.00 times. As of December 31, 2019, the Company’s net secured leverage ratio was 1.50 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 currently 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, 2019, there was $30,961 outstanding under the ABL Facility, leaving $268,608 of availability, net of outstanding letters of credit.

As of December 31, 2019 and December 31, 2018, short-term borrowings consisted of borrowings by the Company’s foreign subsidiaries on local lines of credit and the ABL Facility, which totaled $58,714 and $45,583, respectively.

*13.*	Stock Repurchase Programs

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 new $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 year ended December 31, 2019, the Company did not repurchase any shares of its common stock. During the years ended December 31, 2018 and 2017, the Company repurchased 560,000 and 844,500 shares of its common stock, respectively, for $25,656 and $30,012, 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 (at an average cost per share of $35.21), all funded with cash on hand.

*14.*	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 4, “Redeemable Noncontrolling Interest,” 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,
	2019		2018			2017
Numerator
Net income attributable to Generac Holdings Inc.	$	252,007	$	238,257		$	157,808
Redeemable noncontrolling interest redemption value adjustment		1,253		(17,970	)		909
Net income attributable to common shareholders	$	253,260	$	220,287		$	158,717

Denominator
Weighted average shares, basic		61,926,986		61,662,031			62,040,704
Dilutive effect of stock compensation awards (1)		938,460		571,194			602,168
Diluted shares		62,865,446		62,233,225			62,642,872

Net income attributable to common shareholders per share
Basic	$	4.09	$	3.57		$	2.56
Diluted	$	4.03	$	3.54		$	2.53

	(1)	Excludes approximately 26,100 and 147,400 stock options for the years ended December 31, 2018 and 2017, respectively, as the impact of such awards was anti-dilutive. There were no awards with an anti-dilutive impact for the year ended December 31, 2019.

*15.*	Income Taxes

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

	Year Ended December 31,
	2019			2018			2017
Current:
Federal	$	41,686		$	32,072		$	15,753
State		4,211			9,639			1,775
Foreign		2,660			4,546			4,585
		48,557			46,257			22,113
Deferred:
Federal		19,393			22,225			18,213
State		1,390			1,910			4,139
Foreign		(1,263	)		479			(2,777	)
		19,520			24,614			19,575
Change in valuation allowance		(778	)		(1,015	)		2,454
Provision for income taxes	$	67,299		$	69,856		$	44,142

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. The Company believes the tax positions taken on its returns would be sustained upon an exam, or where a position is uncertain, adequate reserves have been recorded. As of December 31, 2019, the Company is no longer subject to income tax examinations for United States federal income taxes for tax years prior to 2016. Due to the carryforward of net operating losses and research & development credits, the Company’s Wisconsin state income tax returns for tax years 2009 through 2018 remain open. In addition, the Company is subject to audit by various foreign taxing jurisdictions for the tax years 2013 through 2018.

The Company is regularly under examination in the various jurisdictions in which we operate. The Company is 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.

Significant components of deferred tax assets and liabilities are as follows:

	December 31,
	2019			2018
Deferred tax assets:
Accrued expenses	$	21,053		$	16,745
Deferred revenue		14,697			12,418
Inventories		9,879			8,500
Pension obligations		-			1,062
Stock-based compensation		7,490			5,960
Operating loss and credit carryforwards		28,356			25,585
Bad debt		1,094			1,363
Other		4,275			2,516
Valuation allowance		(5,024	)		(5,802	)
Total deferred tax assets		81,820			68,347

Deferred tax liabilities:
Goodwill and intangible assets		142,159			108,899
Depreciation		27,864			25,429
Debt refinancing costs		4,119			4,206
Prepaid expenses		1,073			950
Total deferred tax liabilities		175,215			139,484

Net deferred tax liabilities	$	(93,395	)	$	(71,137	)

As of December 31, 2019 and 2018, deferred tax assets of $2,933 and $163, and deferred tax liabilities of $96,328 and $71,300, 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 2019, the valuation allowance decreased by $778 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, 2019, the Company had various state research & development and state manufacturing tax credit carryforwards of approximately $8,291 and $12,747, respectively, which expire between 2020 and 2034. 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,
	2019			2018
Unrecognized tax benefit, beginning of period	$	5,635		$	7,122
Increase in unrecognized tax benefit for positions taken in prior period		633			-
Increase in unrecognized tax benefit for positions taken in current period		495			580
Statute of limitation expirations		(43	)		(1,818	)
Settlements		-			(249	)
Unrecognized tax benefit, end of period	$	6,720		$	5,635

The unrecognized tax benefit as of December 31, 2019 and 2018, if recognized, would favorably impact the effective tax rate.

As of December 31, 2019 and 2018, total accrued interest of approximately $71 and $37, respectively, and accrued penalties of approximately $195 and $136, 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, 2020.

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 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, 2019, 2018 and 2017 are as follows:

	Year Ended December 31,
	2019			2018			2017
U.S. statutory rate		21.0	%		21.0	%		35.0	%
State taxes		4.3			4.7			4.1
State tax rate differential		(1.0	)		-			-
Research and development credits		(0.8	)		(1.3	)		(1.4	)
State credits		(1.0	)		(1.0	)		(0.2	)
Share-based compensation (1)		(0.6	)		(0.5	)		(1.4	)
Tax Act impact (2)		-			(0.2	)		(13.9	)
Other		(0.8	)		(0.2	)		(0.9	)
Effective tax rate		21.1	%		22.5	%		21.3	%

	(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.
	(2)	As a result of the Tax Act, we recognized a one-time, non-cash benefit of $28.4 million in the fourth quarter of 2017 primarily from the impact of the revaluation of our net deferred tax liabilities. This non-cash benefit resulted primarily from the Federal rate reduction from 35% to 21%.

*16.*	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 $18,290, $14,660, and $14,992 for the years ended December 31, 2019, 2018, and 2017, 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 $4,791, $4,193 and $3,600 of expense related to these plans in 2019, 2018 and 2017, respectively.

Pension Plans

Historically, the Company maintained 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 (Pension 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.

In 2019, the Company completed the termination of its Pension Plan. In connection with the Company’s activities to terminate the plan, lump sum distributions were made in the fourth quarter of 2019 to individuals who elected lump sum distributions, including rolling over their accounts to the Company’s 401(k) savings plan. Also in the fourth quarter of 2019, annuity contracts were purchased to settle obligations for the remaining participants. Upon settlement of the pension liability, the Company reclassified related unrecognized pension losses recorded in AOCL to the consolidated statements of comprehensive income. As a result, the Company recorded pre-tax settlement charges of $10,920 in the fourth quarter of 2019.

The Company’s historical funding policy for the Pension Plans was to contribute amounts at least equal to the minimum annual amount required by applicable regulations. In the year ended December 31, 2018, the Company made a voluntary pension prepayment of $9,400. In the year ended December 31, 2019, the Company made required contributions of $1,017 in connection with the plan termination. No additional contributions will be required in future years as the pension plan termination was finalized in 2019.

The following table provides a reconciliation of benefit obligations, plan assets and funded status of the Pension Plan based on a December 31 measurement date:

	Year Ended December 31,
	2019			2018

Accumulated benefit obligation at end of period	$	-		$	65,978

Change in projected benefit obligation
Projected benefit obligation at beginning of period	$	65,978		$	72,631
Interest cost		2,401			2,575
Net actuarial (gain) loss		3,452			(6,820	)
Benefits paid		(31,321	)		(2,408	)
Annuities purchased		(40,510	)		-
Projected benefit obligation at end of period	$	-		$	65,978

Change in plan assets
Fair value of plan assets at beginning of period	$	61,870		$	58,014
Actual return on plan assets		8,944			(3,507	)
Company contributions		1,017			9,771
Benefits paid		(31,321	)		(2,408	)
Annuities purchased		(40,510	)		-
Fair value of plan assets at end of period	$	-		$	61,870

Funded status: accrued pension liability included in other long-term liabilities	$	-		$	(4,108	)

Amounts recognized in accumulated other comprehensive loss
Net actuarial loss, net of tax	$	-		$	(10,541	)

The actuarial loss for the Pension Plan that was amortized from AOCL into net periodic pension cost during 2019 prior to the pension plan termination was $843.

The actuarial assumption used in the determination of the benefit obligation of the above data is:

		2019				2018
Weighted average discount rate			N/A				4.24%

The following table sets forth the components of net periodic pension cost (benefit) for the years ended December 31, 2019, 2018 and 2017:

	Year Ended December 31,
	2019			2018			2017
Interest cost	$	2,401		$	2,575		$	2,688
Expected return on plan assets		(3,500	)		(3,525	)		(3,011	)
Amortization of net loss		843			802			883
Loss on pension settlement		10,920			-			-
Net periodic pension cost (benefit)	$	10,664		$	(148	)	$	560

Weighted-average assumptions used to determine net periodic pension cost (benefit) are as follows:

	Year Ended December 31,
	2019		2018		2017
Discount Rate		4.24%		3.60%		4.14%
Expected long-term rate of return on plan assets		6.60%		6.19%		6.58%
Rate of compensation increase (1)		N/A		N/A		N/A

(1) No compensation increase was assumed as the Pension Plan was frozen effective December 31, 2008.

To determine the long-term rate of return assumption for the plans’ assets, the Company studied historical markets and preserved the long-term historical relationship 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 evaluated current market factors such as inflation and interest rates before it determined long-term capital market assumptions and reviewed peer data and historical returns to check for reasonableness and appropriateness.

The fair value of the qualified pension plan assets was $0 at December 31, 2019 and $61,870 at December 31, 2018. The Pension Plan’s weighted-average asset allocation at December 31, 2018, by asset category, is as follows:

	Target Allocation						December 31, 2018
Asset Category	Minimum			Maximum			Dollars		%
Fixed income		15.0	%		25.0	%	$	12,257		20	%
Domestic equity		36.5	%		61.5	%		30,731		50	%
International equity		17.0	%		25.0	%		12,380		20	%
Real estate		7.0	%		15.0	%		6,502		10	%
Total								61,870		100	%

The fair values of the Pension Plans’ assets at December 31, 2018 were 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

A reconciliation of beginning and ending balances for Level 3 assets for the year ended December 31, 2018 is as follows:

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

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 historical target allocation for equity securities and real estate was generally between 75% to 85%, with the remainder allocated primarily to fixed income (bonds). The Company regularly reviewed its actual asset allocation and periodically rebalanced its investments to the targeted allocation when considered appropriate.

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 other long-term liabilities in the Company’s consolidated balance sheets and are not material.

*17.*	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 $15,738, $14,563 and $10,205 for the years ended December 31, 2019, 2018 and 2017, respectively, which is recorded in operating expenses in the consolidated statements of comprehensive income.

On June 13, 2019, the stockholders of Generac Holdings Inc. approved the Company’s 2019 Equity Incentive Plan (2019 Plan). The 2019 Plan allows for granting of up to 2.7 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 2019 Plan, net of estimated forfeitures, was $956 for the year ended December 31, 2019, which is recorded in operating expenses in the consolidated statements of comprehensive income.

Stock Options - Stock options granted in 2019 have an exercise price of $52.07 per share; stock options granted in 2018 have an exercise price between $43.88 per share and $45.29 per share; and stock options granted in 2017 have an exercise price between $40.12 per share and $48.98 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 32,211, 63,817 and 9,033 in 2019, 2018 and 2017, 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 $9,395, $5,614 and $6,951 in 2019, 2018 and 2017, respectively, and are reflected as a financing activity in the consolidated statement of cash flows.

Total payments made by the Company to the taxing authorities for the employees’ tax obligations related to stock option exercises were $3,360, $3,846 and $4,301 in 2019, 2018 and 2017, 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 2019, 2018 and 2017 are as follows:

	2019			2018			2017
Weighted average grant date fair value	$	19.33		$	17.86		$	16.84

Assumptions:
Expected stock price volatility		33	%		37	%		40	%
Risk free interest rate		2.52	%		2.60	%		1.92	%
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, 2019, 2018 and 2017 is as follows:

			Weighted-Average Exercise Price			Aggregate Intrinsic Value ($ in thousands)

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

Granted	369,779			52.07
Exercised	(263,250	)		30.75
Forfeited	(35,010	)		43.79
Outstanding as of December 31, 2019	1,592,686			42.04	6.9	$	93,242

Exercisable as of December 31, 2019	726,817			37.78	5.3	$	45,649

As of December 31, 2019, there was $10,649 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 2019, 2018 and 2017 was $5,597, $4,998 and $4,503, 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 2019. 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 a number of financial metrics, from which grantees may earn from 0% to 200% of their target performance share award. The performance period for the 2017 awards covers the years 2017 through 2019, the performance period for the 2018 awards covers the years 2018 through 2020, and the performance period for the 2019 awards covers the years 2019 through 2021. 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 55,953, 38,186 and 39,500 in 2019, 2018 and 2017, respectively, and were based on the value of the stock on the vesting dates. Total payments made by the Company to the taxing authorities for the employees’ tax obligations related to restricted stock vesting were $3,078, $1,812 and $1,591 in 2019, 2018 and 2017, 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, 2019, 2018 and 2017 is as follows:

			Weighted-Average Grant-Date Fair Value

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

Granted	265,255			62.38
Vested	(184,628	)		38.78
Forfeited	(14,986	)		44.23
Non-vested as of December 31, 2019	491,637			52.84

As of December 31, 2019, there was $16,165 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 1.9 years. Total share-based compensation cost related to the restricted stock for 2019, 2018 and 2017, inclusive of performance shares, was $11,097, $9,565 and $5,702, respectively, which is recorded in operating expenses in the consolidated statements of comprehensive income.

During 2019, 2018 and 2017, 22,544, 33,419 and 34,095 shares of stock, respectively, 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 22,544, 33,419 and 22,762 shares, respectively, were fully vested at time of grant. Non-employee directors can elect to receive his or her director fees in the form of deferred stock units, which voluntarily defers the issuance of the related shares granted until the director separates from the Company or a triggering event occurs. 16,604, 22,675, and 11,333 of deferred stock units are included in the shares of stock granted to certain members of the Company’s Board of Directors for the years 2019, 2018, and 2017, respectively. Total share-based compensation cost for these share grants in 2019, 2018 and 2017 was $1,391, $1,718 and $1,133, respectively, which is recorded in operating expenses in the consolidated statements of comprehensive income.

*18.*	Commitments and Contingencies

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, 2019 and 2018 was approximately $49,600 and $47,200, 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.

*19.*	Quarterly Financial Information (Unaudited)

	Quarters Ended 2019
	Q1		Q2		Q3		Q4
Net sales	$	470,353	$	541,916	$	601,135	$	590,932
Gross profit		162,175		195,838		217,517		222,222
Operating income		71,173		90,926		105,556		104,508
Net income attributable to Generac Holdings Inc.		44,861		61,958		75,574		69,614
Net income attributable to common shareholders per common share - basic:	$	0.77	$	0.99	$	1.20	$	1.14
Net income attributable to common shareholders per common share - diluted:	$	0.76	$	0.98	$	1.18	$	1.12

	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

*20.*	Valuation and Qualifying Accounts

For the years ended December 31, 2019, 2018 and 2017:

	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, 2019
Allowance for doubtful accounts	$	4,873	$	3,086	$	(1,033	)	$	42		$	6,968
Reserves for inventory		23,140		4,821		(3,867	)		199		$	24,293
Valuation of deferred tax assets		5,802		-		-			(778	)	$	5,024

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

	(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.

*21.*	Subsequent Events

The Company performed an evaluation of subsequent events through the date these financial statements were issued and no such events were identified.

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