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, 2021 and 2020, the related consolidated statements of comprehensive income, stockholders' equity, and cash flows, for each of the three years in the period ended December 31, 2021, 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, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, 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, 2021, 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 22, 2022, expressed an unqualified opinion on the Company's internal control over financial reporting.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

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 - Deep Sea and ecobee - Intangible Assets and Contingent Consideration - Refer to Note 3 to the consolidated financial statements.

Critical Audit Matter Description

During 2021, the Company acquired Deep Sea and ecobee for a purchase price, net of cash acquired, of $420.7 million and $734.6 million, respectively. The Company accounted for the acquisitions under the acquisition method of accounting for business combinations.  Accordingly, the Company allocated the purchase price, on a preliminary basis, to the assets acquired and liabilities assumed based on their respective values. As a result of the Deep Sea acquisition, the Company recorded approximately $437.9 million of intangible assets, including $266.4 million of goodwill as of the acquisition date. As a result of the ecobee acquisition, the Company recorded approximately $795.6 million of intangible assets, including $231.2 million of goodwill as of the acquisition date. Additionally, the Company also recorded within other accrued liabilities and operating lease and other long-term liabilities a contingent consideration liability of $89.4 million related to the ecobee acquisition.

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. These methodologies incorporated various estimates and assumptions, the most significant being projected revenue growth rates, EBITDA margins, and resulting forecasted cash flows as well as the discount rate. For ecobee the contingent consideration liability was valued using the Monte Carlo Method. Management estimated projections during the earn-out period utilizing various potential pay-out scenarios. Probabilities are applied to each potential scenario and the resulting values were discounted. The principal consideration for our determination that the fair value for the intangible assets for these acquisitions and the contingent consideration for the ecobee acquisition 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 aforementioned estimates and assumptions, and the audit effort involved the use of professionals with specialized skills and knowledge.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the projected revenue growth rates, EBITDA margins, and resulting forecasted cash flows and the selection of the discount rates for the intangible assets and contingent consideration liability included the following, among others:

	●	Evaluated the design and effectiveness of the controls over management's process to estimate the fair value of the intangible assets and contingent consideration liability, including the controls related to the valuation models and underlying assumptions used to develop such estimates.

	●	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.

	●	Tested the nature and classification of the contingent consideration liability.

	●	Obtained the Company's intangible asset valuation and contingent consideration models and evaluated the valuation analyses for mathematical accuracy.

	●	Utilized fair value specialists to evaluate whether the valuation techniques applied by management were appropriate.
	●	Assessed management's intent and/or ability to take specific actions included in the projections.
	●	Evaluated the reasonableness of the discount rates selected, including developing a range of independent estimates and comparing those to the discount rates utilized by management.

Goodwill - Refer to Note 9 to the consolidated 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, 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, 2021.  In the October 31, 2021 impairment test calculation, the Latin America reporting unit had an estimated fair value that exceeded the carrying value by approximately 23%. Because the estimated fair value exceeded the carrying value, no impairment was recorded.  The carrying value of goodwill for the Company’s Latin America reporting unit as of the October 31, 2021 impairment assessment was $45.7 million.

Key financial assumptions utilized to determine the fair value of the reporting unit include revenue growth rates, earnings margins, terminal growth rate and discount rate.

The principal 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 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, 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 reporting unit 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.
	●	Evaluated the reasonableness of the discount rate selected, including developing a range of independent estimates and comparing it to the discount rate utilized by the Company.

/s/ Deloitte & Touche LLP

Milwaukee, Wisconsin

February 22, 2022

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, 2021, 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, 2021, 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, 2021, of the Company and our report dated February 22, 2022, expressed an unqualified opinion on those financial statements.

As described in Management’s Report on Internal Control over Financial Reporting, management excluded Deep Sea Electronics Limited, which was acquired in June 2021, Chilicon Power, LLC, which was acquired in July 2021, Apricity Code Corporation, which was acquired in September 2021, Off Grid Energy Ltd, which was acquired in September 2021, Tank Utility, Inc., which was acquired in October 2021, and ecobee Inc., which was acquired in December 2021 and whose financial statements constitute 57.8% and 31.0% of net and total assets, respectively, 2.1% of net sales, and 0.7% of net income of the consolidated financial statement amounts as of and for the year ended December 31, 2021. Accordingly, our audit did not include the internal control over financial reporting at Deep Sea Electronics Limited, Chilicon Power, LLC, Apricity Code Corporation, Off Grid Energy Ltd, Tank Utility, Inc. and ecobee Inc.

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 22, 2022

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

		December 31,
		2021				2020
Assets
Current assets:
Cash and cash equivalents		$	147,339			$	655,128
Accounts receivable, less allowance for credit losses of $12,025 and $12,001 at December 31, 2021 and 2020, respectively			546,466				374,906
Inventories			1,089,705				603,317
Prepaid expenses and other assets			64,954				36,382
Total current assets			1,848,464				1,669,733
Property and equipment, net			440,852				343,936
Customer lists, net			238,722				49,205
Patents and technology, net			492,473				86,727
Other intangible assets, net			66,436				9,932
Tradenames, net			243,531				146,159
Goodwill			1,409,674				855,228
Deferred income taxes			15,740				1,497
Operating lease and other assets			121,888				73,006
Total assets		$	4,877,780			$	3,235,423
Liabilities and stockholders’ equity
Current liabilities:
Short-term borrowings		$	72,035			$	39,282
Accounts payable			674,208				330,247
Accrued wages and employee benefits			72,060				63,036
Other accrued liabilities			331,674				204,812
Current portion of long-term borrowings and finance lease obligations			5,930				4,147
Total current liabilities			1,155,907				641,524
Long-term borrowings and finance lease obligations			902,091				841,764
Deferred income taxes			205,964				115,769
Operating lease and other long-term liabilities			341,681				179,955
Total liabilities			2,605,643				1,779,012
Redeemable noncontrolling interest			58,050				66,207
Stockholders’ equity:
Common stock, par value $0.01, 500,000,000 shares authorized, 72,386,017 and 72,024,329 shares issued at December 31, 2021 and 2020, respectively			725				721
Additional paid-in capital			952,939				525,541
Treasury stock, at cost, 8,667,031 and 9,173,731 shares at December 31, 2021 and 2020, respectively			(448,976	)			(332,164	)
Excess purchase price over predecessor basis			(202,116	)			(202,116	)
Retained earnings			1,965,957				1,432,565
Accumulated other comprehensive loss			(54,755	)			(34,254	)
Stockholders’ equity attributable to Generac Holdings Inc.			2,213,774				1,390,293
Noncontrolling interests			313				(89	)
Total stockholders’ equity			2,214,087				1,390,204
Total liabilities and stockholders’ equity		$	4,877,780			$	3,235,423

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,
		2021				2020				2019
Net sales		$	3,737,184			$	2,485,200			$	2,204,336
Costs of goods sold			2,377,102				1,527,546				1,406,584
Gross profit			1,360,082				957,654				797,752
Operating expenses:
Selling and service			319,020				246,373				217,683
Research and development			104,303				80,251				68,394
General and administrative			144,272				118,233				109,017
Acquisition related costs			21,465				1,411				1,851
Amortization of intangibles			49,886				32,280				28,644
Total operating expenses			638,946				478,548				425,589
Income from operations			721,136				479,106				372,163
Other (expense) income:
Interest expense			(32,953	)			(32,991	)			(41,544	)
Investment income			1,415				2,182				2,767
Loss on extinguishment of debt			(831	)			–				(926	)
Loss on pension settlement			–				–				(10,920	)
Other, net			2,759				(2,106	)			(1,933	)
Total other expense, net			(29,610	)			(32,915	)			(52,556	)
Income before provision for income taxes			691,526				446,191				319,607
Provision for income taxes			134,957				98,973				67,299
Net income			556,569				347,218				252,308
Net income attributable to noncontrolling interests			6,075				(3,358	)			301
Net income attributable to Generac Holdings Inc.		$	550,494			$	350,576			$	252,007
Other comprehensive income (loss):
Foreign currency translation adjustment		$	(41,030	)		$	4,948			$	2,210
Net unrealized gain (loss) on derivatives			20,529				(14,285	)			(13,855	)
Pension liability adjustment			–				–				10,541
Other comprehensive income (loss)			(20,501	)			(9,337	)			(1,104	)
Total comprehensive income			536,068				337,881				251,204
Comprehensive income (loss) attributable to noncontrolling interests			5,496				(364	)			(635	)
Comprehensive income attributable to Generac Holdings Inc.		$	530,572			$	338,245			$	251,839
Net income attributable to Generac Holdings Inc. per common share - basic:		$	8.51			$	5.61			$	4.09
Weighted average common shares outstanding - basic:			62,686,001				62,280,889				61,926,986
Net income attributable to Generac Holdings Inc. per common share - diluted:		$	8.30			$	5.48			$	4.03
Weighted average common shares outstanding - diluted:			64,253,408				63,737,734				62,865,446

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.
																						Excess Purchase Price								Accumulated
										Additional												Over								Other				Total
		Common Stock								Paid-In				Treasury Stock								Predecessor				Retained				Comprehensive				Stockholders'				Noncontrolling
		Shares				Amount				Capital				Shares				Amount				Basis				Earnings				Income (Loss)				Equity				Interest				Total
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
Accounting standard adoption impact			–				–				–				–				–				–				(1,147	)			–				(1,147	)			–				(1,147	)
Unrealized loss on interest rate swaps, net of tax of ($4,826)			–				–				–				–				–				–				–				(14,285	)			(14,285	)			–				(14,285	)
Foreign currency translation adjustment			–				–				–				–				–				–				–				4,948				4,948				(29	)			4,919
Common stock issued under equity incentive plans, net of shares withheld for employee taxes and strike price			356,603				4				5,793				–				–				–				–				–				5,797				–				5,797
Net share settlement of restricted stock awards			–				–				–				(70,718	)			(7,613	)			–				–				–				(7,613	)			–				(7,613	)
Share-based compensation			–				–				20,882				–				–				–				–				–				20,882				–				20,882
Redemption value adjustment			–				–				–				–				–				–				(1,247	)			–				(1,247	)			–				(1,247	)
Net income			–				–				–				–				–				–				350,576				–				350,576				(529	)			350,047
Balance at December 31, 2020			72,024,329			$	721			$	525,541				(9,173,731	)		$	(332,164	)		$	(202,116	)		$	1,432,565			$	(34,254	)		$	1,390,293			$	(89	)		$	1,390,204
Change in noncontrolling interest share			–				–				–				–				–				–				–				–				–				(96	)			(96	)
Unrealized gain on interest rate swaps, net of tax of $6,933			–				–				–				–				–				–				–				20,529				20,529				–				20,529
Foreign currency translation adjustment			–				–				–				–				–				–				–				(41,030	)			(41,030	)			(3	)			(41,033	)
Common stock issued under equity incentive plans, net of shares withheld for employee taxes and strike price			331,048				3				7,073				–				–				–				–				–				7,076				–				7,076
Common stock issued for business combination			30,640				1				12,000				–				–				–				–				–				12,001				–				12,001
Treasury stock issued for business combination			–				–				384,371				937,283				36,403				–				–				–				420,774				–				420,774
Net share settlement of restricted stock awards			–				–				–				(80,583	)			(27,223	)			–				–				–				(27,223	)			–				(27,223	)
Stock repurchases			–				–				–				(350,000	)			(125,992	)			–				–				–				(125,992	)			–				(125,992	)
Share-based compensation			–				–				23,954				–				–				–				–				–				23,954				–				23,954
Redemption value adjustment			–				–				–				–				–				–				(17,102	)			–				(17,102	)			–				(17,102	)
Net income			–				–				–				–				–				–				550,494				–				550,494				501				550,995
Balance at December 31, 2021			72,386,017			$	725			$	952,939				(8,667,031	)		$	(448,976	)		$	(202,116	)		$	1,965,957			$	(54,755	)		$	2,213,774			$	313			$	2,214,087

See notes to consolidated financial statements.

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

		Year Ended December 31,
		2021				2020				2019
Operating activities
Net income		$	556,569			$	347,218			$	252,308
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation			42,155				36,493				32,265
Amortization of intangible assets			49,886				32,280				28,644
Amortization of original issue discount and deferred financing costs			2,589				2,598				4,712
Loss on extinguishment of debt			831				–				926
Loss on pension settlement			–				–				10,920
Deferred income taxes			(2,096	)			21,195				18,733
Share-based compensation expense			23,954				20,882				16,694
Loss (gain) on disposal of assets			(4,393	)			–				–
Other			206				7,145				1,086
Net changes in operating assets and liabilities, net of acquisitions:
Accounts receivable			(131,861	)			(55,976	)			8,231
Inventories			(470,991	)			(77,983	)			26,369
Other assets			(819	)			12,859				(358	)
Accounts payable			297,323				66,040				(69,404	)
Accrued wages and employee benefits			5,814				20,157				(3,724	)
Other accrued liabilities			73,798				60,593				(16,252	)
Excess tax benefits from equity awards			(31,809	)			(6,968	)			(2,263	)
Net cash provided by operating activities			411,156				486,533				308,887
Investing activities
Proceeds from sale of property and equipment			259				179				95
Proceeds from sale of investment			4,968				–				–
Proceeds from beneficial interest in securitization transactions			4,609				2,651				2,630
Contribution to equity method investment			(3,660	)			–				–
Expenditures for property and equipment			(109,992	)			(62,128	)			(60,802	)
Acquisition of businesses, net of cash acquired			(713,471	)			(64,797	)			(112,001	)
Net cash used in investing activities			(817,287	)			(124,095	)			(170,078	)
Financing activities
Proceeds from short-term borrowings			272,818				257,593				73,340
Proceeds from long-term borrowings			150,088				277				1,660
Repayments of short-term borrowings			(239,113	)			(277,719	)			(59,518	)
Repayments of long-term borrowings and finance lease obligations			(108,556	)			(4,758	)			(53,049	)
Stock repurchases			(125,992	)			–				–
Payment of contingent acquisition consideration			(3,750	)			(4,000	)			(5,550	)
Payment of debt issuance costs			(1,185	)			–				(1,473	)
Purchase of additional ownership interest			(27,164	)			–				–
Cash dividends paid to noncontrolling interest of subsidiary			–				–				(285	)
Taxes paid related to equity awards			(58,903	)			(14,910	)			(6,438	)
Proceeds from the exercise of stock options			38,787				13,089				9,395
Net cash used in financing activities			(102,970	)			(30,428	)			(41,918	)
Effect of exchange rate changes on cash and cash equivalents			1,312				235				1,510
Net (decrease) increase in cash and cash equivalents			(507,789	)			332,245				98,401
Cash and cash equivalents at beginning of period			655,128				322,883				224,482
Cash and cash equivalents at end of period		$	147,339			$	655,128			$	322,883
Supplemental disclosure of cash flow information
Cash paid during the period
Interest		$	27,842			$	28,765			$	35,465
Income taxes			156,728				61,861				61,767

See notes to consolidated financial statements.

Generac Holdings Inc. Notes to Consolidated Financial Statements

Years Ended December 31, 2021, 2020 and 2019

_(_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, grid service solutions, 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 a Smarter World" strategic plan). A summary of acquisitions affecting the reporting periods presented include:

	●	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 other power sources for homeowners and businesses, and is also a developer of advanced power electronics, software and controls for smart energy storage and management.

	●	In July 2020, the Company acquired West Coast Energy Systems LLC (Energy Systems), its industrial distributor in northern California. This addition enhances the Company's ability to serve the west coast markets for both commercial & industrial (C&I) and residential products.
	●	In September 2020, the Company acquired Mean Green Products, LLC (Mean Green), founded in 2009 and located in Ross, Ohio. Mean Green is a designer and manufacturer of commercial grade, battery-powered turf care products that provide quiet, zero emissions and reduced maintenance options as compared to traditional commercial mowers.
	●	In October 2020, the Company acquired Enbala Power Networks Inc. (Enbala), founded in 2003 and headquartered in Denver, Colorado. Enbala is one of the leading providers of distributed energy optimization and control software that helps support the operational stability of the world's power grids.
	●	In June 2021, the Company acquired Deep Sea Electronics Limited (Deep Sea), founded in 1975 and headquartered in Hunmanby, United Kingdom. Deep Sea is an industry leading designer and manufacturer of a diverse suite of flexible control solutions focused on the global power generation and transfer switch markets.
	●	In July 2021, the Company acquired Chilicon Power, LLC (Chilicon), a designer and provider of grid-interactive microinverter and monitoring solutions for the solar market. Based in Los Angeles, California, Chilicon's power inversion and monitoring system technologies maximize photovoltaic (solar power) system production, lower installer operational cost, and promote end-user satisfaction.
	●	In September 2021, the Company acquired Apricity Code Corporation (Apricity Code), an advanced engineering and product design company located in Bend, Oregon.
	●	In September 2021, the Company acquired Off Grid Energy Ltd (Off Grid Energy), a designer and manufacturer of industrial-grade mobile energy storage systems. Headquartered in Rugby, United Kingdom, Off Grid Energy offers a diverse range of energy storage solutions that provide cleaner and more flexible energy for industrial and mobile applications.
	●	In October 2021, the Company acquired Tank Utility, Inc. (Tank Utility). Headquartered in Boston, Massachusetts, Tank Utility is a provider of IoT propane tank monitoring that enables the optimization of propane fuel logistics.
	●	In December 2021, the Company acquired ecobee Inc. (ecobee), founded in 2007 and headquartered in Toronto, Canada. ecobee is a leader in sustainable home technology solutions including smart thermostats that deliver significant energy savings, security and peace of mind.

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 a few commercial banks 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.

43

 

One customer accounted for approximately 8% and 13% of accounts receivable at December 31, 2021 and 2020, respectively. No one customer accounted for greater than 6%, 6%, and 5%, of net sales during the years ended December 31, 2021, 2020, and 2019, respectively.

Accounts Receivable and Allowance for Credit Losses

The Company's trade and other receivables primarily arise from the sale of our products and services to independent residential dealers, industrial distributors and dealers, national and regional retailers, electrical/HVAC/solar wholesalers, e-commerce partners, equipment rental companies, equipment distributors, solar installers, utilities, and certain end users with payment terms generally ranging from 30 to 90 days. The Company evaluates the credit risk of a customer when extending credit based on a combination of various financial and qualitative factors that may affect the customers' ability to pay. These factors include the customer's financial condition, past payment experience, credit bureau information, and regional considerations.

Receivables are recorded at their face value amount less an allowance for credit losses. The Company maintains an allowance for credit losses, which represents an estimate of expected losses over the remaining contractual life of its receivables considering current market conditions and estimates for supportable forecasts when appropriate. The Company measures expected credit losses on its trade receivables on an entity by entity basis. The estimate of expected credit losses considers a historical loss experience rate that is adjusted for delinquency trends, collection experience, and/or economic risk where appropriate based on current market conditions. Additionally, management develops a specific allowance for trade receivables known to have a high risk of expected future credit loss. 

The Company has historically experienced immaterial write-offs given the nature of the customers that receive credit. In addition, the Company holds a credit insurance plan that covers the risk of loss up to specified amounts on certain trade receivables. As of December 31, 2021, the Company had gross receivables of $558,491 and an allowance for credit losses of $12,025.

The following is a tabular reconciliation of the Company's allowance for credit losses: 

		Year Ended December 31, 2021
Balance at beginning of period		$	12,001
Established for Acquisitions			1,458
Provision for credit losses			206
Charge-offs			(1,198	)
Currency translation			(442	)
Balance at end of period		$	12,025

Inventories

Inventories are stated at the lower of cost or market, with cost determined 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 $42,155, $36,493, and $32,265 for the years ended December 31, 2021, 2020 and 2019, 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 2021, 2020 and 2019, 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.

44

 

Debt Issuance Costs

Debt discounts and direct costs incurred in connection with the issuance or amendment 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. $2,589, $2,598, and $4,712 of deferred financing costs and original issue discount were amortized to interest expense during fiscal years 2021, 2020 and 2019, 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: 2022 - $2,603; 2023 - $2,652; 2024 - $2,709; 2025 - $2,753; 2026 - $2,499.

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 a substantial portion 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 $27,388 and $25,710 at December 31, 2021 and December 31, 2020, respectively. During the year ended December 31, 2021, the Company recognized revenue of $25,184 related to amounts included in the December 31, 2020 customer deposit balance. The Company typically recognizes revenue within one year of the receipt of the customer deposit.

45

 

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, maintenance and grid services to utilities in certain circumstances. Total service revenues accounted for less than two percent of revenue during the year ended December 31, 2021.  

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. Expenditures for Co-Op advertising are expensed when claimed by the customer. Total expenditures for advertising were $66,660, $53,678, and $44,153 for the years ended December 31, 2021, 2020 and 2019, respectively.

Research and Development

The Company expenses research and development costs as incurred. Total expenditures incurred for research and development were $104,303, $80,251, and $68,394 for the years ended December 31, 2021, 2020 and 2019, respectively.

Foreign Currency Translation and Transactions

Balance sheet amounts for non-U.S. Dollar functional currency subsidiaries 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 $768,119, was approximately $782,925 (Level 2) at December 31, 2021, as calculated based on independent valuations whose inputs and significant value drivers are observable.

46

 

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. 

Contingent Consideration

Certain of the Company's business combinations involve potential payment of future consideration that is contingent upon the achievement of certain milestones. As part of purchase accounting, a liability is recorded for the estimated fair value of the contingent consideration on the acquisition date. The fair value of the contingent consideration is remeasured at each reporting period, and the change in fair value is recognized within general and administrative expenses in the Company's consolidated statements of comprehensive income. This fair value measurement of contingent consideration is categorized as a Level 3 liability, as the measurement amount is based primarily on significant inputs that are not observable in the market.

The fair value of contingent consideration as of December 31, 2021 and December 31, 2020 was $146,759 and $5,888, respectively. At December 31, 2021, the Company recorded $68,665 in other accrued liabilities and $78,094 in other long-term liabilities in the consolidated balance sheets. At December 31, 2020, the Company recorded $5,888 in other accrued liabilities in the consolidated balance sheets. 

The following table provides a reconciliation of the activity for contingent consideration: 

Beginning balance, January 1, 2021		$	5,888
Purchase price contingent consideration (1)			149,761
Changes in fair value			(6,002	)
Present value interest accretion			862
Payments			(3,750	)
Ending balance, December 31, 2021		$	146,759

	(1)	The increase in the contingent consideration liability is due to the contingent consideration associated with the acquisitions of Chilicon, Off Grid Energy, and ecobee. Refer to Note 3, "Acquisitions," to the consolidated financial statements for further information.

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 to 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.

Acquisition related costs

Acquisition related costs are external costs the Company incurs to effect a business combination including legal fees, professional and advisory services, transaction taxes such as stamp tax, and insurance premiums. The Company accounts for acquisition related costs as expense in the period in which the costs are incurred and the services are received. Total acquisition related costs were $21,465, $1,411, and $1,851 for the years ended December 31, 2021, 2020 and 2019, respectively.

Certain immaterial reclassifications have been made to the Company’s historical financial statements as the Company has elected to report acquisition related costs as a separate line item in its Consolidated Statements of Comprehensive Income, within operating expenses. Previously, acquisition related costs were included in the general and administrative line item within operating expenses in the Consolidated Statements of Comprehensive Income. For the years ended December 31, 2020, and 2019, the Company reclassified $1,411 and $1,851, respectively, from general and administrative expenses to acquisition related costs in the Consolidated Statements of Comprehensive Income.

New Accounting Pronouncements

Changes to GAAP are established by the Financial Accounting Standards Board (FASB) in the form of accounting standard updates (“ASUs”) to the FASB Accounting Standards Codification (ASC). ASUs not listed below were assessed and determined to be either not applicable or are not expected to have a material impact on the Company’s consolidated financial statements.

Recently Adopted Accounting Standards

On October 1, 2021_,_ the Company elected to early adopt ASU 2021-08_,_ Business Combinations – Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This guidance was issued to improve the accounting for acquired revenue contracts with customers in a business combination by addressing diversity in practice and inconsistency related to the following: 1) recognition of an acquired contract liability; 2) payment terms and their effect on subsequent revenue recognized by the acquirer. Specifically, this guidance addresses how to determine whether a contract liability is recognized by the acquirer in a business combination as well as provides specific guidance on how to recognize and measure acquired contract assets and contract liabilities from revenue contracts in a business combination. The Company adopted this standard prospectively as of the date of adoption, meaning no prior period balances were impacted by the adoption. The adoption of the standard allows for the Company to apply ASC 606, Revenue from Contracts with Customers, to recognize and measure contract assets and contract liabilities on the acquisition date, which the Company applied to all of its current year acquisitions. Refer to Note 3 “Acquisitions,” to the consolidated financial statements, for further information regarding the Company’s acquisitions and purchase price allocations. 

47

 

3.	Acquisitions

Fiscal 2021

Acquisition of Deep Sea

On June 1, 2021, the Company acquired Deep Sea for a purchase price, net of cash acquired, of $420,700. Headquartered in Hunmanby, United Kingdom, Deep Sea is an industry leading designer and manufacturer of a diverse suite of flexible control solutions focused on the global power generation and transfer switch markets. The acquisition purchase price was funded solely through cash on hand.

The Company recorded its preliminary purchase price allocation during the second quarter of 2021, and was updated in the third and fourth quarters of 2021, based upon its estimates of the fair value of the acquired assets and assumed liabilities at that time. As a result, the Company recorded $437,864 of intangible assets, including $266,427 of goodwill recorded in the International segment, as of the acquisition date. The goodwill ascribed to this acquisition is not deductible for tax purposes. The accompanying consolidated financial statements include the results of Deep Sea from the date of acquisition through December 31, 2021.

Acquisition of Chilicon

On July 2, 2021, the Company acquired Chilicon for a purchase price, net of cash acquired, of $61,129. Based in Los Angeles, California, Chilicon is a designer and provider of grid-interactive microinverter and monitoring solutions for the solar market. Chilicon's power inversion and monitoring system technologies maximize photovoltaic (solar power) system production, lower installer operational cost, and promote end-user satisfaction. The fair value of the consideration transferred consisted of the following: 

Cash		$	11,821
Deferred cash payment (1)			6,000
Common stock issued			12,000
Contingent consideration (2)			31,308
Total purchase price		$	61,129

(1)	Payable on the third business day after December 31, 2023.
(2)	Payable within 45 calendar days following the conclusion of the earnout period, December 31, 2025. To be paid in the form of common stock issued upon achievement of certain performance targets at the end of the earnout period.

The Company recorded its preliminary purchase price allocation during the third quarter of 2021, and was updated in the fourth quarter of 2021, based upon its estimates of the fair value of the acquired assets and assumed liabilities at that time. As a result, the Company recorded $69,992 of intangible assets, including $37,492 of goodwill recorded in the Domestic segment, as of the acquisition date. The goodwill ascribed to the Chilicon acquisition is not deductible for tax purposes. The accompanying consolidated financial statements include the results of Chilicon from the date of acquisition through December 31, 2021. 

Acquisition of Off Grid Energy

On September 1, 2021, the Company acquired Off Grid Energy for a purchase price of $53,438, net of cash acquired and inclusive of estimated contingent consideration of $29,054 that is to be paid in cash upon achievement of certain performance targets at the end of the earnout period, March 31, 2022. Headquartered in Rugby, United Kingdom, Off Grid Energy is a designer and manufacturer of industrial-grade mobile energy storage systems. The acquisition purchase price was funded through cash on hand.

The Company recorded its preliminary purchase price allocation during the third quarter of 2021, and was updated in the fourth quarter of 2021, based upon its estimates of the fair value of the acquired assets and assumed liabilities at that time. As a result, the Company recorded $52,565 of intangible assets, including $18,020 of goodwill recorded in the International segment, as of the acquisition date. The goodwill ascribed to this acquisition is not deductible for tax purposes. The accompanying consolidated financial statements include the results of Off Grid Energy from the date of acquisition through December 31, 2021. 

Acquisition of ecobee

On December 1, 2021, the Company acquired ecobee for a purchase price, net of cash acquired, of $734,638. Headquartered in Toronto, Canada, ecobee is a leader in sustainable home technology solutions including smart thermostats that deliver significant energy savings, security and peace of mind. The fair value of the consideration transferred consisted of the following:

Cash		$	224,464
Common stock issued			420,774
Contingent consideration (1)			89,400
Total purchase price		$	734,638

(1)	To be paid in the form of common stock issued upon achievement of certain performance targets at the end of each of the two earnout periods, ending June 30, 2022, and June 30, 2023.

The Company recorded its preliminary purchase price allocation during the fourth quarter of 2021 based upon its estimates of the fair value of the acquired assets and assumed liabilities at that time. As a result, the Company recorded $795,613 of intangible assets, including $231,213 of goodwill recorded in the Domestic segment, as of the acquisition date. A portion of the goodwill ascribed to this acquisition is deductible for tax purposes. The accompanying consolidated financial statements include the results of ecobee from the date of acquisition through December 31, 2021.

Other Acquisitions

On September 1, 2021, the Company acquired Apricity Code, an advanced engineering and product design company located in Bend, Oregon.

On October 1, 2021, the Company acquired Tank Utility, a provider of IoT propane tank monitoring that enables the optimization of propane fuel logistics.

The combined purchase price for these acquisitions was $30,086 and was funded solely through cash on hand. The Company recorded its preliminary purchase price allocation for Apricity Code and Tank Utility during the third quarter and fourth quarter of 2021, respectively, based upon its estimates of the fair value of the acquired assets and assumed liabilities. The accompanying consolidated financial statements include the results of these two acquired businesses since the dates of acquisition through December 31, 2021. 

48

 

Fiscal 2020

Acquisition of Enbala

On October 7, 2020, the Company acquired Enbala for a purchase price, net of cash acquired, of $41,982. The acquisition purchase price was funded solely through cash on hand.

The Company finalized its purchase price allocation during the third quarter of 2021 based upon its estimates of the fair value of the acquired assets and assumed liabilities. The finalization did not result in material adjustments to the Company's preliminary estimates. As a result, the Company recorded $46,338 of intangible assets, including $27,038 of goodwill recorded in the Domestic segment, as of the acquisition date. A portion of the goodwill ascribed to this acquisition is deductible for tax purposes. The accompanying consolidated financial statements include the results of Enbala from the date of acquisition through December 31, 2021. 

Other Acquisitions

On  July 1, 2020, the Company acquired Energy Systems, its industrial distributor in northern California.

On  September 1, 2020, the Company acquired Mean Green, a designer and manufacturer of commercial grade, battery-powered turf care products.

The combined purchase price for these acquisitions was $22,958 and was funded solely through cash on hand. The Company finalized its purchase price allocation for these two acquisitions during the third quarter of 2021 based upon its estimates of the fair value of the acquired assets and assumed liabilities. The finalization did not result in material adjustments to the Company's preliminary estimates. The accompanying consolidated financial statements include the results of the acquired businesses since the dates of acquisition through December 31, 2021. 

Fiscal 2019

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 finalized the Pika purchase price allocation during the first quarter of 2020 based upon its estimates of the fair value of the acquired assets and assumed liabilities. The finalization did not result in material adjustments to the Company's preliminary estimates. As a result, the Company recorded $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, 2021. 

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 finalized the Neurio purchase price allocation during the first quarter of 2020 based upon its estimates of the fair value of the acquired assets and assumed liabilities. The finalization did not result in material adjustments to the Company's preliminary estimates. As a result, the Company recorded $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 ascribed to this acquisition is deductible for tax purposes. The accompanying consolidated financial statements include the results of Neurio from the date of acquisition through December 31, 2021. 

Other Acquisitions

In  February 2019, the Company acquired a majority share of Captiva, a manufacturer of customized industrial generators in Kolkata, India. The purchase price was immaterial to the Company and was funded solely through cash on hand. The accompanying consolidated financial statements include the results of the acquired business from the date of acquisition through December 31, 2021. 

49

 

Summary Purchase Price Allocations

The fair values assigned to certain assets acquired and liabilities assumed for all acquisitions completed during the reporting period, as of the acquisition dates, are as follows:

		2021 Acquisitions
		Deep Sea				ecobee				All Other				Total				2020 Acquisitions				2019 Acquisitions
Accounts receivable		$	9,574			$	23,337			$	13,853			$	46,764			$	5,094			$	4,643
Inventories			9,970				7,258				7,034				24,262				3,575				4,313
Prepaid expenses and other assets			826				5,531				6,594				12,951				858				304
Property and equipment			8,838				12,838				480				22,156				635				384
Intangible assets			171,437				564,400				74,394				810,231				26,235				79,200
Goodwill			266,427				231,213				82,121				579,761				40,395				41,428
Deferred income taxes			-				52,329				6,547				58,876				-				3,217
Other assets			151				4,031				8,526				12,708				1,122				133
Total assets acquired			467,223				900,937				199,549				1,567,709				77,914				133,622
Accounts payable			8,998				29,855				7,675				46,528				4,088				4,380
Accrued wages and employee benefits			2,106				1,354				862				4,322				700				4,408
Other accrued liabilities			2,272				18,830				18,258				39,360				2,151				602
Short-term borrowings			-				-				800				800				-
Current portion of long-term borrowings and finance lease obligations			-				1,068				233				1,301				-				937
Deferred income taxes			33,057				81,429				18,169				132,655				3,827				9,958
Other long-term liabilities			90				24,097				7,275				31,462				2,208				778
Long-term debt			-				9,666				1,624				11,290				-				-
Redeemable non-controlling interest			-				-				-				-				-				3,165
Net assets acquired		$	420,700			$	734,638			$	144,653			$	1,299,991			$	64,940			$	109,394

The allocations of the purchase price to identifiable assets and liabilities for the 2021 acquisitions are based on the preliminary valuations performed to determine the fair value of the net assets as of their respective acquisition dates. The measurement period for the valuation of net assets acquired ends as soon as information on the facts and circumstances that existed as of the acquisition dates becomes available, but not to exceed 12 months following the acquisition date. As the Company finalizes valuations, adjustments in purchase price allocations  may require a change in the amounts allocated to net assets acquired during the periods in which the adjustments are determined. 

50

 

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, 2019. Refer to Note 1, “Description of Business,” for further information on the acquisitions included in the table.

		Year Ended December 31,
		2021				2020				2019
Net Sales:
As reported		$	3,737,184			$	2,485,200			$	2,204,336
Pro forma			3,877,995				2,712,813				2,408,671
Net income attributable to Generac Holdings Inc.:
As reported		$	550,494			$	350,576			$	252,007
Pro forma (1)			465,983				276,579				135,778
Net income attributable to Generac Holdings Inc. per common share - diluted
As reported		$	8.30			$	5.48			$	4.03
Pro forma			7.16				4.29				2.15

	(1)	Includes additional pro forma intangible amortization from the effect of all acquisitions as though the transactions had occurred on January 1, 2019 of $63,524, $78,840, and $83,100 for the years ended December 31, 2021, 2020, and 2019, respectively

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, 2019.

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 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 held the right to put its shares to the Company until April 1, 2021. The put and call option price is based on a multiple of earnings, subject to a floor and the terms of the acquisition agreement, as amended. In May 2021, the Company exercised its call option rights and paid a purchase price of $27,164 to purchase an additional 15% ownership interest in Pramac, bringing the Company's total ownership interest to 80%. The Company still holds its call option right to purchase the remaining 20% ownership interest in partial increments over the next three years.

51

 

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 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 subsequent 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,
		2021				2020				2019
Balance at beginning of period		$	66,207			$	61,227			$	61,004
Acquisition of noncontrolling interest in Captiva			-				-				3,165
Net income			5,574				(2,829	)			75
Foreign currency translation			(3,669	)			6,562				(1,764	)
Purchase of additional ownership interest			(27,164	)			-				-
Redemption value adjustment			17,102				1,247				(1,253	)
Balance at end of period		$	58,050			$	66,207			$	61,227

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, 2021, the Company had no commodity contracts outstanding. At December 31, 2020, the Company had one commodity contract 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 $613, $2,185, and $(174) for the years ended December 31, 2021, 2020 and 2019, 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, 2021 and 2020, the Company had eleven and forty-four 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, 2021, 2020 and 2019 were $(416), $355, and $(1,195), respectively.

52

 

Interest Rate Swaps

In 2017, the Company entered into twenty interest rate swap agreements, eight of which were still outstanding as of December 31, 2021. 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. In March 2020, the Company entered into three additional interest rate swap agreements, bringing the total outstanding interest rate swaps to eleven as of December 31, 2021. 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 after-tax gains (losses) recognized for the years ended December 31, 2021, 2020 and 2019 were $20,529, $(14,285), and $(13,855), 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, 2021				December 31, 2020
Commodity contract		$	-			$	1,386
Foreign currency contracts			(36	)			(154	)
Interest rate swaps			(2,074	)			(29,536	)

The fair values of the foreign currency contracts and interest rate swaps are included in other accrued liabilities and other long-term liabilities in the consolidated balance sheet as of December 31, 2021. The fair value of the commodity contract is included in prepaid expenses and other current assets, and the fair values of the foreign currency contracts and interest rate swaps are included in other accrued liabilities and other long-term liabilities in the consolidated balance sheet as of December 31, 2020. Excluding the impact of credit risk, the fair value of the derivative contracts as of  December 31, 2021 and 2020 is a liability of $2,148 and $28,667, respectively, which represents the net amount the Company would pay to exit all 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, 2021 and 2020, net of tax:

		Foreign Currency Translation Adjustments					Unrealized Gain (Loss) on Cash Flow Hedges					Total
Beginning Balance – January 1, 2021		$	(11,674	)			$	(22,580	)			$	(34,254	)
Other comprehensive income (loss) before reclassifications			(41,030	)	(1)			20,529		(2)			(20,501	)
Amounts reclassified from AOCL			-					-					-
Net current-period other comprehensive income (loss)			(41,030	)				20,529					(20,501	)
Ending Balance – December 31, 2021		$	(52,704	)			$	(2,051	)			$	(54,755	)

		Foreign Currency Translation Adjustments				Unrealized Gain (Loss) on Cash Flow Hedges					Total
Beginning Balance – January 1, 2020		$	(16,622	)		$	(8,295	)			$	(24,917	)
Other comprehensive income (loss) before reclassifications			4,948				(14,285	)	(3)			(9,337	)
Amounts reclassified from AOCL			-				-					-
Net current-period other comprehensive income (loss)			4,948				(14,285	)				(9,337	)
Ending Balance – December 31, 2020		$	(11,674	)		$	(22,580	)			$	(34,254	)

	(1)	Represents unfavorable impact from the strengthening of the U.S. dollar against foreign currencies during the year ended December 31, 2021, particularly the Euro and British Pound.
	(2)	Represents unrealized gains of $27,462 on the interest rate swaps, net of tax effect of $(6,933) for the year ended December 31, 2021.

	(3)	Represents unrealized losses of $(19,111) on the interest rate swaps, net of tax effect of $4,826 for the year ended December 31, 2020.

53

 

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 substantially derived from the U.S. and Canada. The International segment includes the legacy Generac business' Latin American export operations, and the Ottomotores, Tower Light, Pramac, Motortech, Selmec, Deep Sea, and Off Grid Energy acquisitions, all of which have revenues substantially derived from outside the U.S and Canada. Both reportable segments design and manufacture a wide range of 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 and solutions, production processes, classes of customers, distribution methods and regional considerations.

The Company's product offerings consist primarily of power generation equipment, energy storage systems, grid service solutions, and other power products geared for varying end customer uses. Residential products and 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, 2021
Product Classes		Domestic				International				Total
Residential products		$	2,366,908			$	89,857			$	2,456,765
Commercial & industrial products			556,520				442,478				998,998
Other			240,622				40,799				281,421
Total net sales		$	3,164,050			$	573,134			$	3,737,184

		Year Ended December 31, 2020
Product Classes		Domestic				International				Total
Residential products		$	1,495,383			$	61,118			$	1,556,501
Commercial & industrial products			404,867				296,884				701,751
Other			188,558				38,390				226,948
Total net sales		$	2,088,808			$	396,392			$	2,485,200

		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

54

 

Residential products consist primarily of automatic home standby generators ranging in output from 7.5kW to 150kW, portable generators, energy storage systems, energy management solutions, and other outdoor power equipment. These products are predominantly 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, with power outputs up to 3,250kW. Also included in C&I products are mobile generators, light towers, mobile energy storage, mobile heaters, mobile pumps, and controllers. These products are sold globally 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 consists primarily of aftermarket service parts and product accessories sold to our customers, the amortization of extended warranty deferred revenue, remote monitoring and grid services subscription revenue, as well as certain installation and maintenance service 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. Other service revenue is recognized when the service is performed.

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,
		2021				2020				2019
Domestic		$	795,417			$	563,394			$	428,667
International			66,008				20,379				25,448
Total adjusted EBITDA		$	861,425			$	583,773			$	454,115
Interest expense			(32,953	)			(32,991	)			(41,544	)
Depreciation and amortization			(92,041	)			(68,773	)			(60,767	)
Non-cash write-down and other adjustments (1)			3,070				327				(240	)
Non-cash share-based compensation expense (2)			(23,954	)			(20,882	)			(16,694	)
Loss on extinguishment of debt (3)			(831	)			-				(926	)
Loss on pension settlement (4)			-				-				(10,920	)
Transaction costs and credit facility fees (5)			(22,357	)			(2,151	)			(2,724	)
Business optimization and other charges (6)			(33	)			(12,158	)			(1,572	)
Other			(800	)			(954	)			879
Income before provision for income taxes		$	691,526			$	446,191			$	319,607

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

	(2)	Represents share-based compensation expense to account for stock options, restricted stock and other stock awards over their respective vesting periods.

	(3)	Represents the 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 (including acquisitions), as defined in our credit agreement, equity issuance, debt issuance or refinancing, together with certain fees relating to our senior secured credit facilities.

	(6)	For the year ended December 31, 2020, represents severance, non-cash asset write-downs, and other charges to address the impact of the COVID-19 pandemic and decline in oil prices.

55

 

The following tables summarize additional financial information by reportable segment:

		Assets
		Year Ended December 31,
		2021				2020				2019
Domestic		$	3,742,101			$	2,659,597			$	2,123,251
International			1,135,679				575,826				542,418
Total		$	4,877,780			$	3,235,423			$	2,665,669

		Depreciation and Amortization
		Year Ended December 31,
		2021				2020				2019
Domestic		$	66,675			$	53,020			$	46,145
International			25,366				15,753				14,764
Total		$	92,041			$	68,773			$	60,909

		Capital Expenditures
		Year Ended December 31,
		2021				2020				2019
Domestic		$	100,672			$	51,867			$	36,007
International			9,320				10,261				24,795
Total		$	109,992			$	62,128			$	60,802

The Company’s sales in the United States represent approximately 82%, 82%, and 75% of total sales for the years ended December 31, 2021, 2020 and 2019, respectively. Approximately 75% and 81% of the Company’s identifiable long-lived assets are located in the United States as of December 31, 2021 and 2020, respectively.

8.	Balance Sheet Details

Inventories consist of the following:

		December 31,
		2021				2020
Raw material		$	727,162			$	375,516
Work-in-process			10,756				6,833
Finished goods			351,787				220,968
Total		$	1,089,705			$	603,317

56

 

As of December 31, 2021 and 2020, inventories totaling $15,555 and $9,154, respectively, were on consignment at customer locations.

Property and equipment consists of the following:

		December 31,
		2021				2020
Land and improvements		$	26,137			$	18,363
Buildings and improvements			244,273				198,908
Machinery and equipment			186,611				153,696
Dies and tools			31,581				24,190
Vehicles			7,621				6,037
Office equipment and systems			125,048				107,923
Leasehold improvements			5,679				5,276
Construction in progress			47,602				30,227
Gross property and equipment			674,551				544,620
Accumulated depreciation			(233,699	)			(200,684	)
Total		$	440,852			$	343,936

Total property and equipment included finance leases of $36,776 and $27,269 at December 31, 2021 and 2020, respectively, 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.

9.	Goodwill and Intangible Assets

The changes in the carrying amount of goodwill by reportable segment for the years ended December 31, 2021 and 2020 are as follows:

		Domestic				International				Total
Balance at December 31, 2019		$	659,209			$	146,075			$	805,284
Acquisitions of businesses, net			42,722				-				42,722
Foreign currency translation			604				6,618				7,222
Balance at December 31, 2020			702,535				152,693				855,228
Acquisitions of businesses, net			293,614				284,447				578,061
Foreign currency translation			(705	)			(22,910	)			(23,615	)
Balance at December 31, 2021		$	995,444			$	414,230			$	1,409,674

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, 2021 and 2020 are as follows:

		Year Ended December 31, 2021												Year Ended December 31, 2020
		Gross				Accumulated Impairment				Net				Gross				Accumulated Impairment				Net
Domestic		$	1,498,637			$	(503,193	)		$	995,444			$	1,205,728			$	(503,193	)		$	702,535
International			418,841				(4,611	)		$	414,230				157,304				(4,611	)		$	152,693
Total		$	1,917,478			$	(507,804	)		$	1,409,674			$	1,363,032			$	(507,804	)		$	855,228

57

 

The following table summarizes intangible assets by major category as of December 31, 2021 and 2020:

		Weighted Average			December 31, 2021												December 31, 2020
		Amortization Years			Gross				Accumulated Amortization				Net Book Value				Gross				Accumulated Amortization				Net Book Value
Finite-lived intangible assets:
Tradenames		14			$	162,563			$	(47,353	)		$	115,210			$	58,729			$	(40,891	)		$	17,838
Customer lists		11				573,910				(335,188	)			238,722				370,736				(321,531	)			49,205
Patents and technology		14				662,341				(169,868	)			492,473				233,271				(146,544	)			86,727
Software		-				1,046				(1,046	)			-				1,046				(1,046	)			-
Non-compete/other		5				79,416				(12,980	)			66,436				16,469				(6,537	)			9,932
Total finite-lived intangible assets					$	1,479,276			$	(566,435	)		$	912,841			$	680,251			$	(516,549	)		$	163,702
Indefinite-lived tradenames						128,321				-				128,321				128,321				-				128,321
Total intangible assets					$	1,607,597			$	(566,435	)		$	1,041,162			$	808,572			$	(516,549	)		$	292,023

Amortization expense of intangible assets was $49,886, $32,280, and $28,644 in 2021, 2020 and 2019, respectively. Excluding the impact of any future acquisitions, the Company estimates amortization expense for the next five years will be as follows: 2022 - $105,577; 2023 - $101,076; 2024 - $95,444; 2025 - $91,218; 2026 - $84,337.

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 and are therefore not separately reported.

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 arm's length transactions.

The Company is a lessor of certain of its C&I mobile products as part of a rental fleet, as well as two of its buildings that it leases to third parties. The lease income related to these arrangements 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.

58

 

The components of total lease cost consist of the following:

		Year Ended December 31,
		2021				2020				2019
Operating lease cost		$	22,432			$	18,648			$	9,647
Finance lease cost:
Amortization of ROU assets			3,187				2,587				2,531
Interest on lease liabilities			2,021				2,237				2,227
Total lease cost		$	27,640			$	23,472			$	14,405

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, 2021				December 31, 2020
Operating Leases
Operating lease ROU assets (1)		$	101,266			$	62,030
Operating lease liabilities - current (2)		$	23,549			$	17,192
Operating lease liabilities - noncurrent (3)			80,370				46,558
Total operating lease liabilities		$	103,919			$	63,750
Finance Leases
Finance lease ROU assets, gross		$	47,119			$	34,929
Accumulated depreciation - finance lease ROU assets			(10,343	)			(7,660	)
Finance lease ROU assets, net (4)		$	36,776			$	27,269
Finance lease liabilities - current (5)		$	4,209			$	2,311
Finance lease liabilities - noncurrent (6)			34,966				25,060
Total finance lease liabilities		$	39,175			$	27,371

	(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:

		Year Ended December 31,
		2021				2020				2019
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases		$	21,250			$	18,412			$	10,125
Operating cash flows from finance leases			1,972				1,871				1,864
Financing cash flows from finance leases			4,679				3,957				3,237
ROU assets obtained in exchange for lease liabilities
Operating leases			55,057				41,678				4,021
Finance leases			4,026				3,737				8,797

59

 

Weighted average remaining lease term and discount rate information related to the Company’s leases as of December 31, 2021 and 2020 is as follows:

		December 31, 2021				December 31, 2020
Weighted average remaining lease term (in years)
Operating Leases			5.21				4.92
Finance Leases			11.94				12.90
Weighted average discount rate
Operating Leases			3.58	%			4.48	%
Finance Leases			7.43	%			7.66	%

The maturities of the Company’s lease liabilities as of December 31, 2021 are as follows:

As of December 31, 2021
		Finance Leases				Operating Leases
2022		$	7,085			$	26,615
2023			6,014				26,220
2024			5,835				25,062
2025			5,432				15,751
2026			5,091				6,469
After 2026			30,646				15,047
Total minimum lease payments			60,103				115,164
Interest component			(20,928	)			(11,245	)
Present value of minimum lease payments		$	39,175			$	103,919

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,
		2021				2020				2019
Balance at beginning of period		$	59,218			$	49,316			$	41,785
Product warranty reserve assumed in acquisition			3,932				124				1,062
Payments			(42,682	)			(33,496	)			(26,096	)
Provision for warranty issued			69,280				42,093				32,060
Changes in estimates for pre-existing warranties			4,465				1,181				505
Balance at end of period		$	94,213			$	59,218			$	49,316

The Company also 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,
		2021				2020				2019
Balance at beginning of period		$	89,788			$	78,738			$	68,340
Extended warranty contracts issued			41,560				26,968				24,483
Amortization of extended warranty contracts			(19,701	)			(15,918	)			(14,085	)
Balance at end of period		$	111,647			$	89,788			$	78,738

60

 

The timing of recognition of the Company’s deferred revenue balance related to extended warranties at December 31, 2021 is as follows:

2022		$	21,210
2023			22,051
2024			19,282
2025			15,413
After 2025			33,691
Total		$	111,647

The Company has 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. These fees are deferred and recorded as other assets in the consolidated balance sheets, and then 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, 2021 and 2020 was $8,479 and $6,869, respectively. Amortization of deferred contract costs recorded during the years ended December 31, 2021, 2020 and 2019 was $1,739, $1,303 and $869, respectively.

Standard product warranty obligations and extended warranty related deferred revenues are included in the consolidated balance sheets as follows:

		December 31,
		2021				2020
Product warranty liability
Current portion - other accrued liabilities		$	59,052			$	37,417
Long-term portion - other long-term liabilities			35,161				21,801
Total		$	94,213			$	59,218
Deferred revenue related to extended warranties
Current portion - other accrued liabilities		$	20,556			$	18,857
Long-term portion - other long-term liabilities			91,091				70,931
Total		$	111,647			$	89,788

12.	Credit Agreements

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

		December 31,
		2021				2020
ABL facility		$	-			$	-
Other lines of credit			72,035				39,282
Total		$	72,035			$	39,282

As of December 31, 2021 and 2020, short-term borrowings consisted of borrowings by the Company’s foreign subsidiaries on local lines of credit.

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

		December 31,
		2021				2020
Term loan		$	780,000			$	830,000
Original issue discount and deferred financing costs			(13,214	)			(15,450	)
ABL facility			100,000				-
Finance lease obligation			39,175				27,371
Other			2,060				3,990
Total			908,020				845,911
Less: current portion of debt			1,721				1,836
Less: current portion of finance lease obligation			4,209				2,311
Total		$	902,091			$	841,764

61

 

Maturities of long-term borrowings outstanding at December 31, 2021, 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:

2022		$	1,765
2023			59
2024			59
2025			92
2026			880,034
After 2026			51
Total		$	882,060

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 substantially 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 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%. Currently, the Term Loan bears interest at rates based upon either a base rate plus an applicable margin of 0.75% or adjusted LIBOR rate plus an applicable margin of 1.75% without a LIBOR floor. The Term Loan agreement has been amended a number of times since inception. 

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 to remove 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. 

In connection with our Term Loan amendment in December 2019, language was added to the agreement to include a benchmark replacement rate, selected by the administrative agent and the borrower, as a replacement to LIBOR that would take affect at the time LIBOR ceases. 

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, 2021, the Company’s net secured leverage ratio was 0.88 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 provide for a senior secured ABL revolving credit facility (ABL Facility). The maturity date of the ABL Facility is currently May 27, 2026. Borrowings under the ABL Facility are guaranteed by substantially 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. Currently, the ABL Facility bears interest at rates based upon either a base rate plus an applicable margin of 0.00% to 0.25% or adjusted LIBOR rate plus an applicable margin of 1.00% to 1.25%, in each case subject to adjustments based upon average availability under the ABL Facility.

62

 

In May 2021, the Company amended the ABL Facility, increasing it from $300,000 to $500,000, raising its incremental capacity from $100,000 to $200,000, and extending the maturity date from  June 12, 2023 to _May 27, 2026 (_Amended ABL Facility). In addition, the Amended ABL Facility modified the pricing by reducing certain applicable interest rates to either a base rate plus an applicable margin of 0.00% to 0.25% or adjusted LIBOR rate plus an applicable margin of 1.00% to 1.25%, in each case, based on average availability under the Amended ABL Facility. In connection with this amendment, the Company capitalized $920 of new debt issuance costs as deferred financing costs on long-term borrowings. At the same time, the Company also amended its Term Loan agreement to reflect the same amendments made to the ABL Facility.

In connection with the ABL Facility amendment in May 2021, language was added to the agreement to include a benchmark replacement rate, selected by the administrative agent and the borrower, as a replacement to LIBOR that would take affect at the time LIBOR ceases.

In May 2021, the Company borrowed $50,000 under the Amended 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 $831 of original issue discount and capitalized debt issuance costs during the second quarter of 2021 as a loss on extinguishment of debt in the consolidated statements of comprehensive income. As of December 31, 2021, there was $100,000 outstanding under the ABL Facility, leaving $399,480 of availability, net of outstanding letters of credit.

13.	Stock Repurchase Programs

In September 2018, the Company’s Board of Directors approved a $250,000 stock repurchase program, which expired in October 2020. In September 2020, the Company’s Board of Directors approved another stock repurchase program, which commenced on October 27, 2020, and allows for the repurchase of up to $250,000 of the Company's common stock over a 24-month period. 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, 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, 2021, the Company repurchased 350,000 shares of its common stock for $125,992, all funded with cash on hand. During the years ended December 31, 2020 and 2019, the Company did not repurchase any shares of its common stock. Since the inception of all stock repurchase programs (starting in August 2015), the Company has repurchased 9,026,706 shares of its common stock for $431,539 (at an average cost per share of $47.81), 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.

63

 

The following table reconciles the numerator and the denominator used to calculate basic and diluted earnings per share:

		Year Ended December 31,
		2021				2020				2019
Numerator
Net income attributable to Generac Holdings Inc.		$	550,494			$	350,576			$	252,007
Redeemable noncontrolling interest redemption value adjustment			(17,102	)			(1,247	)			1,253
Net income attributable to common shareholders		$	533,392			$	349,329			$	253,260
Denominator
Weighted average shares, basic			62,686,001				62,280,889				61,926,986
Dilutive effect of stock compensation awards (1)			1,534,603				1,456,845				938,460
Dilutive effect of contingently issued shares			32,804				-				-
Diluted shares			64,253,408				63,737,734				62,865,446
Net income attributable to common shareholders per share
Basic		$	8.51			$	5.61			$	4.09
Diluted		$	8.30			$	5.48			$	4.03

	(1)	There were no awards with an anti-dilutive impact for the years ended December 31, 2021, 2020 and 2019.

15.	Income Taxes

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

		Year Ended December 31,
		2021				2020				2019
Current:
Federal		$	105,236			$	62,714			$	41,686
State			21,295				13,071				4,211
Foreign			10,536				1,974				2,660
			137,067				77,759				48,557
Deferred:
Federal			10,518				20,452				19,393
State			(3,728	)			1,243				1,390
Foreign			(7,863	)			(1,197	)			(1,263	)
			(1,073	)			20,498				19,520
Change in valuation allowance			(1,037	)			716				(778	)
Provision for income taxes		$	134,957			$	98,973			$	67,299

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, 2021, the Company is no longer subject to income tax examinations for United States federal income taxes for tax years prior to 2018. Due to the carryforward of net operating losses and research & development credits, the Company’s Wisconsin state income tax returns for tax years 2007 through 2020 remain open. In addition, the Company is subject to audit by various foreign taxing jurisdictions for tax years 2009 through 2020.

The Company is regularly under tax return examination by tax authorities 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.

64

 

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

		December 31,
		2021				2020
Deferred tax assets:
Accrued expenses		$	37,797			$	24,358
Deferred revenue			27,003				15,851
Inventories			14,907				11,795
Stock-based compensation			10,202				8,348
Operating loss and credit carryforwards			68,368				31,275
Bad debt			1,253				1,633
Other			12,203				8,558
Valuation allowance			(7,874	)			(5,740	)
Total deferred tax assets			163,859				96,078
Deferred tax liabilities:
Goodwill and intangible assets			328,162				171,831
Depreciation			21,340				33,716
Debt refinancing costs			2,916				3,544
Prepaid expenses			1,664				1,259
Total deferred tax liabilities			354,082				210,350
Net deferred tax liabilities		$	(190,223	)		$	(114,272	)

As of December 31, 2021 and 2020, deferred tax assets of $15,740 and $1,497, and deferred tax liabilities of $205,964 and $115,769, respectively, were reflected on the consolidated balance sheets.

The Company maintains a valuation allowance against the deferred tax assets when it is uncertain it will generate sufficient taxable income to utilize the asset. During 2021, the valuation allowance increased by $2,134 primarily due to foreign net operating losses which are unlikely to be utilized, partially offset by utilization of loss carryforwards in certain domestic and foreign subsidiaries.

At December 31, 2021, the Company had state manufacturing tax credit carryforwards of approximately $28,270, which expire between 2028 and 2035. 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,
		2021				2020
Unrecognized tax benefit, beginning of period		$	7,613			$	6,720
Increase in unrecognized tax benefit for positions taken in prior period			272				332
Increase in unrecognized tax benefit for positions taken in current period			990				750
Statute of limitation expirations			(228	)			(189	)
Settlements			-				-
Unrecognized tax benefit, end of period		$	8,647			$	7,613

The unrecognized tax benefit as of  December 31, 2021 and 2020, if recognized, would favorably impact the effective tax rate.

As of  December 31, 2021 and 2020, total accrued interest of approximately $127 and $95, respectively, and accrued penalties of approximately $357 and $274, 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, 2022.

65

 

A reconciliation of the statutory tax rates and the effective tax rates for the years ended December 31, 2021, 2020 and 2019 are as follows:

		Year Ended December 31,
		2021				2020				2019
U.S. statutory rate			21.0	%			21.0	%			21.0	%
State taxes			4.3				4.3				4.3
State tax rate differential			0.0				0.0				(1.0	)
Research and development credits			(1.0	)			(1.1	)			(0.8	)
State credits			(1.1	)			(1.5	)			(1.0	)
Share-based compensation			(3.8	)			(1.0	)			(0.6	)
Nondeductible U.S. compensation			1.5				0.0				0.0
Foreign tax deduction			(1.5	)			0.0				0.0
Foreign deferred tax rate change			1.2				0.0				0.0
Other			(1.1	)			0.5				(0.8	)
Effective tax rate			19.5	%			22.2	%			21.1	%

16.	Benefit Plans

Medical and Dental Plans

The Company maintains medical and dental benefit plans covering its full-time domestic employees and their dependents. These 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 $24,189, $24,617, and $18,290 for the years ended December 31, 2021, 2020 and 2019, respectively.

The Company’s foreign subsidiaries participate in government sponsored medical benefit plans and other local 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 that is deferred. 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 $6,725, $5,332, and $4,791 of expense related to these plans for the years ended December 31, 2021, 2020 and 2019, respectively.

Pension Plans

Historically, the Company maintained 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 the year ended December 31, 2019.

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.

66

 

17.	Share Plans

The Company adopted an equity incentive plan (the 2010 Plan) on February 10, 2010 in connection with its initial public offering. The 2010 Plan, as amended, allowed for granting of up to 9.1 million share-based awards to executives, directors and employees. Awards available for grant under the 2010 Plan included stock options, stock appreciation rights, restricted stock, other share-based awards and performance-based compensation awards. Awards under the 2010 Plan ceased in June 2019. Total share-based compensation expense related to the 2010 Plan, net of estimated forfeitures, was $6,249, $11,681, and $15,738, for the years ended December 31, 2021, 2020 and 2019, 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 (the 2019 Plan). Following the effectiveness of the 2019 Plan, no new awards may be made under the 2010 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 2019 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 $17,705, $9,201 and $956 for the years ended December 31, 2021, 2020 and 2019, respectively, which is recorded in operating expenses in the consolidated statements of comprehensive income.

Stock Options - Stock options granted in 2021 have an exercise price between $323.66 per share and $438.83 per share; stock options granted in 2020 have an exercise price between $91.00 per share and $158.89 per share; and stock options granted in 2019 have an exercise price of $52.07 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 8,608, 24,070, and 32,211 for the years ended December 31, 2021, 2020 and 2019, 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 $38,787, $13,089, and $9,395 for the years ended December 31, 2021, 2020 and 2019, respectively, and are reflected as a financing activity in the consolidated statements of cash flows.

Total payments made by the Company to the taxing authorities for the employees’ tax obligations related to stock option exercises were $31,680, $7,297, and $3,360 for the years ended December 31, 2021, 2020 and 2019, 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 and are trued up upon vesting based on actual forfeiture activity.

67

 

The weighted-average assumptions used in the Black-Scholes-Merton option pricing model for 2021, 2020 and 2019 are as follows:

		Year Ended December 31,
		2021				2020				2019
Weighted average grant date fair value		$	129.47			$	35.79			$	19.33
Assumptions:
Expected stock price volatility			37	%			32	%			33	%
Risk free interest rate			0.45	%			1.56	%			2.52	%
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, 2021, 2020 and 2019 is as follows:

		Number of Options				Weighted-Average Exercise Price				Weighted-Average Remaining Contractual Term (in years)				Aggregate Intrinsic Value ($ in thousands)
Outstanding as of December 31, 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
Granted			173,650				102.32
Exercised			(216,196	)			39.88
Forfeited			(21,450	)			50.25
Outstanding as of December 31, 2020			1,528,690				49.08				6.3			$	272,553
Granted			70,392				335.70
Exercised			(229,921	)			45.95
Forfeited			(27,030	)			63.27
Outstanding as of December 31, 2021			1,342,131				64.29				5.5			$	386,069
Exercisable as of December 31, 2021			896,456				42.04				4.4			$	277,794

As of December 31, 2021, there was $12,829 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 2.6 years. Total share-based compensation cost related to the stock options for the years ended December 31, 2021, 2020 and 2019 was $6,462, $5,860, and $5,597, 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, whereby 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 2019 awards covers the years 2019 through 2021, the performance period for the 2020 awards covers the years 2020 through 2022, and the performance period for the 2021 awards covers the years 2021 through 2023. 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 and is trued up upon vesting based on actual forfeiture activity.

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 80,583, 70,718, and 55,953 for the years ended December 31, 2021, 2020 and 2019, 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 $27,223, $7,613, and $3,078 for the years ended December 31, 2021, 2020 and 2019, respectively, and are reflected as a financing activity within the consolidated statements of cash flows.

68

 

A summary of the Company's restricted stock activity for the years ended December 31, 2021, 2020 and 2019 is as follows:

		Shares				Weighted-Average Grant-Date Fair Value
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
Granted			183,868				95.14
Vested			(200,390	)			45.10
Forfeited			(18,921	)			56.58
Non-vested as of December 31, 2020			456,194				68.42
Granted			126,339				223.09
Vested			(202,327	)			58.99
Forfeited			(14,241	)			138.64
Non-vested as of December 31, 2021			365,965				124.25

As of December 31, 2021, there was $35,104 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 2.2 years. Total share-based compensation cost related to the restricted stock for the years ended December 31, 2021, 2020 and 2019, inclusive of performance shares, was $17,492, $15,022, and $11,097, respectively, which is recorded in operating expenses in the consolidated statements of comprehensive income.

During 2021, 2020 and 2019, 4,677, 15,275, and 22,544 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, all of which were fully vested at time of grant. A non-employee director 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. 3,160, 10,528, and 16,604 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 2021, 2020, and 2019, respectively. Total share-based compensation cost for these share grants in 2021, 2020 and 2019 was $1,579, $1,558, and $1,391, 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, 2021 and 2020 was approximately $115,900 and $55,600, respectively.

From time to time, we are involved in legal proceedings primarily involving product liability, regulatory, and employment matters, as well as general commercial disputes arising in the ordinary course of our business. As of December 31, 2021, the Company believes there are no legal proceedings pending that would have a material adverse effect on its results of operations or financial condition.

Federal Securities Law Class Actions

On August 20, 2021 and August 31, 2021, the Company and certain of its officers were named as defendants in two putative federal securities law class actions filed in the U.S. District Court for the Central District of California (the "Federal Securities Law Class Actions"). These actions were filed, respectively, under the captions Khami v. Generac Holdings Inc., et al., Case No. 2:21-cv-06777, and Procter v. Generac Holdings Inc., et al., Case No. 2:21-cv-07009. The Federal Securities Law Class Actions were transferred to the U.S. District Court for the Eastern District of Wisconsin, after which the court consolidated the actions under the caption In re Generac Holdings Securities Litigation, Case No. 21-cv-1342, and appointed a lead plaintiff. On February 14, 2022, the lead plaintiff in the consolidated action filed a notice of voluntary dismissal, without prejudice. Should this party, or any other prospective plaintiff, file a new case on the same basis as the actions now dismissed, the Company would resume its vigorous defense against such claims, and, unless new or different claims were presented that the Company has not evaluated, the Company would continue to believe such actions would not have a material adverse effect on our results of operations or financial condition.

69

19.	Quarterly Financial Information (Unaudited)

		Quarters Ended 2021
		Q1				Q2				Q3				Q4
Net sales		$	807,434			$	919,981			$	942,698			$	1,067,071
Gross profit			321,814				339,735				335,994				362,539
Operating income			189,124				182,952				173,579				175,481
Net income attributable to Generac Holdings Inc.			148,993				127,036				131,570				142,895
Net income attributable to common shareholders per common share - basic:		$	2.39			$	2.06			$	1.98			$	2.09
Net income attributable to common shareholders per common share - diluted:		$	2.33			$	2.01			$	1.93			$	2.04

		Quarters Ended 2020
		Q1				Q2				Q3				Q4
Net sales		$	475,915			$	546,848			$	701,355			$	761,082
Gross profit			172,320				208,983				276,149				300,202
Operating income			62,862				89,553				155,637				171,054
Net income attributable to Generac Holdings Inc.			44,460				66,145				114,970				125,001
Net income attributable to common shareholders per common share - basic:		$	0.69			$	1.04			$	1.86			$	2.02
Net income attributable to common shareholders per common share - diluted:		$	0.68			$	1.02			$	1.82			$	1.96

20.	Valuation and Qualifying Accounts

For the years ended December 31, 2021, 2020 and 2019:

		Balance at Beginning of Year				Additions Charged to Earnings				Additions Charged to Retained Earnings (1)				Charges to Reserve, Net (2)				Reserves Established for Acquisitions				Balance at End of Year
Year ended December 31, 2021
Allowance for credit losses		$	12,001			$	206			$	-			$	(1,640	)		$	1,458			$	12,025
Reserves for inventory			27,817				17,698				-				(15,749	)			3,771				33,537
Valuation of deferred tax assets			5,740				1,404				-				(2,441	)			3,171				7,874
Year ended December 31, 2020
Allowance for credit losses		$	6,968			$	4,645			$	1,147			$	(957	)		$	198			$	12,001
Reserves for inventory			24,293				11,353				-				(8,788	)			959				27,817
Valuation of deferred tax assets			5,024				716				-				-				-				5,740
Year ended December 31, 2019
Allowance for credit losses		$	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

	(1)	Result of adopting ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.
	(2)	Deductions from the allowance for doubtful accounts equal accounts receivable written off against the allowance, less recoveries, as well as foreign currency translation adjustments. Deductions from the reserves for inventory excess and obsolete items equal inventory written off against the reserve as items were disposed of, as well as foreign currency translation adjustments.

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.

70