Item 1. Financial Statements

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

		June 30,				December 31,
		2023				2022
Assets
Current assets:
Cash and cash equivalents		$	192,768			$	132,723
Accounts receivable, less allowance for credit losses of $29,610 and $27,664 at June 30, 2023 and December 31, 2022, respectively			540,332				522,458
Inventories			1,436,619				1,405,384
Prepaid expenses and other current assets			103,334				121,783
Total current assets			2,273,053				2,182,348
Property and equipment, net			505,026				467,604
Customer lists, net			200,478				206,987
Patents and technology, net			438,148				454,757
Other intangible assets, net			34,515				41,719
Tradenames, net			223,229				227,251
Goodwill			1,430,283				1,400,880
Deferred income taxes			13,953				12,746
Operating lease and other non-current assets			203,286				175,170
Total assets		$	5,321,971			$	5,169,462
Liabilities and stockholders' equity
Current liabilities:
Short-term borrowings		$	77,889			$	48,990
Accounts payable			454,727				446,050
Accrued wages and employee benefits			53,417				45,741
Accrued product warranty			74,025				89,141
Other accrued liabilities			254,700				349,389
Current portion of long-term borrowings and finance lease obligations			22,069				12,733
Total current liabilities			936,827				992,044
Long-term borrowings and finance lease obligations			1,523,310				1,369,085
Deferred income taxes			114,990				125,691
Operating lease and other long-term liabilities			319,400				312,916
Total liabilities			2,894,527				2,799,736
Redeemable noncontrolling interests			5,688				110,471
Stockholders' equity:
Common stock, par value $0.01, 500,000,000 shares authorized, 73,097,016 and 72,701,257 shares issued at June 30, 2023 and December 31, 2022, respectively			732				728
Additional paid-in capital			1,053,759				1,016,138
Treasury stock, at cost, 10,858,348 and 11,284,350 shares at June 30, 2023 and December 31, 2022, respectively			(779,892	)			(808,491	)
Excess purchase price over predecessor basis			(202,116	)			(202,116	)
Retained earnings			2,363,015				2,316,224
Accumulated other comprehensive loss			(16,216	)			(65,102	)
Stockholders' equity attributable to Generac Holdings Inc.			2,419,282				2,257,381
Noncontrolling interests			2,474				1,874
Total stockholders' equity			2,421,756				2,259,255
Total liabilities and stockholders' equity		$	5,321,971			$	5,169,462

See notes to condensed consolidated financial statements.

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

		Three Months Ended June 30,								Six Months Ended June 30,
		2023				2022				2023				2022
Net sales		$	1,000,420			$	1,291,391			$	1,888,330			$	2,427,247
Costs of goods sold			671,999				834,406				1,287,410				1,609,514
Gross profit			328,421				456,985				600,920				817,733
Operating expenses:
Selling and service			115,743				120,066				216,431				218,309
Research and development			43,942				41,599				85,762				81,343
General and administrative			56,371				52,600				116,056				94,572
Amortization of intangibles			26,393				25,876				52,216				51,930
Total operating expenses			242,449				240,141				470,465				446,154
Income from operations			85,972				216,844				130,455				371,579
Other (expense) income:
Interest expense			(25,160	)			(10,235	)			(48,155	)			(19,789	)
Investment income			941				92				1,629				169
Loss on extinguishment of debt			-				(3,743	)			-				(3,743	)
Other, net			(331	)			505				(497	)			751
Total other expense, net			(24,550	)			(13,381	)			(47,023	)			(22,612	)
Income before provision for income taxes			61,422				203,463				83,432				348,967
Provision for income taxes			15,907				45,826				23,756				74,434
Net income			45,515				157,637				59,676				274,533
Net income attributable to noncontrolling interests			317				1,278				2,048				4,316
Net income attributable to Generac Holdings Inc.		$	45,198			$	156,359			$	57,628			$	270,217
Net income attributable to Generac Holdings Inc. per common share - basic:		$	0.70			$	2.24			$	0.76			$	3.85
Weighted average common shares outstanding - basic:			61,721,614				63,662,510				61,645,341				63,607,711
Net income attributable to Generac Holdings Inc. per common share - diluted:		$	0.70			$	2.21			$	0.75			$	3.78
Weighted average common shares outstanding - diluted:			62,348,184				64,713,748				62,429,911				64,799,002
Comprehensive income attributable to Generac Holdings Inc.		$	69,060			$	120,864			$	104,422			$	243,229

See notes to condensed consolidated financial statements.

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

		Generac Holdings Inc.
																						Excess Purchase Price				Retained				Accumulated
										Additional												Over				Earnings				Other				Total
		Common Stock								Paid-In				Treasury Stock								Predecessor				(Accumulated				Comprehensive				Stockholders'				Noncontrolling
		Shares				Amount				Capital				Shares				Amount				Basis				Deficit)				Income (Loss)				Equity				Interest				Total
Balance at April 1, 2023			73,052,760			$	731			$	1,042,786				(10,855,203	)		$	(779,533	)		$	(202,116	)		$	2,319,638			$	(42,343	)		$	2,339,163			$	2,216			$	2,341,379
Unrealized gain on interest rate swaps, net of tax of $1,922																															5,752				5,752								5,752
Foreign currency translation adjustment																															20,375				20,375				(5	)			20,370
Common stock issued under equity incentive plans, net of shares withheld for employee taxes and strike price			44,256				1				928																								929								929
Net share settlement of restricted stock awards															(3,145	)			(359	)															(359	)							(359	)
Share-based compensation											10,045																								10,045								10,045
Redemption value adjustment																											(1,821	)							(1,821	)							(1,821	)
Net income																											45,198								45,198				263				45,461
Balance at June 30, 2023			73,097,016			$	732			$	1,053,759				(10,858,348	)		$	(779,892	)		$	(202,116	)		$	2,363,015			$	(16,216	)		$	2,419,282			$	2,474			$	2,421,756

		Generac Holdings Inc.
																						Excess Purchase Price				Retained				Accumulated
										Additional												Over				Earnings				Other				Total
		Common Stock								Paid-In				Treasury Stock								Predecessor				(Accumulated				Comprehensive				Stockholders'				Noncontrolling
		Shares				Amount				Capital				Shares				Amount				Basis				Deficit)				Income (Loss)				Equity				Interest				Total
Balance at January 1, 2023			72,701,257			$	728			$	1,016,138				(11,284,350	)		$	(808,491	)		$	(202,116	)		$	2,316,224			$	(65,102	)		$	2,257,381			$	1,874			$	2,259,255
Unrealized gain on interest rate swaps, net of tax of $423																															1,264				1,264								1,264
Foreign currency translation adjustment																															47,622				47,622				55				47,677
Common stock issued under equity incentive plans, net of shares withheld for employee taxes and strike price			384,816				4				1,832																								1,836								1,836
Net share settlement of restricted stock awards															(40,116	)			(4,797	)															(4,797	)							(4,797	)
Share-based compensation											20,379																								20,379								20,379
Payment of contingent consideration			10,943								15,410				466,118				33,396																48,806								48,806
Redemption value adjustment																											(10,837	)							(10,837	)							(10,837	)
Net income																											57,628								57,628				545				58,173
Balance at June 30, 2023			73,097,016			$	732			$	1,053,759				(10,858,348	)		$	(779,892	)		$	(202,116	)		$	2,363,015			$	(16,216	)		$	2,419,282			$	2,474			$	2,421,756

		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 April 1, 2022			72,589,905			$	727			$	959,890				(8,740,863	)		$	(471,833	)		$	(202,116	)		$	2,067,868			$	(46,402	)		$	2,308,134			$	478			$	2,308,612
Unrealized gain on interest rate swaps, net of tax of $2,408																															7,129				7,129				–				7,129
Foreign currency translation adjustment																															(43,566	)			(43,566	)			(256	)			(43,822	)
Common stock issued under equity incentive plans, net of shares withheld for employee taxes and strike price			(1,317	)							194																								194								194
Net share settlement of restricted stock awards															(14,588	)			(3,461	)															(3,461	)							(3,461	)
Share-based compensation											7,735																								7,735								7,735
Redemption value adjustment																											(13,645	)							(13,645	)							(13,645	)
Net income																											156,359								156,359				661				157,020
Balance at June 30, 2022			72,588,588			$	727			$	967,819				(8,755,451	)		$	(475,294	)		$	(202,116	)		$	2,210,582			$	(82,839	)		$	2,418,879			$	883			$	2,419,762

		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 January 1, 2022			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
Unrealized gain on interest rate swaps, net of tax of $8,734																															25,857				25,857				–				25,857
Foreign currency translation adjustment																															(53,941	)			(53,941	)			(74	)			(54,015	)
Common stock issued under equity incentive plans, net of shares withheld for employee taxes and strike price			202,571				2				(1,682	)																							(1,680	)							(1,680	)
Net share settlement of restricted stock awards															(88,420	)			(26,318	)															(26,318	)							(26,318	)
Share-based compensation											16,562																								16,562								16,562
Redemption value adjustment																											(25,592	)							(25,592	)							(25,592	)
Net income																											270,217								270,217				644				270,861
Balance at June 30, 2022			72,588,588			$	727			$	967,819				(8,755,451	)		$	(475,294	)		$	(202,116	)		$	2,210,582			$	(82,839	)		$	2,418,879			$	883			$	2,419,762

See notes to condensed consolidated financial statements.

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

		Six Months Ended June 30,
		2023				2022
Operating activities
Net income		$	59,676			$	274,533
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation			28,982				25,629
Amortization of intangible assets			52,216				51,930
Amortization of original issue discount and deferred financing costs			1,921				1,287
Loss on extinguishment of debt			–				3,743
Deferred income taxes			(14,152	)			(61,625	)
Share-based compensation expense			20,379				16,562
Gain on disposal of assets			(532	)			(587	)
Other noncash (gains) charges			735				(2,037	)
Net changes in operating assets and liabilities, net of acquisitions:
Accounts receivable			(15,535	)			(143,308	)
Inventories			(15,897	)			(158,232	)
Other assets			16,333				1,637
Accounts payable			(2,449	)			(54,583	)
Accrued wages and employee benefits			6,694				(11,876	)
Other accrued liabilities			(72,743	)			86,616
Excess tax benefits from equity awards			(1,040	)			(15,996	)
Net cash provided by operating activities			64,588				13,693
Investing activities
Proceeds from sale of property and equipment			1,801				1,883
Proceeds from sale of investment			–				1,308
Proceeds from beneficial interests in securitization transactions			1,472				1,843
Contribution to equity method investment			(6,627	)			(10,229	)
Purchase of long-term investment			(2,000	)			–
Expenditures for property and equipment			(53,900	)			(46,503	)
Acquisition of business, net of cash acquired			(16,188	)			(11,421	)
Net cash used in investing activities			(75,442	)			(63,119	)
Financing activities
Proceeds from short-term borrowings			45,989				216,681
Proceeds from long-term borrowings			317,975				935,000
Repayments of short-term borrowings			(21,125	)			(208,244	)
Repayments of long-term borrowings and finance lease obligations			(160,557	)			(538,401	)
Payment of contingent acquisition consideration			(4,979	)			–
Payment of debt issuance costs			–				(10,330	)
Purchase of additional ownership interest			(104,844	)			(375	)
Taxes paid related to equity awards			(9,186	)			(38,347	)
Proceeds from exercise of stock options			6,223				10,383
Net cash provided by financing activities			69,496				366,367
Effect of exchange rate changes on cash and cash equivalents			1,403				2,860
Net increase in cash and cash equivalents			60,045				319,801
Cash and cash equivalents at beginning of period			132,723				147,339
Cash and cash equivalents at end of period		$	192,768			$	467,140

See notes to condensed consolidated financial statements.

Generac Holdings Inc. Notes to Condensed Consolidated Financial Statements

_(_U.S. Dollars in Thousands, Except Share and Per Share Data)

(Unaudited)

1.   Description of Business and Basis of Presentation

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, energy management devices & solutions, and other power products and services 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 (as discussed in Item 1 of the Annual Report on Form 10-K for the year ended December 31, 2022). A summary of acquisitions affecting the reporting periods presented include:

	●	In June 2022, the Company acquired Electronic Environments Co. LLC and related subsidiaries (collectively EEC). Headquartered in Marlborough, Massachusetts, EEC is an industrial generator distributor as well as a provider of data center and telecom facility design, build, maintenance, and repair services.
	●	In October 2022, the Company acquired BPAC, Inc. (Blue Pillar), an industrial IoT platform developer that designs, deploys, and manages industrial IoT network software solutions to enable distributed energy generation monitoring and control.
	●	In February 2023, the Company acquired REFU Storage Systems (REFUstor), headquartered in Pfullingen, Germany. REFUstor is a developer and supplier of battery storage hardware products, advanced software, and platform services for the commercial and industrial market.

The condensed consolidated financial statements include the accounts of the Company and its subsidiaries that are consolidated in conformity with U.S. generally accepted accounting principles (GAAP). All intercompany amounts and transactions have been eliminated in consolidation.

The condensed consolidated balance sheet as of June 30, 2023, the condensed consolidated statements of comprehensive income for the three and six months ended June 30, 2023 and 2022, the condensed consolidated statements of stockholders’ equity for the three and six months ended June 30, 2023 and 2022, and the condensed consolidated statements of cash flows for the six months ended June 30, 2023 and 2022 have been prepared by the Company and have not been audited. In the opinion of management, all adjustments (which include only normal recurring adjustments except where disclosed) necessary for the fair presentation of the financial position, results of operation, and cash flows have been made. The results of operations for any interim period are not necessarily indicative of the results to be expected for the full year.

The preparation of the condensed consolidated financial statements in conformity with 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 condensed consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with GAAP have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2022.

5

 

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 issued were assessed and have already been adopted in a prior period or determined to be either not applicable or are not expected to have a material impact on the Company’s consolidated financial statements.

2****.   Acquisitions

Fiscal 2023 Acquisitions

On February 1, 2023, the Company acquired REFUstor, headquartered in Pfullingen, Germany. REFUstor is a developer and supplier of battery storage hardware products, advanced software, and platform services for the commercial and industrial market.

The accompanying condensed consolidated financial statements include the results of REFUstor from the date of acquisition through June 30, 2023. The Company recorded its preliminary purchase price allocation for REFUstor during the first quarter of 2023, based on its estimates of the fair value of the acquired assets and assumed liabilities. Purchase accounting will be finalized prior to March 31, 2024, and there have not been any material changes to the balances acquired as of June 30, 2023. Pro forma and other financial information are not presented as the effects of the REFUstor acquisition are not material to the Company's results of operations or financial position prior to the acquisition date. 

Fiscal 2022 Acquisitions

On June 30, 2022, the Company acquired EEC. Headquartered in Marlborough, Massachusetts, EEC is an industrial generator distributor as well as a provider of data center and telecom facility design, build, maintenance, and repair services.

On October 3, 2022, the Company acquired Blue Pillar, an industrial IoT platform developer that designs, deploys, and manages industrial IoT network software solutions to enable distributed energy generation monitoring and control.

The combined purchase price for these two acquisitions was $25,654, net of cash acquired. The Company recorded its preliminary purchase price allocation for EEC and Blue Pillar during the second quarter and fourth quarter of 2022, respectively, based on its estimates of the fair value of the acquired assets and assumed liabilities. Purchase accounting for EEC was finalized in the second quarter of 2023 and did not result in material adjustments to the Company's preliminary estimates. Through the second quarter of 2023, the combined purchase price for EEC and Blue Pillar has increased to $27,456 due to working capital true-ups. The accompanying condensed consolidated financial statements include the results of the acquired businesses since the dates of acquisition through June 30, 2023. Pro forma and other financial information are not presented as the effects of the 2022 acquisitions are not material to the Company's results of operations or financial position prior to the acquisition dates. 

6

 

3.   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 condensed consolidated balance sheets, as the noncontrolling interest holder had within its control the right to require the Company to redeem its interest in Pramac. 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 in Pramac to 80%. On March 8, 2023, the Company and the noncontrolling interest holder entered into an agreement whereby the Company acquired the remaining 20% ownership interest in Pramac for a purchase price of $116,754, which brought the Company's total ownership interest in Pramac to 100%. The purchase price included $105,264 of initial consideration (which included a cash payment of $104,844 and a $420 gain on a foreign currency settlement in the first quarter of 2023) and $11,490 of contingent deferred consideration to be paid in up to 135,205 restricted shares that were issued based on the twenty day volume weighted average price of the Company’s stock ending on December 31, 2022, and which shall vest upon achievement of certain earnings targets at the end of the earn-out period, December 31, 2025. 

On February 1, 2019, the Company acquired a 51% ownership interest in Captiva Energy Solutions Private Limited (Captiva). The 49% noncontrolling interest in Captiva had an acquisition date fair value of $3,165 and was recorded as a redeemable noncontrolling interest in the condensed consolidated balance sheets, as the noncontrolling interest holder had within its control the right to require the Company to redeem its interest in Captiva. The noncontrolling interest holder has a put option to sell his interest to the Company any time after five years from the date of acquisition, or earlier upon the occurrence of certain circumstances. 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 put and call option price is based on a multiple of earnings, subject to the terms of the acquisition agreement. In March 2022, the Company signed an agreement to purchase an additional 15% ownership interest in Captiva for a purchase price of $461, bringing the Company's total ownership interest in Captiva to 66%. In May 2022, the Company signed an amendment to the purchase agreement resulting in a revised purchase price of $375, which was paid with cash on hand.

The redeemable noncontrolling interests are recorded at the greater of the initial fair value, increased or decreased for the noncontrolling interests’ share of comprehensive income (loss), or the estimated redemption value, with any adjustments to the redemption value impacting retained earnings, but not net income. However, the redemption value adjustments are reflected in the earnings per share calculation, as detailed in Note 13, “Earnings Per Share,” to the condensed consolidated financial statements. The following table presents the changes in the redeemable noncontrolling interest for both Captiva and Pramac:

		Three Months Ended June 30,								Six Months Ended June 30,
		2023				2022				2023				2022
Balance at beginning of period		$	3,814			$	71,511			$	110,471			$	58,050
Net income			222				816				1,670				3,672
Foreign currency translation			(169	)			(3,228	)			(536	)			(4,109	)
Purchase of additional ownership interest			-				86				(116,754	)			(375	)
Redemption value adjustment			1,821				13,645				10,837				25,592
Balance at end of period		$	5,688			$	82,830			$	5,688			$	82,830

4****.   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 on the condensed 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.

The Company periodically utilizes commodity derivatives and foreign currency forward purchase and sales contracts in the normal course of business. Because these contracts do not qualify for hedge accounting, the related gains and losses are recorded in the Company’s condensed consolidated statements of comprehensive income. These gains and losses are not material to the Company’s condensed consolidated financial statements for the periods presented.

Interest Rate Swaps

In 2017, the Company entered into twenty interest rate swap agreements, the final four of which expired in  May 2023. In March 2020, the Company entered into three additional interest rate swap agreements which were still outstanding as of June 30, 2023.

In June 2022, in conjunction with the amendments to the Company's credit agreements discussed further in Note 11, “Credit Agreements,” the Company amended its interest rate swaps to match that of the underlying debt and reconfirmed hedge effectiveness. 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 various hedge transactions. These interest rate swap agreements qualify as cash flow hedges and therefore, the effective portions of their gains or losses are reported as a component of accumulated other comprehensive loss ("AOCL") in the condensed consolidated balance sheets.

The amount of gains/(losses), net of tax recognized, for the three and six months ended June 30, 2023, was $5,752 and $1,264, respectively. The amount of gains/(losses), net of tax, recognized for the three and six months ended June 30, 2022, was $7,129 and $25,857, 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 all of the Company’s derivatives:

		June 30, 2023				December 31, 2022
Commodity contracts		$	79			$	-
Foreign currency contracts			130				94
Interest rate swaps			50,966				49,279

In the condensed consolidated balance sheets, the fair value of the commodity and foreign currency contracts is included in prepaid expenses and other current assets, and the fair value of the interest rate swaps is included in operating lease and other assets. Excluding the impact of credit risk, the fair value of the derivative contracts as of June 30, 2023 and December 31, 2022 is an asset of $52,998 and $51,184 respectively, which represents the amount the Company would receive to exit all of the agreements on those dates.

7

 

5.   Fair Value Measurements

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 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 revolving facility borrowings), excluding Term Loan borrowings, approximates the fair value of these instruments based on their short-term nature. The fair value of the Term Loan B borrowing, which has a net carrying value of $524,114, was $528,013 (Level 2) at June 30, 2023, as calculated based on independent valuations which contain inputs and significant value drivers that are observable. As the Term Loan A is not actively traded, the fair value of Term Loan A approximates the carrying value. 

For the fair value of the derivatives measured on a recurring basis, refer to the fair value table in Note 4, “Derivative Instruments and Hedging Activities,” to the condensed 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 the derivative contracts above 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 condensed consolidated statements of comprehensive income. The fair value measurement of contingent consideration is typically categorized as a Level 3 liability, as the measurement amount is based primarily on significant inputs that are not observable in the market.

At June 30, 2023, the fair value of contingent consideration is $39,579 in other long-term liabilities in the condensed consolidated balance sheets. At December 31, 2022, the Company had contingent consideration of $49,500 in other accrued liabilities and $32,033 in other long-term liabilities in the condensed consolidated balance sheets.

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

Beginning balance, January 1, 2023		$	81,533
Changes in fair value			-
Additional contingent consideration (1)			11,490
Payment of contingent consideration (2)			(53,786	)
Present value interest accretion			342
Ending balance, June 30, 2023		$	39,579

(1) Represents $11,490 of contingent deferred consideration for the Pramac buyout. See Note 3, "Redeemable Noncontrolling Interest". 

(2) Includes payments of $479 in cash and $44,521 in shares for the ecobee acquisition, $4,286 in shares for the Chilicon acquisition, and $4,500 in cash for the Mean Green acquisition. The payment of common stock is accounted for as a non-cash item in the condensed consolidated statement of cash flows. 

8

 

6.   Accumulated Other Comprehensive Loss

The following table presents a disclosure of changes in AOCL during the three and six months ended June 30, 2023 and 2022, net of tax:

		Foreign Currency Translation Adjustments					Unrealized Gain (Loss) on Cash Flow Hedges					Total
Beginning Balance – April 1, 2023		$	(74,298	)			$	31,955				$	(42,343	)
Other comprehensive income (loss)			20,375		(1)			5,752		(2)			26,127
Ending Balance – June 30, 2023		$	(53,923	)			$	37,707				$	(16,216	)

		Foreign Currency Translation Adjustments					Unrealized Gain (Loss) on Cash Flow Hedges					Total
Beginning Balance – April 1, 2022		$	(63,079	)			$	16,677				$	(46,402	)
Other comprehensive income (loss)			(43,566	)	(3)			7,129		(4)			(36,437	)
Ending Balance – June 30, 2022		$	(106,645	)			$	23,806				$	(82,839	)

		Foreign Currency Translation Adjustments					Unrealized Gain (Loss) on Cash Flow Hedges					Total
Beginning Balance – January 1, 2023		$	(101,545	)			$	36,443				$	(65,102	)
Other comprehensive income (loss)			47,622		(1)			1,264		(5)			48,886
Ending Balance – June 30, 2023		$	(53,923	)			$	37,707				$	(16,216	)

		Foreign Currency Translation Adjustments					Unrealized Gain (Loss) on Cash Flow Hedges					Total
Beginning Balance – January 1, 2022		$	(52,704	)			$	(2,051	)			$	(54,755	)
Other comprehensive income (loss)			(53,941	)	(3)			25,857		(6)			(28,084	)
Ending Balance – June 30, 2022		$	(106,645	)			$	23,806				$	(82,839	)

	(1)	Represents favorable impact from the weakening of the U.S. dollar against foreign currencies during the three and six months ended June 30, 2023, particularly the Euro, British Pound, and Mexican Peso.
	(2)	Represents unrealized gains of $7,674 on the interest rate swaps, net of tax effect of $(1,922) for the three months ended June 30, 2023.

	(3)	Represents unfavorable impact from the strengthening of the U.S. dollar against foreign currencies during the three and six months ended June 30, 2022, particularly the Euro and British Pound.
	(4)	Represents unrealized gains of $9,537 on the interest rate swaps, net of tax effect of $(2,408) for the three months ended June 30, 2022.
	(5)	Represents unrealized gains of $1,687 on the interest rate swaps, net of tax effect of $(423) for the six months ended June 30, 2023.
	(6)	Represents unrealized gains of $34,591 on the interest rate swaps, net of tax effect of $(8,734) for the six months ended June 30, 2022.

9

 

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 Company's various international 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, production processes, classes of customers, distribution methods, organizational structure, and regional considerations.

The Company's product offerings consist primarily of power generation equipment, energy storage systems, energy management devices and solutions, and other power products geared for varying end customer uses. While Residential products and Commercial & Industrial (C&I) products include similar products, they differ based on power output and end customer. The breakout of net sales between residential, C&I, and other products and services by reportable segment is as follows:

		Net Sales by Segment
		Three Months Ended June 30, 2023
Product Classes		Domestic				International				Total
Residential products		$	468,184			$	30,403			$	498,587
Commercial & industrial products			234,605				149,748				384,353
Other			101,750				15,730				117,480
Total net sales		$	804,539			$	195,881			$	1,000,420

		Net Sales by Segment
		Three Months Ended June 30, 2022
Product Classes		Domestic				International				Total
Residential products		$	860,014			$	35,999			$	896,013
Commercial & industrial products			173,549				135,799				309,348
Other			73,868				12,162				86,030
Total net sales		$	1,107,431			$	183,960			$	1,291,391

		Net Sales by Segment
		Six Months Ended June 30, 2023
Product Classes		Domestic				International				Total
Residential products		$	849,336			$	68,114			$	917,450
Commercial & industrial products			462,729				284,614				747,343
Other			196,862				26,675				223,537
Total net sales		$	1,508,927			$	379,403			$	1,888,330

		Net Sales by Segment
		Six Months Ended June 30, 2022
Product Classes		Domestic				International				Total
Residential products		$	1,610,341			$	62,616			$	1,672,957
Commercial & industrial products			319,286				268,791				588,077
Other			142,478				23,735				166,213
Total net sales		$	2,072,105			$	355,142			$	2,427,247

Residential products consist primarily of automatic home standby generators ranging in output from 7.5kW to 150kW, portable generators, energy storage systems, energy management devices and 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 they in turn sell or rent 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 product's 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, energy storage systems, mobile heaters, mobile pumps, and related controllers for power generation equipment. 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 they in turn sell or rent 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.

The Other product class 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 revenue and subscription revenue are recognized over the life of the contract. Other service revenue is recognized when the service is performed.

10

 

The following table sets forth total sales by reportable segment and is inclusive of intersegment sales:

		Three Months Ended June 30, 2023																Three Months Ended June 30, 2022
		Domestic				International				Eliminations				Total				Domestic				International				Eliminations				Total
External net sales		$	804,539			$	195,881			$	-			$	1,000,420			$	1,107,431			$	183,960			$	-			$	1,291,391
Intersegment sales			10,713				27,842				(38,555	)			-				18,987				19,334				(38,321	)			-
Total sales		$	815,252			$	223,723			$	(38,555	)		$	1,000,420			$	1,126,418			$	203,294			$	(38,321	)		$	1,291,391

		Six Months Ended June 30, 2023																Six Months Ended June 30, 2022
		Domestic				International				Eliminations				Total				Domestic				International				Eliminations				Total
External net sales		$	1,508,927			$	379,403			$	-			$	1,888,330			$	2,072,105			$	355,142			$	-			$	2,427,247
Intersegment sales			26,320				60,784				(87,104	)			-				29,257				33,659				(62,916	)			-
Total sales		$	1,535,247			$	440,187			$	(87,104	)		$	1,888,330			$	2,101,362			$	388,801			$	(62,916	)		$	2,427,247

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 defined as net income before noncontrolling interest adjusted for the following items: interest expense, depreciation expense, amortization of intangible assets, income tax expense, certain non-cash gains and losses including purchase accounting and contingent consideration adjustments, share-based compensation expense, losses on extinguishment of debt, certain transaction costs and credit facility fees, business optimization expenses, and certain other specific provisions.

		Adjusted EBITDA
		Three Months Ended June 30,								Six Months Ended June 30,
		2023				2022				2023				2022
Domestic		$	103,202			$	241,928			$	170,863			$	412,349
International			33,343				29,534				65,757				55,526
Total adjusted EBITDA		$	136,545			$	271,462			$	236,620			$	467,875
Interest expense			(25,160	)			(10,235	)			(48,155	)			(19,789	)
Depreciation and amortization			(41,247	)			(39,098	)			(81,198	)			(77,559	)
Non-cash write-down and other adjustments (1)			4,152				(4,607	)			7,312				3,185
Non-cash share-based compensation expense (2)			(10,045	)			(7,735	)			(20,379	)			(16,562	)
Loss on extinguishment of debt (3)			-				(3,743	)			-				(3,743	)
Transaction costs and credit facility fees (4)			(1,149	)			(1,592	)			(2,240	)			(2,581	)
Business optimization and other charges (5)			(1,760	)			(1,590	)			(2,860	)			(2,749	)
Provision for regulatory charges (6)			-				-				(5,800	)			-
Other			86				601				132				890
Income before provision for income taxes		$	61,422			$	203,463			$	83,432			$	348,967

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

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

	(3)	Represents the write-off of original issue discount and capitalized debt issuance costs due to voluntary debt prepayment.
	(4)	Represents transaction costs incurred directly in connection with any investment, as defined in our credit agreement, equity issuance or debt issuance or refinancing, together with certain fees relating to our senior secured credit facilities.

	(5)	Represents severance and other restructuring charges.
	(6)	The amount recorded in the first quarter of 2023 represents a provision of $5,800 for a matter with the Consumer Product Safety Commission (CPSC) concerning the imposition of penalty fines for allegedly failing to timely submit a report under the Consumer Product Safety Act (CPSA) in relation to certain portable generators that were subject to a voluntary recall previously announced on July 29, 2021. On May 25, 2023, the Company and the CPSC entered into a final mutual settlement agreement resolving this matter.

The Company’s sales in the U.S. represented approximately 75% and 82% of total sales for the three months ended June 30, 2023 and June 30, 2022, respectively. The Company's sales in the U.S. represented approximately 75% and 82% of total sales for the six months ended June 30, 2023 and June 30, 2022, respectively. Approximately 75% and 77% of the Company’s identifiable long-lived assets were located in the U.S. at  June 30, 2023 and December 31, 2022, respectively.

11

 

8****.   Balance Sheet Details

Inventories consist of the following:

		June 30,				December 31,
		2023				2022
Raw material		$	818,867			$	798,340
Work-in-process			14,919				14,899
Finished goods			602,833				592,145
Total		$	1,436,619			$	1,405,384

Property and equipment consists of the following:

		June 30,				December 31,
		2023				2022
Land and improvements		$	23,065			$	22,589
Buildings and improvements			252,437				243,553
Machinery and equipment			256,375				229,593
Dies and tools			40,448				37,343
Vehicles			10,148				9,807
Office equipment and systems			164,114				148,166
Leasehold improvements			8,072				6,849
Construction in progress			64,885				52,522
Gross property and equipment			819,544				750,422
Accumulated depreciation			(314,518	)			(282,818	)
Total		$	505,026			$	467,604

Total property and equipment includes finance leases of $26,993 and $24,719 on  June 30, 2023 and  December 31, 2022, respectively, primarily consisting of buildings and improvements. Amortization of finance lease right of use assets is recorded within depreciation expense in the condensed 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 condensed consolidated statements of cash flows.

12

 

9.   Product Warranty Obligations

The Company records a liability for standard product warranty obligations accounted for as assurance warranties at the time of sale of the product 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:

		Three Months Ended June 30,								Six Months Ended June 30,
		2023				2022				2023				2022
Balance at beginning of period		$	128,599			$	101,491			$	138,011			$	94,213
Payments			(25,490	)			(18,434	)			(51,642	)			(31,458	)
Provision for warranty issued			17,352				21,668				33,217				43,093
Changes in estimates for pre-existing warranties			1,761				5,613				2,636				4,490
Balance at end of period		$	122,222			$	110,338			$	122,222			$	110,338

Additionally, the Company sells extended warranty coverage for certain products, which it accounts for as a service warranty. The sales of extended warranties are recorded as deferred revenue, and typically have a duration of five to ten years. The deferred revenue related to extended warranty coverage is amortized over the duration of the extended warranty contract period, following the standard warranty period, using the straight-line method. Revenue is recognized on extended warranty contracts when the revenue recognition criteria are met, resulting in ratable recognition over the contract term. The amortization of deferred revenue is recorded to net sales in the condensed consolidated statements of comprehensive income. The following is a tabular reconciliation of the deferred revenue related to extended warranty coverage:

		Three Months Ended June 30,								Six Months Ended June 30,
		2023				2022				2023				2022
Balance at beginning of period		$	136,685			$	115,923			$	132,813			$	111,647
Deferred revenue contracts issued			10,433				11,332				20,159				20,878
Amortization of deferred revenue contracts			(6,196	)			(5,357	)			(12,050	)			(10,627	)
Balance at end of period		$	140,922			$	121,898			$	140,922			$	121,898

The timing of recognition of the Company’s deferred revenue balance related to extended warranties as of  June 30, 2023 is as follows:

Remainder of 2023		$	12,789
2024			26,454
2025			26,744
2026			22,638
2027			17,656
After 2027			34,641
Total		$	140,922

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

		June 30,				December 31,
		2023				2022
Product warranty liability
Current portion - Accrued product warranty		$	74,025			$	89,141
Long-term portion - other long-term liabilities			48,197				48,870
Total		$	122,222			$	138,011
Deferred revenue related to extended warranties
Current portion - other accrued liabilities		$	25,818			$	30,291
Long-term portion - other long-term liabilities			115,104				102,522
Total		$	140,922			$	132,813

10.   Contract Balances

While the Company’s standard payment terms are less than one year, the specific payment terms and conditions in its customer contracts vary. In certain cases, the Company’s customers pay for their goods in advance. These prepayments are recognized as customer deposits (contract liabilities) and recorded in other accrued liabilities in the condensed consolidated balance sheets. The balance of customer deposits was $24,096 and $33,551 on  June 30, 2023 and December 31, 2022, respectively. During the six months ended June 30, 2023, the Company recognized revenue of $15,529 related to amounts included in the December 31, 2022 customer deposit balance. The Company typically recognizes revenue within one year of the receipt of the customer deposit.

13

 

11****.   Credit Agreements

Short-term borrowings included in the condensed consolidated balance sheets as of June 30, 2023 and December 31, 2022 consisted of borrowings by the Company’s foreign subsidiaries on local lines of credit totaling $77,889 and $48,990, respectively.

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

		June 30,				December 31,
		2023				2022
Tranche A Term Loan		$	750,000			$	750,000
Tranche B Term Loan			530,000				530,000
Original issue discount and deferred financing costs			(14,647	)			(16,568	)
Revolver			250,000				90,000
Finance lease obligation			29,770				27,420
Other			256				966
Total			1,545,379				1,381,818
Less: current portion of debt			18,767				10,083
Less: current portion of finance lease obligation			3,302				2,650
Total		$	1,523,310			$	1,369,085

Maturities of the Company's Tranche A Term Loan Facility, Tranche B Term Loan Facility, and Revolving Facility outstanding at June 30, 2023 are as follows:

		Tranche A Term Loan				Tranche B Term Loan				Revolver				Total
2023		$	9,375			$	-			$	-			$	9,375
2024			28,125				-				-				28,125
2025			46,875				-				-				46,875
2026			65,625				530,000				-				595,625
2027			600,000				-				250,000				850,000
Total		$	750,000			$	530,000			$	250,000			$	1,530,000

The Tranche B Term Loan Facility matures on December 13, 2026, while the Tranche A Term Loan Facility and Revolving Facility mature on June 29, 2027. The Tranche A Term Loan Facility principal is repayable in quarterly installments beginning in September 2023, as noted in the table above. 

The Company’s credit agreements originally provided for a $1,200,000 term loan B credit facility (Tranche B Term Loan Facility) and included a $300,000 uncommitted incremental term loan on that facility. The Tranche B Term Loan Facility initially bore interest at rates based on 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%. After a number of amendments, the Tranche B Term Loan Facility currently bears interest at rates based on either a base rate plus an applicable margin of 0.75% or adjusted Secured Overnight Financing Rate (SOFR) rate plus an applicable margin of 1.75%, subject to a SOFR floor of 0.00%. The interest rate for the Tranche B Term Loan Facility as of June 30, 2023, was 7.01%. 

The Tranche B Term Loan Facility 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 June 30, 2023, the Company’s net secured leverage ratio was 2.52 to 1.00 times, and the Company was in compliance with all covenants of the Tranche B Term Loan Facility. There are no financial maintenance covenants on the Tranche B Term Loan Facility.

In June 2022, the Company amended and restated its existing credit agreements (Amended Credit Agreement) resulting in a new term loan facility in an aggregate principal amount of $750,000 (Tranche A Term Loan Facility), established a new revolving facility with an available borrowing amount of $1,250,000 (Revolving Facility), terminated the ABL Facility, and replaced all LIBOR provisions in the existing Tranche B Term Loan Facility with SOFR provisions. Proceeds received by the Company from the Tranche A Term Loan Facility were used to repay the total existing outstanding balance on the Company's former ABL Facility and to make a $250,000 voluntary prepayment on the Tranche B Term Loan Facility, with the remaining funds to be used for future general corporate purposes. As a result of these prepayments, the Company wrote off $3,546 of original issue discount and capitalized debt issuance costs during the second quarter of 2022 as a loss on extinguishment of debt in the condensed consolidated statements of comprehensive income. 

The Tranche A Term Loan Facility and the Revolving Facility initially bore interest at a rate based on adjusted SOFR plus an applicable margin of 1.5% through December 31, 2022, subject to a SOFR floor of 0.0%. Beginning on January 1, 2023, the Tranche A Term Loan Facility and the Revolving Facility bear interest at a rate based on adjusted SOFR plus an applicable margin between 1.25% and 1.75%, based on the Company's total leverage ratio and subject to a SOFR floor of 0.0%. The interest rate for the Tranche A Term Loan Facility and the Revolving Facility as of June 30, 2023 was 6.49%. 

The Tranche A Term Loan Facility and the Revolving Facility added certain financial covenants that require the Company to maintain a total leverage ratio below 3.75 to 1.00 as well as an interest coverage ratio above 3.00 to 1.00. As of June 30, 2023, the Company’s total leverage ratio was2.66 to 1.00 times, and the Company's interest coverage ratio was 7.00 to 1.00. The Company was in compliance with all other covenants of the Amended Credit Agreement as of June 30, 2023. 

The Tranche B Term Loan Facility, Tranche A Term Loan Facility and Revolving 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 virtually all of the Company’s assets, including fixed assets and intangibles, cash, trade accounts receivable, inventory, and other current assets and proceeds thereof. 

In connection with the June 2022 refinancing and in accordance with ASC 470-50, the Company capitalized $10,330 of fees paid to creditors as deferred financing costs on long-term borrowings and expensed $800 of transaction fees. The Company evaluated on a lender-by-lender basis if the debt related to returning lenders on the Revolving Facility was significantly modified or not, resulting in the write-off of $197 in unamortized deferred financing costs related to the former ABL Facility as a loss on extinguishment of debt in the condensed consolidated statements of comprehensive income. 

As of June 30, 2023, there was $250,000 outstanding under the Revolving Facility, leaving $999,945 of availability, net of outstanding letters of credit.

See Note 4, "Derivative Instruments and Hedging Activities" and Item 7A of the Annual Report on Form 10-K for further information on interest rate swaps that are currently outstanding and partially offset the above interest rate expense. 

14

 

12****.   Stock Repurchase Program

In September 2020, the Company’s Board of Directors approved a stock repurchase program, which commenced on October 27, 2020, and allowed for the repurchase of up to $250,000 of the Company's common stock over a 24-month period. That program was exhausted in the third quarter of 2022. In  July 2022, the Company's Board of Directors approved another stock repurchase program, which commenced on August 5, 2022, and allows for the repurchase of up to $500,000 of the Company's common stock over a 24-month period. Pursuant to the approved program, 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 credit agreements. 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. There were no share repurchases under the program during the three and six months ended June 30, 2023 and 2022. Since the inception of all stock repurchase programs (starting in August 2015), the Company has repurchased 11,748,713 shares of common stock for $777,379 (at an average cost per share of $66.17). Since the inception of all stock repurchase programs, the Company has reissued shares out of Treasury stock, including for earnout payments. 

13. 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, as well as the satisfaction of certain contingent consideration conditions as of the end of the period. Refer to Note 3, “Redeemable Noncontrolling Interest,” to the condensed consolidated financial statements, for further information regarding the accounting for redeemable noncontrolling interests within earnings per share.

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

		Three Months Ended June 30,								Six Months Ended June 30,
		2023				2022				2023				2022
Numerator
Net income attributable to Generac Holdings Inc.		$	45,198			$	156,359			$	57,628			$	270,217
Redeemable noncontrolling interest redemption value adjustment			(1,821	)			(13,645	)			(10,837	)			(25,592	)
Net income attributable to common shareholders		$	43,377			$	142,714			$	46,791			$	244,625
Denominator
Weighted average shares, basic			61,721,614				63,662,510				61,645,341				63,607,711
Dilutive effect of stock compensation awards (1)			626,570				1,040,295				784,570				1,180,348
Dilutive effect of contingently issued shares			-				10,943				-				10,943
Diluted shares			62,348,184				64,713,748				62,429,911				64,799,002
Net income attributable to common shareholders per share
Basic		$	0.70			$	2.24			$	0.76			$	3.85
Diluted		$	0.70			$	2.21			$	0.75			$	3.78

(1) Excludes approximately 393,000 and 360,000 stock options and restricted stock awards for the three and six months ended June 30, 2023, respectively, because they would be anti-dilutive. Excludes approximately 79,000 and 33,000 stock options and restricted stock awards for the three and six months ended June 30, 2022, respectively, because they would be anti-dilutive. 

14****. Income Taxes

The effective income tax rates for the six months ended June 30, 2023 and 2022 was 28.5% and 21.3%, respectively. The increase in the effective tax rate was primarily due to a significantly lower benefit from equity compensation coupled with lower year-over-year pre-tax book income in the current year.

15****. 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 on  June 30, 2023 and December 31, 2022 was approximately $166.9 million and $212.2 million respectively.

On August 1, 2022, Power Home Solar, LLC d/b/a Pink Energy (“PHS”) filed a lawsuit in the Western District of Virginia against Generac Power Systems, Inc., a wholly-owned subsidiary of the Company (“Generac Power”). The complaint alleges breaches of warranty, product liability, and other various causes of action against Generac Power relating to the sale and performance of certain clean energy equipment and seeks to recover damages, including consequential damages, that PHS allegedly incurred. The Company disputes the allegations in the complaint, including that PHS can seek consequential damages or amounts greater than the $25.0 million liability cap set forth in the agreement between the parties. On September 23, 2022, Generac Power moved to dismiss the complaint and compel arbitration consistent with the parties’ agreement. On October 7, 2022, PHS filed a Chapter 7 bankruptcy petition in the Western District of North Carolina that identified Generac Power as one of its outstanding creditors. The petition listed a $17.7 million liability to Generac Power, which PHS characterized as disputed. The $17.7 million claim relates to equipment that Generac Power sold to PHS but was not paid for. After filing of the bankruptcy petition, the parties filed a joint motion to toll PHS’s deadline to respond to the motion to dismiss and all other pretrial deadlines to allow the bankruptcy trustee to evaluate the complaint, which motion was granted on October 11, 2022. The Trustee has not yet taken further action in this lawsuit. Generac Power intends to vigorously defend against the claims in the complaint, in whichever forum they may proceed.

On October 28, 2022, Daniel Haak filed a putative class action lawsuit against Generac Power in the Middle District of Florida. The complaint alleges breaches of warranty, tort-based, and unjust enrichment claims against Generac Power relating to the sale and performance of certain clean energy products, and seeks to recover damages, including consequential damages, that the plaintiff and putative class allegedly incurred. Generac Power disputes the allegations and intends to vigorously defend against the claims in the complaint, including that plaintiff and the putative class can seek consequential damages.

Eight additional putative class actions were filed by consumers of Generac clean energy products between November 21, 2022 and July 5, 2023. These complaints assert claims for breaches of warranty, tort-based, statutory, and unjust enrichment claims against Generac Power and/or the Company and seek to recover damages, including consequential damages, that plaintiffs and putative classes allegedly incurred. In some of these cases, the Company as well as Generac Power has been named as a defendant. The cases were filed in or removed to the federal district courts for the Eastern District of Wisconsin (Basler, et al. v. Generac Power Systems, Inc., Case No. 22-cv-01386; Dillon v. Generac Power Systems, Inc., Case No. 23-cv-00034; Kates v. Generac Power Systems, Inc., et al., Case No. 23-cv-00892; and Zukas, et al., v. Generac Power Systems, Inc., et al., Case No. 23-cv-00874), the Northern District of California (Moon v. Generac Power Systems, Inc., et al., Case No. 22-cv-09183; Hufton, et al., v. Generac Power Systems, Inc., et al., Case No. 23-cv-02462), the Eastern District of California (Locatell v. Generac Power Systems, Inc., et al., Case No. 23-cv-00203), and the Eastern District of North Carolina (Baltimore, et al. v. Generac Power Systems, Inc., Case No. 23-cv-00217). Generac Power and the Company dispute the allegations and intend to vigorously defend against the claims in the complaints.

On March 3, 2023, the plaintiff in the Moon case filed a motion (the “MDL Motion”) to transfer that case and other pending putative class actions seeking relief for alleged harm purportedly arising in connection with a Generac clean energy product, to a proposed multidistrict litigation. The Judicial Panel on Multidistrict Litigation issued orders that ultimately resulted in all of the putative class actions being coordinated and consolidated for pretrial proceedings before the Honorable Lynn S. Adelman in the Eastern District of Wisconsin. On July 19, 2023, Judge Adelman issued an order giving plaintiffs in these actions 45 days to file a consolidated master complaint and Generac Power and the Company 60 days thereafter to respond to the consolidated master complaint. Generac Power and the Company intend to vigorously defend against the consolidated master complaint.

On December 1, 2022, Oakland County Voluntary Employees’ Beneficiary Association and Oakland County Employees’ Retirement System filed a putative securities class action lawsuit against the Company and certain of its officers in the Eastern District of Wisconsin. On January 20, 2023, the California Ironworkers Field Pension Trust filed a related putative securities class action, also in the United States District Court for the Eastern District of Wisconsin. Both complaints assert claims for alleged violation of federal securities law related to disclosures of quality issues in Generac Power’s clean energy product, reliance on channel partners, and accounting for warranty reserves. The plaintiffs seek to represent a class of individuals who purchased or otherwise acquired common stock between April 29, 2021 and November 1, 2022 and seek unspecified compensatory damages and other relief on behalf of a purported class of purchasers of the Company’s stock. On March 14, 2023, the court consolidated the two actions. On May 30, 2023, the court appointed a lead plaintiff. On July 31, 2023, the lead plaintiff filed a consolidated complaint. The Company disputes the allegations in the operative consolidated complaint and intends to vigorously defend against the claims in the consolidated class action.

On February 3, 2023, a purported Company shareholder filed a shareholder derivative action against certain of the Company’s officers and directors in the United States District Court for the Eastern District of Wisconsin. The complaint seeks unspecified damages on behalf of the Company and certain other relief, such as certain reforms to corporate governance practices. The complaint (in which the Company is named as a nominal defendant) generally alleges, among other things, breaches of fiduciary duties in connection with the oversight of the Company’s public statements and legal compliance, and that the Company was damaged as a result of the breaches of fiduciary duties, and the defendants were unjustly enriched. The complaint also alleges, among other things, violations of Sections 14(a), 10(b) and 20(a) of the Securities Exchange Act of 1934, abuse of control, gross mismanagement, and waste of corporate assets. On March 6, 2023, a second shareholder derivative action, making substantially similar allegations, was filed in the same court against certain of the Company’s officers and directors. The complaint (in which the Company is named as a nominal defendant) asserts a single claim for breach of fiduciary duty and seeks unspecified damages on behalf of the Company and certain other relief. On May 2, 2023, the court consolidated the two actions. On May 30, 2023, the court entered an order staying the consolidated action.

Between March 20, 2023 and April 11, 2023, three shareholder derivative actions were filed in the Circuit Court of Waukesha County, Wisconsin. The complaints (in which the Company is named as a nominal defendant) assert breaches of fiduciary duty and unjust enrichment, among other claims, based generally on alleged misrepresentations in the Company’s public statements and filings relating to the Company’s clean energy product, reliance on channel partners, and accounting for warranty reserves, among other allegations. Each complaint seeks unspecified damages on behalf of the Company and certain other relief, including certain corporate governance reforms. On June 1, 2023, the court entered an order consolidating the three actions, appointing lead plaintiffs’ counsel, and staying the consolidated actions. The Company disputes the allegations in the shareholder derivative actions and intends to vigorously defend against the claims in the complaints.

On  October 28, 2022, Generac Power received a grand jury subpoena from the U.S. Attorney for the Eastern District of Michigan, as a result of which the Company became aware of an enforcement investigation by the U.S. Department of Justice (“DOJ”). The subpoena requests similar documents and information provided by the Company to the U.S. Environmental Protection Agency (“EPA”) and the California Air Resources Board (“CARB”) in response to civil document requests related to the Company’s compliance with emissions regulations for approximately 1.85 thousand portable generators produced by the Company in 2019 and 2020 and sold in 2020_._ The Company is cooperating with both the DOJ and the EPA and CARB inquiries.

On  November 30, 2022, the U.S. Consumer Product Safety Commission (“CPSC”) notified the Company of its intention to recommend the imposition of a civil penalty for failing to timely submit a report under section 19(a)(4) of the Consumer Product Safety Act (“CPSA”), 15 U.S.C. § 2068(a)(4), in relation to certain portable generators that were subject to a voluntary recall previously announced on  July 29, 2021. On May 3, 2023, the parties entered into a mutual settlement agreement. The agreement does not constitute an admission by Generac or a determination by the CPSC that Generac violated the CPSA. The terms of the settlement agreement require the Company to (i) abide by certain customary agency requirements regarding the ongoing commitment to the Company’s internal CPSA compliance practices and program, and (ii) pay a civil fine of $15.8 million. On July 21, 2023, Generac Power received a grand jury subpoena from the U.S. Attorney for the Eastern District of Wisconsin, as a result of which the Company became aware of a continuing inquiry by the DOJ related to our statutory obligations under the Consumer Product Safety Act in connection with this matter. We are cooperating fully with this investigation and, at this time, we are unable to predict the eventual scope, duration or final outcome of such investigation.

In 2019, EcoFactor, Inc. started a litigation campaign against smart thermostat manufacturers, including ecobee, Inc., which was acquired by the Company in 2021. ecobee has prevailed against EcoFactor in two separate proceedings before the International Trade Commission (Certain Smart Thermostats, Smart HVAC Systems, and Components Thereof (Inv. No. 337-TA-1185) and Certain Smart Thermostat Systems, Smart HVAC Systems, Smart HVAC Control Systems, and Components Thereof (Inv. No. 337-TA-1258) where EcoFactor accused ecobee of infringing its intellectual property.  In addition to the proceedings before the ITC, EcoFactor accused ecobee of infringing its patents in three lawsuits filed in the United States District Court for the Western District of Texas and one lawsuit pending in the United States District Court for the District of Delaware. On June 23, 2023, a jury issued a verdict in a consolidated action in the Western District of Texas (Case Nos. 21-cv-00428-ADA and 20-cv-00078-ADA) finding that ecobee infringed one of the two patents at issue and awarded a lump sum payment of $5.4 million for past and future damages. EcoFactor has filed a motion seeking entry of a judgment based on the verdict plus pre-judgment interest, and ecobee filed its opposition to the motion. There are presently two remaining trials involving EcoFactor.  EcoFactor claims ecobee infringes two patents in Case No. 22-cv-000330-ADA, which is scheduled for a jury trial in the Western District of Texas on October 30, 2023, and accuses ecobee of infringing three patents in Case No. 21-cv-00323-ADA, which is currently scheduled for trial on December 11, 2023 in the District of Delaware.  ecobee denies infringement and intends to vigorously defend each of the lawsuits.

On March 8, 2022, Ollnova Technologies Limited, a non-practicing entity, filed a patent infringement lawsuit against ecobee in the United States District Court for the Eastern District of Texas (Case No. 22-cv-00072-JRG).  Ollnova currently claims that ecobee infringes on four of its patents.  ecobee denies that its products infringe on any of the asserted patents and intends to vigorously defend the case, which is currently scheduled for jury trial on September 11, 2023.

On June 9, 2023, Spartronics Vietnam, Inc., a contract manufacturer of Generac Power’s clean energy products, filed two lawsuits against Generac Power and sub-suppliers accusing Generac Power of fraud, breaching its supply agreement with Spartronics, tortiously interfering with Spartronics’ relationships with its sub-suppliers, and requesting a determination of rights under the parties’ agreements (Spartronics Vietnam, Inc. v. Generac Power Systems, Inc., et al., Case No. 23-cv-00957-MWB (M.D. Pa.); Spartronics Vietnam, Inc. v. Generac Power Systems, Inc., et al., Case No. GD-23-7206 (Pa. Allegheny Cnty.)).  Spartronics made similar claims against Generac Power in a third-party complaint in a lawsuit Spartronics is defending brought by one of its suppliers (EXIM & Mfr Enter. v. Spartronics Vietnam, Inc., Case No. 23-cv-00660-MWB (M.D. Pa.)).  Generac Power denies the allegations in the complaints, including that Generac Power is responsible for Spartronics purchasing practices, and will seek dismissal of the actions in favor of arbitration, as required by Generac Power’s supply agreement with Spartronics, and intends to pursue available claims in connection with the arbitration. 

In the opinion of management, it is presently unlikely that any legal or regulatory proceedings pending against or involving the Company will have a material adverse effect on the Company’s financial condition, results of operations or cash flows. However, in many of these matters, it is inherently difficult to determine whether a loss is probable or to estimate the size or range of the possible loss given the variety and potential outcomes of actual and potential claims, the uncertainty of future rulings, the behavior or incentives of adverse parties, and other factors outside the control of the Company. Accordingly, the Company’s loss reserves may change from time to time, and actual losses could exceed the amounts reserved by an amount that could be material to the Company’s consolidated financial position, results of operations or cash flows in any particular reporting period.

15