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Table of Contents



 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

   
 

For the quarterly period ended September 30, 2018

   
 

OR

   

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

   
 

For the transition period from            to

 

Commission File Number 001-34627

 

GENERAC HOLDINGS INC.

(Exact name of registrant as specified in its charter)

 

Delaware

20-5654756

(State or other jurisdiction of

(IRS Employer

incorporation or organization)

Identification No.)

   

S45 W29290 Hwy 59, Waukesha, WI

53189

(Address of principal executive offices)

(Zip Code)

 

(262) 544-4811

(Registrant’s telephone number, including area code)

 

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☑

Accelerated filer ☐

Non-accelerated filer ☐

Smaller reporting company ☐

Emerging growth company ☐

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

 

As of October 30, 2018, there were 62,059,983 shares of registrant’s common stock outstanding.

 



 

 

 

GENERAC HOLDINGS INC.

TABLE OF CONTENTS

 

 

Page

PART I. FINANCIAL INFORMATION

     

Item 1.

Condensed Consolidated Financial Statements (Unaudited)

 
     
 

Condensed Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017

1

     
 

Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2018 and 2017

2

     
 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2018 and 2017

3

     
 

Notes to Condensed Consolidated Financial Statements

4

     

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

17

     

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

29

     

Item 4.

Controls and Procedures

29

   

PART II. OTHER INFORMATION

     

Item 1.

Legal Proceedings

29

     

Item 1A.

Risk Factors

29

     

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

29

     
Item 5.  Other Information 30
     

Item 6.

Exhibits

30

     
 

Signatures

31

 

 

 

PART I. FINANCIAL INFORMATION

 

Item 1.           Financial Statements

 

Generac Holdings Inc.

Condensed Consolidated Balance Sheets

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

(Unaudited)

 

   

September 30,

   

December 31,

 
   

2018

   

2017

 

Assets

               

Current assets:

               

Cash and cash equivalents

  $ 174,001     $ 138,472  

Accounts receivable, less allowance for doubtful accounts

    341,758       279,294  

Inventories

    496,088       387,049  

Prepaid expenses and other assets

    28,110       19,741  

Total current assets

    1,039,957       824,556  
                 

Property and equipment, net

    243,362       230,380  
                 

Customer lists, net

    64,585       41,064  

Patents, net

    32,375       39,617  

Other intangible assets, net

    3,228       2,401  

Tradenames, net

    153,585       152,683  

Goodwill

    769,168       721,523  

Deferred income taxes

    1,207       3,238  

Other assets

    25,206       10,502  

Total assets

  $ 2,332,673     $ 2,025,964  
                 

Liabilities and stockholders’ equity

               

Current liabilities:

               

Short-term borrowings

  $ 35,758     $ 20,602  

Accounts payable

    287,718       233,639  

Accrued wages and employee benefits

    41,335       27,992  

Other accrued liabilities

    136,416       112,618  

Current portion of long-term borrowings and capital lease obligations

    51,886       1,572  

Total current liabilities

    553,113       396,423  
                 

Long-term borrowings and capital lease obligations

    859,625       906,548  

Deferred income taxes

    68,380       41,852  

Other long-term liabilities

    93,023       82,893  

Total liabilities

    1,574,141       1,427,716  
                 

Redeemable noncontrolling interests

    59,897       43,929  
                 

Stockholders’ equity:

               

Common stock, par value $0.01, 500,000,000 shares authorized, 71,105,573 and 70,820,173 shares issued at September 30, 2018 and December 31, 2017, respectively

    711       708  

Additional paid-in capital

    473,886       459,816  

Treasury stock, at cost

    (321,397 )     (294,005 )

Excess purchase price over predecessor basis

    (202,116 )     (202,116 )

Retained earnings

    756,636       610,835  

Accumulated other comprehensive loss

    (9,557 )     (21,198 )

Stockholders’ equity attributable to Generac Holdings Inc.

    698,163       554,040  

Noncontrolling interests

    472       279  

Total stockholders' equity

    698,635       554,319  

Total liabilities and stockholders’ equity

  $ 2,332,673     $ 2,025,964  

 

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 September 30,

   

Nine Months Ended September 30,

 
   

2018

   

2017

   

2018

   

2017

 
                                 

Net sales

  $ 559,515     $ 455,839     $ 1,452,098     $ 1,181,199  

Costs of goods sold

    361,630       299,608       937,968       783,247  

Gross profit

    197,885       156,231       514,130       397,952  
                                 

Operating expenses:

                               

Selling and service

    46,536       43,463       135,270       124,940  

Research and development

    13,653       10,850       38,122       31,690  

General and administrative

    25,499       22,128       75,613       64,508  

Amortization of intangibles

    5,678       7,242       16,792       21,554  

Total operating expenses

    91,366       83,683       265,797       242,692  

Income from operations

    106,519       72,548       248,333       155,260  
                                 

Other (expense) income:

                               

Interest expense

    (9,824 )     (10,672 )     (30,939 )     (32,353 )

Investment income

    382       14       1,095       57  

Loss on extinguishment of debt

                (1,332 )      

Other, net

    (483 )     (1,710 )     (2,764 )     (3,525 )

Total other expense, net

    (9,925 )     (12,368 )     (33,940 )     (35,821 )
                                 

Income before provision for income taxes

    96,594       60,180       214,393       119,439  

Provision for income taxes

    20,072       20,404       49,870       42,105  

Net income

    76,522       39,776       164,523       77,334  

Net income attributable to noncontrolling interests

    746       341       1,841       433  

Net income attributable to Generac Holdings Inc.

  $ 75,776     $ 39,435     $ 162,682     $ 76,901  
                                 

Net income attributable to common shareholders per common share - basic:

  $ 1.12     $ 0.64     $ 2.36     $ 1.25  

Weighted average common shares outstanding - basic:

    61,579,564       61,758,190       61,659,817       62,094,807  
                                 

Net income attributable to common shareholders per common share - diluted:

  $ 1.11     $ 0.63     $ 2.34     $ 1.24  

Weighted average common shares outstanding - diluted:

    62,220,298       62,316,788       62,266,140       62,703,269  
                                 

Comprehensive income attributable to Generac Holdings Inc.

  $ 80,768     $ 42,939     $ 173,355     $ 90,867  

 

See notes to condensed consolidated financial statements.

 

 

 

Generac Holdings Inc.

Condensed Consolidated Statements of Cash Flows

(U.S. Dollars in Thousands)

(Unaudited)

 

   

Nine Months Ended September 30,

 
   

2018

   

2017

 

Operating activities

               

Net income

  $ 164,523     $ 77,334  

Adjustment to reconcile net income to net cash provided by operating activities:

               

Depreciation

    18,332       17,137  

Amortization of intangible assets

    16,792       21,554  

Amortization of original issue discount and deferred financing costs

    3,554       2,400  

Loss on extinguishment of debt

    1,332        

Deferred income taxes

    17,218       25,336  

Share-based compensation expense

    9,910       8,402  

Other

    1,249       361  

Net changes in operating assets and liabilities, net of acquisitions:

               

Accounts receivable

    (55,649 )     (68,003 )

Inventories

    (99,957 )     9,379  

Other assets

    (16,488 )     (3,852 )

Accounts payable

    47,559       (206 )

Accrued wages and employee benefits

    13,044       6,288  

Other accrued liabilities

    18,011       25,148  

Excess tax benefits from equity awards

    (432 )     (661 )

Net cash provided by operating activities

    138,998       120,617  
                 

Investing activities

               

Proceeds from sale of property and equipment

    213       77  

Proceeds from beneficial interests in
securitization transactions

    2,825       2,102  

Expenditures for property and equipment

    (25,577 )     (16,658 )

Acquisition of business, net of cash acquired

    (71,926 )     1,257  

Net cash used in investing activities

    (94,465 )     (13,222 )
                 

Financing activities

               

Proceeds from short-term borrowings

    28,332       74,443  

Proceeds from long-term borrowings

    51,425       3,069  

Repayments of short-term borrowings

    (12,478 )     (80,952 )

Repayments of long-term borrowings and capital lease obligations

    (51,164 )     (13,051 )

Stock repurchases

    (25,656 )     (30,012 )

Cash dividends paid to noncontrolling interest of subsidiary

    (314 )      

Payment of debt issuance costs

    (1,702 )     (1,517 )

Taxes paid related to equity awards

    (2,777 )     (2,479 )

Proceeds from exercise of stock options

    5,191       1,717  

Net cash used in financing activities

    (9,143 )     (48,782 )
                 

Effect of exchange rate changes on cash and cash equivalents

    139       2,895  
                 

Net increase in cash and cash equivalents

    35,529       61,508  

Cash and cash equivalents at beginning of period

    138,472       67,272  

Cash and cash equivalents at end of period

  $ 174,001     $ 128,780  

 

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 power generation equipment and other engine powered products serving the residential, light-commercial and industrial markets. The Company’s power products are available globally through a broad network of independent dealers, distributors, retailers, wholesalers, equipment rental companies, and e-commerce partners, as well as sold direct to certain end user customers.

 

Over the years, the Company has executed a number of acquisitions that support its strategic plan (as discussed in Item 1 of its Annual Report on Form 10-K for the year ended December 31, 2017). A summary of acquisitions affecting the reporting periods presented include:

 

 

In June 2018, the Company acquired Selmec Equipos Industriales, S.A. de C.V. (Selmec), headquartered in Mexico City, Mexico. Selmec is a designer and manufacturer of industrial generators ranging from 10kW to 2,750kW. Selmec offers a market-leading service platform and specialized engineering capabilities, together with robust integration, project management and remote monitoring services.

 

In January 2017, the Company acquired Motortech GmbH (Motortech), headquartered in Celle, Germany. Motortech is a leading manufacturer of gaseous-engine control systems and accessories, which are sold primarily to European gas-engine manufacturers and to aftermarket customers around the world.

 

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 (U.S. GAAP). All intercompany amounts and transactions have been eliminated in consolidation.

 

The condensed consolidated balance sheets as of September 30, 2018 and December 31, 2017, the condensed consolidated statements of comprehensive income for the three and nine months ended September 30, 2018 and 2017, and the condensed consolidated statements of cash flows for the nine months ended September 30, 2018 and 2017 have been prepared by the Company and have not been audited. In the opinion of management, all adjustments (which include only normal recurring adjustments) 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 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 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 disclosure normally included in consolidated financial statements prepared in accordance with U.S. 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 Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

 

New Accounting Standards Not Yet Adopted

 

In February 2016, the Financial Standards Accounting Board (FASB) issued Accounting Standards Update (ASU) 2016-02, Leases. This guidance was issued to increase transparency and comparability among organizations by requiring the recognition of lease assets and lease liabilities on the balance sheet and by disclosing key information about leasing arrangements. The guidance should be applied using a modified retrospective approach and is effective for the Company in 2019. The Company has developed a comprehensive project plan and established a cross-functional implementation team to evaluate the impact of the standard. The project plan includes evaluating the Company’s lease portfolio, analyzing the standard’s impact on the Company’s various types of lease contracts and identifying the reporting requirements of the standard. While the Company does not anticipate the impact to the statement of comprehensive income to be material, it is still calculating the impact the lease asset and lease liability will have on the balance sheet.

 

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging – Targeted Improvements to Accounting for Hedging Activities. This guidance was issued to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements and to make certain targeted improvements to simplify the application of the hedge accounting guidance. The standard is effective for the Company in 2019, with early adoption permitted. The Company is currently assessing the impact the adoption of this guidance will have on the Company’s results of operations and financial position.

 

 

In August 2018, the FASB issued ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract. This guidance was issued to address the diversity in practice related to the accounting for costs of implementation activities performed in a cloud computing arrangement that is a service contract. The guidance can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption, and is effective for the Company in 2020. The Company is currently assessing the impact the adoption of this guidance will have on the Company’s results of operations and financial position.

 

There are several other new accounting pronouncements issued by the FASB. Each of these pronouncements, as applicable, has been or will be adopted by the Company. Management does not believe any of these accounting pronouncements has had or will have a material impact on the Company’s consolidated financial statements.

 

Recently Adopted Accounting Standards

 

On January 1, 2018, the Company adopted ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The new standard requires presentation of certain components of net periodic pension cost as non-operating expense. The adoption of this new standard did not have a significant impact on the Company’s financial statements. The changes in presentation of the components of net periodic pension cost were applied retrospectively to all periods presented.

 

On January 1, 2018, the Company adopted ASU 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments. The changes in presentation of the proceeds from beneficial interests in securitization transactions were applied retrospectively to all periods presented.

 

On January 1, 2018, the Company adopted ASU 2014-09, Revenue from Contracts with Customers, and all related amendments (the “new revenue recognition standard”) using the full retrospective method, which requires application to all periods presented.

 

The impact of adopting the above standards on the Company’s previously reported condensed consolidated financial statements is as follows:

 

Condensed Consolidated Balance Sheets

 

September 30, 2017

 
   

As Reported

   

Impact of Adoption

   

As Adjusted

 
                         

Accounts receivable

  $ 320,626     $ (4,207 )   $ 316,419  

Inventories

    349,023       7,359       356,382  

Other accrued liabilities

    109,362       5,584       114,946  

Deferred income taxes

    49,528       (3,367 )     46,161  

Other long-term liabilities

    69,556       6,178       75,734  

Retained earnings

  $ 535,172     $ (5,243 )   $ 529,929  

 

   

December 31, 2017

 
   

As Reported

   

Impact of Adoption

   

As Adjusted

 
                         

Accounts receivable

  $ 280,002     $ (708 )   $ 279,294  

Inventories

    380,341       6,708       387,049  

Other accrued liabilities

    105,067       7,551       112,618  

Deferred income taxes

    43,789       (1,937 )     41,852  

Other long-term liabilities

    76,995       5,898       82,893  

Retained earnings

  $ 616,347     $ (5,513 )   $ 610,835  

 

 

Condensed Consolidated Statements of Comprehensive Income

 

Three Months Ended September 30, 2017

 
   

As Reported

   

Impact of Adoption

   

As Adjusted

 
                         

Net sales

  $ 457,253     $ (1,414 )   $ 455,839  

Cost of goods sold

    299,784       (176 )     299,608  

Selling and service expenses

    44,402       (939 )     43,463  

Research and development expenses

    10,864       (14 )     10,850  

General and administrative expenses

    22,102       26       22,128  

Other, net

    1,570       140       1,710  

Provision for income taxes

    20,581       (177 )     20,404  

Net income attributable to Generac Holdings Inc.

  $ 39,709     $ (274 )   $ 39,435  
                         

Earnings per share

                       

Basic

  $ 0.64     $ -     $ 0.64  

Diluted

  $ 0.64     $ (0.01 )   $ 0.63  
                         

Comprehensive income attributable to Generac Holdings Inc.

  $ 43,213     $ (274 )   $ 42,939  

 

   

Nine Months Ended September 30, 2017

 
   

As Reported

   

Impact of Adoption

   

As Adjusted

 
                         

Net sales

  $ 1,184,443     $ (3,244 )   $ 1,181,199  

Cost of goods sold

    782,028       1,219       783,247  

Selling and service expenses

    127,702       (2,762 )     124,940  

Research and development expenses

    31,732       (42 )     31,690  

General and administrative expenses

    64,436       72       64,508  

Other, net

    3,105       420       3,525  

Provision for income taxes

    42,946       (841 )     42,105  

Net income attributable to Generac Holdings Inc.

  $ 78,211     $ (1,310 )   $ 76,901  
                         

Earnings per share

                       

Basic

  $ 1.27     $ (0.02 )   $ 1.25  

Diluted

  $ 1.26     $ (0.02 )   $ 1.24  
                         

Comprehensive income attributable to Generac Holdings Inc.

  $ 92,177     $ (1,310 )   $ 90,867  

 

Condensed Consolidated Statement of Cash Flows

 

Nine Months Ended September 30, 2017

 
   

As Reported

   

Impact of Adoption

   

As Adjusted

 
                         

Net income

  $ 78,644     $ (1,310 )   $ 77,334  

Deferred income taxes

    28,703       (3,367 )     25,336  

Accounts receivable

    (70,108 )     2,105       (68,003 )

Inventories

    16,738       (7,359 )     9,379  

Other accrued liabilities

    17,319       7,829       25,148  

Net cash provided by operating activities

  $ 122,719     $ (2,102 )   $ 120,617  
                         

Proceeds from beneficial interests in securitization transactions

  $ -     $ 2,102     $ 2,102  

Net cash used in investing activities

  $ (15,324 )   $ 2,102     $ (13,222 )

 

 

2. 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 condensed consolidated statements of comprehensive income. Product revenues are recognized at the point in time when control of the product is transferred to the customer, which typically occurs upon shipment or delivery to the customer. To determine when control has transferred, the Company considers if there is a present right to payment and if legal title, physical possession, and the significant risks and rewards of ownership of the asset has transferred to the customer. As substantially all of the Company’s 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 condensed 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 condensed consolidated balance sheets until revenue is recognized. The balance of customer deposits (contract liabilities) was $18,543 and $7,034 at September 30, 2018 and December 31, 2017, respectively. During the nine month period ended September 30, 2018, the Company recognized revenue of $6,824 related to amounts included in the December 31, 2017 customer deposit balance. The Company typically recognizes revenue within one year of the receipt of the customer deposit.

 

The Company offers standard warranty coverage on substantially all products that it sells and accounts for this standard warranty coverage as an assurance warranty. As such, no transaction price is allocated to the standard warranty, and the Company records a liability for product warranty obligations at the time of sale to a customer based upon historical warranty experience. Refer to Note 10, “Product Warranty Obligations,” to the condensed consolidated financial statements for further information regarding the Company’s standard warranties.

 

The Company also sells extended warranty coverage for certain products, which it accounts for as service warranties. In most cases, the extended warranty is sold as a separate contract. As such, extended warranty sales are considered a separate performance obligation, and the extended warranty transaction price is separate and distinct from the product. The extended warranty transaction price is initially recorded as deferred revenue on the condensed consolidated balance sheets and amortized on a straight-line basis to selling and service expenses in the condensed consolidated statements of comprehensive income, as an offset to warranty expense, 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 on the condensed consolidated balance sheets. The deferred contract costs are amortized to selling and service expense in the condensed consolidated statements of comprehensive income consistent with how the related deferred revenue is recognized. Refer to Note 10, “Product Warranty Obligations,” to the condensed consolidated financial statements for further information regarding the Company’s extended warranties.

 

The Company offers other services, including remote monitoring, installation and maintenance services in limited circumstances. These other services are currently not material, accounting for less than one percent of revenue in 2018.

 

Refer to Note 8, “Segment Reporting,” to the condensed consolidated financial statements for the Company’s disaggregated revenue disclosure. The information discussed above is applicable to each of the Company’s product classes.

 

 

3. Selmec Acquisition

 

On June 1, 2018, the Company acquired Selmec for a purchase price of $86,459, net of cash acquired and inclusive of estimated earnout payments of $14,902. Headquartered in Mexico City, Mexico, Selmec is a designer and manufacturer of industrial generators ranging from 10kW to 2,750kW. Selmec offers a market-leading service platform and specialized engineering capabilities, together with robust integration, project management and remote monitoring services. To date, the acquisition purchase price was funded solely through cash on hand.

 

The Company recorded a preliminary purchase price allocation during the third quarter of 2018 based upon its estimates of the fair value of the acquired assets and assumed liabilities. As a result, the Company recorded approximately $81,500 of intangible assets, including approximately $47,870 of goodwill recorded in the International segment, as of the acquisition date. The goodwill ascribed to the acquisition is not deductible for tax purposes. The accompanying condensed consolidated financial statements include the results of Selmec from the date of acquisition through September 30, 2018.

 

 

 

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 condensed consolidated balance sheets, as the noncontrolling interest holder has within its control the right to require the Company to redeem its interest in Pramac. The noncontrolling interest holder has a put option to sell his interest to the Company any time within five years from the date of acquisition. Within the first two years from the date of acquisition, the put option price was based on a fixed amount if voluntarily exercised. Subsequently, the put option price is based on the greater of the fixed amount or a multiple of earnings, subject to the terms of the acquisition. Additionally, the Company holds a call option that it may redeem commencing five years from the date of acquisition, or earlier upon the occurrence of certain circumstances. The call option price is based on a multiple of earnings that is subject to the terms of the acquisition. Both the put and call option only provide for the complete transfer of the noncontrolling interest, with no partial transfers of interest permitted.

 

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

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

   
   

2018

   

2017

   

2018

   

2017

   

Balance at beginning of period

  $ 53,035     $ 37,796     $ 43,929     $ 33,138    

Noncontrolling interest of Pramac

    -       1,540   (1)   -       1,540   (1)

Net income

    519       283       1,341       493    

Foreign currency translation

    (569 )     2,178       (2,255 )     7,535    

Redemption value adjustment

    6,912   (2)   -       16,882   (2)    (909 )  

Balance at end of period

  $ 59,897     $ 41,797     $ 59,897     $ 41,797    

 

 

(1)

Represents the additional noncontrolling interest of Pramac resulting from a common control transaction between the Generac Mobile Products S.r.l. and Pramac UK Limited legal entities.

 

(2)

The redemption value adjustments recorded during the three and nine month periods ended September 30, 2018 relate to the adjustment required to reflect the redeemable noncontrolling interest value as a multiple of earnings after two years from the date of acquisition, in accordance with the terms of the acquisition.

 

 

5. Derivative Instruments and Hedging Activities

 

The Company records all derivatives in accordance with Accounting Standards Codification (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.

 

Commodities

 

The Company is exposed to price fluctuations in commodities it uses as raw materials, primarily steel, copper and aluminum, and periodically utilizes commodity derivatives to mitigate the impact of these potential price fluctuations on its financial results. These derivatives typically have maturities of less than eighteen months. At September 30, 2018, December 31, 2017 and September 30, 2017, the Company had five, one and one commodity contracts outstanding, respectively, covering the purchases of copper.

 

Because these contracts do not qualify for hedge accounting, the related gains and losses are recorded in cost of goods sold in the Company’s condensed consolidated statements of comprehensive income. Net pre-tax losses recognized for the three and nine months ended September 30, 2018 were $607 and $810, respectively. Net pre-tax gains recognized for the three and nine months ended September 30, 2017 were $140 and $325, 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 September 30, 2018, December 31, 2017 and September 30, 2017, the Company had thirty-six, twenty-eight and twenty-two 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 condensed consolidated statements of comprehensive income. Net pre-tax losses recognized for the three and nine months ended September 30, 2018 were $124 and $442, respectively. Net pre-tax gains recognized for the three and nine months ended September 30, 2017 were $447 and $626, respectively.

 

Interest Rate Swaps

 

In October 2013, the Company entered into two interest rate swap agreements. In May 2014, the Company entered into one interest rate swap agreement, and in 2017, the Company entered into 20 additional interest rate swap agreements. The Company formally documented all relationships between interest rate hedging instruments and the related hedged items, as well as its risk-management objectives and strategies for undertaking various 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 condensed consolidated balance sheets. The amount of gains, net of tax, recognized for the three and nine months ended September 30, 2018 were $1,626 and $10,403, respectively. The amount of gains, net of tax, recognized for the three and nine months ended September 30, 2017 were $581 and $1,345, 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:

 

   

September 30,
201
8

   

December 31,
201
7

 

Commodity contracts

  $ (542 )   $ 107  

Foreign currency contracts

    (67 )     167  

Interest rate swaps

    18,414       4,356  

 

The fair values of the commodity contracts and foreign currency contracts are included in other accrued liabilities, and the fair value of the interest rate swaps is included in other assets in the condensed consolidated balance sheet as of September 30, 2018. The fair values of the commodity and foreign currency contracts are included in prepaid expenses and other assets, and the fair value of the interest rate swaps is included in other assets in the consolidated balance sheet as of December 31, 2017. Excluding the impact of credit risk, the fair value of the derivative contracts as of September 30, 2018 and December 31, 2017 is an asset of $18,211 and $4,703, respectively, which represents the amount the Company would receive upon exit of the agreements on those dates.

 

 

6. 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 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 $856,729, was approximately $858,516 (Level 2) at September 30, 2018, as calculated based on independent valuations whose inputs and significant value drivers are observable.

 

 

For the fair value of the derivatives measured on a recurring basis, see the fair value table in Note 5, “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 derivative contracts above considers the Company’s credit risk in accordance with ASC 820-10.

 

 

7. Accumulated Other Comprehensive Loss

 

The following presents a tabular disclosure of changes in AOCL during the three and six months ended June 30, 2018 and 2017, net of tax:

 

   

Foreign

Currency

Translation

Adjustments

   

Defined

Benefit

Pension Plan

   

Unrealized

Gain (Loss) on

Cash Flow

Hedges

   

Total

 
                                 

Beginning Balance – July 1, 2018

  $ (17,335 )   $ (10,978 )   $ 11,413     $ (16,900 )

Other comprehensive income before reclassifications

    5,717       -       1,626   (1)    7,343  

Amounts reclassified from AOCL

    -       -       -       -  

Net current-period other comprehensive income

    5,717       -       1,626       7,343  

Ending Balance – September 30, 2018

  $ (11,618 )   $ (10,978 )   $ 13,039     $ (9,557 )
                                 
                                 

Beginning Balance – July 1, 2017

  $ (15,857 )   $ (11,040 )   $ (312 )   $ (27,209 )

Other comprehensive income before reclassifications

    3,826       -       581   (2)    4,407  

Amounts reclassified from AOCL

    -       -       -       -  

Net current-period other comprehensive income

    3,826       -       581       4,407  

Ending Balance – September 30, 2017

  $ (12,031 )   $ (11,040 )   $ 269     $ (22,802 )
                                 
                                 

Beginning Balance – January 1, 2018

  $ (12,856 )   $ (10,978 )   $ 2,636     $ (21,198 )

Other comprehensive income before reclassifications

    1,238       -       10,403   (3)    11,641  

Amounts reclassified from AOCL

    -       -       -       -  

Net current-period other comprehensive income

    1,238       -       10,403       11,641  

Ending Balance – September 30, 2018

  $ (11,618 )   $ (10,978 )   $ 13,039     $ (9,557 )
                                 
                                 

Beginning Balance – January 1, 2017

  $ (28,047 )   $ (11,040 )   $ (1,076 )   $ (40,163 )

Other comprehensive income before reclassifications

    16,016       -       1,345   (4)    17,361  

Amounts reclassified from AOCL

    -       -       -       -  

Net current-period other comprehensive income

    16,016       -       1,345       17,361  

Ending Balance – September 30, 2017

  $ (12,031 )   $ (11,040 )   $ 269     $ (22,802 )

 

 

(1)

Represents unrealized gains of $2,197, net of tax effect of $(571), for the three months ended September 30, 2018.

 

(2)

Represents unrealized gains of $954, net of tax effect of $(373), for the three months ended September 30, 2017.

 

(3)

Represents unrealized gains of $14,057, net of tax effect of $(3,654), for the nine months ended September 30, 2018.

 

(4)

Represents unrealized gains of $2,208, net of tax effect of $(863), for the nine months ended September 30, 2017.

 

 

8. Segment Reporting

 

The Company has two reportable segments for financial reporting purposes - Domestic and International. The Domestic segment includes the legacy Generac business and the impact of acquisitions based in the United States, all of which have revenues that are substantially derived from the U.S. and Canada. The International segment includes the Ottomotores, Tower Light, Pramac, Motortech and Selmec businesses, all of which have revenues that are substantially derived from outside of the U.S. and Canada. Both reportable segments design and manufacture a wide range of power generation equipment and other engine powered products. The Company has multiple operating segments, which it aggregates into the two reportable segments, based on materially similar economic characteristics, products, production processes, classes of customers and distribution methods.

 

 

The Company's product offerings consist primarily of power generation equipment and other engine powered products geared for varying end customer uses. Residential products and commercial & industrial (C&I) products are each a similar class of products based on similar power output and end customer. The breakout of net sales between residential, C&I, and other products by reportable segment is as follows:

 

   

Net Sales by Segment

 
   

Three Months Ended September 30, 2018

 

Product Classes

 

Domestic

   

International

   

Total

 

Residential products

  $ 300,387     $ 11,531     $ 311,918  

Commercial & industrial products

    121,952       84,414       206,366  

Other

    30,920       10,311       41,231  

Total net sales

  $ 453,259     $ 106,256     $ 559,515  

 

   

Three Months Ended September 30, 2017

 

Product Classes

 

Domestic

   

International

   

Total

 

Residential products

  $ 236,821     $ 14,382     $ 251,203  

Commercial & industrial products

    101,122       72,720       173,842  

Other

    24,966       5,828       30,794  

Total net sales

  $ 362,909     $ 92,930     $ 455,839  

 

   

Nine Months Ended September 30, 2018

 

Product Classes

 

Domestic

   

International

   

Total

 

Residential products

  $ 711,203     $ 37,587     $ 748,790  

Commercial & industrial products

    340,244       256,875       597,119  

Other

    83,078       23,111       106,189  

Total net sales

  $ 1,134,525     $ 317,573     $ 1,452,098  

 

   

Nine Months Ended September 30, 2017

 

Product Classes

 

Domestic

   

International

   

Total

 

Residential products

  $ 563,636     $ 40,252     $ 603,888  

Commercial & industrial products

    284,796       209,702       494,498  

Other

    67,051       15,762       82,813  

Total net sales

  $ 915,483     $ 265,716     $ 1,181,199  

 

Residential products consist primarily of automatic home standby generators ranging in output from 6kW to 60kW, portable generators, power washers and other outdoor power equipment. These products are sold through independent residential dealers, national and regional retailers, e-commerce merchants, electrical and HVAC wholesalers and outdoor power equipment dealers. The residential products revenue consists of the sale of the product to our distribution partners, which in turn sell or rent the product to the end consumer, including installation and maintenance services. In some cases, residential products are sold direct to the end consumer. Substantially all of the residential products revenues are transferred to the customer at a point in time.

 

C&I products consist of larger output stationary generators used in C&I applications and fueled by diesel, natural gas, liquid propane and bi-fuel, with power outputs ranging from 10kW up to 3,250kW. Also included in C&I products are mobile generators, light towers, mobile heaters and mobile pumps. These products are sold through industrial distributors and dealers, equipment rental companies and equipment distributors. The C&I products revenue consists of the sale of the product to our distribution partners, which in turn sell or rent the product to the end customer, including installation and maintenance services. In some cases, C&I products are sold direct to the end customer. Substantially all of the C&I products revenues are transferred to the customer at a point in time.

 

Other products consist primarily of aftermarket service parts sold to our dealers, product accessories and proprietary engines sold to third-party original equipment manufacturers. Substantially all of the Other products revenues are transferred to the customer at a point in time.

 

 

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

 
   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2018

   

2017

   

2018

   

2017

 

Domestic

  $ 117,108     $ 82,817     $ 273,185     $ 188,400  

International

    7,366       5,625       25,300       16,471  

Total adjusted EBITDA

  $ 124,474     $ 88,442     $ 298,485     $ 204,871  
                                 

Interest expense

    (9,824 )     (10,672 )     (30,939 )     (32,353 )

Depreciation and amortization

    (11,841 )     (13,108 )     (35,124 )     (38,691 )

Non-cash write-down and other adjustments (1)

    (900 )     (756 )     (3,522 )     (2,632 )

Non-cash share-based compensation expense (2)

    (2,919 )     (2,584 )     (9,910 )     (8,402 )

Loss on extinguishment of debt (3)

    -       -       (1,332 )     -  

Transaction costs and credit facility fees (4)

    (1,767 )     (234 )     (2,470 )     (970 )

Business optimization expenses (5)

    (583 )     (487 )     (750 )     (1,933 )

Other

    (46 )     (421 )     (45 )     (451 )

Income before provision for income taxes

  $ 96,594     $ 60,180     $ 214,393     $ 119,439  

 

 

(1)

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

 

(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 transaction costs incurred directly in connection with any investment, as defined in our credit agreement, equity issuance, debt issuance or refinancing; together with certain fees relating to our senior secured credit facilities.

 

(5)

Represents charges relating to business optimization and restructuring costs.

 

The Company’s sales in the United States represented approximately 78% and 76% of total sales for the three month periods ended September 30, 2018 and 2017, respectively, and represented approximately 74% of total sales for the nine month periods ended September 30, 2018 and 2017. Approximately 80% and 85% of the Company’s identifiable long-lived assets were located in the United States at September 30, 2018 and December 31, 2017, respectively.

 

 

9. Balance Sheet Details

 

Inventories consist of the following:

   

September 30,
2018

   

December 31,

2017

 
                 

Raw material

  $ 294,519     $ 242,947  

Work-in-process

    4,101       2,544  

Finished goods

    197,468       141,558  

Total

  $ 496,088     $ 387,049  

 

Property and equipment consists of the following:

   

September 30,
2018

   

December 31,

2017

 
                 

Land and improvements

  $ 15,583     $ 13,118  

Buildings and improvements

    141,275       132,072  

Machinery and equipment

    96,756       90,487  

Dies and tools

    26,921       24,504  

Vehicles

    1,947       1,878  

Office equipment and systems

    80,144       73,254  

Leasehold improvements

    2,471       2,436  

Construction in progress

    19,216       18,799  

Gross property and equipment

    384,313       356,548  

Accumulated depreciation

    (140,951 )     (126,168 )

Total

  $ 243,362     $ 230,380  

 

 

 

10. 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:

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2018

   

2017

   

2018

   

2017

 

Balance at beginning of period

  $ 38,660     $ 32,813     $ 35,422     $ 31,695  

Product warranty reserve assumed in acquisition

    -       -       -       43  

Payments

    (5,205 )     (5,135 )     (15,097 )     (13,980 )

Provision for warranty issued

    8,074       6,206       19,552       14,452  

Changes in estimates for pre-existing warranties

    (974 )     (705 )     678       969  

Balance at end of period

  $ 40,555     $ 33,179     $ 40,555     $ 33,179  

 

Additionally, the Company sells extended warranty coverage for certain products, which it accounts for as a service warranty. The sales of extended warranties are recorded as deferred revenue, and typically have a duration of five to ten years. The deferred revenue related to extended warranty coverage is amortized over the duration of the extended warranty contract period, following the standard warranty period, using the straight-line method. The Company believes the straight-line method is appropriate because the performance obligation is satisfied based on the passage of time. The amortization of deferred revenue is recorded to selling and service expenses on the condensed consolidated statements of comprehensive income as an offset to warranty expense. The following is a tabular reconciliation of the deferred revenue related to extended warranty coverage:

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2018

   

2017

   

2018

   

2017

 

Balance at beginning of period

  $ 63,007     $ 43,356     $ 57,854     $ 36,139  

Deferred revenue contracts issued

    4,787       12,741       15,029       23,204  

Amortization of deferred revenue contracts

    (2,873 )     (1,908 )     (7,962 )     (5,154 )

Balance at end of period

  $ 64,921     $ 54,189     $ 64,921     $ 54,189  

 

The timing of recognition of the Company’s deferred revenue balance related to extended warranties at September 30, 2018 is as follows:

 

Remainder of 2018

  $ 3,187  

2019

    12,941  

2020

    12,566  

2021

    10,821  

2022

    8,502  

After 2022

    16,904  

Total

  $ 64,921  

 

In the second quarter of 2017, the Company launched a post-sale extended warranty marketing program. In the program’s agreement, the Company is required to pay fees to a third-party service provider based on the number of extended warranty contracts sold, which it classifies as costs to obtain a contract. The contract costs are deferred and recorded as other assets in the condensed consolidated balance sheets. The deferred contract costs are amortized to selling and service expense in the condensed consolidated statements of comprehensive income over the same period that the underlying deferred revenue is recognized. The balance of deferred contract costs as of September 30, 2018 and 2017 was $4,563 and $2,196, respectively. Amortization of deferred contract costs recorded during the nine months ended September 30, 2018 was $449.

 

 

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

 

   

September 30,

   

December 31,

 
   

2018

   

2017

 

Product warranty liability

               

Current portion - other accrued liabilities

  $ 23,374     $ 20,576  

Long-term portion - other long-term liabilities

    17,181       14,846  

Total

  $ 40,555     $ 35,422  
                 

Deferred revenue related to extended warranties

               

Current portion - other accrued liabilities

  $ 13,641     $ 11,017  

Long-term portion - other long-term liabilities

    51,280       46,837  

Total

  $ 64,921     $ 57,854  

 

 

11. Credit Agreements

 

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

 

   

September 30,

   

December 31,

 
   

2018

   

2017

 

ABL Facility

  $ 11,000     $ -  

Other lines of credit

    24,758       20,602  

Total

  $ 35,758     $ 20,602  

 

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

 

   

September 30,

   

December 31,

 
   

2018

   

2017

 

Term Loan

  $ 879,000     $ 929,000  

Original issue discount and deferred financing costs

    (23,635 )     (26,937 )

ABL Facility

    50,000       -  

Capital lease obligation

    4,091       4,690  

Other

    2,055       1,367  

Total

    911,511       908,120  

Less: current portion of debt

    51,266       936  

Less: current portion of capital lease obligation

    620       636  

Total

  $ 859,625     $ 906,548  

 

The Company’s credit agreements originally provided for a $1,200,000 term loan B credit facility (Term Loan) and currently include a $300,000 uncommitted incremental term loan facility. The maturity date of the Term Loan is May 31, 2023. The Term Loan is guaranteed by all of the Company’s wholly-owned domestic restricted subsidiaries, and is secured by associated collateral agreements which pledge a first priority lien on virtually all of the Company’s assets, including fixed assets and intangibles, other than all cash, trade accounts receivable, inventory, and other current assets and proceeds thereof, which are secured by a second priority lien. The Term Loan initially bore interest at rates based upon either a base rate plus an applicable margin of 1.75% or adjusted LIBOR rate plus an applicable margin of 2.75%, subject to a LIBOR floor of 0.75%. Beginning in the second quarter of 2014, the applicable margin related to base rate loans was reduced to 1.50% and the applicable margin related to LIBOR rate loans was reduced to 2.50%, in each case, if the Company’s net debt leverage ratio, as defined in the Term Loan, fell below 3.00 to 1.00 for that measurement period.

 

In May 2017, the Company amended the Term Loan, modifying the pricing of the facility by reducing the applicable margin rates to base rate plus a fixed applicable margin of 1.25% or adjusted LIBOR rate plus a fixed applicable margin of 2.25%. Further, the amendment removed the pricing grid that would reduce the applicable margin if a net debt leverage ratio of 3.00 to 1.00 was achieved. As a result, the Company does not anticipate any future catch-up gains or losses resulting from changes in contractual interest rates to be recorded in the statements of comprehensive income. The amended Term Loan pricing, however, is still subject to the 0.75% LIBOR floor. In connection with this amendment and in accordance with ASC 470-50, the Company capitalized $1,432 of fees paid to creditors as deferred financing costs on long-term borrowings in the second quarter of 2017.

 

 

In December 2017, the Company again amended the Term Loan, which further reduced the applicable margin rates to base rate plus a fixed applicable margin of 1.00% or adjusted LIBOR rate plus a fixed applicable margin of 2.00%. Additionally, the amendment eliminated the Excess Cash Flow payment requirement for 2017, and eliminated future related payment requirements if the Company’s secured leverage ratio was maintained below 3.75 to 1.00 times. In connection with this amendment and in accordance with ASC 470-50, the Company capitalized $2,346 of fees paid to creditors as original issue discount and deferred financing costs on long-term borrowings in the fourth quarter of 2017.

 

In June 2018, the Company again amended the Term Loan, which further reduced the applicable margin rates to base rate plus a fixed applicable margin of 0.75% or adjusted LIBOR rate plus a fixed applicable margin of 1.75%. In connection with this amendment and in accordance with ASC 470-50, the Company capitalized $829 of fees paid to creditors as deferred financing costs on long-term borrowings in the second quarter of 2018.

 

As of September 30, 2018, the Company’s secured leverage ratio was 1.82 to 1.00 times, and the Company was in compliance with all Term Loan covenants. There are no financial maintenance covenants on the Term Loan.

 

The Company’s credit agreements also originally provided for a $250,000 senior secured ABL revolving credit facility (ABL Facility), with a maturity date of May 29, 2020. Borrowings under the ABL Facility are guaranteed by all of the Company’s wholly-owned domestic restricted subsidiaries, and are secured by associated collateral agreements which pledge a first priority lien on all cash, trade accounts receivable, inventory, and other current assets and proceeds thereof, and a second priority lien on all other assets, including fixed assets and intangibles of the Company and certain domestic subsidiaries. ABL Facility borrowings originally bore interest at rates based upon either a base rate plus an applicable margin of 0.50% or adjusted LIBOR rate plus an applicable margin of 1.50%, in each case, subject to adjustments based upon average availability under the ABL Facility.

 

In June 2018, the Company amended the ABL Facility; increasing it from $250,000 to $300,000 and extending the maturity date from May 29, 2020 to June 12, 2023 (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 0.375% or an adjusted LIBOR rate plus an applicable margin of 1.375%. In connection with this amendment and in accordance with ASC 470-50, the Company capitalized $755 of new debt issuance costs as deferred financing costs on long-term borrowings in 2018 and wrote-off $34 of capitalized debt issuance costs as a loss on extinguishment of debt in the second quarter of 2018.

 

In June 2018, the Company borrowed $50,000 under the 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 $1,298 of original issue discount and capitalized debt issuance costs during the second quarter of 2018 as a loss on extinguishment of debt in the condensed consolidated statements of comprehensive income.

 

As of September 30, 2018, there was $61,000 outstanding under the Amended ABL Facility, leaving $207,498 of availability, net of outstanding letters of credit. In October 2018, the Company repaid the $50,000 outstanding Amended ABL Facility balance classified as current portion of long-term borrowings as of September 30, 2018.

 

As of September 30, 2018 and December 31, 2017, short-term borrowings consisted of borrowings by the Company’s foreign subsidiaries on local lines of credit and the Amended ABL Facility, which totaled $35,758 and $20,602, respectively.

 

 

12. Stock Repurchase Program

 

In August 2015, the Company’s Board of Directors approved a $200,000 stock repurchase program, which the Company completed in the third quarter of 2016. In October 2016, the Company’s Board of Directors approved an additional $250,000 stock repurchase program. Under the second program, the Company may repurchase up to $250,000 of its common stock over the 24 months following the date of approval. The Company may repurchase its common stock from time to time, in amounts and at prices the Company deems appropriate, subject to market conditions and other considerations. The repurchases may be executed using open market purchases, privately negotiated agreements or other transactions. The actual timing, number and value of shares repurchased under the program will be determined by management at its discretion and will depend on a number of factors, including the market price of the Company’s common stock and general market and economic conditions, applicable legal requirements, and compliance with the terms of the Company’s outstanding indebtedness. The repurchases may be funded with cash on hand, available borrowings or proceeds from potential debt or other capital markets sources. The stock repurchase program may be suspended or discontinued at any time without prior notice. During the nine months ended September 30, 2018 and 2017, the Company repurchased 560,000 and 844,500 shares of its common stock, respectively, for $25,656 and $30,012, respectively, all funded with cash on hand. Since the inception of both programs, the Company has repurchased 8,676,706 shares of its common stock for $305,547, all funded with cash on hand.

 

 

In September 2018, the Company’s Board of Directors approved another $250,000 stock repurchase program, which will commence in October 2018 upon the expiration of the previous stock repurchase program.

 

 

13. Earnings Per Share

 

Basic earnings per share is calculated by dividing net income attributable to the common stockholders 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. The following table reconciles the numerator and the denominator used to calculate basic and diluted earnings per share:

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2018

   

2017

   

2018

   

2017

 

Numerator

                               

Net income attributable to Generac Holdings Inc.

  $ 75,776     $ 39,435     $ 162,682     $ 76,901  

Redeemable noncontrolling interest redemption value adjustment

    (6,912 )     -       (16,882 )     909  

Net income attributable to common shareholders

  $ 68,864     $ 39,435     $ 145,800     $ 77,810  
                                 

Denominator

                               

Weighted average shares, basic

    61,579,564       61,758,190       61,659,817       62,094,807  

Dilutive effect of stock compensation awards (1)

    640,734       558,598       606,323       608,462  

Diluted shares

    62,220,298       62,316,788       62,266,140       62,703,269  
                                 

Net income attributable to common shareholders per share

                               

Basic

  $ 1.12     $ 0.64     $ 2.36     $ 1.25  

Diluted

  $ 1.11     $ 0.63     $ 2.34     $ 1.24  

 

(1) Excludes approximately 38,900 and 146,000 stock options for the three month periods ended September 30, 2018 and 2017, respectively, as the impact of such awards was anti-dilutive. Excludes approximately 48,200 and 188,800 stock options for the nine month periods ended September 30, 2018 and 2017, respectively, as the impact of such awards was anti-dilutive.

 

 

14. Income Taxes

 

The effective income tax rates for the nine months ended September 30, 2018 and 2017 were 23.3% and 35.3%, respectively. The decrease in the effective income tax rate in 2018 was primarily due to a reduction of the U.S. federal corporate tax rate as a result of the Tax Cuts and Jobs Act (Tax Act) enacted on December 22, 2017.

 

The SEC staff issued Staff Legal Bulletin 118 (SAB 118), which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act. The Company's accounting for certain elements of the Tax Act is incomplete. However, reasonable estimates of certain effects were able to be made and, therefore, provisional adjustments were recorded in the Company’s financial statements as of, and for the period ended, December 31, 2017. For the nine months ended September 30, 2018, the Company recorded a $2,500 favorable adjustment to the provisional amounts recorded in 2017 as a result of the completion of the 2017 federal income tax return. For further discussion on the impact of the Tax Act, see Item 8 (Note 13 “Income Taxes”) of the Annual Report on Form 10-K for the year ended December 31, 2017.

 

 

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 at September 30, 2018 and December 31, 2017 was approximately $40,600 and $36,500, respectively.

 

In the normal course of business, the Company is named as a defendant in various lawsuits in which claims are asserted against the Company. In the opinion of management, the liabilities, if any, which may result from such lawsuits are not expected to have a material adverse effect on the financial position, results of operations or cash flows of the Company.

 

 

 

Item 2.          Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

This quarterly report contains forward-looking statements that are subject to risks and uncertainties. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “anticipate,” “estimate,” “expect,” “forecast,” “project,” “plan,” “intend,” “believe,” “confident,” “may,” “should,” “can have,” “likely,” “future,” “optimistic” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events.

 

The forward-looking statements contained in this quarterly report are based on assumptions that we have made in light of our industry experience and on our perceptions of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the circumstances. As you read and consider this report, you should understand that these statements are not guarantees of performance or results. They involve risks, uncertainties (some of which are beyond our control) and assumptions. Although we believe that these forward-looking statements are based on reasonable assumptions, you should be aware that many factors could affect our actual financial results and cause them to differ materially from those anticipated in the forward-looking statements. The forward-looking statements contained in this quarterly report include estimates regarding:

 

 

our business, financial and operating results, and future economic performance; 

 

proposed new product and service offerings; and 

 

management's goals, expectations, objectives and other similar expressions concerning matters that are not historical facts.

 

Factors that could affect our actual financial results and cause them to differ materially from those anticipated in the forward-looking statements include:

 

 

frequency and duration of power outages impacting demand for our products;

 

availability, cost and quality of raw materials and key components and labor needed in producing our products; 

 

the impact on our results of possible fluctuations in interest rates, foreign currency exchange rates, commodities, product mix and regulatory tariffs;

 

the possibility that the expected synergies, efficiencies and cost savings of our acquisitions will not be realized, or will not be realized within the expected time period;

 

the risk that our acquisitions will not be integrated successfully;

 

difficulties we may encounter as our business expands globally;

 

our dependence on our distribution network; 

 

our ability to invest in, develop or adapt to changing technologies and manufacturing techniques; 

 

loss of our key management and employees; 

 

increase in product and other liability claims or recalls; and

 

changes in environmental, health and safety laws and regulations.

 

Should one or more of these risks or uncertainties materialize, or should any of these assumptions prove incorrect, our actual results may vary in material respects from those projected in any forward-looking statements. A detailed discussion of these and other factors that may affect future results is contained in our filings with the Securities and Exchange Commission, including in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2017. Stockholders, potential investors and other readers should consider these factors carefully in evaluating the forward-looking statements.

 

Any forward-looking statement made by us in this report speaks only as of the date on which it is made. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.

 

Overview

 

We are a leading global designer and manufacturer of a wide range of power generation equipment and other engine powered products serving the residential, light commercial and industrial markets. Power generation is our primary focus, which differentiates us from our main competitors that also have broad operations outside of the power equipment market. As the only significant market participant focused predominantly on these products, we have one of the leading market positions in the power equipment market in North America and an expanding presence internationally. We believe we have one of the widest ranges of products in the marketplace, including residential, commercial and industrial standby generators, as well as portable and mobile generators used in a variety of applications. Other engine powered products that we design and manufacture include light towers which provide temporary lighting for various end markets; commercial and industrial mobile heaters and pumps used in the oil and gas, construction and other industrial markets; and a broad product line of outdoor power equipment for residential and commercial use.

 

 

Over the past eight years, we have executed a number of acquisitions that support our strategic plan. A summary of the recent acquisitions can be found in Note 1, “Description of Business and Basis of Presentation,” to the condensed consolidated financial statements in Part 1, Item 1 of this Quarterly Report on Form 10-Q, and in Item 8 (Note 1 “Description of Business”) of the Annual Report on Form 10-K for the year ended December 31, 2017.

 

Business Drivers and Operational Factors

 

In operating our business and monitoring its performance, we pay attention to a number of business drivers and trends as well as operational factors. The statements in this section are based on our current expectations.

 

Business Drivers and Trends

 

Our performance is affected by the demand for back-up power generation products, mobile product solutions and other engine powered products by our customer base. This demand is influenced by several important drivers and trends affecting our industry, including the following:

 

Increasing penetration opportunity. Many potential customers are still not aware of the costs and benefits of automatic backup power solutions. We estimate that penetration rates for home standby generators are only approximately 4.0% of U.S. single-family detached, owner-occupied households with a home value of over $100,000, as defined by the U.S. Census Bureau's 2015 American Housing Survey for the United States. The decision to purchase backup power for many light-commercial buildings such as convenience stores, restaurants and gas stations is more return-on-investment driven and, as a result, these applications have relatively lower penetration rates as compared to buildings used in code-driven or mission critical applications such as hospitals, wastewater treatment facilities, 911 call centers, data centers and certain industrial locations. The emergence of lower cost, cleaner burning natural gas-fueled generators has helped to increase the penetration of standby generators over the past decade in the light-commercial market. In addition, the installed base of backup power for telecommunications infrastructure is still increasing due to the growing importance for uninterrupted voice and data services. We believe by expanding our distribution network, continuing to develop our product line and targeting our marketing efforts, we can continue to build awareness and increase penetration for our standby generators for residential, commercial and industrial purposes.

 

Effect of large scale and baseline power disruptions. Power disruptions are an important driver of customer awareness for back-up power and have historically influenced demand for generators, both in the United States and internationally. Increased frequency and duration of major power outage events, that have a broader impact beyond a localized level, increases product awareness and may drive consumers to accelerate their purchase of a standby or portable generator during the immediate and subsequent period, which we believe may last for six to twelve months following a major power outage event for standby generators. For example, the major outage events that occurred during the second half of 2017 drove strong demand for portable and home standby generators, and the increased awareness of these products contributed to strong revenue growth in 2017 and thus far in 2018. Major power disruptions are unpredictable by nature and, as a result, our sales levels and profitability may fluctuate from period to period. In addition, there are smaller, more localized power outages that occur frequently across the United States that drive the baseline level of demand for back-up power solutions. The level of baseline power outage activity occurring across the United States can also fluctuate, and may cause our financial results to fluctuate from year to year.

 

Impact of residential investment cycle. The market for residential generators is also affected by the residential investment cycle and overall consumer confidence and sentiment. When homeowners are confident of their household income, the value of their home and overall net worth, they are more likely to invest in their home. These trends can have an impact on demand for residential generators. Trends in the new housing market highlighted by residential housing starts can also impact demand for our residential generators. Demand for outdoor power equipment is also impacted by several of these factors, as well as weather precipitation patterns.

 

Impact of business capital investment cycles. The global market for our commercial and industrial products is affected by different capital investment cycles, which can vary across the numerous regions around the world in which we participate. These markets include non-residential building construction, durable goods and infrastructure spending as well as investments in the exploration and production of oil and gas, as businesses or organizations either add new locations or make investments to upgrade existing locations or equipment. These trends can have a material impact on demand for these products. The capital investment cycle may differ for the various commercial and industrial end markets that we serve, including light commercial, retail, telecommunications, industrial, data centers, healthcare, construction, oil and gas and municipal infrastructure, among others. The market for these products is also affected by general economic and geopolitical conditions as well as credit availability in the geographic regions that we serve. In addition, we believe demand for our mobile power products will continue to benefit from a secular shift towards renting versus buying this type of equipment. We believe the passage of the Tax Act in late 2017 could have a favorable impact on future demand within many of the end markets that we serve, as the improved cash flow, liquidity and business sentiment may lead to further investments in equipment, facilities and infrastructure in the United States.

 

 

Factors Affecting Results of Operations

 

We are subject to various factors that can affect our results of operations, which we attempt to mitigate through factors we can control, including continued product development, expanded distribution, pricing, cost control and hedging. Certain operational and other factors that affect our business include the following:

 

Effect of commodity, currency and component price fluctuations.    Industry-wide price fluctuations of key commodities, such as steel, copper and aluminum, and other components we use in our products, as well as changes in labor costs required to produce our products, can have a material impact on our results of operations. Also, acquisitions in recent years have further expanded our commercial and operational presence outside of the United States. These acquisitions, along with our existing global supply chain, expose us to fluctuations in foreign currency exchange rates and regulatory tariffs that can have a material impact on our results of operations.

 

We have historically attempted to mitigate the impact of any inflationary pressures through improved product design and sourcing, manufacturing efficiencies, price increases and select hedging transactions. Our results are also influenced by changes in fuel prices in the form of freight rates, which in some cases are accepted by our customers and in other cases are paid by us.

 

Seasonality.    Although there is demand for our products throughout the year, in each of the past five years approximately 20% to 27% of our net sales occurred in the first quarter, 22% to 25% in the second quarter, 24% to 27% in the third quarter and 25% to 29% in the fourth quarter, with different seasonality depending on the occurrence, timing and severity of major power outage activity in each year. Major outage activity is unpredictable by nature and, as a result, our sales levels and profitability may fluctuate from period to period. The seasonality experienced during a major power outage, and for the subsequent quarters following the event, will vary relative to other periods when no major outage events occurred. We maintain a flexible production and supply chain infrastructure in order to respond to outage-driven peak demand.

 

Factors influencing interest expense and cash interest expense. Interest expense can be impacted by a variety of factors, including market fluctuations in LIBOR, interest rate election periods, interest rate swap agreements, repayments or borrowings of indebtedness, and amendments to our credit agreements. Cash interest expense decreased during the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017, primarily due to lower interest rate spreads resulting from Term Loan amendments, new interest rate swaps beginning July 2, 2018, and the October 2017 repayment of $100.0 million of ABL Facility borrowings. These factors are partially offset by an increase in the market LIBOR rate. Refer to Note 11, “Credit Agreements,” to the condensed consolidated financial statements included in Part 1, Item 1 of this Quarterly Report on Form 10-Q for further information.

 

Factors influencing provision for income taxes and cash income taxes paid.   The Tax Act significantly changes how the U.S. taxes corporations. The Tax Act requires complex computations to be performed that were not previously required in U.S. tax law, significant judgments to be made in interpretation of the provisions of the Tax Act and significant estimates in calculations, and the preparation and analysis of information not previously relevant or regularly produced. The U.S. Treasury Department, the IRS, and other standard-setting bodies could interpret or issue guidance on how provisions of the Tax Act will be applied or otherwise administered that is different from our interpretation.

 

As a result of the Tax Act, we recognized a one-time, non-cash benefit of $28.4 million in the fourth quarter of 2017 primarily from the impact of the revaluation of our net deferred tax liabilities. While we continue to assess the full impact of the Tax Act, the preliminary analysis suggests a meaningful benefit from the legislation. Specifically for 2018, our combined federal and state effective tax rate is expected to decline to between 23 to 25%, resulting in lower cash income taxes. As we complete our analysis of the Tax Act, collect and prepare necessary data, and interpret any additional guidance, we may make adjustments to provisional amounts that we have recorded that may materially impact our provision for income taxes in the period in which the adjustments are made. Refer to Note 14, “Income Taxes,” to the consolidated financial statements in Item 8 of the Annual Report on Form 10-K for the year ended December 31, 2017 for further information on the Tax Act and its impact.

 

 

Further, we had approximately $470 million of tax-deductible goodwill and intangible asset amortization remaining as of December 31, 2017 related to our acquisition by CCMP Capital Advisors, LLC in 2006 that we expect to generate aggregate cash tax savings of approximately $122 million through 2021, assuming continued profitability and a 26% combined federal and state tax rate. The aggregate cash tax savings reflects a decrease of $61 million from prior estimates due to a reduction in the assumed tax rate from 39% to 26% as a result of the Tax Act. The amortization of these assets for tax purposes is expected to be $122 million annually through 2020 and $102 million in 2021, which generates annual cash tax savings of $32 million through 2020 and $26 million in 2021, assuming profitability and a 26% combined federal and state tax rate. As a result of the asset acquisition of the Magnum business in the fourth quarter of 2011, we had approximately $34 million of incremental tax deductible goodwill and intangible assets remaining as of December 31, 2017. We expect these assets to generate aggregate cash tax savings of $9.0 million through 2026 assuming continued profitability and a 26% combined federal and state tax rate. The aggregate cash tax savings reflects a decrease of $4.5 million due to a reduction in the assumed tax rate from 39% to 26% as a result of the Tax Act. The amortization of these assets for tax purposes is expected to be $3.8 million annually through 2025 and $2.8 million in 2026, which generates an additional annual cash tax savings of $1.0 million through 2025 and $0.7 million in 2026, assuming profitability and a 26% combined federal and state tax rate. Based on current business plans, we believe that our cash tax obligations through 2026 will be significantly reduced by these tax attributes. Other domestic acquisitions have resulted in additional tax deductible goodwill and intangible assets that will generate tax savings, but are not material to our consolidated financial statements.

 

Results of Operations

 

Three months ended September 30, 2018 compared to the three months ended September 30, 2017

 

The following table sets forth our consolidated statements of operations data for the periods indicated:

 

   

Three Months Ended September 30,

                 

(U.S. Dollars in thousands)

 

2018

   

2017

   

$ Change

   

% Change

 

Net sales

  $ 559,515     $ 455,839     $ 103,676       22.7 %

Cost of goods sold

    361,630       299,608       62,022       20.7 %

Gross profit

    197,885       156,231       41,654       26.7 %

Operating expenses:

                               

Selling and service

    46,536       43,463       3,073       7.1 %

Research and development

    13,653       10,850       2,803       25.8 %

General and administrative

    25,499       22,128       3,371       15.2 %

Amortization of intangible assets

    5,678       7,242       (1,564 )     -21.6 %

Total operating expenses

    91,366       83,683       7,683       9.2 %

Income from operations

    106,519       72,548       33,971       46.8 %

Total other expense, net

    (9,925 )     (12,368 )     2,443       -19.8 %

Income before provision for income taxes

    96,594       60,180       36,414       60.5 %

Provision for income taxes

    20,072       20,404       (332 )     -1.6 %

Net income

    76,522       39,776       36,746       92.4 %

Net income attributable to noncontrolling interests

    746       341       405       118.8 %

Net income attributable to Generac Holdings Inc.

  $ 75,776     $ 39,435     $ 36,341       92.2 %

 

The following table sets forth our reportable segment information for the periods indicated:

 

   

Net Sales

                 
   

Three Months Ended September 30,

                 

(U.S. Dollars in thousands)

 

2018

   

2017

   

$ Change

   

% Change

 

Domestic

  $ 453,259     $ 362,909     $ 90,350       24.9 %

International

    106,256       92,930       13,326       14.3 %

Total net sales

  $ 559,515     $ 455,839     $ 103,676       22.7 %

 

   

Adjusted EBITDA

                 
   

Three Months Ended September 30,

                 
   

2018

   

2017

   

$ Change

   

% Change

 

Domestic

  $ 117,108     $ 82,817     $ 34,291       41.4 %

International

    7,366       5,625       1,741       31.0 %

Total Adjusted EBITDA

  $ 124,474     $ 88,442     $ 36,032       40.7 %

 

 

The following table sets forth our product class information for the periods indicated:

 

   

Three Months Ended September 30,

                 

(U.S. Dollars in thousands)

 

2018

   

2017

   

$ Change

   

% Change

 

Residential products

  $ 311,922     $ 251,203     $ 60,719       24.2 %

Commercial & industrial products

    206,366       173,842       32,524       18.7 %

Other

    41,227       30,794       10,433       33.9 %

Total net sales

  $ 559,515     $ 455,839     $ 103,676       22.7 %

 

Net sales.    The increase in Domestic sales for the three months ended September 30, 2018 was primarily due to continued strong growth in shipments of home standby generators, C&I mobile products, C&I stationary generators, and service parts, all of which contributed to the year-over-year growth. Shipments of residential products were particularly strong as disruptions from power outages continued to drive awareness around the home standby category and the need for homeowners to have back-up power. Sales of our C&I mobile and stationary products were also strong during the quarter with rental, telecom, and healthcare verticals experiencing growth.

 

The increase in International sales for the three months ended September 30, 2018 was primarily due to the contribution from the Selmec acquisition, which was $13.4 million for the third quarter. Our Pramac, Tower Light and Motortech businesses grew modestly as we continue to drive market penetration across the globe. However, the tough prior year comparison with hurricane Maria impacted year-over-year growth rates in Latin America.

 

Gross profit.    Gross profit margin for the third quarter of 2018 was 35.4% compared to 34.3% in the prior-year third quarter. A significant favorable mix shift towards higher margin home standby generator sales primarily drove this increase. Price and cost factors were largely neutral to gross margins relative to the prior year as a more favorable pricing environment and improved manufacturing overhead absorption helped to offset general inflationary pressures.

 

Operating expenses.   The increase in operating expenses was primarily driven by higher variable operating expenses given the higher sales volumes, an increase in employee and incentive compensation costs, and recurring operating expenses from the Selmec acquisition. These items were partially offset by lower promotion, marketing, and intangible amortization expenses.

 

Other expense.    The decrease in other expense, net was primarily due to lower interest expense given the lower interest rate spreads resulting from Term Loan refinancing amendments and the October 2017 repayment of $100.0 million of ABL Facility borrowings.

 

Provision for income taxes.    The effective income tax rates for the three months ended September 30, 2018 and 2017 were 20.8% and 33.9%, respectively. The decrease in the effective income tax rate in 2018 was primarily due to a reduction in the U.S. federal corporate tax rate as a result of the Tax Act enacted on December 22, 2017. In addition, a favorable provision-to-return adjustment was recorded in the current year third quarter related to the finalization of our 2017 federal income tax return.

 

Net income attributable to Generac Holdings Inc.    The increase was primarily driven by higher operating earnings as outlined above and a lower effective tax rate during the current year quarter.

 

Adjusted EBITDA.   Adjusted EBITDA for the Domestic segment was $117.1 million, or 25.8% of net sales, as compared to $82.8 million, or 22.8% of net sales in the prior year. Adjusted EBITDA margin in the current year benefitted from favorable mix, improved operating leverage, a favorable pricing environment, and focused margin improvement initiatives. These benefits were partially offset by an increase in employee costs and general inflationary pressures.

 

Adjusted EBITDA for the International segment, before deducting for non-controlling interests, improved to $7.4 million, or 6.9% of net sales, as compared to $5.6 million, or 6.1% of net sales, in the prior year. The improvement was primarily due to increased leverage of fixed operating costs on the higher organic sales volumes and favorable mix. 

 

Adjusted Net Income.    Adjusted Net Income of $89.1 million for the three months ended September 30, 2018 increased 55.3% from $57.4 million for the three months ended September 30, 2017, due to the factors outlined above, partially offset by an increase in cash income tax expense.

 

See “Non-GAAP Measures” for a discussion of how we calculate Adjusted EBITDA and Adjusted Net Income and the limitations on their usefulness.

 

 

Nine months ended September 30, 2018 compared to the nine months ended September 30, 2017

 

The following table sets forth our consolidated statements of operations data for the periods indicated:

 

   

Nine Months Ended September 30,

                 

(U.S. Dollars in thousands)

 

2018

   

2017

   

$ Change

   

% Change

 

Net sales

  $ 1,452,098     $ 1,181,199     $ 270,899       22.9 %

Cost of goods sold

    937,968       783,247       154,721       19.8 %

Gross profit

    514,130       397,952       116,178       29.2 %

Operating expenses:

                               

Selling and service

    135,270       124,940       10,330       8.3 %

Research and development

    38,122       31,690       6,432       20.3 %

General and administrative

    75,613       64,508       11,105       17.2 %

Amortization of intangible assets

    16,792       21,554       (4,762 )     -22.1 %

Total operating expenses

    265,797       242,692       23,105       9.5 %

Income from operations

    248,333       155,260       93,073       59.9 %

Total other expense, net

    (33,940 )     (35,821 )     1,881       -5.3 %

Income before provision for income taxes

    214,393       119,439       94,954       79.5 %

Provision for income taxes

    49,870       42,105       7,765       18.4 %

Net income

    164,523       77,334       87,189       112.7 %

Net income attributable to noncontrolling interests

    1,841       433       1,408       325.2 %

Net income attributable to Generac Holdings Inc.

  $ 162,682     $ 76,901     $ 85,781       111.5 %

 

The following table sets forth our reportable segment information for the periods indicated:

 

   

Net Sales

                 
   

Nine Months Ended September 30,

                 

(U.S. Dollars in thousands)

 

2018

   

2017

   

$ Change

   

% Change

 

Domestic

  $ 1,134,525     $ 915,483     $ 219,042       23.9 %

International

    317,573       265,716       51,857       19.5 %

Total net sales

  $ 1,452,098     $ 1,181,199     $ 270,899       22.9 %

 

   

Adjusted EBITDA

                 
   

Nine Months Ended September 30,

                 
   

2018

   

2017

   

$ Change

   

% Change

 

Domestic

  $ 273,185     $ 188,400     $ 84,785       45.0 %

International

    25,300       16,471       8,829       53.6 %

Total Adjusted EBITDA

  $ 298,485     $ 204,871     $ 93,614       45.7 %

 

The following table sets forth our product class information for the periods indicated:

 

   

Nine Months Ended September 30,

                 

(U.S. Dollars in thousands)

 

2018

   

2017

   

$ Change

   

% Change

 

Residential products

  $ 748,794     $ 603,888     $ 144,906       24.0 %

Commercial & industrial products

    597,119       494,498       102,621       20.8 %

Other

    106,185       82,813       23,372       28.2 %

Total net sales

  $ 1,452,098     $ 1,181,199     $ 270,899       22.9 %

 

Net sales.    The increase in Domestic sales for the nine months ended September 30, 2018 was primarily due to continued strong growth in shipments of home standby and portable generators, C&I mobile products, C&I stationary generators, and service parts, all of which contributed to the year-over-year growth. Shipments of residential products were particularly strong with demand climbing to record levels as disruptions from power outages continued to drive awareness around the home standby category and the need for homeowners to have back-up power. Sales of our C&I mobile and stationary products were also strong during the quarter with rental, telecom, and healthcare verticals experiencing growth.

 

The increase in International sales for the nine months ended September 30, 2018 was primarily due to the $17.4 million contri