10-Q 1 gnrc20210930_10q.htm FORM 10-Q gnrc20210930_10q.htm
0001474735 GENERAC HOLDINGS INC. false --12-31 Q3 2021 0.01 0.01 500,000,000 500,000,000 72,335,705 72,024,329 993 5,128 339 6,217 5 5 5 0 20 3 15 82 5 10 0 0 0 0 0 0 0 0 Represents share-based compensation expense to account for stock options, restricted stock and other stock awards over their respective vesting periods. To be paid in the form of common stock issued upon achievement of certain performance targets at the end of the earnout period. Represents unfavorable impact from the strengthening of the U.S. dollar against foreign currencies during the three months ended September 30, 2021, particularly the Euro and British Pound. Represents unfavorable impact from the strengthening of the U.S. dollar against foreign currencies during the nine months ended September 30, 2021, particularly the Euro and British Pound. Represents unrealized gains of $1,342 on the interest rate swaps, net of tax effect of $(339) for the three months ended September 30, 2020. Represents unrealized gains of $20,312 on the interest rate swaps, net of tax effect of $(5,128) for the nine months ended September 30, 2021. Represents unfavorable impact from the strengthening of the U.S. dollar against foreign currencies during the nine months ended September 30, 2020, particularly the Mexican Peso, Euro, Brazilian Real, and Russian Ruble. The increase in the contingent consideration liability is due to the contingent consideration associated with the acquisitions of Chilicon and Off Grid Energy. Refer to Note 2 for further information. There were no awards with an anti-dilutive impact for the three and nine months ended September 30, 2021 and 2020. Represents the non-cash write-off of original issue discount and deferred financing costs due to voluntary prepayment of Term Loan debt. 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. Represents unrealized losses of $(24,623) on the interest rate swaps, net of tax effect of $6,217 for the nine months ended September 30, 2020. Includes gains/losses on disposals of assets and investments, unrealized mark-to-market adjustments on commodity contracts, certain foreign currency related adjustments, and certain purchase accounting adjustments. Represents unrealized gains of $3,934 on the interest rate swaps, net of tax effect of $(993) for the three months ended September 30, 2021. 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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, 2021

  

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)

 

(262544-4811

(Registrant’s telephone number, including area code)

 

Not Applicable

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

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.01 par value

GNRC

New York Stock Exchange

 

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 November 1, 2021, there were 63,089,973 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, 2021 and December 31, 2020

1

     
 

Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2021 and 2020

2

     
 

Condensed Consolidated Statements of Stockholders’ Equity for the Three and Nine Months Ended September 30, 2021 and 2020

3

     
 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2021 and 2020

5

     
 

Notes to Condensed Consolidated Financial Statements

6

     

Item 2.

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

16

     

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

30

     

Item 6.

Exhibits

30

     
 

Signatures

31

 

 

 
 

PART I. FINANCIAL INFORMATION

 

 

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,

 
  

2021

  

2020

 

Assets

        

Current assets:

        

Cash and cash equivalents

 $423,726  $655,128 

Accounts receivable, less allowance for credit losses

  510,670   374,906 

Inventories

  934,948   603,317 

Prepaid expenses and other assets

  54,228   36,382 

Total current assets

  1,923,572   1,669,733 
         

Property and equipment, net

  412,706   343,936 
         

Customer lists, net

  154,152   49,205 

Patents and technology, net

  141,952   86,727 

Other intangible assets, net

  14,703   9,932 

Tradenames, net

  172,398   146,159 

Goodwill

  1,174,315   855,228 

Deferred income taxes

  3,813   1,497 

Operating lease and other assets

  102,819   73,006 

Total assets

 $4,100,430  $3,235,423 
         

Liabilities and stockholders’ equity

        

Current liabilities:

        

Short-term borrowings

 $61,470  $39,282 

Accounts payable

  611,181   330,247 

Accrued wages and employee benefits

  69,882   63,036 

Other accrued liabilities

  270,536   204,812 

Current portion of long-term borrowings and finance lease obligations

  4,945   4,147 

Total current liabilities

  1,018,014   641,524 
         

Long-term borrowings and finance lease obligations

  843,426   841,764 

Deferred income taxes

  175,665   115,769 

Operating lease and other long-term liabilities

  236,344   179,955 

Total liabilities

  2,273,449   1,779,012 
         

Redeemable noncontrolling interests

  44,704   66,207 
         

Stockholders’ equity:

        

Common stock, par value $0.01, 500,000,000 shares authorized, 72,335,705 and 72,024,329 shares issued at September 30, 2021 and December 31, 2020, respectively

  724   721 

Additional paid-in capital

  563,162   525,541 

Treasury stock, at cost

  (358,634)  (332,164)

Excess purchase price over predecessor basis

  (202,116)  (202,116)

Retained earnings

  1,834,477   1,432,565 

Accumulated other comprehensive loss

  (55,541)  (34,254)

Stockholders’ equity attributable to Generac Holdings Inc.

  1,782,072   1,390,293 

Noncontrolling interests

  205   (89)

Total stockholders' equity

  1,782,277   1,390,204 

Total liabilities and stockholders’ equity

 $4,100,430  $3,235,423 

 

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,

 
  

2021

  

2020

  

2021

  

2020

 
                 

Net sales

 $942,698  $701,355  $2,670,113  $1,724,118 

Costs of goods sold

  606,704   425,206   1,672,570   1,066,666 

Gross profit

  335,994   276,149   997,543   657,452 
                 

Operating expenses:

                

Selling and service

  82,242   60,901   229,443   178,566 

Research and development

  27,165   20,658   74,897   58,762 

General and administrative

  40,802   31,061   115,311   88,732 

Amortization of intangibles

  12,206   7,892   32,237   23,340 

Total operating expenses

  162,415   120,512   451,888   349,400 

Income from operations

  173,579   155,637   545,655   308,052 
                 

Other (expense) income:

                

Interest expense

  (7,980)  (8,096)  (23,424)  (25,081)

Investment income

  165   301   1,012   1,921 

Loss on extinguishment of debt

        (831)   

Other, net

  (400)  (557)  2,536   (2,687)

Total other expense, net

  (8,215)  (8,352)  (20,707)  (25,847)
                 

Income before provision for income taxes

  165,364   147,285   524,948   282,205 

Provision for income taxes

  32,611   32,050   114,341   59,967 

Net income

  132,753   115,235   410,607   222,238 

Net income (loss) attributable to noncontrolling interests

  1,183   265   3,008   (3,337)

Net income attributable to Generac Holdings Inc.

 $131,570  $114,970  $407,599  $225,575 
                 

Net income attributable to Generac Holdings Inc. per common share - basic:

 $1.98  $1.86  $6.42  $3.59 

Weighted average common shares outstanding - basic:

  62,690,437   62,353,473   62,583,957   62,244,872 
                 

Net income attributable to Generac Holdings Inc. per common share - diluted:

 $1.93  $1.82  $6.27  $3.51 

Weighted average common shares outstanding - diluted:

  64,208,116   63,761,380   64,146,281   63,546,132 
                 

Comprehensive income attributable to Generac Holdings Inc.

 $113,727  $123,887  $386,789  $187,548 

 

See notes to condensed consolidated financial statements.

 

 

 

Generac Holdings Inc.

Condensed Consolidated Statements of Stockholders' Equity

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

(Unaudited)

 

  

Generac Holdings Inc.

         
                      

Excess Purchase Price

  

 

  

Accumulated

             
          

Additional

          

Over

  

 

  

Other

  

Total

         
  

Common Stock

  

Paid-In

  

Treasury Stock

  

Predecessor

  Retained  

Comprehensive

  

Stockholders'

  

Noncontrolling

     
  

Shares

  

Amount

  

Capital

  

Shares

  

Amount

  

Basis

  Earnings  

Income (Loss)

  

Equity

  

Interest

  

Total

 

Balance at July 1, 2021

  72,252,980  $723  $542,893   (9,252,097) $(358,481) $(202,116) $1,710,464  $(37,583) $1,655,900  $38  $1,655,938 

Unrealized gain on interest rate swaps, net of tax of $993

                       2,941   2,941      2,941 

Foreign currency translation adjustment

                       (20,899)  (20,899)  (8)  (20,907)

Common stock issued under equity incentive plans, net of shares withheld for employee taxes and strike price

  52,085   1   2,486                  2,487      2,487 

Common stock issued for business combination

  30,640      12,000                  12,000      12,000 

Net share settlement of restricted stock awards

           (397)  (153)           (153)     (153)

Share-based compensation

        5,783                  5,783      5,783 

Redemption value adjustment

                    (7,557)     (7,557)     (7,557)

Net income

                    131,570      131,570   175   131,745 
                                             

Balance at September 30, 2021

  72,335,705  $724  $563,162   (9,252,494) $(358,634) $(202,116) $1,834,477  $(55,541) $1,782,072  $205  $1,782,277 

 

  

Generac Holdings Inc.

         
                      

Excess Purchase Price

  

 

  

Accumulated

             
          

Additional

          

Over

  

 

  

Other

  

Total

         
  

Common Stock

  

Paid-In

  

Treasury Stock

  

Predecessor

  Retained  

Comprehensive

  

Stockholders'

  

Noncontrolling

     
  

Shares

  

Amount

  

Capital

  

Shares

  

Amount

  

Basis

  Earnings  

Income (Loss)

  

Equity

  

Interest

  

Total

 

Balance at January 1, 2021

  72,024,329  $721  $525,541   (9,173,731) $(332,164) $(202,116) $1,432,565  $(34,254) $1,390,293  $(89) $1,390,204 

Unrealized gain on interest rate swaps, net of tax of $5,128

                       15,184   15,184      15,184 

Foreign currency translation adjustment

                       (36,471)  (36,471)  (13)  (36,484)

Common stock issued under equity incentive plans, net of shares withheld for employee taxes and strike price

  280,736   3   7,417                  7,420      7,420 

Common stock issued for business combination

  30,640      12,000                  12,000      12,000 

Net share settlement of restricted stock awards

           (78,763)  (26,470)           (26,470)     (26,470)

Share-based compensation

        18,204                  18,204      18,204 

Redemption value adjustment

                    (5,687)     (5,687)     (5,687)

Net income

                    407,599      407,599   307   407,906 
                                             

Balance at September 30, 2021

  72,335,705  $724  $563,162   (9,252,494) $(358,634) $(202,116) $1,834,477  $(55,541) $1,782,072  $205  $1,782,277 

 

See notes to condensed consolidated financial statements.

 

 

Generac Holdings Inc.

Condensed Consolidated Statements of Stockholders' Equity

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

(Unaudited)

 

  

Generac Holdings Inc.

         
                      

Excess Purchase Price

  

 

  

Accumulated

             
          

Additional

          

Over

  

 

  

Other

  

Total

         
  

Common Stock

  

Paid-In

  

Treasury Stock

  

Predecessor

  

Retained

  

Comprehensive

  

Stockholders'

  

Noncontrolling

     
  

Shares

  

Amount

  

Capital

  

Shares

  

Amount

  

Basis

  Earnings  

Income (Loss)

  

Equity

  

Interest

  

Total

 

Balance at July 1, 2020

  71,960,067  $720  $512,318   (9,170,162) $(331,415) $(202,116) $1,190,749  $(72,526) $1,097,730  $(455) $1,097,275 

Unrealized gain on interest rate swaps, net of tax of $339

                       1,003   1,003      1,003 

Foreign currency translation adjustment

                       9,484   9,484   (25)  9,459 

Common stock issued under equity incentive plans, net of shares withheld for employee taxes and strike price

  51,835      1,939                  1,939      1,939 

Net share settlement of restricted stock awards

           (572)  (98)           (98)     (98)

Share-based compensation

        4,353                  4,353      4,353 

Redemption value adjustment

                    811      811      811 

Net income

                    114,970      114,970   184   115,154 
                                             

Balance at September 30, 2020

  72,011,902  $720  $518,610   (9,170,734) $(331,513) $(202,116) $1,306,530  $(62,039) $1,230,192  $(296) $1,229,896 

 

  

Generac Holdings Inc.

         
                      

Excess Purchase Price

  

 

  

Accumulated

             
          

Additional

          

Over

  

 

  

Other

  

Total

         
  

Common Stock

  

Paid-In

  

Treasury Stock

  

Predecessor

  Retained  

Comprehensive

  

Stockholders'

  

Noncontrolling

     
  

Shares

  

Amount

  

Capital

  

Shares

  

Amount

  

Basis

  Earnings  

Income (Loss)

  

Equity

  

Interest

  

Total

 

Balance at January 1, 2020

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

Accounting standard adoption impact

                    (1,147)     (1,147)     (1,147)

Unrealized loss on interest rate swaps, net of tax of ($6,217)

                       (18,406)  (18,406)     (18,406)

Foreign currency translation adjustment

                       (18,716)  (18,716)  (27)  (18,743)

Common stock issued under equity incentive plans, net of shares withheld for employee taxes and strike price

  344,176   3   5,417                  5,420      5,420 

Net share settlement of restricted stock awards

           (67,721)  (6,962)           (6,962)     (6,962)

Share-based compensation

        14,327                  14,327      14,327 

Redemption value adjustment

                    (2,281)     (2,281)     (2,281)

Net income

                    225,575      225,575   (738)  224,837 
                                             

Balance at September 30, 2020

  72,011,902  $720  $518,610   (9,170,734) $(331,513) $(202,116) $1,306,530  $(62,039) $1,230,192  $(296) $1,229,896 

 

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,

 
  

2021

  

2020

 

Operating activities

        

Net income

 $410,607  $222,238 

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

        

Depreciation

  30,445   26,747 

Amortization of intangible assets

  32,237   23,340 

Amortization of original issue discount and deferred financing costs

  1,941   1,940 

Loss on extinguishment of debt

  831    

Deferred income taxes

  8,210   15,433 

Share-based compensation expense

  18,204   14,327 

Loss (gain) on disposal of assets

  (4,018)   

Other, net

  (12)  6,414 

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

        

Accounts receivable

  (116,768)  (85,474)

Inventories

  (322,954)  (14,604)

Other assets

  (6,874)  2,543 

Accounts payable

  269,951   11,624 

Accrued wages and employee benefits

  4,497   11,793 

Other accrued liabilities

  49,987   38,211 

Excess tax benefits from equity awards

  (26,880)  (6,222)

Net cash provided by operating activities

  349,404   268,310 
         

Investing activities

        

Proceeds from sale of property and equipment

  182   26 

Proceeds from sale of investment

  4,968    

Proceeds from beneficial interests in securitization transactions

  2,240   1,998 

Contribution to equity method investment

  (781)   

Expenditures for property and equipment

  (87,456)  (33,940)

Acquisition of businesses, net of cash acquired

  (465,926)  (22,815)

Net cash used in investing activities

  (546,773)  (54,731)
         

Financing activities

        

Proceeds from short-term borrowings

  127,816   198,087 

Proceeds from long-term borrowings

  50,000   297 

Repayments of short-term borrowings

  (105,206)  (210,854)

Repayments of long-term borrowings and finance lease obligations

  (54,889)  (3,584)

Payment of contingent acquisition consideration

  (3,750)  (4,000)

Payment of debt issuance costs

  (1,185)   

Purchase of additional ownership interest

  (27,164)   

Taxes paid related to equity awards

  (49,569)  (13,533)

Proceeds from exercise of stock options

  30,502   11,991 

Net cash used in financing activities

  (33,445)  (21,596)
         

Effect of exchange rate changes on cash and cash equivalents

  (588)  (922)
         

Net increase (decrease) in cash and cash equivalents

  (231,402)  191,061 

Cash and cash equivalents at beginning of period

  655,128   322,883 

Cash and cash equivalents at end of period

 $423,726  $513,944 

 

 

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, manufacturer and provider of a wide range of energy technology solutions. The Company provides power generation equipment, energy storage systems, grid service solutions, and other power products serving the residential, commercial and industrial markets. Generac’s power products and solutions are available globally through a broad network of independent dealers, distributors, retailers, e-commerce partners, wholesalers, and equipment rental companies, as well as sold direct to certain end user customers.

 

Over the years, the Company has executed a number of acquisitions that support its strategic plan (as discussed in Item 1 of the Annual Report on Form 10-K for the year ended December 31, 2020). A summary of acquisitions affecting the reporting periods presented include:

 

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

 

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

 

The condensed consolidated balance sheet as of September 30, 2021, the condensed consolidated statements of comprehensive income for the three and nine months ended September 30, 2021 and 2020, the condensed consolidated statements of stockholders’ equity for the three and nine months ended September 30, 2021 and 2020, and the condensed consolidated statements of cash flows for the nine months ended September 30, 2021 and 2020 have been prepared by the Company and have not been audited. In the opinion of management, all adjustments (which include only normal recurring adjustments except where disclosed) necessary for the fair presentation of the financial position, results of operation, and cash flows have been made. The results of operations for any interim period are not necessarily indicative of the results to be expected for the full year.

 

The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with GAAP have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2020.

 

6

 

New Accounting Pronouncements

 

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

 

 

2.   Acquisitions

 

Fiscal 2021 Acquisitions

 

Acquisition of Deep Sea

 

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

 

The Company recorded its preliminary purchase price allocation during the second quarter of 2021, and was updated in the third quarter of 2021, based upon its estimates of the fair value of the acquired assets and assumed liabilities at that time. As a result, the Company recorded $434,724 of intangible assets, including $263,287 of goodwill recorded in the International segment, as of the acquisition date. The goodwill ascribed to this acquisition is not deductible for tax purposes. The accompanying condensed consolidated financial statements include the results of Deep Sea from the date of acquisition through September 30, 2021. Pro forma financial information is not presented as the effects of this acquisition are not material to the Company's results of operations or financial position prior to the acquisition date.

 

Acquisition of Off Grid Energy

 

On September 1, 2021, the Company acquired Off Grid Energy for a purchase price of $76,553, net of cash acquired and inclusive of estimated contingent consideration of $44,042 that is to be paid in cash upon achievement of certain performance targets at the end of the earnout period. Headquartered in Rugby, United Kingdom, Off Grid Energy is a designer and manufacturer of industrial-grade mobile energy storage systems. The acquisition purchase price was funded through cash on hand.

 

The Company recorded its preliminary purchase price allocation during the third quarter of 2021 based upon its estimates of the fair value of the acquired assets and assumed liabilities at that time. As a result, the Company recorded $71,935 of intangible assets, including $48,263 of goodwill recorded in the International segment, as of the acquisition date. The goodwill ascribed to this acquisition is deductible for tax purposes. The accompanying condensed consolidated financial statements include the results of Off Grid Energy from the date of acquisition through September 30, 2021. Pro forma financial information is not presented as the effects of this acquisition are not material to the Company's results of operations or financial position prior to the acquisition date.

 

Other Acquisitions

 

On July 2, 2021, the Company acquired Chilicon, a designer and provider of grid-interactive microinverter and monitoring solutions for the solar market. Chilicon is based in Los Angeles, California.

 

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

 

The combined fair value of the consideration transferred for these acquisitions consisted of the following: 

 

Cash at closing

 $18,823 

Deferred cash payment

  6,000 

Common stock issued at closing

  12,000 

Contingent consideration (1)

  23,971 

Total purchase price

 $60,794 

 

 (1)To be paid in the form of common stock issued upon achievement of certain performance targets at the end of the earnout period.

 

The Company recorded its preliminary purchase price allocation during the third quarter of 2021 based upon its estimates of the fair value of the acquired assets and assumed liabilities at that time. As a result, the Company recorded $69,776 of intangible assets, including $30,976 of goodwill recorded in the Domestic segment, as of the acquisition date for these acquisitions. The goodwill ascribed to the Chilicon acquisition is not deductible for tax purposes. The goodwill ascribed to the Apricity acquisition is deductible for tax purposes. The accompanying condensed consolidated financial statements include the results of the acquired businesses since the dates of acquisition through September 30, 2021. Pro forma financial information is not presented for these acquisitions as the effects of the acquisitions individually and in the aggregate are not material to the Company's results of operations or financial position prior to the acquisition dates.

 

Fiscal 2020 Acquisitions

 

Acquisition of Enbala

 

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

 

The Company finalized its purchase price allocation during the third quarter of 2021 based upon its estimates of the fair value of the acquired assets and assumed liabilities at that time. The finalization did not result in material adjustments to the Company's preliminary estimates. As a result, the Company recorded $46,338 of intangible assets, including $27,038 of goodwill recorded in the Domestic segment, as of the acquisition date. A portion of the goodwill ascribed to this acquisition is deductible for tax purposes. The accompanying condensed consolidated financial statements include the results of Enbala from the date of acquisition through September 30, 2021. Pro forma financial information is not presented as the effects of this acquisition or the combined acquisitions are not material to the Company's results of operations or financial position prior to the acquisition date.

 

Other Acquisitions

 

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

 

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

 

The combined purchase price for these two acquisitions was $22,958 and was funded solely through cash on hand. The Company finalized its purchase price allocation for these two acquisitions during the third quarter of 2021 based upon its estimates of the fair value of the acquired assets and assumed liabilities at that time. The finalization did not result in material adjustments to the Company's preliminary estimates. The accompanying condensed consolidated financial statements include the results of the acquired businesses since the dates of acquisition through September 30, 2021. Pro forma financial information is not presented for these acquisitions as the effects of the acquisitions individually and in the aggregate are not material to the Company's results of operations or financial position prior to the acquisition dates. 

 

Summary Purchase Price Allocations

 

The fair values assigned to certain assets acquired and liabilities assumed, as of the acquisition dates, are as follows for the 2021 and 2020 acquisitions:

 

  2021 Acquisitions    
  

Deep Sea

  

All Other

  

2020 Acquisitions

 

Accounts receivable

 $9,574  $13,478  $5,094 

Inventories

  9,970   4,522   3,575 

Prepaid expenses and other assets

  826   1,146   858 

Property and equipment

  8,838   413   635 

Intangible assets

  171,437   62,472   26,235 

Goodwill

  263,287   79,239   40,395 

Other assets

  3,414   4,750   1,122 

Total assets acquired

  467,346   166,020   77,914 
             

Accounts payable

  8,254   4,066   4,088 

Accrued wages and employee benefits

  2,106   788   700 

Other accrued liabilities

  3,641   1,903   2,151 

Short-term borrowings

  -   833   - 

Current portion of long-term debt

  -   233   - 

Deferred income taxes

  32,545   13,981   3,827 

Long-term debt

  -   1,672   - 

Other long-term liabilities

  100   5,197   2,208 

Net assets acquired

 $420,700  $137,347  $64,940 

 

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

 

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3.   Redeemable Noncontrolling Interest

 

On March 1, 2016, the Company acquired a 65% ownership interest in PR Industrial S.r.l. and its subsidiaries (Pramac). The 35% noncontrolling interest in Pramac had an acquisition date fair value of $34,253, and was recorded as a redeemable noncontrolling interest in the condensed consolidated balance sheet, as the noncontrolling interest holder had within its control the right to require the Company to redeem its interest in Pramac. In February 2019, the Company amended its agreement with the noncontrolling interest holder of Pramac, extending the agreement by five years, allowing the Company to exercise its call option rights in partial increments at certain times during the five year period, and providing that the noncontrolling interest holder no longer holds the right to put its shares to the Company until April 1, 2021. The put and call option price is based on a multiple of earnings, subject to a floor and the terms of the acquisition agreement, as amended. In May 2021, the Company exercised its call option rights and paid a purchase price of $27,164 to purchase an additional 15% ownership interest in Pramac, bringing the Company's total ownership interest in Pramac to 80%. The Company still holds its call option right to purchase the remaining 20% ownership interest in partial increments over the next 3 years.  

 

On February 1, 2019, the Company acquired a 51% ownership interest in Captiva. The 49% noncontrolling interest in Captiva had an acquisition date fair value of $3,165, and was recorded as a redeemable noncontrolling interest in the condensed consolidated balance sheet, as the noncontrolling interest holder had within its control the right to require the Company to redeem its interest in Captiva. The noncontrolling interest holder has a put option to sell his interest to the Company any time after five years from the date of acquisition, or earlier upon the occurrence of certain circumstances. Further, the Company has a call option that it may redeem any time after five years from the date of acquisition, or earlier upon the occurrence of certain circumstances. The put and call option price is based on a multiple of earnings, subject to the terms of the acquisition. 

 

For both transactions, the redeemable noncontrolling interest is recorded at the greater of the initial fair value, increased or decreased for the noncontrolling interests’ share of comprehensive income (loss), or the estimated redemption value, with any adjustments to the redemption value impacting retained earnings, but not net income. However, the redemption value adjustments are reflected in the earnings per share calculation, as detailed in Note 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,

 
  

2021

  

2020

  

2021

  

2020

 

Balance at beginning of period

 $37,245  $61,019  $66,207  $61,227 

Net income

  1,007   80   2,700   (2,601)

Foreign currency translation

  (1,105)  3,257   (2,726)  2,638 

Purchase of additional ownership interest

  -   -   (27,164)  - 

Redemption value adjustment

  7,557   (811)  5,687   2,281 

Balance at end of period

 $44,704  $63,545  $44,704  $63,545 

 

 

4.   Derivative Instruments and Hedging Activities

 

The Company records all derivatives in accordance with ASC 815, Derivatives and Hedging, which requires derivative instruments to be reported on the condensed consolidated balance sheets at fair value and establishes criteria for designation and effectiveness of hedging relationships. The Company is exposed to market risk such as changes in commodity prices, foreign currencies and interest rates. The Company does not hold or issue derivative financial instruments for trading purposes.

 

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

 

Interest Rate Swaps

 

In 2017, the Company entered into twenty interest rate swap agreements, twelve of which were still outstanding as of September 30, 2021. In December 2019, in conjunction with the amendment to its term loan, the Company amended those interest rate swaps to remove the LIBOR floor, which also resulted in minor reductions to the future dated swap fixed rates. In March 2020, the Company entered into three additional interest rate swap agreements, bringing the total outstanding interest rate swaps to fifteen as of September 30, 2021. The Company formally documented all relationships between interest rate hedging instruments and the related hedged items, as well as its risk-management objectives and strategies for undertaking various hedge transactions. These interest rate swap agreements qualify as cash flow hedges and therefore, the effective portions of their gains or losses are reported as a component of accumulated other comprehensive loss (AOCL) in the condensed consolidated balance sheets. The amount of gains, net of tax, recognized for the three and nine months ended September 30, 2021 were $2,941 and $15,184, respectively. The amount of gains and losses, net of tax, recognized for the three and nine months ended September 30, 2020 were $1,003 and $(18,406), 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, 2021

  

December 31, 2020

 

Commodity contracts

 $32  $1,386 

Foreign currency contracts

  23   (154)

Interest rate swaps

  (9,224)  (29,536)

 

The fair values of the commodity contracts and foreign currency contracts are included in prepaid expenses and other current assets, and the fair value of the interest rate swaps is included in other assets, other accrued liabilities and other long-term liabilities in the condensed consolidated balance sheets as of September 30, 2021. The fair value of the commodity contracts is included in prepaid expenses and other current assets, and the fair values of the foreign currency contracts and interest rate swaps are included in other accrued liabilities and other long-term liabilities, respectively, in the condensed consolidated balance sheets as of  December 31, 2020. Excluding the impact of credit risk, the fair value of the derivative contracts as of September 30, 2021 and December 31, 2020 is a liability of $9,383 and $28,667, respectively, which represents the amount the Company would pay to exit all of the agreements on those dates.

 

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5.   Fair Value Measurements

 

ASC 820-10, Fair Value Measurement, defines fair value, establishes a consistent framework for measuring fair value, and expands disclosure for each major asset and liability category measured at fair value on either a recurring basis or nonrecurring basis. ASC 820-10 clarifies that fair value is an exit price, representing the amount that would be received in the sale of an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the pronouncement establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows: (Level