10-Q 1 gnrc20240331_10q.htm FORM 10-Q gnrc20240331_10q.htm
0001474735 GENERAC HOLDINGS INC. false --12-31 Q1 2024 34,594 33,925 0.01 0.01 500,000,000 500,000,000 73,492,146 73,195,055 13,087,185 13,057,298 662 1,500 5 5 0 3 13 2 74 5 10 0.75 1 1 1 1 1 December 13, 2026 June 29, 2027 24 0 35.7 25,000 15,800 false false false false Represents share-based compensation expense to account for stock options, restricted stock and other stock awards over their respective vesting periods. Includes a specific warranty provision recorded during the third quarter of 2022 in the amount of $37,338 to address certain clean energy product related matters. Represents non-cash gains and losses from changes in the fair value of the Company's investment in warrants and equity securities in Wallbox N.V. Represents unfavorable impact from the strengthening of the U.S. dollar against foreign currencies during the three months ended March 31, 2024. Represents favorable impact from the weakening of the U.S. dollar against foreign currencies during the three months ended March 31, 2023, particularly the Euro and British Pound. Represents transaction costs incurred directly in connection with any investment, as defined in our credit agreement, equity issuance or debt issuance or refinancing, together with certain fees relating to our senior secured credit facilities, such as administrative agent fees and credit facility commitment fees under our Amended Credit Agreement, which we believe to be akin to, or associated with, interest expense and whose inclusion in Adjusted EBITDA is therefore similar to the inclusion of interest expense in that calculation. Represents severance and other restructuring charges related to the consolidation of certain operating facilities and organizational functions. Includes gains/losses on dispositions of assets other than in the ordinary course of business, gains/losses on sales of certain investments, unrealized mark-to-market adjustments on commodity contracts, certain foreign currency related adjustments, and certain purchase accounting and contingent consideration adjustments. Represents unrealized losses of $(5,988) on the interest rate swaps, net of tax effect of $1,500 for the three months ended March 31, 2023. Excludes approximately 427,000 and 411,000 stock options and restricted stock awards for the three months ended March 31, 2024 and 2023, respectively, because they would be anti-dilutive. Represents unrealized gains of $2,644 on the interest rate swaps, net of tax effect of $(662) for the three months ended March 31, 2024. Represents the following significant and unusual charges not indicative of our ongoing operations: • A provision for judgments and legal expenses related to certain patent lawsuits - $2,170 in 2024. • Additional customer support costs related to a clean energy product customer that filed for bankruptcy in 2022 – $365 in 2024. • A provision for a matter with the Consumer Product Safety Commission ("CPSC") concerning the imposition of civil fines for allegedly failing to timely submit a report under the Consumer Product Safety Act ("CPSA") in relation to certain portable generators that were subject to a voluntary recall previously announced on July 29, 2021 - $5,800 in the first quarter 2023. 00014747352024-01-012024-03-31 xbrli:shares 00014747352024-05-03 iso4217:USD 00014747352024-03-31 00014747352023-12-31 iso4217:USDxbrli:shares 00014747352023-01-012023-03-31 0001474735us-gaap:CommonStockMember2023-12-31 0001474735us-gaap:AdditionalPaidInCapitalMember2023-12-31 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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 March 31, 2024

  

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 May 3, 2024, there were 60,614,444 shares of registrant's common stock outstanding.

 



 

  

 

GENERAC HOLDINGS INC.

TABLE OF CONTENTS

 

 

Page

PART I. FINANCIAL INFORMATION

     

Item 1.

Financial Statements

 
     
 

Condensed Consolidated Balance Sheets as of March 31, 2024, and December 31, 2023

1

     
 

Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2024 and 2023

2

     
 

Condensed Consolidated Statements of Stockholders' Equity for the Three Months Ended March 31, 2024 and 2023

3

     
 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2024 and 2023

4

     
 

Notes to Condensed Consolidated Financial Statements

5

     

Item 2.

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

16

     

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

26

     

Item 4.

Controls and Procedures

26

   

PART II. OTHER INFORMATION

     

Item 1.

Legal Proceedings

26

     

Item 1A.

Risk Factors

26

     

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

27

     
Item 3. Defaults Upon Senior Securities 27
     
Item 4. Mine Safety Disclosures 27
     
Item 5. Other Information 27
     

Item 6.

Exhibits

27

     
 

Signatures

28

 

 

 
 

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)

 

  

March 31,

  

December 31,

 
  

2024

  

2023

 

Assets

        

Current assets:

        

Cash and cash equivalents

 $249,355  $200,994 

Accounts receivable, less allowance for credit losses of $34,594 and $33,925 at March 31, 2024 and December 31, 2023, respectively

  520,725   537,316 

Inventories

  1,182,350   1,167,484 

Prepaid expenses and other current assets

  101,483   91,898 

Total current assets

  2,053,913   1,997,692 
         

Property and equipment, net

  605,466   598,577 
         

Customer lists, net

  175,632   184,513 

Patents and technology, net

  407,928   417,441 

Other intangible assets, net

  23,956   27,127 

Tradenames, net

  214,136   216,995 

Goodwill

  1,429,495   1,432,384 

Deferred income taxes

  16,035   15,532 

Operating lease and other assets

  202,959   203,051 

Total assets

 $5,129,520  $5,093,312 
         

Liabilities and stockholders’ equity

        

Current liabilities:

        

Short-term borrowings

 $78,086  $81,769 

Accounts payable

  381,352   340,719 

Accrued wages and employee benefits

  46,198   54,970 

Accrued product warranty

  61,801   65,298 

Other accrued liabilities

  287,026   292,120 

Current portion of long-term borrowings and finance lease obligations

  43,438   45,895 

Total current liabilities

  897,901   880,771 
         

Long-term borrowings and finance lease obligations

  1,439,736   1,447,553 

Deferred income taxes

  84,923   90,012 

Deferred revenue

  172,500   167,008 

Operating lease and other long-term liabilities

  155,031   158,349 

Total liabilities

  2,750,091   2,743,693 
         

Redeemable noncontrolling interests

  9,117   6,549 
         

Stockholders’ equity:

        

Common stock, par value $0.01, 500,000,000 shares authorized, 73,492,146 and 73,195,055 shares issued at March 31, 2024 and December 31, 2023, respectively

  735   733 

Additional paid-in capital

  1,081,985   1,070,386 

Treasury stock, at cost, 13,087,185 and 13,057,298 shares at March 31, 2024 and December 31, 2023, respectively

  (1,037,227)  (1,032,921)

Excess purchase price over predecessor basis

  (202,116)  (202,116)

Retained earnings

  2,542,859   2,519,313 

Accumulated other comprehensive loss

  (18,832)  (15,143)

Stockholders’ equity attributable to Generac Holdings Inc.

  2,367,404   2,340,252 

Noncontrolling interests

  2,908   2,818 

Total stockholders' equity

  2,370,312   2,343,070 

Total liabilities and stockholders’ equity

 $5,129,520  $5,093,312 

 

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 March 31,

 
   

2024

   

2023

 
                 

Net sales

  $ 889,273     $ 887,910  

Costs of goods sold

    572,894       615,411  

Gross profit

    316,379       272,499  
                 

Operating expenses:

               

Selling and service

    108,586       100,688  

Research and development

    49,410       41,820  

General and administrative

    66,764       59,685  

Amortization of intangibles

    24,750       25,823  

Total operating expenses

    249,510       228,016  

Income from operations

    66,869       44,483  
                 

Other (expense) income:

               

Interest expense

    (23,605 )     (22,995 )

Investment income

    1,688       688  

Change in fair value of investment

    (6,019 )     -  

Other, net

    (422 )     (166 )

Total other expense, net

    (28,358 )     (22,473 )
                 

Income before provision for income taxes

    38,511       22,010  

Provision for income taxes

    12,033       7,849  

Net income

    26,478       14,161  

Net income attributable to noncontrolling interests

    246       1,731  

Net income attributable to Generac Holdings Inc.

  $ 26,232     $ 12,430  
                 

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

  $ 0.39     $ 0.06  

Weighted average common shares outstanding - basic:

    59,849,362       61,556,044  
                 

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

  $ 0.39     $ 0.05  

Weighted average common shares outstanding - diluted:

    60,486,125       62,294,447  
                 

Comprehensive income attributable to Generac Holdings Inc.

  $ 22,564     $ 35,362  

 

See notes to condensed consolidated financial statements.

 

 

 

Generac Holdings Inc.

Condensed Consolidated Statements of Stockholders' Equity

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

(Unaudited)

 

 

  

Generac Holdings Inc.

         
                      

Excess Purchase Price

  

Retained

  

Accumulated

             
          

Additional

          

Over

  

Earnings

  

Other

  

Total

         
  

Common Stock

  

Paid-In

  

Treasury Stock

  

Predecessor

  

(Accumulated

  

Comprehensive

  

Stockholders'

  

Noncontrolling

     
  

Shares

  

Amount

  

Capital

  

Shares

  

Amount

  

Basis

  

Deficit)

  

Income (Loss)

  

Equity

  

Interest

  

Total

 

Balance at January 1, 2024

  73,195,055  $733  $1,070,386   (13,057,298) $(1,032,921) $(202,116) $2,519,313  $(15,143) $2,340,252  $2,818  $2,343,070 

Unrealized gain on interest rate swaps, net of tax of $662

                              1,982   1,982       1,982 

Foreign currency translation adjustment

                              (5,671)  (5,671)  (87)  (5,758)

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

  297,091   2   (841)  8,417   -               (839)      (839)

Net share settlement of restricted stock awards

              (38,304)  (4,306)              (4,306)      (4,306)

Share-based compensation

          12,440                       12,440       12,440 

Redemption value adjustment

                          (2,686)      (2,686)      (2,686)

Net income

                          26,232       26,232   177   26,409 
                                             

Balance at March 31, 2024

  73,492,146  $735  $1,081,985   (13,087,185) $(1,037,227) $(202,116) $2,542,859  $(18,832) $2,367,404  $2,908  $2,370,312 

 

  

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, 2023

  72,701,257  $728  $1,016,138   (11,284,350) $(808,491) $(202,116) $2,316,224  $(65,102) $2,257,381  $1,874  $2,259,255 

Unrealized gain (loss) on interest rate swaps, net of tax of $1,500

                              (4,488)  (4,488)      (4,488)

Foreign currency translation adjustment

                              27,247   27,247   60   27,307 

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

  340,560   3   904                       907       907 

Net share settlement of restricted stock awards

              (36,971)  (4,438)              (4,438)      (4,438)

Share-based compensation

          10,334                       10,334       10,334 

Payment of contingent consideration

  10,943       15,410   466,118   33,396               48,806       48,806 

Redemption value adjustment

                          (9,016)      (9,016)      (9,016)

Net income

                          12,430       12,430   282   12,712 
                                             

Balance at March 31, 2023

  73,052,760  $731  $1,042,786   (10,855,203) $(779,533) $(202,116) $2,319,638  $(42,343) $2,339,163  $2,216  $2,341,379 

 

See notes to condensed consolidated financial statements.

 

 

 

Generac Holdings Inc.

Condensed Consolidated Statements of Cash Flows

(U.S. Dollars in Thousands)

(Unaudited)

 

   

Three Months Ended March 31,

 
   

2024

   

2023

 

Operating activities

               

Net income

  $ 26,478     $ 14,161  

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

               

Depreciation

    17,152       14,128  

Amortization of intangible assets

    24,750       25,823  

Amortization of original issue discount and deferred financing costs

    973       954  

Change in fair value of investment

    6,019        

Deferred income taxes

    (5,405 )     (10,712 )

Share-based compensation expense

    12,440       10,334  

(Gain) loss on disposal of assets

    (52 )     30  

Other noncash charges

    1,410       (160 )

Excess tax expense (benefits) from equity awards

    1,009       (998 )

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

               

Accounts receivable

    13,664       33,925  

Inventories

    (18,109 )     (23,820 )

Other assets

    (920 )     (5,576 )

Accounts payable

    44,682       (24,488 )

Accrued wages and employee benefits

    (8,512 )     1,630  

Other accrued liabilities

    (3,681 )     (53,790 )

Net cash provided by (used in) operating activities

    111,898       (18,559 )
                 

Investing activities

               

Proceeds from sale of property and equipment

    51       84  

Proceeds from beneficial interests in securitization transactions

          795  

Contribution to tax equity investment

    (1,629 )      

Net proceeds from (purchase of) long-term investment

    1,761       (2,000 )

Expenditures for property and equipment

    (26,820 )     (23,977 )

Acquisition of business, net of cash acquired

          (16,188 )

Net cash used in investing activities

    (26,637 )     (41,286 )
                 

Financing activities

               

Proceeds from short-term borrowings

    8,970       19,515  

Proceeds from long-term borrowings

    471       267,869  

Repayments of short-term borrowings

    (18,489 )     (5,080 )

Repayments of long-term borrowings and finance lease obligations

    (7,030 )     (113,573 )

Payment of contingent acquisition consideration

          (479 )

Payment of deferred acquisition consideration

    (6,000 )     -  

Payment for additional ownership interest

    (9,117 )     (104,844 )

Taxes paid related to equity awards

    (5,455 )     (4,710 )

Proceeds from exercise of stock options

    319       4,975  

Net cash (used in) provided by financing activities

    (36,331 )     63,673  
                 

Effect of exchange rate changes on cash and cash equivalents

    (569 )     814  
                 

Net increase in cash and cash equivalents

    48,361       4,642  

Cash and cash equivalents at beginning of period

    200,994       132,723  

Cash and cash equivalents at end of period

  $ 249,355     $ 137,365  

 

See notes to condensed consolidated financial statements.

 

 

Generac Holdings Inc.
Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

 

 

 

1.   Description of Business and Basis of Presentation

 

Founded in 1959, Generac Holdings Inc. ("the Company") is a leading global designer and manufacturer of a wide range of energy technology solutions. The Company provides power generation equipment, energy storage systems, energy management devices & solutions, and other power products and services serving the residential, light commercial, and industrial markets. Generac’s power products and solutions are available globally through a broad network of independent dealers, distributors, retailers, e-commerce partners, wholesalers, and equipment rental companies, as well as sold direct to certain end user customers.

 

Over the years, the Company has executed a number of acquisitions that support its strategic plan (as discussed in Item 1 of the Annual Report on Form 10-K for the year ended December 31, 2023). A summary of acquisitions affecting the reporting periods presented include:

 

 In February 2023, the Company acquired REFU Storage Systems ("REFUstor"), headquartered in Pfullingen, Germany. REFUstor is a developer and supplier of battery storage hardware products, advanced software, and platform services for the commercial and industrial energy storage market.

 

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

 

The condensed consolidated balance sheet as of March 31, 2024, the condensed consolidated statements of comprehensive income for the three months ended March 31, 2024 and 2023, the condensed consolidated statements of stockholders’ equity for the three months ended March 31, 2024 and 2023, and the condensed consolidated statements of cash flows for the three months ended March 31, 2024 and 2023 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, 2023.

 

5

 

New Accounting Pronouncements

 

Changes to GAAP are established by the Financial Accounting Standards Board ("FASB") in the form of accounting standard updates ("ASUs") to the FASB Accounting Standards Codification ("ASC"). 

 

In March 2024, the SEC adopted a final rule under SEC Release No. 33-11275, The Enhancement and Standardization of Climate-Related Disclosures for Investors, to enhance and standardize climate-related disclosures. The rule will require companies to disclose material Scope 1 and Scope 2 greenhouse gas emissions; climate-related risks, governance, and oversight; and the financial effects of severe weather events and other natural conditions. These disclosures will begin to be phased in beginning with our annual report for the year ending December 31, 2025. While this rule has been stayed pending the outcome of legal challenges, we are currently assessing the impact of adoption on the Company's consolidated financial statements and related disclosures in the event the stay is lifted.

 

In December 2023, the FASB issued ASU 2023-09 Improvements to Income Tax Disclosures. The ASU establishes new income tax disclosure requirements in addition to modifying and eliminating certain existing requirements. Under the new guidance, the Company must consistently categorize and provide greater disaggregation of information in the rate reconciliation. It must also further disaggregate income taxes paid. The update is effective for fiscal years beginning after December 15, 2024, and interim periods for fiscal years beginning after December 15, 2025. Entities may apply the amendments prospectively or may elect retrospective application. We are evaluating the impact of the new required disclosures but do not expect the adoption of ASU 2023-09 will have a material impact on the Company's consolidated financial statements. 

 

In November 2023, the FASB issued ASU 2023-07 Segment Reporting - Improving Reportable Segment Disclosures (Topic 280). The update is intended to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant expenses. The ASU requires disclosures to include significant segment expenses that are regularly provided to the chief operating decision maker ("CODM"), a description of other segment items by reportable segment, and any additional measures of a segment's profit or loss used by the CODM when deciding how to allocate resources. The ASU also requires all annual disclosures currently required by Topic 280 to be included in interim periods. The update is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted and requires retrospective application to all prior periods presented in the financial statements. We are evaluating the impact of the new required disclosures but do not expect the adoption of ASU 2023-07 will have a material impact on the Company's consolidated financial statements. 

 

There have been no other recent accounting pronouncements, changes in accounting pronouncements or recently adopted accounting guidance during the first quarter of 2024 that are of significance or potential significance to the Company's consolidated financial statements or disclosures. 

 

 

2.   Acquisitions

 

Fiscal 2023 Acquisitions

 

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

 

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

 

6

 
 

3.   Redeemable Noncontrolling Interest

 

On March 1, 2016, the Company acquired a 65% ownership interest in PR Industrial S.r.l. and its subsidiaries (Pramac). The 35% noncontrolling interest in Pramac had an acquisition date fair value of $34,253 and was recorded as a redeemable noncontrolling interest in the consolidated balance sheets, as the noncontrolling interest holder had within its control the right to require the Company to redeem its interest in Pramac. In May 2021, the Company exercised its call option rights and paid a purchase price of $27,164 to purchase an additional 15% ownership interest in Pramac, bringing the Company's total ownership interest in Pramac to 80%. On March 8, 2023, the Company and the noncontrolling interest holder entered into an agreement whereby the Company acquired the remaining 20% ownership interest in Pramac for a purchase price of $116,754, which brought the Company's total ownership interest in Pramac to 100%. The purchase price included $105,264 of initial consideration (which included a cash payment of $104,844 and a $420 gain on a foreign currency settlement in the first quarter of 2023) and $11,490 of contingent deferred consideration to be paid in up to 135,205 restricted shares that were issued based on the twenty day volume weighted average price of the Company’s stock ending on December 31, 2022, and which shall vest upon achievement of certain earnings targets at the end of the earn-out period, December 31, 2025. 

 

On February 1, 2019, the Company acquired a 51% ownership interest in Captiva Energy Solutions Private Limited (Captiva). The 49% noncontrolling interest in Captiva had an acquisition date fair value of $3,165 and was recorded as a redeemable noncontrolling interest in the consolidated balance sheets, as the noncontrolling interest holder had within its control the right to require the Company to redeem its interest in Captiva. The noncontrolling interest holder has a put option to sell his interest to the Company any time after five years from the date of acquisition, or earlier upon the occurrence of certain circumstances. Further, the Company has a call option that it may redeem any time after five years from the date of acquisition, or earlier upon the occurrence of certain circumstances. The put and call option price is based on a multiple of earnings, subject to the terms of the acquisition agreement. In March 2022, the Company signed an agreement to purchase an additional 15% ownership interest in Captiva for a purchase price of $461, bringing the Company's total ownership interest in Captiva to 66%. In May 2022, the Company signed an amendment to the purchase agreement resulting in a revised purchase price of $375, which was paid with cash on hand. On April 5, 2024, the Company acquired the remaining 34% ownership interest in Captiva for $9,117.

 

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

 

  

Three Months Ended March 31,

 
  

2024

  

2023

 

Balance at beginning of period

 $6,549  $110,471 

Net income

  58   1,448 

Foreign currency translation

  (176)  (367)

Purchase of additional ownership interest

  -   (116,754)

Redemption value adjustment

  2,686   9,016 

Balance at end of period

 $9,117  $3,814 

 

 

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 in 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. The commodity and foreign currency forward contract gains and losses are not material to the Company’s condensed consolidated financial statements for the periods presented. 

 

Additionally, during the fourth quarter of 2023, the Company acquired stock warrants described in more detail below.

 

Interest Rate Swaps

 

In 2017, the Company entered into twenty interest rate swap agreements, the final four of which expired in  May 2023. In March 2020, the Company entered into three additional interest rate swap agreements, which were still outstanding as of March 31, 2024.

 

In June 2022, in conjunction with the amendments to the Company's credit agreements discussed further in Note 11, “Credit Agreements,” to the condensed consolidated financial statements, the Company amended its interest rate swaps to match the underlying debt and reconfirmed hedge effectiveness. The Company formally documented all relationships between interest rate hedging instruments and the related hedged items, as well as its risk-management objectives and strategies for undertaking various hedge transactions. These interest rate swap agreements qualify as cash flow hedges and therefore, the effective portions of their gains or losses are reported as a component of accumulated other comprehensive loss (AOCL) in the condensed consolidated balance sheets.

 

The amount of gains/(losses), net of tax recognized, for the three months ended March 31, 2024 and 2023 were $1,982 and $(4,488), 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.

 

Stock Warrants

 

During the fourth quarter of 2023, the Company entered into a $30,000 agreement with Wallbox N.V. to purchase 5% of its Class A common stock ("Wallbox Shares") and acquire stock warrants, which provide the option to purchase an additional 5% of the Class A common stock outstanding of Wallbox N.V. at a fixed price during a stated period. In accordance with GAAP, the Company is required to adjust the carrying value of these investments to market value on a quarterly basis. As a result of the decrease in the stock price of Wallbox N.V. during the quarter, the Company recognized a loss of $6,019 on the Wallbox Shares and stock warrants during the period. 

 

The loss specifically ascribed to the warrant derivative instruments, for the three months ended March 31, 2024, was $4,849.

 

Fair Value 

 

The following table presents the fair value of all the Company’s derivatives:

 

  

March 31, 2024

  

December 31, 2023

 

Foreign currency contracts

 $(13)  $(147)

Interest rate swaps

  41,245   38,601 
Stock warrants  10,014   14,862 

 

In the condensed consolidated balance sheets, the fair value of the foreign currency contracts is included in prepaid expenses and other current assets as well as other accrued liabilities at both March 31, 2024, and December 31, 2023. The fair value of the interest rate swaps and stock warrants is included in operating lease and other assets at both March 31, 2024, and December 31, 2023. Excluding the impact of credit risk, the fair value of the derivative contracts as of March 31, 2024 and December 31, 2023 is an asset of $52,576 and $55,042, respectively, which represents the amount the Company would receive to exit all of the agreements on those dates.

 

7

 
 

5.   Fair Value Measurements

 

ASC 820-10, Fair Value Measurement, defines fair value, establishes a consistent framework for measuring fair value, and expands disclosure for each major asset and liability category measured at fair value on either a recurring basis or nonrecurring basis. ASC 820-10 clarifies that fair value is an exit price, representing the amount that would be received in the sale of an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the pronouncement establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows: (Level 1) observable inputs such as quoted prices in active markets; (Level 2) inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and (Level 3) unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

 

The Company believes the carrying amount of its financial instruments (cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, short-term borrowings, and revolving facility borrowings), excluding Term Loan borrowings, approximates the fair value of these instruments based on their short-term nature. The fair value of the Term Loan B borrowing, which has a net carrying value of $525,361, was $528,675 (Level 2) on  March 31, 2024. The fair value of the Term Loan A borrowing, which has a net carrying value of $738,246, was $736,922 (Level 2) on March 31, 2024. These fair values were calculated based on independent valuations which contain inputs and significant value drivers that are observable. The fair value of the Revolving Facility approximates the carrying value. 

 

For the fair value of the derivatives measured on a recurring basis, refer to the fair value table in Note 4, “Derivative Instruments and Hedging Activities,” to the condensed consolidated financial statements. The fair value of our interest rate swaps and commodity and foreign currency derivative contracts are classified as Level 2. The valuation techniques used to measure the fair value of these derivative contracts, all of which have counterparties with high credit ratings, were based on quoted market prices or model driven valuations using significant inputs derived from or corroborated by observable market data. The fair value of the derivative contracts above considers the Company’s credit risk in accordance with ASC 820-10. The fair value of the Wallbox N.V. stock warrants is classified as Level 3. The fair value of these contracts is measured using a Black Scholes option pricing model, with significant inputs derived from or corroborated by observable market data as well as internal estimates, specifically the time period until exercise. The warrants expire at the earlier of when the price per share equals or exceeds $6.00 or in 2029. The time period until exercise assumption has a significant impact on the fair value of the warrants.

 

Equity Securities

 

Equity securities consist of shares of Wallbox N.V. Class A common stock. The Company owned 9,836,066 Wallbox Shares as of March 31, 2024. The Wallbox Shares are classified as Level 1 in the fair value hierarchy and are recognized at fair value using the most recent closing price of Wallbox N.V. common stock quoted on the New York Stock Exchange ("NYSE"). The Wallbox Shares are included in operating lease and other assets in the condensed consolidated balance sheets. The fair value of the Wallbox Shares was $13,967 and $17,213 as of March 31, 2024, and December 31, 2023, respectively.

 

Contingent Consideration

 

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

 

The fair value of contingent consideration for Chilicon and Pramac as of March 31, 2024, and December 31, 2023, was $39,082 and $38,937, respectively, and was reported in other long-term liabilities in the condensed consolidated balance sheets. The contingent consideration for Chilicon extends through December 31, 2028, while the contingent consideration for Pramac extends through December 31, 2025. 

 

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

 

Beginning balance, January 1, 2024

 $38,937 

Changes in fair value

  - 

Present value interest accretion

  145 

Ending balance, March 31, 2024

 $39,082 

 

8

 
 

6.   Accumulated Other Comprehensive Loss

 

The following table presents a disclosure of changes in AOCL during the three months ended March 31, 2024 and 2023, net of tax:

 

  

Foreign Currency Translation Adjustments

   

Unrealized Gain (Loss) on Cash Flow Hedges

   

Total

 

Beginning Balance – January 1, 2024

 $(43,582)  $28,439   $(15,143)

Other comprehensive income (loss)

  (5,671)

(1)

  1,982 

(2)

  (3,689)

Ending Balance – March 31, 2024

 $(49,253)  $30,421   $(18,832)

 

  

Foreign Currency Translation Adjustments

   

Unrealized Gain (Loss) on Cash Flow Hedges

   

Total

 

Beginning Balance – January 1, 2023

 $(101,545)  $36,443   $(65,102)

Other comprehensive income (loss)

  27,247 

(3)

  (4,488)

(4)

  22,759 

Ending Balance – March 31, 2023

 $(74,298)  $31,955   $(42,343)

 

 

 (1)Represents unfavorable impact from the strengthening of the U.S. dollar against foreign currencies during the three months ended March 31, 2024.
 

(2)

Represents unrealized gains of $2,644 on the interest rate swaps, net of tax effect of $(662), for the three months ended March 31, 2024. 

 (3)Represents favorable impact from the weakening of the U.S. dollar against foreign currencies during the three months ended March 31, 2023, particularly the Euro and British Pound.
 (4)Represents unrealized losses of $(5,988) on the interest rate swaps, net of tax effect of $1,500, for the three months ended March 31, 2023.

 

9

 
 

7.   Segment Reporting

 

The Company has two reportable segments for financial reporting purposes – domestic and international. The domestic segment includes the legacy Generac business and the acquisitions that are based in the U.S. and Canada, all of which have revenues substantially derived from the U.S. and Canada. The international segment includes acquisitions not based in the U.S and Canada, all of which have revenues substantially derived from outside the U.S and Canada. Both reportable segments design and manufacture a wide range of energy technology solutions and other power products. The Company has multiple operating segments, which it aggregates into the two reportable segments, based on materially similar economic characteristics, products, production processes, classes of customers, distribution methods, organizational structure, and regional considerations.

 

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

 

  

Net Sales by Reportable Segment

 
  

Three Months Ended March 31, 2024

 

Product Classes

 

Domestic

  

International

  

Total

 

Residential products

 $412,153  $16,797  $428,950 

Commercial & industrial products

  206,493   147,477   353,970 

Other

  93,691   12,662   106,353 

Total net sales

 $712,337  $176,936  $889,273 

 

  

Net Sales by Reportable Segment

 
  

Three Months Ended March 31, 2023

 

Product Classes

 

Domestic

  

International

  

Total

 

Residential products

 $381,151  $37,712  $418,863 

Commercial & industrial products

  228,123   134,867   362,990 

Other

  95,112   10,945   106,057 

Total net sales

 $704,386  $183,524  $887,910 

 

Residential products consist primarily of automatic home standby generators ranging in output from 7.5kW to 150kW, portable generators, residential energy storage systems, energy management devices & solutions, and other outdoor power equipment. These products are predominantly sold through independent residential dealers, national and regional retailers, e-commerce merchants, electrical/HVAC/solar wholesalers, solar installers, and outdoor power equipment dealers. The residential products revenue consists of the sale of the product to our distribution partners, who in turn sell or rent the product to the end consumer, including installation and maintenance services. In some cases, residential products are sold direct to the end consumer. Substantially all of the residential products' revenues are transferred to the customer at a point in time.

 

C&I products consist of larger output stationary generators used in C&I applications, with power outputs up to 3,250kW. Also included in C&I products are mobile generators, light towers, C&I energy storage systems, mobile heaters, mobile pumps, and related controllers for power generation equipment. These products are sold globally through industrial distributors and dealers, EPC companies, equipment rental companies, and equipment distributors. The C&I products revenue consists of the sale of the product to our distribution partners, who in turn sell or rent the product to the end customer, including installation and maintenance services. In some cases, C&I products are sold direct to the end customer. Substantially all of the C&I products revenues are transferred to the customer at a point in time.

 

Other consists primarily of aftermarket service parts and product accessories sold to our customers, the amortization of extended warranty deferred revenue, remote monitoring and grid services subscription revenue, as well as certain installation and maintenance service revenue. The aftermarket service parts and product accessories are generally transferred to the customer at a point in time, while the extended warranty and subscription revenue are recognized over the life of the contract. Other service revenue is recognized when the service is performed, sometimes based on achievement of milestones.

 

10

 

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

 

  

Three Months Ended March 31, 2024

  

Three Months Ended March 31, 2023

 
  

Domestic

  

International

  

Eliminations

  

Total

  

Domestic

  

International

  

Eliminations

  

Total

 

External net sales

 $712,337  $176,936  $-  $889,273  $704,386  $183,524  $-  $887,910 

Intersegment sales

  8,136   9,772   (17,908)  -   15,607   32,942   (48,549)  - 

Total sales

 $720,473  $186,708  $(17,908) $889,273  $719,993  $216,466  $(48,549) $887,910 

 

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 primarily on the definition that is contained in the Company’s credit agreements.

 

  

Adjusted EBITDA by Reportable Segment

 
  

Three Months Ended March 31,

 
  

2024

  

2023

 

Domestic

 $99,175  $67,662 

International

  28,058   32,413 

Total Adjusted EBITDA

 $127,233  $100,075 
         

Interest expense

  (23,605)  (22,995)

Depreciation and amortization

  (41,902)  (39,951)

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

  (510)  3,160 

Non-cash share-based compensation expense (2)

  (12,440)  (10,334)

Transaction costs and credit facility fees (3)

  (1,425)  (1,091)

Business optimization and other charges (4)

  (486)  (1,100)

Provision for regulatory, legal, and clean energy product charges (5)

  (2,535)  (5,800)

Change in fair value of investment (6)

  (6,019)  - 

Other

  200   46 

Income before provision for income taxes

 $38,511  $22,010 

 

 

(1)

Includes gains/losses on dispositions of assets other than in the ordinary course of business, gains/losses on sales of certain investments, unrealized mark-to-market adjustments on commodity contracts, certain foreign currency related adjustments, and certain purchase accounting and contingent consideration adjustments. 
 

(2)

Represents share-based compensation expense to account for stock options, restricted stock and other stock awards over their respective vesting periods.
 (3)Represents transaction costs incurred directly in connection with any investment, as defined in our credit agreement, equity issuance or debt issuance or refinancing, together with certain fees relating to our senior secured credit facilities, such as administrative agent fees and credit facility commitment fees under our Amended Credit Agreement, which we believe to be akin to, or associated with, interest expense and whose inclusion in Adjusted EBITDA is therefore similar to the inclusion of interest expense in that calculation.
 

(4)

Represents severance and other restructuring charges related to the consolidation of certain operating facilities and organizational functions.
 (5)

Represents the following significant and unusual charges not indicative of our ongoing operations:
•  A provision for judgments and legal expenses related to certain patent lawsuits - $2,170 in 2024. 
•  Additional customer support costs related to a clean energy product customer that filed for bankruptcy in 2022 – $365 in 2024.

•  A provision for a matter with the Consumer Product Safety Commission ("CPSC") concerning the imposition of civil fines for allegedly failing to timely submit a report under the Consumer Product Safety Act ("CPSA") in relation to certain portable generators that were subject to a voluntary recall previously announced on July 29, 2021 - $5,800 in the first quarter 2023.

 (6)Represents non-cash gains and losses from changes in the fair value of the Company's investment in warrants and equity securities of Wallbox N.V.

 

The Company’s sales in the U.S. represented approximately 76% and 75% of total sales for the three months ended March 31, 2024 and 2023, respectively. Approximately 74% of the Company’s identifiable long-lived assets were located in the U.S. on  March 31, 2024 and December 31, 2023.

 

11

 
 

8.   Balance Sheet Details

 

Inventories consist of the following:

 

  

March 31,

  

December 31,

 
  

2024

  

2023

 

Raw material

 $683,145  $677,428 

Work-in-process

  7,609   10,877 

Finished goods

  491,596   479,179 

Total

 $1,182,350  $1,167,484 

 

Property and equipment consists of the following:

 

  

March 31,

  

December 31,

 
  

2024

  

2023

 

Land and improvements

 $24,549  $22,556 

Buildings and improvements

  316,350   298,483 

Machinery and equipment

  271,215   271,879 

Dies and tools

  45,722   45,998 

Vehicles

  11,960   11,411 

Office & information technology equipment and internal use software

  185,323   185,601 

Leasehold improvements

  8,957   8,772 

Construction in progress

  85,831   98,083 

Gross property and equipment

  949,907   942,783 

Accumulated depreciation

  (344,441)  (344,206)

Total

 $605,466  $598,577 

 

Total property and equipment includes finance leases of $68,535 and $68,079 on  March 31, 2024 and  December 31, 2023, respectively, primarily consisting of buildings and improvements. Amortization of finance lease right of use assets is recorded within depreciation expense in the condensed consolidated statements of comprehensive income. The initial measurement of new finance lease right of use assets is accounted for as a non-cash item in the condensed consolidated statements of cash flows.

 

12

 
 

9.   Product Warranty Obligations

 

The Company records a liability for standard product warranty obligations accounted for as assurance warranties at the time of sale of the related product to a customer based on 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 March 31,

 
  

2024

  

2023

 

Balance at beginning of period

 $116,408  $138,011 

Payments

  (21,347)  (26,152)

Provision for warranty issued

  15,304   15,865 

Changes in estimates for pre-existing warranties

  761   875 

Balance at end of period

 $111,126  $128,599 

 

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

 

  

Three Months Ended March 31,

 
  

2024

  

2023

 

Balance at beginning of period

 $155,870  $132,813 

Deferred revenue contracts issued

  14,784   9,726 

Amortization of deferred revenue contracts

  (6,861)  (5,854)

Balance at end of period

 $163,793  $136,685 

 

The timing of recognition of the Company’s deferred revenue balance related to extended warranties as of  March 31, 2024 is as follows:

 

Remainder of 2024

 $22,014 

2025

  31,430 

2026

  29,697 

2027

  24,251 

2028

  18,247 

After 2028

  38,154 

Total

 $163,793 

 

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

 

  

March 31,

  

December 31,

 
  

2024

  

2023

 

Product warranty liability

        

Current portion - accrued product warranty

 $61,801  $65,298 

Long-term portion - other long-term liabilities

  49,325   51,110 

Total

 $111,126  $116,408 
         

Deferred revenue related to extended warranties

        

Current portion - other accrued liabilities

 $29,750  $28,203 

Long-term portion - deferred revenue

  134,043   127,667 

Total

 $163,793  $155,870 

 

 

10.   Contract Balances

 

While the Company’s standard payment terms for its customers are less than one year, the specific payment terms and conditions in its customer contracts vary. In certain cases, the Company’s customers pay for their goods in advance. These prepayments are recognized as customer deposits (contract liabilities) and recorded in other accrued liabilities in the condensed consolidated balance sheets. The balance of customer deposits was $14,430 and $19,173 on  March 31, 2024 and December 31, 2023, respectively. During the three months ended March 31, 2024, the Company recognized revenue of $9,167 related to amounts included in the December 31, 2023 customer deposit balance. The Company typically recognizes revenue within one year of the receipt of the customer deposit.

 

13

 
 

11.   Credit Agreements

 

Short-term borrowings included in the condensed consolidated balance sheets as of March 31, 2024, and December 31, 2023, consisted of borrowings by the Company’s foreign subsidiaries on local lines of credit totaling $78,086 and $81,769, respectively.

 

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

 

  

March 31,

  

December 31,

 
  

2024

  

2023

 

Tranche A Term Loan

 $740,625  $745,313 

Tranche B Term Loan

  530,000   530,000 

Original issue discount and deferred financing costs

  (11,710)  (12,685)

Revolver

  150,000   150,000 

Finance lease obligation

  72,543   71,308 

Other

  1,716   9,512 

Total

  1,483,174   1,493,448 

Less: current portion of debt

  39,030   42,110 

Less: current portion of finance lease obligation

  4,408   3,785 

Total

 $1,439,736  $1,447,553 

 

Maturities of the Company's Tranche A Term Loan Facility, Tranche B Term Loan Facility, and Revolving Facility outstanding on  March 31, 2024, are as follows:

 

  

Tranche A Term Loan

  

Tranche B Term Loan

  

Revolving Facility

  

Total

 

2024

 $28,125  $-  $-  $28,125 

2025

  46,875   -   -   46,875 

2026

  65,625   530,000   -   595,625 

2027

  600,000   -   150,000   750,000 

Total

 $740,625  $530,000  $150,000  $1,420,625 

 

The Tranche B Term Loan Facility matures on December 13, 2026, while the Tranche A Term Loan Facility and Revolving Facility mature on June 29, 2027The Tranche A Term Loan Facility is repayable in installments due at the end of each quarter commencing September 2023. 

 

The Company’s credit agreements originally provided for a $1,200,000 Tranche B Term Loan Facility and included a $300,000 uncommitted incremental term loan on that facility. The Tranche B Term Loan Facility initially bore interest at rates based on either a base rate plus an applicable margin of 1.75% or adjusted LIBOR rate plus an applicable margin of 2.75%, subject to a LIBOR floor of 0.75%. After a number of amendments, the Tranche B Term Loan Facility currently bears interest at rates based on either a base rate plus an applicable margin of 0.75% or adjusted SOFR rate plus an applicable margin of 1.75%, subject to a SOFR floor of 0.00%. The interest rate for the Tranche B Term Loan Facility as of March 31, 2024, was 7.18%. 

 

The Tranche B Term Loan Facility does not require an Excess Cash Flow payment if the Company’s net secured leverage ratio is maintained below 3.75 to 1.00. As of March 31, 2024, the Company’s net secured leverage ratio was 1.87 to 1.00, and the Company was in compliance with all covenants of the Tranche B Term Loan Facility. There are no financial maintenance covenants on the Tranche B Term Loan Facility.

 

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

 

The Tranche A Term Loan Facility and the Revolving Facility initially bore interest at a rate based on adjusted SOFR plus an applicable margin of 1.5% through December 31, 2022, subject to a SOFR floor of 0.0%. Beginning on January 1, 2023, the Tranche A Term Loan Facility and the Revolving Facility bear interest at a rate based on adjusted SOFR plus an applicable margin between 1.25% and 1.75%, based on the Company's total leverage ratio and subject to a SOFR floor of 0.0%. As of March 31, 2024, the interest rate for the Tranche A Term Loan Facility and Revolving Facility was 6.93%.

 

The Tranche A Term Loan Facility and the Revolving Facility contain certain financial covenants that require the Company to maintain a total leverage ratio below 3.75 to 1.00 as well as an interest coverage ratio above 3.00 to 1.00. As of March 31, 2024, the Company’s total leverage ratio was 1.99 to 1.00, and the Company's interest coverage ratio was 7.39 to 1.00. The Company was also in compliance with all other covenants of the Amended Credit Agreement as of March 31, 2024. 

 

The Tranche B Term Loan Facility, Tranche A Term Loan Facility and Revolving Facility are guaranteed by substantially all of the Company’s wholly-owned domestic restricted subsidiaries and are secured by associated collateral agreements which pledge a first priority lien on virtually all of the Company’s assets, including fixed assets and intangibles, cash, trade accounts receivable, inventory, and other current assets and proceeds thereof. 

 

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

 

As of March 31, 2024, there was $150,000 outstanding under the Revolving Facility, leaving $1,099,203 of unused capacity, net of outstanding letters of credit. 

 

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

 

14

 
 

12.   Stock Repurchase Program

 

In September 2020, the Company’s Board of Directors approved a $250,000 stock repurchase program, which was exhausted in the third quarter of 2022. In  July 2022, the Company's Board of Directors approved another stock repurchase program, which commenced on August 5, 2022, and allowed for the repurchase of up to $500,000 of the Company's common stock over a 24-month period. Additionally, on February 12, 2024, the Company’s Board of Directors approved a new stock repurchase program that allows for the repurchase of up to $500,000 of the Company’s common stock over the next 24 months. The new program replaces the prior share repurchase program, which had approximately $26,297 remaining available for repurchase when the new program was approved. Pursuant to the approved program, the Company may repurchase its common stock from time to time, in amounts and at prices the Company deems appropriate, subject to market conditions and other considerations. The repurchases may be executed using open market purchases, privately negotiated agreements or other transactions. The actual timing, number and value of shares repurchased under the program will be determined by management at its discretion and in compliance with the terms of the Company's credit agreements. The repurchases may be funded with cash on hand, available borrowings, or proceeds from potential debt or other capital markets sources. The stock repurchase program may be suspended or discontinued at any time without prior notice.

 

There were no share repurchases during the three months ended March 31, 2024 and 2023. Since the inception of all stock repurchase programs (starting in August 2015), the Company has repurchased 13,937,188 shares of common stock for $1,028,892 (at an average cost per share of $73.82). The Company has periodically reissued shares out of Treasury stock, including for earnout payments. 

 

 

13. Earnings Per Share

 

Basic earnings per share is calculated by dividing net income attributable to the common shareholders of the Company by the weighted average number of common shares outstanding during the period, exclusive of restricted shares. Except where the result would be anti-dilutive, diluted earnings per share is calculated by assuming the vesting of unvested restricted stock and the exercise of stock options, as well as the satisfaction of certain contingent acquisition consideration conditions as of the end of the period. Refer to Note 3, “Redeemable Noncontrolling Interest,” to the condensed consolidated financial statements for further information regarding the accounting for redeemable noncontrolling interests within earnings per share.

 

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

 

  

Three Months Ended March 31,

 
  

2024

  

2023

 

Numerator

        

Net income attributable to Generac Holdings Inc.

 $26,232  $12,430 

Redeemable noncontrolling interest redemption value adjustment

  (2,686)  (9,016)

Net income attributable to common shareholders

 $23,546  $3,414 
         

Denominator

        

Weighted average shares, basic

  59,849,362   61,556,044 

Dilutive effect of stock compensation awards (1)

  636,763   738,403 

Diluted shares

  60,486,125   62,294,447 
         

Net income attributable to common shareholders per share

        

Basic

 $0.39  $0.06 

Diluted

 $0.39  $0.05 

 

(1) Excludes approximately 427,000 and 411,000 stock options and restricted stock awards for the three months ended March 31, 2024 and 2023, respectively, because they would be anti-dilutive. 

 

 

14. Income Taxes

 

The effective income tax rates for the three months ended March 31, 2024 and 2023 were 31.2% and 35.7%, respectively. The decrease in the effective tax rate was primarily driven by increased year-over-year pre-tax book income, which reduced the impact of certain discrete tax items in the current year.

 

 

15. Commitments and Contingencies

 

The Company has an arrangement with a finance company to provide floor plan financing for certain dealers. The Company receives payment from the finance company after shipment of product to the dealer. The Company participates in the cost of dealer financing up to certain limits and has agreed to repurchase products repossessed by the finance company but does not indemnify the finance company for any credit losses they incur. The amount financed by dealers which remained outstanding under this arrangement on March 31, 2024, and December 31, 2023, was approximately $153.5 million and $158.0 million, respectively.

 

On August 1, 2022, Power Home Solar, LLC d/b/a Pink Energy (PHS) filed a lawsuit in the Western District of Virginia against Generac Power Systems, Inc., a wholly-owned subsidiary of the Company (Generac Power). The complaint alleges breaches of warranty, product liability, and other various causes of action against Generac Power relating to the sale and performance of certain clean energy equipment and seeks to recover damages, including consequential damages, that PHS allegedly incurred. The Company disputes the allegations in the complaint, including that PHS can seek consequential damages or amounts greater than the $25,000 liability cap set forth in the agreement between the parties. Generac Power moved to dismiss the complaint and compel arbitration consistent with the parties’ agreement. PHS later filed a Chapter 7 bankruptcy petition in the Western District of North Carolina that identified Generac Power as one of its outstanding creditors. The parties agreed to toll PHS’s deadline to respond to the motion to dismiss and all other pretrial deadlines to allow the bankruptcy trustee to evaluate the complaint. The Trustee has not yet taken further action in this lawsuit. Generac Power intends to vigorously defend against the claims in the complaint, in whichever forum they may proceed. 

 

On October 28, 2022, Daniel Haak filed a putative consumer class action lawsuit against Generac Power in the Middle District of Florida. The complaint alleges breaches of warranty, tort-based, and unjust enrichment claims against Generac Power relating to the sale and performance of certain clean energy products, and seeks to recover damages, including consequential damages, that the plaintiff and putative class allegedly incurred. Additional putative class actions were filed by consumers raising similar claims and allegations in other district court cases. These putative class actions have been consolidated into a Multidistrict Litigation, In re: Generac Solar Power Systems Marketing, Sales Practices and Products Liability Litigation currently pending in the Eastern District of Wisconsin, Case No. 23-md-3078. Generac Power moved to dismiss claims in the consolidated master complaint, which is pending with the court. Generac Power and the Company intend to vigorously defend against the consolidated master complaint. 

 

On December 1, 2022, Oakland County Voluntary Employees’ Beneficiary Association and Oakland County Employees’ Retirement System filed a putative securities class action lawsuit against the Company and certain of its officers in the Eastern District of Wisconsin. The court subsequently consolidated a later filed action and appointed a lead plaintiff. The lead plaintiff filed a consolidated complaint alleging violation of federal securities law related to disclosures of quality issues in Generac Power’s clean energy product, accounting for warranty reserves, reliance on channel partners, and demand for home standby generators (the “Oakland County Lawsuit”). The Company moved to dismiss the consolidated complaint on October 9, 2023. The Company disputes the allegations in the operative consolidated complaint and intends to vigorously defend against the claims in the consolidated class action. 

 

On February 3, 2023, a purported Company shareholder filed a shareholder derivative action against certain of the Company’s officers and directors in the United States District Court for the Eastern District of Wisconsin. The complaint seeks unspecified damages on behalf of the Company and certain other relief, such as certain reforms to corporate governance practices. The complaint (in which the Company is named as a nominal defendant) generally alleges, among other things, breaches of fiduciary duties in connection with the oversight of the Company’s public statements and legal compliance, and that the Company was damaged as a result of the breaches of fiduciary duties, and the defendants were unjustly enriched. The complaint also alleges, among other things, violations of Sections 14(a), 10(b) and 20(a) of the Securities Exchange Act of 1934, abuse of control, gross mismanagement, and waste of corporate assets. The Company has received several additional derivative actions filed in both state and federal courts raising similar claims and allegations, including issues raised in the Oakland County Lawsuit. The Company disputes the allegations in the shareholder derivative actions and intends to vigorously defend against the claims in the complaints.

 

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

 

On November 30, 2022, the CPSC notified the Company of its intention to recommend the imposition of a civil penalty for failing to timely submit a report to the CPSC in relation to certain portable generators that were subject to a voluntary recall previously announced on July 29, 2021. On May 3, 2023, the parties entered into a mutual settlement agreement. The agreement does not constitute an admission by Generac or a determination by the CPSC that Generac violated the CPSA. The terms of the settlement agreement require the Company to (i) abide by certain customary agency requirements regarding the ongoing commitment to the Company’s internal CPSA compliance practices and program, and (ii) pay a civil fine of $15,800. On July 21, 2023, Generac Power received a grand jury subpoena from the U.S. Attorney for the Eastern District of Wisconsin, as a result of which the Company became aware of a continuing inquiry by the DOJ related to its statutory obligations under the CPSA in connection with this matter. Additionally, on October 23, 2023, the CPSC notified the Company that it is further investigating whether the Company complied with the reporting requirements to the CPSC in relation to certain portable generators that were subject to a voluntary recall previously announced on September 14, 2023. The Company is cooperating fully with both the CPSC and DOJ investigations and, at this time, is unable to predict the eventual scope, duration or final outcome of such investigations. 

 

On March 8, 2022, Ollnova Technologies Limited, a non-practicing entity, filed a patent infringement lawsuit against ecobee in the United States District Court for the Eastern District of Texas (Case No. 22-cv-00072-JRG). Ollnova claimed that ecobee infringes on four of its patents. On October 5, 2023, a jury issued a verdict finding one of Ollnova’s patents invalid and that ecobee infringed at least one of the claims of the asserted patents and awarded a lump-sum payment of $11,500. ecobee filed motions for judgment as a matter of law and intends to appeal any adverse judgment. In the first quarter of 2024, the Company recorded an additional reserve of $1,826 for estimated prejudgment interest.

 

On June 9, 2023, Spartronics Vietnam, Inc., a contract manufacturer of Generac Power’s clean energy products, filed multiple lawsuits against Generac Power and sub-suppliers accusing Generac Power of fraud, breaching its supply agreement with Spartronics, tortiously interfering with Spartronics’ relationships with its sub-suppliers, and requesting a determination of rights under the parties’ agreements in state and federal court. Spartronics subsequently filed additional third-party complaints against Generac Power raising similar claims and allegations. After a court granted Generac Power’s motion to compel arbitration, Spartronics filed a demand for arbitration of its claims. Generac Power denies the allegations in the complaints, including that Generac Power is responsible for Spartronics purchasing practices, and intends to pursue available claims in connection with the arbitration.

 

On November 21, 2023, Christopher Walling filed a putative securities class action lawsuit against the Company and certain of its officers in the Western District of Wisconsin and was later appointed lead plaintiff. The complaint asserts claims for alleged violation of federal securities law related to statements concerning the Company’s financial outlook and the impact of macroeconomic trends on the demand for its products. The plaintiff seeks to represent a class of individuals who purchased or otherwise acquired common stock between May 3, 2023, and August 3, 2023, and seeks unspecified compensatory damages and other relief on behalf of a purported class of purchasers of the Company’s stock (the “Walling Lawsuit”). The Company plans to move for dismissal of the recently filed amended complaint, disputes the allegations, and intends to defend itself vigorously in this action.

 

On February 14, 2024, a purported Company shareholder filed a derivative action against certain of the Company’s officers and directors in the United States District Court for the Eastern District of Wisconsin. The complaint (in which the Company is named as a nominal defendant) generally alleges, among other things, breaches of fiduciary duties in connection with the oversight of the Company’s public statements and legal compliance, including as to the claims raised in the Walling Lawsuit. The complaint seeks unspecified damages on behalf of the Company and certain other relief, including certain corporate governance reforms. The Company disputes the allegations in the shareholder derivative action and intends to vigorously defend against the claims in the complaint.

 

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

 

15

 
 

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:

 

 

fluctuations in cost, availability, and quality of raw materials, key components and labor required to manufacture our products;
  our dependence on a small number of contract manufacturers and component suppliers, including single-source suppliers;
  our ability to protect our intellectual property rights or successfully defend against third party infringement claims;
  increase in product and other liability claims, warranty costs, recalls, or other claims;
  significant legal proceedings, claims, fines, penalties, tax assessments, lawsuits or government investigations;
  our ability to consummate our share repurchase programs;
  our failure or inability to adapt to, or comply with, current or future changes in applicable laws and regulations;
  scrutiny regarding our ESG practices;
  our ability to develop and enhance products and gain customer acceptance for our products;
  frequency and duration of power outages impacting demand for our products;
  changes in durable goods spending by consumers and businesses or other macroeconomic conditions, impacting demand for our products;
  our ability to accurately forecast demand for our products and effectively manage inventory levels relative to such forecast;
  our ability to remain competitive;
  our dependence on our dealer and distribution network;
  market reaction to changes in selling prices or mix of products;
  loss of our key management and employees;
  disruptions from labor disputes or organized labor activities;
  our ability to attract and retain employees;
  disruptions in our manufacturing operations;
  changes in U.S. trade policy;
  the possibility that the expected synergies, efficiencies and cost savings of our acquisitions, divestitures, restructurings, or realignments will not be realized, or will not be realized within the expected time period;
  risks related to sourcing components in foreign countries;
  compliance with environmental, health and safety laws and regulations;
 
government regulation of our products;
  failures or security breaches of our networks, information technology systems, or connected products;
  our ability to make payments on our indebtedness;
  terms of our credit facilities that may restrict our operations;
  our potential need for additional capital to finance our growth or refinancing our existing credit facilities; 
  risks of impairment of the value of our goodwill and other indefinite-lived assets;
  volatility of our stock price; and
  potential tax liabilities.

 

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, 2023 and in Part II, Item 1A of this Quarterly Report on Form 10-Q. 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

 

Generac is a leading energy technology solutions company that provides backup and prime power generation products for residential and commercial & industrial applications, solar + battery storage systems, energy monitoring & management devices and services, and engine- & battery-powered tools and equipment. As an energy technology solutions company that is “Powering a Smarter World”, our corporate purpose is to lead the evolution to more resilient, efficient, and sustainable energy solutions around the world.

 

We have a long history of providing power generation products across a variety of applications, and we maintain one of the leading market positions in the power equipment markets in North America and an expanding presence internationally. We believe we have one of the widest ranges of products in the power generation marketplace, including residential, commercial, and industrial standby generators, as well as portable and mobile generators used in a variety of applications. In recent years, the Company has been evolving its product portfolio by building out ecosystems of energy technology products, solutions, and services for homes and businesses. As part of this evolution, we have made significant investments into growing markets such as residential and C&I energy storage, solar module-level power electronics (MLPE), energy monitoring & management devices, and electric vehicle (EV) charging. Central to these ecosystems are the Company’s next-generation connectivity devices, controls capabilities, and software platforms that facilitate the integration of our products and support the growing utilization of such distributed energy resources (DERs) in grid services programs. In addition, we have been leveraging our leading position in the growing market for natural gas fueled generators, which we believe represents a cleaner transition fuel compared to diesel, to expand into applications beyond standby power, allowing us to participate in Energy-as-a-Service and microgrid projects for C&I customers. As the traditional centralized utility model evolves over time, we believe that a more decarbonized, digitized, and decentralized grid infrastructure will develop, and Generac’s energy technology solutions are uniquely and strategically positioned to participate in this next-generation grid referred to as “Grid 2.0”.

 

As our traditional power generation markets continue to grow due to multiple mega-trends that are driving increased penetration of our products, we believe we are in an excellent position to execute on this opportunity given our competitive strengths. In addition, our focus on more resilient, efficient and sustainable energy solutions has dramatically increased our served addressable market, and as a result, we believe that Generac is well positioned for success over the long term.

 

 

Mega-Trends, Strategic Growth Themes, and Additional Business Drivers

 

In 2021, we unveiled our “Powering A Smarter World” strategic plan, which serves as the framework for the significant investments we have made and will continue to make to capitalize on the long-term growth prospects of Generac. Our enterprise strategy is based on the combination of several key mega-trends that we believe will drive several significant strategic growth themes for our business.

 

Key Mega-Trends:

 

 

“Grid 2.0”: which is the evolution of the traditional electrical utility model as the increasing reliance on intermittent renewable generation sources and the electrification of everything are leading to supply/demand imbalances and rising electricity costs, driving the migration towards distributed energy resources and decarbonization, digitization, and decentralization of the grid.
 

Impact of climate change: which includes the expectation of more severe and volatile weather driving increased power outage activity, and more global regulation accelerating renewable investments. 
 
Home as a Sanctuary: which includes the trend of the increasing importance of the home – including more people working from home and aging in place – is leading to increasing sensitivity to power outages and need for peace of mind, combined with the more intelligent and connected home and desire for improved energy resiliency and efficiency.
  Emergence of cleaner alternative fuels: natural gas, and other alternative fuels, are important elements in the transition to a lower-carbon global energy supply.<