2.	Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its subsidiaries

that are consolidated in conformity with U.S. generally accepted accounting principles (U.S. GAAP). All intercompany amounts and transactions have been eliminated in consolidation.

Cash

and Cash

Equivalents

The Company considers all highly liquid investments purchased with an original maturity of

three

months or less to be cash equivalents.

Concentration of Credit Risk

The Company maintains the majority of its

domestic cash in

one

commercial bank in multiple operating and investment accounts. Balances on deposit are insured by the Federal Deposit Insurance Corporation (FDIC) up to specified limits. Balances in excess of FDIC limits are uninsured.

One

customer accounted for

approximately

and

11%

of accounts receivable at

December

31,

2016

and

2015,

respectively.

one

customer accounted for greater than

7%,

and

8%,

of net sales during the years ended

December

31,

2016,

2015,

2014,

respectively.

Accounts Receivable

Receivables are recorded at their face value amount less an allowance for doubtful accounts. The Company estimates and records an allowance for doubtful accounts based on specific identification and historical experience. The Company writes off uncollectible accounts against the allowance for doubtful accounts after all collection efforts have been exhausted. Sales are generally made on an unsecured basis.

Inventories

Inventories are stated at the lower of cost or

market, with cost determined generally using the

first

-in,

first

-out method.

Property and Equipment

Property and equipment are recorded at cost and are being depreciated using the straight-line method over the estimated useful lives of the assets, which are summarized below (in years). Costs of leasehold improvements are amortized over the lesser of the term of the lease (including renewal option periods) or the estimated useful lives of the improvements.

Land improvements	15	–	20
Buildings and improvements	10	–	40
Machinery and equipment	3	–	10
Dies and tools	3	–	10
Vehicles	3	–	6
Office equipment and systems	3	–	15
Leasehold improvements	2	–	20

Total depreciation expense was

$21,465,

$16,742,

and

$13,706

for the years ended

December

31,

2016,

2015,

and

2014,

respectively.

Goodwill and Other Indefinite-Lived Intangible Assets

Goodwill represents the excess of the purchase price over fair value of identifiable net assets acquired from business acquisitions. Goodwill is not amortized, but is reviewed for impairment on an annual basis and between annual tests

if indicators of impairment are present. The Company evaluates goodwill for impairment annually as of

October

or more frequently when an event occurs or circumstances change that indicates the carrying value

may

not be recoverable. The Company has the option to assess goodwill for impairment by

first

performing a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the Company determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then further goodwill impairment testing is not required to be performed. If the Company determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company is required to perform a

two

-step goodwill impairment test. In the

first

step, the fair value of the reporting unit is compared to its book value including goodwill. If the fair value of the reporting unit is in excess of its book value, the related goodwill is not impaired and no further analysis is necessary. If the fair value of the reporting unit is less than its book value, there is an indication of potential impairment and a

second

step is performed. When required, the

second

step of testing involves calculating the implied fair value of goodwill for the reporting unit. The implied fair value of goodwill is determined in the same manner as goodwill recognized in a business combination, which is the excess of the fair value of the reporting unit determined in step

one

over the fair value of its net assets and identifiable intangible assets as if the reporting unit had been acquired. If the carrying value of the reporting unit's goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. For reporting units with a negative book value (i.e., excess of liabilities over assets), qualitative factors are evaluated to determine whether it is necessary to perform the

second

step of the goodwill impairment test.

The Company performed the required annual impairment tests for goodwill and other indefinite-lived intangible assets for the fiscal years

2016,

2015

and

2014,

and found

impairment following the

2016

and

2014

tests.

There were no reporting units with a carrying value at-risk of exceeding fair value as of the

October

31,

2016

impairment test date.

After performing the impairment tests for fiscal year

2015,

he Company determined that the fair value of the Ottomotores reporting unit was less than its carrying value, resulting in a non-cash goodwill impairment charge in the

fourth

quarter of

2015

$4,611

to write-down the balance of the Ottomotores goodwill. The decrease in fair value of the Ottomotores reporting unit was due to several factors in the

second

half of

2015:

the continued challenges of the Latin American economies, devaluation of the Peso against the U.S. Dollar, the slow development of Mexican energy reform as a result of decreasing oil prices; combining to cause

2015

results to fall short of prior expectations and future forecasts to decrease. The fair value was determined using a discounted cash flow analysis, which utilized key financial assumptions including the sales growth factors discussed above, a

terminal growth rate and a

15.7%

discount rate.

Other indefinite-lived intangible assets consist of

certain tradenames. The Company tests the carrying value of these tradenames by comparing the assets’ fair value to its carrying value. Fair value is measured using a relief-from-royalty approach, which assumes the fair value of the tradename is the discounted cash flows of the amount that would be paid had the Company not owned the tradename and instead licensed the tradename from another company. The Company conducts its annual impairment test for indefinite-lived intangible assets as of

October

of each year.

In the

fourth

quarter of

2015,

the Company

’s Board of Directors approved a plan to strategically transition and consolidate certain of the Company’s brands acquired in acquisitions over the past several years to the Generac® tradename. This brand strategy change resulted in a reclassification to a

two

year remaining useful life for the impacted tradenames, causing the fair value to be less than the carrying value using the relief-from-royalty approach in a discounted cash flow analysis. As such, a

$36,076

non-cash impairment charge was recorded to write-down the impacted tradenames to net realizable value.

Other than the impairment charges discussed above, the Company found no other impairment when performing the required annual

impairment tests for goodwill and other indefinite-lived intangible assets for fiscal year

2015.

There can be no assurance that future impairment tests will not result in a charge to earnings.

Impairment of

Long-Lived Assets

The Company periodically evaluates the carrying value of long-lived asset

s (excluding goodwill and indefinite-lived tradenames). Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount

may

not be recoverable. If the sum of the expected future undiscounted cash flows is less than the carrying amount of an asset, a loss is recognized for the difference between the fair value and carrying value of the asset.

Debt Issuance Costs

Debt discounts and d

irect and incremental costs incurred in connection with the issuance of long-term debt are deferred and recorded as a reduction of outstanding debt and amortized to interest expense using the effective interest method over the terms of the related credit agreements. Approximately

$3,939,

$5,429,

and

$6,615

of deferred financing costs and original issue discount were amortized to interest expense during fiscal years

2016,

2015

and

2014,

respectively. Excluding the impact of any future long-term debt issuances or prepayments, estimated amortization expense for the next

five

years is as follows:

2017

$2,516;

2018

$4,314;

2019

$4,466;

2020

$4,420;

2021

$4,419.

Income Taxes

The Company is

a C Corporation and therefore accounts for income taxes pursuant to the liability method. Accordingly, the current or deferred tax consequences of a transaction are measured by applying the provision of enacted tax laws to determine the amount of taxes payable currently or in future years. Deferred income taxes are provided for temporary differences between the income tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the years in which those temporary differences become deductible. The Company considers taxable income in prior carryback years, the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies, as appropriate, in making this assessment.

Revenue Recognition

Sales, net of estimated returns and allowances, are recognized upon shipment of product to the customer, which is generally when title passes, the Company has no further obligations, and the customer is required to pay subject to agreed upon payment terms. The Company, at the request of certain customers, will warehouse inventory billed to the customer but not delivered. Unless all revenue recognition criteria have been met, the Company does not recognize revenue on these transactions until the customers take possession of the product. In these cases, the funds collected on product warehoused for these customers are recorded as a customer advance until the customer takes possession of the product and the Company’s obligation to deliver the goods is completed. Customer advances are included in accrued liabilities in the consolidated balance sheets.

The Company provides for certain estimated sales

programs, discounts and incentive expenses which are recognized as a reduction of sales.

Shipping and Handling Costs

Shipping and handling costs billed to customers are included in net sales, and the related costs are included in cost of goods sold in the consolidated statements of comprehensive income.

Advertising and Co-Op Advertising

Expenditures for advertising, included in selling and service expenses in the consolidated statements of comprehensive income, are expensed as incurred. Total

expenditures for advertising were

$45,488,

$39,258,

and

$32,352

for the years ended

December

31,

2016,

2015,

and

2014,

respectively.

Research and Development

The Company expenses research and development costs as incurred. Total expenditures incurred for research and development

were

$37,229,

$32,922,

and

$31,494

for the years ended

December

31,

2016,

2015

and

2014,

respectively.

Foreign Currency Translation and Transactions

Balance sheet amounts for non-U.S. Dollar functional currency businesses

are translated into U.S. Dollars at the rates of exchange in effect at fiscal year-end. Income and expenses incurred in a foreign currency are translated at the average rates of exchange in effect during the year. The related translation adjustments are made directly to accumulated other comprehensive loss, a component of stockholders’ equity, in the consolidated balance sheets. Gains and losses from foreign currency transactions are recognized as incurred in the consolidated statements of comprehensive income.

Fair Value of Financial Instruments

The Financial Accounting Standards Board (FASB) Accounting Standards Update (

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

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

observable inputs such as quoted prices in active markets; (Level

inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and (Level

unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

The Company believes the carrying amount of its financial instruments (cash and cash equivalents, accounts receivable, accounts

payable, accrued liabilities, short-term borrowings and ABL facility borrowings), excluding Term Loan borrowings, approximates the fair value of these instruments based upon their short-term nature. The fair value of Term Loan borrowings, which have an aggregate carrying value of

$903,673,

was approximately

$904,780

(Level

December

31,

2016,

as calculated based on independent valuations whose inputs and significant value drivers are observable.

For the fair value of the assets and liabilities measured on a recurring basis, see the fair value table in Note

“Derivative Instruments and Hedging Activities,” to the consolidated financial statements. The fair value of all derivative contracts is classified as Level

The valuation

techniques used to measure the fair value of derivative contracts, all of which have counterparties with high credit ratings, were based on quoted market prices or model driven valuations using significant inputs derived from or corroborated by observable market data. The fair value of derivative contracts considers the Company’s credit risk in accordance with ASC

820

10.

Use of Estimates

The preparation of the consolidated financial statements in conformity with

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

Derivative Instruments and Hedging Activities

The Company records

all derivatives in accordance with ASC

815,

Derivatives and Hedging

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

Stock-Based Compensation

Stock-based compensation expense, including stock options and restricted stock awards, is generally recognized on a straight-line basis over the vesting period based on the fair value of awards which are expected to vest. The fair value of all share-based awards is estimated on the date of grant.

New Accounting Pronouncements

May

2014,

the FASB issued ASU

2014

09,

Revenue from Contracts with Customers

. This guidance is the culmination of the FASB’s joint project with the International Accounting Standards Board to clarify the principles for recognizing revenue. The core principal of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides a

five

-step process that entities should follow in order to achieve that core principal. ASU

2014

09,

as amended by ASU

2015

14,

Revenue from Contracts with Customers (Topic

606):

eferral of the Effective Date

, ASU

2016

08,

Revenue from Contracts with Customers (Topic

606):

Principal versus Agent Considerations

, ASU

2016

10,

Revenue from Contracts with Customers (Topic

606):

Identifying Performance Obligations and Licensing

ASU

2016

12,

Revenue from Contracts with Customers (Topic

606):

Narrow-Scope Improvements and Practical Expedients

, and ASU

2016

20,

Technical

Corrections and Improvements to Topic

606,

Revenue from Contracts with Customers

, becomes effective for the Company in

2018.

The guidance can be applied either on a full retrospective basis or on a modified retrospective basis in which the cumulative effect of initially applying the standard is recognized at the date of initial application. While the Company is continuing to assess all potential impacts the standard

may

have on its financial statements, it believes that the adoption will not have a significant impact on its revenue related to equipment and parts sales, which represent substantially all of the revenue for the Company. The Company has not yet determined its method of adoption.

February

2016,

the FASB issued ASU

2016

02,

Leases

. This guidance is being issued to increase transparency and comparability among organizations by requiring the recognition of lease assets and lease liabilities on the statement of financial position and by disclosing key information about leasing arrangements. The guidance should be applied using a modified retrospective approach and is effective for the Company in

2019,

with early adoption permitted. The Company is currently assessing the impact the adoption of this guidance will have on its results of operations and financial position.

March

2016,

the FASB issued ASU

2016

09,

Compensation – Stock Compensation: Improvements to Employee Share-Based Payment Accounting

. This guidance is a part of the FASB’s initiative to reduce complexity in accounting standards, and includes simplification involving several aspects of the accounting for share-based payment transactions, including excess tax benefits. The guidance should be applied on a modified retrospective basis and is effective for the Company in

2017,

with early adoption permitted. While the Company is still currently assessing all impacts of the guidance, the primary impact of adoption will be the recognition of excess tax benefits within the provision for income taxes on the statement of comprehensive income rather than within additional paid-in capital on the balance sheet. Additionally, this change will result in excess tax benefits from stock compensation to be reflected in net cash from operating activities on the statement of cash flows.

August

2016,

the FASB issued ASU

2016

15,

Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments

. This guidance is being issued to decrease diversity in practice for how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This guidance should be applied on a retrospective basis and is effective for the Company in

2018,

with early adoption permitted. The Company does not believe that this guidance will have a significant impact on its presentation of the statement of cash flows.

January

2017,

the FASB issued ASU

2017

04,

Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment

. This guidance is being issued to simplify the subsequent measurement of goodwill by eliminating Step

of the goodwill impairment test. Under the new guidance, the recognition of a goodwill impairment charge is calculated based on the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. This guidance should be applied on a prospective basis and is effective for the Company in

2020.

Early adoption is permitted for goodwill impairment tests performed after

January

2017.

The Company is currently assessing the impact the adoption will have on its results of operations and financial position.

In the

first

quarter of

2016,

the Company adopted ASU

2015

03,

Interest – Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs

. As a result, the Company adjusted the impacted line items in the

December

31,

2015

consolidated balance sheet to conform to the current period’s presentation; decreasing both the Deferred financing costs, net and Long-term borrowings and capital lease obligations line items by

$12,965.

Also in the

first

quarter of

2016,

the Company adopted ASU

2015

17,

Income Taxes: Balance Sheet Classification of Deferred Taxes

. As a result, the Company adjusted the impacted line items in the

December

31,

2015

consolidated balance sheet to conform to the current period’s presentation; decreasing the Deferred income taxes line item within current assets by

$29,355,

increasing the Deferred income taxes line item within noncurrent assets by

$28,139,

and decreasing the Deferred income taxes line within noncurrent liabilities by

$1,216.

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

’s consolidated financial statements.