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, 2023
OR
☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from             to

Commission File Number 001-34627

GENERAC HOLDINGS INC.

(Exact name of registrant as specified in its charter)

Delaware	20-5654756
(State or other jurisdiction of	(IRS Employer
incorporation or organization)	Identification No.)
S45 W29290 Hwy 59, Waukesha, WI	53189
(Address of principal executive offices)	(Zip Code)

(262) 544-4811

(Registrant’s telephone number, including area code)

Not Applicable

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

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, 2023, there were 62,193,347 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, 2023 and December 31, 2022	1
	Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2023 and 2022	2
	Condensed Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, 2023 and 2022	3
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2023 and 2022	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,
	2023			2022
Assets
Current assets:
Cash and cash equivalents	$	137,365		$	132,723
Accounts receivable, less allowance for credit losses of $28,660 and $27,664 at March 31, 2023 and December 31, 2022, respectively		490,384			522,458
Inventories		1,438,296			1,405,384
Prepaid expenses and other assets		119,729			121,783
Total current assets		2,185,774			2,182,348
Property and equipment, net		490,143			467,604
Customer lists, net		202,556			206,987
Patents and technology, net		445,333			454,757
Other intangible assets, net		37,633			41,719
Tradenames, net		225,198			227,251
Goodwill		1,426,332			1,400,880
Deferred income taxes		8,320			12,746
Operating lease and other assets		189,843			175,170
Total assets	$	5,211,132		$	5,169,462
Liabilities and stockholders’ equity
Current liabilities:
Short-term borrowings	$	64,093		$	48,990
Accounts payable		426,191			446,050
Accrued wages and employee benefits		48,088			45,741
Accrued product warranty		80,902			89,141
Other accrued liabilities		273,039			349,389
Current portion of long-term borrowings and finance lease obligations		18,029			12,733
Total current liabilities		910,342			992,044
Long-term borrowings and finance lease obligations		1,527,355			1,369,085
Deferred income taxes		110,447			125,691
Operating lease and other long-term liabilities		317,795			312,916
Total liabilities		2,865,939			2,799,736
Redeemable noncontrolling interests		3,814			110,471
Stockholders’ equity:
Common stock, par value $0.01, 500,000,000 shares authorized, 73,052,760 and 72,701,257 shares issued at March 31, 2023 and December 31, 2022, respectively		731			728
Additional paid-in capital		1,042,786			1,016,138
Treasury stock, at cost, 10,855,203 and 11,284,350 shares at March 31, 2023 and December 31, 2022, respectively		(779,533	)		(808,491	)
Excess purchase price over predecessor basis		(202,116	)		(202,116	)
Retained earnings		2,319,638			2,316,224
Accumulated other comprehensive loss		(42,343	)		(65,102	)
Stockholders’ equity attributable to Generac Holdings Inc.		2,339,163			2,257,381
Noncontrolling interests		2,216			1,874
Total stockholders' equity		2,341,379			2,259,255
Total liabilities and stockholders’ equity	$	5,211,132		$	5,169,462

See notes to condensed consolidated financial statements.

1

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,
	2023		2022
Net sales		$ 887,910		$ 1,135,856
Costs of goods sold		615,411		775,108
Gross profit		272,499		360,748
Operating expenses:
Selling and service		100,688		98,243
Research and development		41,820		39,744
General and administrative		59,685		41,972
Amortization of intangibles		25,823		26,054
Total operating expenses		228,016		206,013
Income from operations		44,483		154,735
Other (expense) income:
Interest expense		(22,995)		(9,554)
Investment income		688		77
Other, net		(166)		246
Total other expense, net		(22,473)		(9,231)
Income before provision for income taxes		22,010		145,504
Provision for income taxes		7,849		28,608
Net income		14,161		116,896
Net income attributable to noncontrolling interests		1,731		3,038
Net income attributable to Generac Holdings Inc.		$ 12,430		$ 113,858
Net income attributable to Generac Holdings Inc. per common share - basic:		$ 0.06		$ 1.61
Weighted average common shares outstanding - basic:		61,556,044		63,449,380
Net income attributable to Generac Holdings Inc. per common share - diluted:		$ 0.05		$ 1.57
Weighted average common shares outstanding - diluted:		62,294,447		64,828,819
Comprehensive income attributable to Generac Holdings Inc.		$ 35,362		$ 122,365

See notes to condensed consolidated financial statements.

2

Generac Holdings Inc.

Condensed Consolidated Statements of Stockholders' Equity

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

(Unaudited)

	Generac Holdings Inc.
													Excess Purchase Price						Accumulated
					Additional								Over						Other			Total
	Common Stock				Paid-In		Treasury Stock						Predecessor			Retained			Comprehensive			Stockholders'			Noncontrolling
	Shares		Amount		Capital		Shares			Amount			Basis			Earnings			Income (Loss)			Equity			Interest		Total
Balance at 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

	Generac Holdings Inc.
														Excess Purchase Price						Accumulated
					Additional									Over						Other			Total
	Common Stock				Paid-In			Treasury Stock						Predecessor			Retained			Comprehensive			Stockholders'			Noncontrolling
	Shares		Amount		Capital			Shares			Amount			Basis			Earnings			Income (Loss)			Equity			Interest			Total
Balance at January 1, 2022		72,386,017	$	725	$	952,939			(8,667,031	)	$	(448,976	)	$	(202,116	)	$	1,965,957		$	(54,755	)	$	2,213,774		$	313		$	2,214,087
Unrealized gain on interest rate swaps, net of tax of $(6,326)																					18,728			18,728			–			18,728
Foreign currency translation adjustment																					(10,375	)		(10,375	)		182			(10,193	)
Common stock issued under equity incentive plans, net of shares withheld for employee taxes and strike price		203,888		2		(1,876	)																	(1,874	)					(1,874	)
Net share settlement of restricted stock awards									(73,832	)		(22,857	)											(22,857	)					(22,857	)
Share-based compensation						8,827																		8,827						8,827
Redemption value adjustment																		(11,947	)					(11,947	)					(11,947	)
Net income																		113,858						113,858			(17	)		113,841
Balance at March 31, 2022		72,589,905	$	727	$	959,890			(8,740,863	)	$	(471,833	)	$	(202,116	)	$	2,067,868		$	(46,402	)	$	2,308,134		$	478		$	2,308,612

See notes to condensed consolidated financial statements.

3

Generac Holdings Inc.

Condensed Consolidated Statements of Cash Flows

(U.S. Dollars in Thousands)

(Unaudited)

	Three Months Ended March 31,
	2023			2022
Operating activities
Net income	$	14,161		$	116,896
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation		14,128			12,407
Amortization of intangible assets		25,823			26,054
Amortization of original issue discount and deferred financing costs		954			637
Deferred income taxes		(10,712	)		(49,156	)
Share-based compensation expense		10,334			8,827
Loss (gain) on disposal of assets		30			(571	)
Other noncash (gains) charges		(160	)		(6,446	)
Net changes in operating assets and liabilities, net of acquisitions:
Accounts receivable		33,925			(66,510	)
Inventories		(23,820	)		(147,250	)
Other assets		(5,576	)		2,253
Accounts payable		(24,488	)		26,363
Accrued wages and employee benefits		1,630			(21,558	)
Other accrued liabilities		(53,790	)		102,015
Excess tax benefits from equity awards		(998	)		(14,103	)
Net cash used in operating activities		(18,559	)		(10,142	)
Investing activities
Proceeds from sale of property and equipment		84			1,864
Proceeds from sale of investment		–			1,308
Proceeds from beneficial interests in securitization transactions		795			1,573
Contribution to equity method investment		–			(2,921	)
Expenditures for property and equipment		(23,977	)		(28,200	)
Purchase of long-term investment		(2,000	)		–
Acquisition of business, net of cash acquired		(16,188	)		(999	)
Net cash used in investing activities		(41,286	)		(27,375	)
Financing activities
Proceeds from short-term borrowings		19,515			136,664
Proceeds from long-term borrowings		267,869			110,000
Repayments of short-term borrowings		(5,080	)		(124,609	)
Repayments of long-term borrowings and finance lease obligations		(113,573	)		(1,737	)
Payment of contingent acquisition consideration		(479	)		–
Purchase of additional ownership interest		(104,844	)		–
Taxes paid related to equity awards		(4,710	)		(34,620	)
Proceeds from exercise of stock options		4,975			9,903
Net cash provided by financing activities		63,673			95,601
Effect of exchange rate changes on cash and cash equivalents		814			600
Net increase in cash and cash equivalents		4,642			58,684
Cash and cash equivalents at beginning of period		132,723			147,339
Cash and cash equivalents at end of period	$	137,365		$	206,023

See notes to condensed consolidated financial statements.

4

Generac Holdings Inc.
Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

1.   Description of Business and Basis of Presentation

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

Over the years, the Company has executed a number of acquisitions that support its strategic plan (as discussed in Item 1 of the Annual Report on Form 10-K for the year ended December 31, 2022). A summary of acquisitions affecting the reporting periods presented include:

● In June 2022, the Company acquired Electronic Environments Co. LLC and related subsidiaries (collectively EEC). Headquartered in Marlborough, Massachusetts, EEC is an industrial generator distributor as well as a provider of data center and telecom facility design, build, maintenance, and repair services.

● In October 2022, the Company acquired BPAC, Inc. (Blue Pillar), an industrial IoT platform developer that designs, deploys, and manages industrial IoT network software solutions to enable distributed energy generation monitoring and control.

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

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

The condensed consolidated balance sheet as of March 31, 2023, the condensed consolidated statements of comprehensive income for the three months ended March 31, 2023 and 2022, the condensed consolidated statements of stockholders’ equity for the three months ended March 31, 2023 and 2022, and the condensed consolidated statements of cash flows for the three months ended March 31, 2023 and 2022 have been prepared by the Company and have not been audited. In the opinion of management, all adjustments (which include only normal recurring adjustments except where disclosed) necessary for the fair presentation of the financial position, results of operation, and cash flows have been made. The results of operations for any interim period are not necessarily indicative of the results to be expected for the full year.

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

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

5

 

New Accounting Pronouncements

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

2.   Acquisitions

Fiscal 2023 Acquisitions

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

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

Fiscal 2022 Acquisitions

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

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

The combined purchase price for these two acquisitions was $25,654, net of cash acquired. The Company recorded its preliminary purchase price allocation for EEC and Blue Pillar during the second quarter and fourth quarter of 2022, respectively, based on its estimates of the fair value of the acquired assets and assumed liabilities. Purchase accounting will be finalized in 2023. Through Q1 2023, the combined purchase price has increased to $27,138. The accompanying condensed consolidated financial statements include the results of the acquired businesses since the dates of acquisition through March 31, 2023. Pro forma and other financial information are not presented as the effects of the 2022 acquisitions are not material to the Company's results of operations or financial position prior to the acquisition 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 condensed consolidated balance sheets, as the noncontrolling interest holder had within its control the right to require the Company to redeem its interest in Pramac. In May 2021, the Company exercised its call option rights and paid a purchase price of $27,164 to purchase an additional 15% ownership interest in Pramac, bringing the Company's total ownership interest in Pramac to 80%. On March 8, 2023, the Company and the noncontrolling interest holder entered into an agreement whereby the Company acquired the remaining 20% ownership interest in Pramac for a purchase price of $116,754, which brought the Company's total ownership interest in Pramac to 100%. The purchase price included $105,264 of initial consideration (which included a cash payment of $104,844 and a $420 gain on a foreign currency settlement) and $11,490 of contingent deferred consideration to be paid in up to 135,205 restricted shares that were issued based on the twenty day volume weighted average price of the Company’s stock ending on December 31, 2022, and which shall vest upon achievement of certain earnings targets at the end of the earn-out period, December 31, 2025. 

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

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

	Three Months Ended March 31,
	2023			2022
Balance at beginning of period	$	110,471		$	58,050
Net income		1,448			2,856
Foreign currency translation		(367	)		(881	)
Purchase of additional ownership interest		(116,754	)		(461	)
Redemption value adjustment		9,016			11,947
Balance at end of period	$	3,814		$	71,511

4.   Derivative Instruments and Hedging Activities

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

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

Interest Rate Swaps

In 2017, the Company entered into twenty interest rate swap agreements, four of which were still outstanding as of March 31, 2023. In March 2020, the Company entered into three additional interest rate swap agreements, bringing the total outstanding interest rate swaps to seven as of March 31, 2023.

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

The amount of gains/(losses), net of tax, recognized for the three months ended March 31, 2023 and 2022 were ($4,488) and $18,728, respectively. The cash flows of the swaps are recognized as adjustments to interest expense each period. The ineffective portions of the derivatives’ changes in fair value, if any, are immediately recognized in earnings.

Fair Value 

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

	March 31, 2023		December 31, 2022
Commodity contracts	$	111	$	-
Foreign currency contracts		112		94
Interest rate swaps		43,291		49,279

In the condensed consolidated balance sheets, the fair value of the commodity and foreign currency contracts are included in prepaid expenses & other current assets, and the fair value of the interest rate swaps is included in prepaid expenses & other current assets and operating lease & other assets. Excluding the impact of credit risk, the fair value of the derivative contracts as of March 31, 2023 and December 31, 2022 is an asset of $45,003 and $51,184 respectively, which represents the amount the Company would receive to exit all of the agreements on those dates.

7

 

5.   Fair Value Measurements

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

The Company believes the carrying amount of its financial instruments (cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, short-term borrowings, and revolving facility borrowings), excluding Term Loan borrowings, approximates the fair value of these instruments based on their short-term nature. The fair value of the Term Loan B borrowing, which has a net carrying value of $523,706, was $528,675 (Level 2) at March 31, 2023, as calculated based on independent valuations whose inputs and significant value drivers are observable. The fair value of Term Loan A approximates the carrying value. 

For the fair value of the derivatives measured on a recurring basis, refer to the fair value table in Note 4, “Derivative Instruments and Hedging Activities,” to the condensed consolidated financial statements. The fair value of all derivative contracts is classified as Level 2. The valuation techniques used to measure the fair value of derivative contracts, all of which have counterparties with high credit ratings, were based on quoted market prices or model driven valuations using significant inputs derived from or corroborated by observable market data. The fair value of derivative contracts above considers the Company’s credit risk in accordance with ASC 820-10.

Contingent Consideration

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

At March 31, 2023, the fair value of contingent consideration is $10,500 in other accrued liabilities and $33,385 in other long-term liabilities in the condensed consolidated balance sheets. At December 31, 2022, the Company had contingent consideration of $49,500 in other accrued liabilities and $32,033 in other long-term liabilities in the condensed consolidated balance sheets.

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

Beginning balance, January 1, 2023	$	81,533
Changes in fair value		-
Additional contingent consideration (1)		11,490
Payment of contingent consideration (2)		(49,286	)
Present value interest accretion		148
Ending balance, March 31, 2023	$	43,885

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

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

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6.   Accumulated Other Comprehensive Loss

The following presents a tabular disclosure of changes in AOCL during the three months ended March 31, 2023 and 2022, net of tax:

	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		(1)		(4,488	)	(2)		22,759
Ending Balance – March 31, 2023	$	(74,298	)		$	31,955			$	(42,343	)

	Foreign Currency Translation Adjustments				Unrealized Gain (Loss) on Cash Flow Hedges				Total
Beginning Balance – January 1, 2022	$	(52,704	)		$	(2,051	)		$	(54,755	)
Other comprehensive income (loss)		(10,375	)	(3)		18,728		(4)		8,353
Ending Balance – March 31, 2022	$	(63,079	)		$	16,677			$	(46,402	)

(1)	Represents favorable impact from the weaking of the U.S. dollar against foreign currencies during the three months ended March 31, 2023, including the Euro and British Pound.
(2)	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.

(3)	Represents unfavorable impact from the strengthening of the U.S. dollar against foreign currencies during the three months ended March 31, 2022, including the Euro and British Pound.
(4)	Represents unrealized gains of $25,054 on the interest rate swaps, net of tax effect of $(6,326) for the three months ended March 31, 2022.

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7.   Segment Reporting

The Company has two reportable segments for financial reporting purposes – Domestic and International. The Domestic segment includes the legacy Generac business (excluding its traditional Latin American export operations), and the acquisitions that are based in the U.S. and Canada, all of which have revenues substantially derived from the U.S. and Canada. The International segment includes the legacy Generac business’ Latin American export operations, and the Ottomotores, Tower Light, Pramac, Motortech, Selmec, Deep Sea, Off Grid Energy, and REFUstor acquisitions, all of which have revenues substantially derived from outside the U.S. and Canada. Both reportable segments design and manufacture a wide range of energy technology solutions and other power products. The Company has multiple operating segments, which it aggregates into the two reportable segments, based on materially similar economic characteristics, products, production processes, classes of customers, distribution methods, organizational structure, and regional considerations.

The Company's product offerings consist primarily of power generation equipment, energy storage systems, energy management devices & solutions, and other power products geared for varying end customer uses. While Residential products and Commercial &

Industrial (C&I) products include similar products, they differ based on power output and end customer. The breakout of net sales between residential, C&I, and other products & services by reportable segment is as follows:

	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

	Net Sales by Reportable Segment
	Three Months Ended March 31, 2022
Product Classes	Domestic		International		Total
Residential products	$	750,327	$	26,617	$	776,944
Commercial & industrial products		145,737		132,991		278,728
Other		68,610		11,574		80,184
Total net sales	$	964,674	$	171,182	$	1,135,856

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

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

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

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

	Three Months Ended March 31, 2023									Three Months Ended March 31, 2022
	Domestic		International		Eliminations			Total		Domestic		International		Eliminations			Total
External net sales	$	704,386	$	183,524	$	-		$	887,910	$	964,674	$	171,182	$	-		$	1,135,856
Intersegment sales		15,607		32,942		(48,549	)		-		10,270		14,250		(24,520	)		-
Total sales	$	719,993	$	216,466	$	(48,549	)	$	887,910	$	974,944	$	185,432	$	(24,520	)	$	1,135,856

Management evaluates the performance of its segments based primarily on Adjusted EBITDA, which is reconciled to income before provision for income taxes below. The computation of Adjusted EBITDA is defined as net income before noncontrolling interest adjusted for the following items: interest expense, depreciation expense, amortization of intangible assets, income tax expense, certain non-cash gains and losses including purchase accounting and contingent consideration adjustments, share-based compensation expense, certain transaction costs and credit facility fees, business optimization expenses, certain specific provisions, and adjusted EBITDA attributable to noncontrolling interests.

	Adjusted EBITDA by Reportable Segment
	Three Months Ended March 31,
	2023			2022
Domestic	$	67,662		$	170,421
International		32,413			25,992
Total adjusted EBITDA	$	100,075		$	196,413
Interest expense		(22,995	)		(9,554	)
Depreciation and amortization		(39,951	)		(38,461	)
Non-cash write-down and other adjustments (1)		3,160			7,792
Non-cash share-based compensation expense (2)		(10,334	)		(8,827	)
Transaction costs and credit facility fees (3)		(1,091	)		(989	)
Business optimization and other charges (4)		(1,100	)		(1,159	)
Provision for regulatory charges (5)		(5,800	)		-
Other		46			289
Income before provision for income taxes	$	22,010		$	145,504

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

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

(3) Represents 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.

(4)	Represents severance and other non-recurring restructuring charges.
(5)	Represents a provision of $5,800 for a matter with the Consumer Product Safety Commission concerning the imposition of penalty fines for allegedly failing to timely submit a report under the Consumer Product Safety Act in relation to certain portable generators that were subject to a voluntary recall previously announced on July 29, 2021.

The Company’s sales in the U.S. represented approximately 75% and 83% of total sales for the three months ended March 31, 2023 and March 31, 2022, respectively. Approximately 76% and 77% of the Company’s identifiable long-lived assets were located in the U.S. at  March 31, 2023 and December 31, 2022, respectively.

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8.   Balance Sheet Details

Inventories consist of the following:

	March 31,		December 31,
	2023		2022
Raw material	$	825,487	$	798,340
Work-in-process		11,530		14,899
Finished goods		601,279		592,145
Total	$	1,438,296	$	1,405,384

Property and equipment consists of the following:

	March 31,			December 31,
	2023			2022
Land and improvements	$	23,866		$	22,589
Buildings and improvements		250,056			243,553
Machinery and equipment		241,332			229,593
Dies and tools		39,269			37,343
Vehicles		10,052			9,807
Office equipment and systems		159,098			148,166
Leasehold improvements		7,093			6,849
Construction in progress		58,021			52,522
Gross property and equipment		788,787			750,422
Accumulated depreciation		(298,644	)		(282,818	)
Total	$	490,143		$	467,604

Total property and equipment includes finance leases of $26,926 and $24,719 on  March 31, 2023 and  December 31, 2022, respectively, primarily consisting of buildings and improvements. Amortization of finance lease right of use assets is recorded within depreciation expense in the condensed consolidated statements of comprehensive income. The initial measurement of new finance lease right of use assets is accounted for as a non-cash item in the condensed consolidated statements of cash flows.

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9.   Product Warranty Obligations

The Company records a liability for standard product warranty obligations accounted for as assurance warranties at the time of sale of the product to a customer based upon historical warranty experience. The Company also records a liability for specific warranty matters when they become known and are reasonably estimable. The following is a tabular reconciliation of the Company’s standard product warranty liability accounted for as an assurance warranty:

	Three Months Ended March 31,
	2023			2022
Balance at beginning of period	$	138,011		$	94,213
Payments		(26,152	)		(13,024	)
Provision for warranty issued		15,865			21,425
Changes in estimates for pre-existing warranties		875			(1,123	)
Balance at end of period	$	128,599		$	101,491

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

	Three Months Ended March 31,
	2023			2022
Balance at beginning of period	$	132,813		$	111,647
Deferred revenue contracts issued		9,726			9,546
Amortization of deferred revenue contracts		(5,854	)		(5,270	)
Balance at end of period	$	136,685		$	115,923

The timing of recognition of the Company’s deferred revenue balance related to extended warranties as of  March 31, 2023 is as follows:

Remainder of 2023	$	18,638
2024		25,688
2025		25,085
2026		20,734
2027		15,881
After 2027		30,659
Total	$	136,685

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

	March 31,		December 31,
	2023		2022
Product warranty liability
Current portion - accrued product warranty	$	80,902	$	89,141
Long-term portion - other long-term liabilities		47,697		48,870
Total	$	128,599	$	138,011
Deferred revenue related to extended warranties
Current portion - other accrued liabilities	$	30,890	$	30,291
Long-term portion - other long-term liabilities		105,795		102,522
Total	$	136,685	$	132,813

10.   Contract Balances

While the Company’s standard payment terms are less than one year, the specific payment terms and conditions in its customer contracts vary. In certain cases, the Company’s customers pay for their goods in advance. These prepayments are recognized as customer deposits (contract liabilities) and recorded in other accrued liabilities in the condensed consolidated balance sheets. The balance of customer deposits was $25,326 and $33,551 on  March 31, 2023 and December 31, 2022, respectively. During the three months ended March 31, 2023, the Company recognized revenue of $11,290 related to amounts included in the December 31, 2022 customer deposit balance. The Company typically recognizes revenue within one year of the receipt of the customer deposit.

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11.   Credit Agreements

Short-term borrowings included in the condensed consolidated balance sheets as of March 31, 2023, and December 31, 2022, consisted of borrowings by the Company’s foreign subsidiaries on local lines of credit totaling $64,093 and $48,990, respectively.

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

	March 31,			December 31,
	2023			2022
Tranche A Term Loan	$	750,000		$	750,000
Tranche B Term Loan		530,000			530,000
Original issue discount and deferred financing costs		(15,614	)		(16,568	)
Revolving Facility		250,000			90,000
Finance lease obligation		29,765			27,420
Other		1,233			966
Total		1,545,384			1,381,818
Less: current portion of debt		15,050			10,083
Less: current portion of finance lease obligation		2,979			2,650
Total	$	1,527,355		$	1,369,085

Maturities of the Company's Tranche A Term Loan Facility, Tranche B Term Loan Facility, and Revolving Facility outstanding at March 31, 2023 are as follows:

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

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

The Company’s credit agreements originally provided for a $1,200,000 term loan B credit facility (Tranche B Term Loan Facility) and included a $300,000 uncommitted incremental term loan on that facility. The Tranche B Term Loan Facility initially bore interest at rates based on either a base rate plus an applicable margin of 1.75% or adjusted LIBOR rate plus an applicable margin of 2.75%, subject to a LIBOR floor of 0.75%. After a number of amendments, the Tranche B Term Loan Facility currently bears interest at rates based on either a base rate plus an applicable margin of 0.75% or adjusted Secured Overnight Financing Rate (SOFR) rate plus an applicable margin of 1.75%, subject to a SOFR floor of 0.00%. The interest rate for the Tranche B Term Loan Facility as of March 31, 2023, was 6.52%. 

The Tranche B Term Loan Facility does not require an Excess Cash Flow payment if the Company’s net secured leverage ratio is maintained below 3.75 to 1.00 times. As of March 31, 2023, the Company’s net secured leverage ratio was 2.13 to 1.00 times, and the Company was in compliance with all covenants of the Tranche B Term Loan Facility. There are no financial maintenance covenants on the Tranche B Term Loan Facility.

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

The Tranche A Term Loan Facility and the Revolving Facility initially bore interest at a rate based on adjusted SOFR plus an applicable margin of 1.5% through December 31, 2022, subject to a SOFR floor of 0.0%. Beginning on January 1, 2023, the Tranche A Term Loan Facility and the Revolving Facility will bear interest at a rate based on adjusted SOFR plus an applicable margin between 1.25% and 1.75%, based on the Company's total leverage ratio and subject to a SOFR floor of 0.0%. The interest rate for the Tranche A Term Loan Facility and the Revolving Facility as of March 31, 2023, was 6.27%. 

The Tranche A Term Loan Facility and the Revolving Facility added certain financial covenants that require the Company to maintain a total leverage ratio below 3.75 to 1.00 as well as an interest coverage ratio above 3.00 to 1.00. As of March 31, 2023, the Company’s total leverage ratio was 2.22 to 1.00 times, and the Company's interest coverage ratio was 30.99 to 1.00. The Company was in compliance with all other covenants of the Amended Credit Agreement as of March 31, 2023. 

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

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

As of March 31, 2023, there was $250,000 outstanding under the Revolving Facility, leaving $998,580 of availability, net of outstanding letters of credit.

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

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12.   Stock Repurchase Program

In September 2020, the Company’s Board of Directors approved a stock repurchase program, which commenced on October 27, 2020, and allowed for the repurchase of up to $250,000 of the Company's common stock over a 24-month period. That program was exhausted in the third quarter of 2022. In  July 2022, the Company's Board of Directors approved another stock repurchase program, which commenced on August 5, 2022, and allows for the repurchase of up to $500,000 of the Company's common stock over a 24-month period. Pursuant to the approved program, the Company may repurchase its common stock from time to time, in amounts and at prices the Company deems appropriate, subject to market conditions and other considerations. The repurchases may be executed using open market purchases, privately negotiated agreements or other transactions. The actual timing, number and value of shares repurchased under the program will be determined by management at its discretion and will depend on a number of factors, including the market price of the Company’s common stock, general market and economic conditions, applicable legal requirements, and compliance with the terms of the Company’s credit agreements. The repurchases may be funded with cash on hand, available borrowings, or proceeds from potential debt or other capital markets sources. The stock repurchase program may be suspended or discontinued at any time without prior notice. There were no share repurchases under the program during the three months ended March 31, 2023 and 2022. Since the inception of all stock repurchase programs (starting in August 2015), the Company has repurchased 11,748,713 shares of common stock for $777,379 (at an average cost per share of $66.17).

13. Earnings Per Share

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

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

	Three Months Ended March 31,
	2023			2022
Numerator
Net income attributable to Generac Holdings Inc.	$	12,430		$	113,858
Redeemable noncontrolling interest redemption value adjustment		(9,016	)		(11,947	)
Net income attributable to common shareholders	$	3,414		$	101,911
Denominator
Weighted average shares, basic		61,556,044			63,449,380
Dilutive effect of stock compensation awards (1)		738,403			1,279,626
Dilutive effect of contingently issued shares		-			99,813
Diluted shares		62,294,447			64,828,819
Net income attributable to common shareholders per share
Basic	$	0.06		$	1.61
Diluted	$	0.05		$	1.57

(1) Excludes approximately 411,000 and 17,000 stock options and restricted stock awards for the three months ended March 31, 2023 and March 31, 2022, respectively, because they would be anti-dilutive. 

14. Income Taxes

The effective income tax rates for the three months ended March 31, 2023 and 2022 were 35.7% and 19.7%, respectively. The increase in the effective tax rate was primarily due to a significantly lower benefit from equity compensation on a low pre-tax earnings base in the current period compared to the prior period.

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, 2023 and December 31, 2022 was approximately $179.8 million and $212.2 million respectively.

On August 1, 2022, Power Home Solar, LLC d/b/a Pink Energy 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 Power Home Solar allegedly incurred. The Company disputes the allegations in the complaint, including that Power Home Solar can seek consequential damages or amounts greater than the $25.0 million liability cap set forth in the agreement between the parties. On September 23, 2022, Generac Power moved to dismiss the complaint and compel arbitration consistent with the parties’ agreement. On October 7, 2022, Power Home Solar, LLC filed a Chapter 7 bankruptcy petition in the Western District of North Carolina that identified Generac Power as one of its outstanding creditors. The petition listed a $17.7 million liability to Generac Power, which Power Home Solar characterized as disputed. The $17.7 million claim relates to equipment that Generac Power sold to Power Home Solar but was not paid for. After filing of the bankruptcy petition, the parties filed a joint motion to toll Power Home Solar’s deadline to respond to the motion to dismiss and all other pretrial deadlines to allow the bankruptcy trustee to evaluate the complaint, which motion was granted on October 11, 2022. The Company intends to vigorously defend against the claims in the complaint, whichever forum in which it may proceed.

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

Five additional putative class actions were filed by consumers of Generac clean energy products between November 21, 2022 and March 21, 2023. These complaints assert claims for breaches of warranty, tort-based, statutory, and unjust enrichment claims against Generac Power or the Company and seek to recover damages, including consequential damages, that plaintiffs and putative class allegedly incurred. The cases are pending in the Eastern District of Wisconsin (Basler, et al. v. Generac Power Systems, Inc., Case No. 22-cv-01386-NJ and Dillon v. Generac Power Systems, Inc., Case No. 23-cv-00034-NJ), the Northern District of California (Moon v. Generac Power Systems, Inc. et al., Case No. 22-cv-09183-CRB), the Eastern District of California (Locatell v. Generac Power Systems, Inc., et al., Case No. 23-cv-00203-TLN), and the County of Wake, State of North Carolina (Baltimore, et al. v. Generac Power Systems, Inc., Case No. 23CV006415-910. Generac Power and the Company dispute the allegations and intend to vigorously defend against the claims in the complaints. Generac Power and the Company have filed motions to dismiss in the Haak, Basler, and Moon cases.

On March 3, 2023, the plaintiff in the Moon case filed a motion (the “MDL Motion”) to transfer that case and others seeking relief for alleged harm purportedly arising in connection with a Generac clean energy product, to a proposed multidistrict litigation. Subsequently, the parties to each of the federal court actions filed motions to stay those actions until the Judicial Panel on Multidistrict Litigation (“JPML”) determines whether to grant the MDL Motion. Those motions to stay were granted by the respective courts. On March 28, 2023, Generac Power and the plaintiffs in the other putative federal class actions each filed responses to the MDL Motion in which all agreed that the pending cases should be transferred to the proposed Multidistrict Litigation. A hearing on the MDL Motion is scheduled for May 25, 2023.

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

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

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

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

On  November 30, 2022, the U.S. Consumer Product Safety Commission ("CPSC") notified the Company of its intention to recommend the imposition of a civil penalty for failing to timely submit a report under section 19(a)(4) of the Consumer Product Safety Act ("CPSA"), 15 U.S.C. § 2068(a)(4), in relation to certain portable generators that were subject to a voluntary recall previously announced on  July 29, 2021. On May 3, 2023, the CPSC provisionally accepted the terms of a mutual settlement agreement between the CPSC and the Company. The parties entered into such agreement for settlement purposes only. 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, once finalized, would require the Company to (i) abide by certain customary agency requirements regarding the ongoing commitment to the Company’s internal CPSA compliance practices and program, and (ii) pay a civil fine of $15.8 million. The settlement agreement with CPSC under its current terms will not have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

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

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

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

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

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

● proposed new product and service offerings; and 

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

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

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

● fluctuations in cost and quality of raw materials required to manufacture our products;

● availability of both labor and key components from our manufacturing operations and global supply chain, including single-sourced components and contract manufacturers, needed in producing our products;

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

● the risk that our acquisitions will not be integrated successfully;

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

● difficulties we may encounter as our business expands globally or into new markets;

● our dependence on our distribution network;

● our ability to remain competitive by investing in, developing or adapting to changing technologies and manufacturing techniques, as well as protecting our intellectual property rights;

● loss of our key management and employees;

● increase in product and other liability claims or recalls;

● failures or security breaches of our networks, information technology systems, or connected products;

● changes in laws and regulations regarding environmental, health and safety, product compliance, or international trade that affect our products, operations, or customer demand;

● significant legal proceedings, claims, lawsuits, or government investigations; and

● changes in durable goods spending by consumers and businesses or other macroeconomic conditions, impacting demand for our products. 

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, 2022 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 systems for residential and commercial & industrial (C&I) applications, solar + battery storage solutions, energy management devices and energy services, advanced power grid software platforms, 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 business model to focus on building out an ecosystem of energy technology products, solutions, and services for home and business purposes. As part of this evolution, we have made significant investments into rapidly growing markets such as residential clean energy storage, solar module-level power electronics (MLPE), and energy monitoring & management devices, all of which are distributed energy resources (DERs) that can be aggregated into virtual power plants (VPPs) within grid services programs. In addition, we have been leveraging our leading position in the growing market for natural gas fueled generators to expand into applications beyond standby power, allowing us to participate in Energy-as-a-Service and microgrid projects for C&I customers. We believe natural gas represents a cleaner transition fuel to more renewable and energy storage sources compared to diesel.

We have also made investments in next-generation platforms and controls for both residential and C&I applications that facilitate the connection of our products to the grid. Expanding these capabilities will enable the increasing utilization of our equipment as DERs as the nascent market for grid services expands over the next several years. Our growing presence in grid services programs will enhance the value of our power generation and storage products that might otherwise sit idle, as they are now able to be dispatched and orchestrated as part of a distributed energy solution, thereby generating additional return-on-investment for the home or business owner while also delivering value to utilities and grid operators by helping to balance, support and enhance the reliability of the electrical grid. As the traditional centralized utility model evolves over time, we believe that a more decarbonized, digitized, and decentralized grid infrastructure will build-out, 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 remain strong 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.

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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. See our Annual Report on Form 10-K for the year ended December 31, 2022 for more information on our "Powering A Smarter World" strategic plan.

Key Mega-Trends:

● “Grid 2.0”: which is the evolution of the traditional electrical utility model as supply/demand imbalances are created due to the accelerating adoption of renewable energy generation and the “electrification of everything” in society’s energy consumption. It includes the decarbonization, digitization, and decentralization of the grid and a migration toward distributed energy resources that is expected to drive demand for a variety of clean energy and grid services solutions going forward.

● Impact of climate change: which includes the expectation of more volatile and severe weather driving increased power outage activity, and more global regulation accelerating renewable investments. 

● Natural gas as an important transition fuel to the future: as natural gas will remain in demand as a source of cleaner, reliable power generation for backup power and beyond standby applications, compared to diesel fuel. 

● Legacy infrastructure needs a major investment cycle: to rebuild and upgrade aging networks and systems including transportation, water and power.

● Telecommunications infrastructure shifting to next generation: which involves the “5G” architecture that will enable new technologies requiring significant improvement in network uptime through backup power solutions.

● Home as a Sanctuary: in recent years, there has been a trend of more people working, shopping, entertaining, aging in place, and generally spending more time at home. As a result of this and the “electrification of everything” trend, homeowners are becoming increasingly sensitive to power outages due to lost productivity and functionality. These trends combined with ongoing elevated power outage activity has led to significantly increased awareness regarding the importance and need for backup power security.

Strategic Growth Themes:

Power quality issues continue to increase. Power disruptions are an important driver of consumer awareness for back-up power and have historically influenced demand for generators, both in the United States and internationally. Increased frequency and duration of major power outage events, that have a broader impact beyond a localized level, increases product awareness and may drive consumers to accelerate their purchase of a standby or portable generator during the immediate and subsequent period, which we believe may last for six to twelve months following a major outage event. Energy storage systems offer similar resiliency advantages to consumers and can benefit from these same awareness drivers, at least for short duration power outages. The optional standby market for C&I power generation is also driven by power quality issues and the related need for backup power. Attitudes around climate change have shifted and undergone increased global focus, and an aging and underinvested electrical grid infrastructure remains highly vulnerable to the expectation of more volatile and severe weather. Additionally, rapid growth in renewable power sources such as solar and wind is resulting in increased intermittency of supply, further impairing the reliable supply of electricity at a time when demand is starting to increase meaningfully with the electrification of a wide range of consumer and commercial products, including transportation, HVAC systems, and other major appliances. These developments are causing a growing supply/demand imbalance for grid operators across North America, which has led to recent high-profile examples of rolling blackouts necessary to maintain grid integrity. In fact, the North American Electric Reliability Corporation has labeled significant portions of the continent as being at high risk of resource adequacy shortfalls during normal seasonal peak conditions in the 2023-2027 period due in part to these supply/demand dynamics. Further, in California, Public Safety Power Shutoff events have occurred whereby public utilities are turning off power supply to their customers under certain circumstances to prevent their transmission equipment from starting wildfires, which we anticipate may continue in the future. Taken together, we expect these factors to continue driving increased awareness and demand for Generac’s products within multiple categories.

Home standby penetration opportunity is significant. Many potential customers are still not aware of the costs and benefits of automatic backup power solutions. With only approximately 5.75% penetration of the addressable market of homes in the United States (which we define as single-fa