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Includes a specific warranty provision recorded during the third quarter of 2022 in the amount of $37,338 to address certain clean energy product warranty-related matters. Represents unfavorable impact from the strengthening of the U.S. dollar against foreign currencies during the three and nine months ended September 30, 2022, particularly the Euro and British Pound. Represents severance and other restructuring charges related to the consolidation of certain operating facilities and organizational functions. The amount recorded in the third quarter 2023 represents a provision for judgments, estimates of pre-judgment interest and costs, and legal expenses related to certain patent lawsuits. The amount recorded in the first quarter 2023 represents a provision of $5.8 million for a matter with the Consumer Product Safety Commission (CPSC) concerning the imposition of civil fines for allegedly failing to timely submit a report under the Consumer Product Safety Act (CPSA) in relation to certain portable generators that were subject to a voluntary recall previously announced on July 29, 2021. The amount recorded in the third quarter of 2022 represents a specific bad debt provision of $17.9 million for a clean energy product customer that filed for bankruptcy as well as a warranty provision of $37.3 million to address certain clean energy product warranty-related matters. 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. 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. Represents the write-off of original issue discount and capitalized debt issuance costs due to voluntary debt prepayment. Represents unrealized gains of $52,995 on the interest rate swaps, net of tax effect of $(13,381) for the nine months ended September 30, 2022. Represents unrealized gains of $1,394 on the interest rate swaps, net of tax effect of $(349) for the three months ended September 30, 2023. Represents favorable impact from the weakening of the U.S. dollar against foreign currencies during the nine months ended September 30, 2023, particularly the Euro, British Pound, and Mexican Peso. Represents $11,490 of contingent deferred consideration for the Pramac buyout. See Note 3, "Redeemable Noncontrolling Interest". 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Table of Contents



 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

(Mark One)

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

  
 

For the quarterly period ended September 30, 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)

 

(262544-4811

(Registrant's telephone number, including area code)

 

Not Applicable

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

 

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.01 par value

GNRC

New York Stock Exchange

 

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

  

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

 

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

 

Large accelerated filer ☑

Accelerated filer ☐

Non-accelerated filer ☐

Smaller reporting company

Emerging growth company

 

 

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

 

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

 

As of November 1, 2023, there were 61,431,577 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 September 30, 2023 and December 31, 2022

1

     
 

Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2023 and 2022

2

     
 

Condensed Consolidated Statements of Stockholders' Equity for the Three and Nine Months Ended September 30, 2023 and 2022

3

     
 

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

27

     

Item 4.

Controls and Procedures

27

   

PART II. OTHER INFORMATION

     

Item 1.

Legal Proceedings

27

     

Item 1A.

Risk Factors

27

     

Item 2.

Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities

28

     
Item 3. Defaults Upon Senior Securities 28
     
Item 4. Mine Safety Disclosures 28
     
Item 5. Other Information 28
     

Item 6.

Exhibits

28

     
 

Signatures

29

 

 

 

 
 

PART I. FINANCIAL INFORMATION

 


Item 1.           Financial Statements

 

Generac Holdings Inc.

Condensed Consolidated Balance Sheets

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

 

  

September 30,

  

December 31,

 
  

2023

  

2022

 

Assets

        

Current assets:

        

Cash and cash equivalents

 $161,525  $132,723 

Accounts receivable, less allowance for credit losses of $29,580 and $27,664 at September 30, 2023 and December 31, 2022, respectively

  589,226   522,458 

Inventories

  1,311,129   1,405,384 

Prepaid expenses and other current assets

  105,169   121,783 

Total current assets

  2,167,049   2,182,348 
         

Property and equipment, net

  511,893   467,604 
         

Customer lists, net

  188,513   206,987 

Patents and technology, net

  426,552   454,757 

Other intangible assets, net

  30,317   41,719 

Tradenames, net

  219,012   227,251 

Goodwill

  1,417,564   1,400,880 

Deferred income taxes

  17,140   12,746 

Operating lease and other non-current assets

  188,301   175,170 

Total assets

 $5,166,341  $5,169,462 
         

Liabilities and stockholders’ equity

        

Current liabilities:

        

Short-term borrowings

 $74,346  $48,990 

Accounts payable

  394,168   446,050 

Accrued wages and employee benefits

  56,454   45,741 

Accrued product warranty

  70,572   89,141 

Other accrued liabilities

  267,217   349,389 

Current portion of long-term borrowings and finance lease obligations

  37,337   12,733 

Total current liabilities

  900,094   992,044 
         

Long-term borrowings and finance lease obligations

  1,465,141   1,369,085 

Deferred income taxes

  113,390   125,691 

Deferred revenue

  160,264   143,726 

Operating lease and other long-term liabilities

  155,326   169,190 

Total liabilities

  2,794,215   2,799,736 
         

Redeemable noncontrolling interests

  5,639   110,471 
         

Stockholders’ equity:

        

Common stock, par value $0.01, 500,000,000 shares authorized, 73,108,913 and 72,701,257 shares issued at September 30, 2023 and December 31, 2022, respectively

  732   728 

Additional paid-in capital

  1,064,418   1,016,138 

Treasury stock, at cost, 11,739,423 and 11,284,350 shares at September 30, 2023 and December 31, 2022, respectively

  (880,858)  (808,491)

Excess purchase price over predecessor basis

  (202,116)  (202,116)

Retained earnings

  2,423,346   2,316,224 

Accumulated other comprehensive loss

  (41,614)  (65,102)

Stockholders’ equity attributable to Generac Holdings Inc.

  2,363,908   2,257,381 

Noncontrolling interests

  2,579   1,874 

Total stockholders' equity

  2,366,487   2,259,255 

Total liabilities and stockholders’ equity

 $5,166,341  $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 September 30,

   

Nine Months Ended September 30,

 
   

2023

   

2022

   

2023

   

2022

 
                                 

Net sales

  $ 1,070,667     $ 1,088,258     $ 2,958,997     $ 3,515,505  

Costs of goods sold

    694,880       727,154       1,982,290       2,336,668  

Gross profit

    375,787       361,104       976,707       1,178,837  
                                 

Operating expenses:

                               

Selling and service

    117,929       170,381       334,360       388,690  

Research and development

    43,312       39,985       129,074       121,328  

General and administrative

    83,052       37,464       199,108       132,036  

Amortization of intangibles

    26,718       25,751       78,934       77,681  

Total operating expenses

    271,011       273,581       741,476       719,735  

Income from operations

    104,776       87,523       235,231       459,102  
                                 

Other (expense) income:

                               

Interest expense

    (24,707 )     (15,514 )     (72,862 )     (35,303 )

Investment income

    1,160       451       2,789       620  

Loss on extinguishment of debt

    -       -       -       (3,743 )

Other, net

    (1,167 )     (420 )     (1,664 )     331  

Total other expense, net

    (24,714 )     (15,483 )     (71,737 )     (38,095 )
                                 

Income before provision for income taxes

    80,062       72,040       163,494       421,007  

Provision for income taxes

    19,428       11,594       43,184       86,028  

Net income

    60,634       60,446       120,310       334,979  

Net income attributable to noncontrolling interests

    257       2,176       2,305       6,492  

Net income attributable to Generac Holdings Inc.

  $ 60,377     $ 58,270     $ 118,005     $ 328,487  
                                 

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

  $ 0.98     $ 0.84     $ 1.74     $ 4.69  

Weighted average common shares outstanding - basic:

    61,368,440       63,249,881       61,552,949       63,480,161  
                                 

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

  $ 0.97     $ 0.83     $ 1.72     $ 4.61  

Weighted average common shares outstanding - diluted:

    62,091,163       64,267,638       62,362,743       64,630,346  
                                 

Comprehensive income attributable to Generac Holdings Inc.

  $ 37,041     $ 21,683     $ 141,463     $ 264,912  

 

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

  

Retained

  

Accumulated

             
          

Additional

          

Over

  

Earnings

  

Other

  

Total

         
  

Common Stock

  

Paid-In

  

Treasury Stock

  

Predecessor

  

(Accumulated

  

Comprehensive

  

Stockholders'

  

Noncontrolling

     
  

Shares

  

Amount

  

Capital

  

Shares

  

Amount

  

Basis

  

Deficit)

  

Income (Loss)

  

Equity

  

Interest

  

Total

 

Balance at July 1, 2023

  73,097,016  $732  $1,053,759   (10,858,348) $(779,892) $(202,116) $2,363,015  $(16,216) $2,419,282  $2,474  $2,421,756 

Unrealized gain on interest rate swaps, net of tax of $349

                              1,045   1,045       1,045 

Foreign currency translation adjustment

                         (26,443)  (26,443)  (93)  (26,536)
Common stock issued under equity incentive plans, net of shares withheld for employee taxes and strike price  11,897      732                   732      732 

Net share settlement of restricted stock awards

            (5,495)  (699)           (699)     (699)

Stock repurchases

           (875,580)  (100,267)           (100,267)     (100,267)

Share-based compensation

         9,927                   9,927      9,927 

Redemption value adjustment

                      (46)     (46)     (46)

Net income

                      60,377      60,377   198   60,575 
                                             

Balance at September 30, 2023

  73,108,913  $732  $1,064,418   (11,739,423) $(880,858) $(202,116) $2,423,346  $(41,614) $2,363,908  $2,579  $2,366,487 

 

  

Generac Holdings Inc.

         
                      

Excess Purchase Price

  

Retained

  

Accumulated

             
          

Additional

          

Over

  

Earnings

  

Other

  

Total

         
  

Common Stock

  

Paid-In

  

Treasury Stock

  

Predecessor

  

(Accumulated

  

Comprehensive

  

Stockholders'

  

Noncontrolling

     
  

Shares

  

Amount

  

Capital

  

Shares

  

Amount

  

Basis

  

Deficit)

  

Income (Loss)

  

Equity

  

Interest

  

Total

 

Balance at January 1, 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 on interest rate swaps, net of tax of $772

                         2,309   2,309      2,309 

Foreign currency translation adjustment

                         21,179   21,179   (38)  21,141 

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

  396,713   4   2,563                   2,567      2,567 

Net share settlement of restricted stock awards

            (45,611)  (5,496)           (5,496)     (5,496)

Stock repurchases

           (875,580)  (100,267)           (100,267)     (100,267)

Share-based compensation

         30,306                   30,306      30,306 

Payment of contingent consideration

  10,943      15,411   466,118   33,396            48,807      48,807 

Redemption value adjustment

                      (10,883)     (10,883)     (10,883)

Net income

                      118,005      118,005   743   118,748 
                                             

Balance at September 30, 2023

  73,108,913  $732  $1,064,418   (11,739,423) $(880,858) $(202,116) $2,423,346  $(41,614) $2,363,908  $2,579  $2,366,487 

 

  

Generac Holdings Inc.

         
                      

Excess Purchase Price

      

Accumulated

             
          

Additional

          

Over

      

Other

  

Total

         
  

Common Stock

  

Paid-In

  

Treasury Stock

  

Predecessor

  

Retained

  

Comprehensive

  

Stockholders'

  

Noncontrolling

     
  

Shares

  

Amount

  

Capital

  

Shares

  

Amount

  

Basis

  

Earnings

  

Income (Loss)

  

Equity

  

Interest

  

Total

 

Balance at July 1, 2022

  72,588,588  $727  $967,819   (8,755,451) $(475,294) $(202,116) $2,210,582  $(82,839) $2,418,879  $883  $2,419,762 

Unrealized gain on interest rate swaps, net of tax of $4,647

                         13,757   13,757      13,757 

Foreign currency translation adjustment

                         (51,324)  (51,324)  (396)  (51,720)

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

  51,413   1   1,321                   1,322      1,322 

Net share settlement of restricted stock awards

            (455)  (110)           (110)     (110)

Stock repurchases

           (536,633)  (123,900)           (123,900)     (123,900)

Share-based compensation

         6,861                   6,861      6,861 

Redemption value adjustment

                      (5,225)     (5,225)     (5,225)

Net income

                      58,270      58,270   588   58,858 
                                             

Balance at September 30, 2022

  72,640,001  $728  $976,001   (9,292,539) $(599,304) $(202,116) $2,263,627  $(120,406) $2,318,530  $1,075  $2,319,605 

 

  

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 $13,381

                         39,614   39,614      39,614 

Foreign currency translation adjustment

                         (105,265)  (105,265)  (470)  (105,735)

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

  253,984   3   (361)                  (358)     (358)

Net share settlement of restricted stock awards

            (88,875)  (26,428)           (26,428)     (26,428)

Stock repurchases

           (536,633)  (123,900)           (123,900)     (123,900)

Share-based compensation

         23,423                   23,423      23,423 

Redemption value adjustment

                      (30,817)     (30,817)     (30,817)

Net income

                      328,487      328,487   1,232   329,719 
                                             

Balance at September 30, 2022

  72,640,001  $728  $976,001   (9,292,539) $(599,304) $(202,116) $2,263,627  $(120,406) $2,318,530  $1,075  $2,319,605 

 

See notes to condensed consolidated financial statements.

 

3

 

 

Generac Holdings Inc.

Condensed Consolidated Statements of Cash Flows

(U.S. Dollars in Thousands)

(Unaudited)

 

   

Nine Months Ended September 30,

 
   

2023

   

2022

 

Operating activities

               

Net income

  $ 120,310     $ 334,979  

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

               

Depreciation

    45,215       39,043  

Amortization of intangible assets

    78,934       77,681  

Amortization of original issue discount and deferred financing costs

    2,902       2,261  

Loss on extinguishment of debt

          3,743  

Deferred income taxes

    (18,715 )     (83,272 )

Share-based compensation expense

    30,306       23,423  

Gain on disposal of assets

    (538 )     (555 )

Other noncash charges

    380       7,037  

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

               

Accounts receivable

    (68,975 )     (20,810 )

Inventories

    101,894       (353,618 )

Other assets

    32,175       (7,033 )

Accounts payable

    (57,866 )     (136,289 )

Accrued wages and employee benefits

    10,244       (17,418 )

Other accrued liabilities

    (70,622 )     105,544  

Excess tax benefits from equity awards

    (920 )     (17,068 )

Net cash provided by (used in) operating activities

    204,724       (42,352 )
                 

Investing activities

               

Proceeds from sale of property and equipment

    1,933       2,049  

Proceeds from sale of investment

          1,308  

Proceeds from beneficial interests in securitization transactions

    2,533       2,745  

Contribution to equity method investment

    (6,627 )     (14,930 )

Purchase of long-term investment

    (2,592 )      

Expenditures for property and equipment

    (77,718 )     (64,833 )

Acquisition of business, net of cash acquired

    (15,974 )     (11,421 )

Net cash used in investing activities

    (98,445 )     (85,082 )
                 

Financing activities

               

Proceeds from short-term borrowings

    49,078       237,182  

Proceeds from long-term borrowings

    345,384       935,614  

Repayments of short-term borrowings

    (25,910 )     (239,550 )

Repayments of long-term borrowings and finance lease obligations

    (233,101 )     (540,481 )

Stock repurchases

    (100,267 )     (123,900 )

Payment of contingent acquisition consideration

    (4,979 )     (16,135 )

Payment of debt issuance costs

          (10,330 )

Purchase of additional ownership interest

    (104,844 )     (375 )

Cash dividends paid to noncontrolling interest of subsidiary

          (309 )

Taxes paid related to equity awards

    (10,068 )     (40,472 )

Proceeds from exercise of stock options

    7,139       13,627  

Net cash (used in) provided by financing activities

    (77,568 )     214,871  
                 

Effect of exchange rate changes on cash and cash equivalents

    91       (4,865 )
                 

Net increase in cash and cash equivalents

    28,802       82,572  

Cash and cash equivalents at beginning of period

    132,723       147,339  

Cash and cash equivalents at end of period

  $ 161,525     $ 229,911  

 

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 energy storage market.

 

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

 

The condensed consolidated balance sheet as of September 30, 2023, the condensed consolidated statements of comprehensive income for the three and nine months ended September 30, 2023 and 2022, the condensed consolidated statements of stockholders’ equity for the three and nine months ended September 30, 2023 and 2022, and the condensed consolidated statements of cash flows for the nine months ended September 30, 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 REFUstor, headquartered in Pfullingen, Germany. REFUstor is a developer and supplier of battery storage hardware products, advanced software, and platform services for the commercial and industrial energy storage market.

 

The Company recorded its preliminary purchase price allocation for REFUstor during the first quarter of 2023, based on its estimates of the fair value of the acquired assets and assumed liabilities. Purchase accounting will be finalized prior to March 31, 2024, and there have not been any material changes to the balances acquired as of September 30, 2023. The accompanying condensed consolidated financial statements include the results of REFUstor from the date of acquisition through September 30, 2023. 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 for EEC was finalized in the second quarter of 2023 and did not result in material adjustments to the Company's preliminary estimates. The Company will finalize the purchase accounting for Blue Pillar in the fourth quarter of 2023. Through the third quarter of 2023, the combined purchase price for EEC and Blue Pillar has increased to $27,456 due to working capital adjustments. The accompanying condensed consolidated financial statements include the results of the acquired businesses since the dates of acquisition through September 30, 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 dates. 

 

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 in the first quarter of 2023) and $11,490 of contingent deferred consideration to be paid in up to 135,205 restricted shares that were issued based on the twenty day volume weighted average price of the Company’s stock ending on December 31, 2022, and which shall vest upon achievement of certain earnings targets at the end of the earn-out period, December 31, 2025. 

 

On February 1, 2019, the Company acquired a 51% ownership interest in Captiva Energy Solutions Private Limited ("Captiva"). The 49% noncontrolling interest in Captiva had an acquisition date fair value of $3,165 and was recorded as a redeemable noncontrolling interest in the 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 September 30,

  

Nine Months Ended September 30,

 
  

2023

  

2022

  

2023

  

2022

 

Balance at beginning of period

 $5,688  $82,830  $110,471  $58,050 

Net income

  58   1,589   1,728   5,261 

Foreign currency translation

  (153)  (2,708)  (689)  (6,817)

Purchase of additional ownership interest

  -   -   (116,754)  (375)

Redemption value adjustment

  46   5,225   10,883   30,817 

Balance at end of period

 $5,639  $86,936  $5,639  $86,936 

 

 

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, the final four of which expired in  May 2023. In March 2020, the Company entered into three additional interest rate swap agreements which were still outstanding as of September 30, 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, net of tax recognized, for the three and nine months ended September 30, 2023, were $1,045 and $2,309, respectively. The amount of gains, net of tax recognized, for the three and nine months ended September 30, 2022, were $13,757 and $39,614, respectively. The cash flows of the swaps are recognized as adjustments to interest expense each period. The ineffective portions of the derivatives’ changes in fair value, if any, are immediately recognized in earnings.

 

Fair Value 

 

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

 

  

September 30, 2023

  

December 31, 2022

 
Commodity contracts $9  $- 

Foreign currency contracts

  (181)  94 

Interest rate swaps

  52,360   49,279 

 

In the condensed consolidated balance sheets, the fair value of the commodity contracts is included in prepaid expenses and other current assets. The fair value of the foreign currency contracts is included in other accrued liabilities at  September 30, 2023, and included in prepaid expenses and other current assets at December 31, 2022. The fair value of the interest rate swaps is included in operating lease and other non-current assets. Excluding the impact of credit risk, the fair value of the derivative contracts as of September 30, 2023, and December 31, 2022, is an asset of $54,388 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 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 $524,529, was $530,000 (Level 2) at September 30, 2023, as calculated based on independent valuations which contain inputs and significant value drivers that 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 the 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 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 September 30, 2023, the fair value of contingent consideration for Chilicon Power LLC ("Chilicon") and Pramac is $38,746 and is included 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 earn-out period for the contingent consideration for Chilicon extends through December 31, 2028. The earn-out period for the contingent consideration for Pramac extends through December 31, 2025. 

 

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

 

Beginning balance, January 1, 2023

 $81,533 

Changes in fair value

  - 

Additional contingent consideration (1)

  11,490 

Payment of contingent consideration (2)

  (53,786)

Present value interest accretion

  (491)

Ending balance, September 30, 2023

 $38,746 

 

(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, $4,286 in shares for the Chilicon acquisition, and $4,500 in cash for the Mean Green Products ("Mean Green") acquisition. The payment of common stock is accounted for as a non-cash item in the condensed consolidated statement of cash flows. 

 

8

 
 

6.   Accumulated Other Comprehensive Loss

 

The following table presents a disclosure of changes in AOCL during the three and nine months ended September 30, 2023 and 2022, net of tax:

 

  

Foreign Currency Translation Adjustments

   

Unrealized Gain (Loss) on Cash Flow Hedges

   

Total

 

Beginning Balance – July 1, 2023

 $(53,923)  $37,707   $(16,216)

Other comprehensive income (loss)

  (26,443)

(1)

  1,045 

(2)

  (25,398)

Ending Balance – September 30, 2023

 $(80,366)  $38,752   $(41,614)

 

  

Foreign Currency Translation Adjustments

   

Unrealized Gain (Loss) on Cash Flow Hedges

   

Total

 

Beginning Balance – July 1, 2022

 $(106,645)  $23,806   $(82,839)

Other comprehensive income (loss)

  (51,324)

(3)

  13,757 

(4)

  (37,567)

Ending Balance – September 30, 2022

 $(157,969)  $37,563   $(120,406)

 

  

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)

  21,179 

(5)

  2,309 

(6)

  23,488 

Ending Balance – September 30, 2023

 $(80,366)