2.	Significant Accounting Policies

Principles of Consolidation

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

that are consolidated in conformity with U.S. GAAP. All intercompany amounts and transactions have been eliminated in consolidation.

Cash

and Cash

Equivalents

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

three

months or less to be cash equivalents.

Concentration of Credit Risk

The Company maintains the majority of its

domestic cash in

one

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

One

customer accounted for

approximately

and

of accounts receivable at

December 31, 2017

and

2016,

respectively.

one

customer accounted for greater than

6%,

and

7%,

of net sales during the years ended

December 31, 2017,

2016,

2015,

respectively.

Accounts Receivable

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

Inventories

Inventories are stated at the lower of cost or

market, with cost determined generally using the

first

-in,

first

-out method.

Property and Equipment

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

Land improvements	8	–	20
Buildings and improvements	10	–	40
Machinery and equipment	3	–	15
Dies and tools	3	–	10
Vehicles	3	–	6
Office equipment and systems	3	–	15
Leasehold improvements	2	–	20

Total depreciation expense

was

$23,127,

$21,465,

and

$16,742

for the years ended

December 31, 2017,

2016,

and

2015,

respectively.

Goodwill and Other Indefinite-Lived Intangible Assets

Goodwill represents the excess of the purchase price over fair value of identifiable net assets acquired from business acquisitions. Goodwill is

not

amortized, but is reviewed for impairment on an annual basis and between annual tests

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

October 31

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

may

not

be recoverable. The Company has the option to assess goodwill for impairment by performing either a qualitative assessment or quantitative test. The qualitative assessment determines whether it is more likely than

not

that the fair value of a reporting unit is less than its carrying amount. If the Company determines that it is

not

more likely than

not

that the fair value of a reporting unit is less than its carrying amount, then the quantitative test is

not

required to be performed. If the Company determines that it is more likely than

not

that the fair value of a reporting unit is less than its carrying amount, the Company is required to perform the quantitative test. In the quantitative test, the calculated fair value of the reporting unit is compared to its book value including goodwill. If the fair value of the reporting unit is in excess of its book value, the related goodwill is

not

impaired. If the fair value of the reporting unit is less than its book value, an impairment loss is recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit.

Other indefinite-lived intangible assets consist of certain tradenames.

The Company tests the carrying value of these tradenames annually as of

October 31

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

may

not

be recoverable by comparing the assets’ fair value to its carrying value. Fair value is measured using a relief-from-royalty approach, which assumes the fair value of the tradename is the discounted cash flows of the amount that would be paid had the Company

not

owned the tradename and instead licensed the tradename from another company.

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

201

2016

and

2015,

and found

impairment following the

2017

and

2016

tests. There were

reporting units with a carrying value at-risk of exceeding fair value as of the

October 31, 2017

impairment test date.

After performing the impairment tests for fiscal year

2015,

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

fourth

quarter of

2015

$4,611

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

second

half of

2015:

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

2015

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

terminal growth rate and a

15.7%

discount rate.

In the

fourth

quarter of

2015,

the Company

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

two

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

$36,076

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

Other than the impairment charges discussed above, the Company found

other impairment when performing the required annual

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

2015.

There can be

assurance that future impairment tests will

not

result in a charge to earnings.

Impairment of

Long-Lived Assets

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

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

may

not

be recoverable. If the sum of the expected future undiscounted cash flows is less than the carrying amount of an asset, a loss is recognized for the difference between the fair value and carrying value of the asset.

Debt Issuance Costs

Debt discounts and d

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

3,516,

$3,939,

and

$5,429

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

2017,

2016

and

2015,

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

five

years is as follows:

2018

$4,798;

2019

$4,982;

2020

$4,936;

2021

$4,931;

2022

$5,099.

Income Taxes

The Company is

a C Corporation and therefore accounts for income taxes pursuant to the liability method. Accordingly, the current or deferred tax consequences of a transaction are measured by applying the provision of enacted tax laws to determine the amount of taxes payable currently or in future years. Deferred income taxes are provided for temporary differences between the income tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than

not

that some portion or all of the deferred tax assets will

not

be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the years in which those temporary differences become deductible. The Company considers taxable income in prior carryback years, the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies, as appropriate, in making this assessment.

Revenue Recognition

Sales, net of estimated returns and allowances, are recognized upon shipment of product to the customer, which is generally when title passes, the Company has

further obligations, and the customer is required to pay subject to agreed upon payment terms. The Company, at the request of certain customers, will warehouse inventory billed to the customer but

not

delivered. Unless all revenue recognition criteria have been met, the Company does

not

recognize revenue on these transactions until the customers take possession of the product. In these cases, the funds collected on product warehoused for these customers are recorded as a customer advance until the customer takes possession of the product and the Company’s obligation to deliver the goods is completed. Customer advances are included in accrued liabilities in the consolidated balance sheets.

The Company provides for certain estimated sales

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

Shipping and Handling Costs

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

Advertising and Co-Op Advertising

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

expenditures for advertising were

$45,926,

$45,488,

and

$39,258

for the years ended

December 31, 2017,

2016,

and

2015,

respectively.

Research and Development

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

were

$42,925,

$37,229,

and

$32,922

for the years ended

December 31, 2017,

2016

and

2015,

respectively.

Foreign Currency Translation and Transactions

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

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

Fair Value of Financial Instruments

ASC

820

Fair Value Measurement

defines fair value, establishes a consistent framework for measuring fair value, and expands disclosure for each major asset and liability category measured at fair value on either a recurring basis or nonrecurring basis. ASC

820

clarifies that fair value is an exit price, representing the amount that would be received in the sale of an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the pronouncement establishes a

three

-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows: (Level

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

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

) unobservable inputs in which there is little or

market data, which require the reporting entity to develop its own assumptions.

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

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

$902,959,

was approximately

$903,500

(Level

) at

December 31, 2017,

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

For the fair value of the assets and liabilities measured on a recurring basis,

refer to the fair value table in Note

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

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

820

10.

Use of Estimates

The preparation of the consolidated financial statements in conformity with

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

Derivative Instruments and Hedging Activities

The Company records

all derivatives in accordance with ASC

815,

Derivatives and Hedging

, which requires derivative instruments be reported on the consolidated balance sheets at fair value and establishes criteria for designation and effectiveness of hedging relationships. The Company is exposed to market risk such as changes in commodity prices, foreign currencies and interest rates. The Company does

not

hold or issue derivative financial instruments for trading purposes.

Share-Based Compensation

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

New Accounting Pronouncements

May 2014,

the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU)

2014

09,

Revenue from Contracts with Customers

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

five

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

2014

09,

as amended by ASU

2015

14,

Revenue from Contracts with Customers (Topic

606

): D

eferral of the Effective Date

, ASU

2016

08,

Revenue from Contracts with Customers (Topic

606

): Principal versus Agent Considerations

, ASU

2016

10,

Revenue from Contracts with Customers (Topic

606

): Identifying Performance Obligations and Licensin

ASU

2016

12,

Revenue from Contracts with Customers (Topic

606

Narrow-

Scope Improvements and Practical Expedients

, and ASU

2016

20,

Technical Corrections and Improvements to Topic

606,

Revenue from Contracts with Customers

, becomes effective for the Company in

2018.

The guidance can be applied either on a full retrospective basis or on a modified retrospective basis in which the cumulative effect of initially applying the standard is recognized at the date of initial application. The Company has completed its assessment of the impacts the standard will have on its financial statements, and determined that the adoption does

not

have a material impact. In all material respects, the Company has identified a similar amount of performance obligations under the new guidance as compared with deliverables previously identified. As a result, the timing of revenue recognition will generally remain the same. The Company adopted the standard

January 1, 2018

and will use the full retrospective method.

February 2016,

the FASB issued ASU

2016

02,

Leases

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

2019,

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

August 2016,

the FASB issued ASU

2016

15,

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

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

2018,

with early adoption permitted. The Company does

not

believe that the adoption of this guidance will have a significant impact on the presentation of the statement of cash flows.

January 2017,

the FASB issued ASU

2017

04,

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

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

of the goodwill impairment test. Under the new guidance, the recognition of a goodwill impairment charge is calculated based on the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should

not

exceed the total amount of goodwill allocated to that reporting unit. This guidance should be applied on a prospective basis and is effective for the Company in

2020.

The Company has early adopted this standard, which did

not

have a significant impact on its consolidated financial statements.

August 2017,

the FASB issued ASU

2017

12,

Derivatives and Hedging

–

Targeted Improvements to Accounting for Hedging Activities

. This guidance was issued to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements, and to make certain targeted improvements to simplify the application of the hedge accounting guidance. For existing hedges, this guidance should be applied using a cumulative effect adjustment, while the presentation and disclosure guidance should be adopted on a prospective basis. The standard is effective for the Company in

2019,

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

In the

first

quarter of

2017,

the Company adopted ASU

2016

09,

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

. The primary impact of adoption is the prospective recognition of excess tax benefits or deficiencies within the provision for income taxes on the consolidated statement of comprehensive income rather than within additional paid-in capital on the consolidated balance sheet. Further, the Company has elected to continue to estimate forfeitures expected to occur to determine the amount of stock compensation expense recognized each period. The Company also elected to apply the presentation requirements for cash flows related to excess tax benefits or deficiencies prospectively. The presentation requirements for cash flows related to employee taxes paid in exchange for withheld shares had

impact to any period presented on the consolidated statements of cash flows as such cash flows have historically been presented as a financing activity. There were

cumulative effect adjustments made to equity as of the beginning of the fiscal period, as those provisions of ASU

2016

were

not

applicable or had

impact to the Company.

There are several other new accounting pronouncements issued by the FASB. Each of these pronouncements, as applicable, has been or will be adopted by the Company. Management does

not

believe any of these accounting pronouncements has had or will have a material impact on the Company

’s consolidated financial statements.