Generac Reports Strong Second Quarter 2012 Results

Generac Holdings Inc. (NYSE: GNRC), a leading designer and manufacturer of generators and other engine powered products, today reported financial results for its second quarter ended June 30, 2012.

Highlights
  • Net sales increased year-over-year by 48.2% to $239.1 million as compared to $161.4 million in the second quarter of 2011.
    • Residential product sales increased 33.8% compared to the second quarter of 2011.
    • Commercial & Industrial (C&I) product sales increased 76.4% compared to the prior year second quarter.
  • Net sales over the trailing four quarters were $1.040 billion; on a pro-forma basis, when including the results for Magnum Products for the entire period, net sales were $1.082 billion.
  • Net income was $9.3 million or $0.14 per share for the second quarter of 2012 as compared to $15.3 million or $0.23 per share for the same period of 2011. The current year results include a charge for refinancing costs and a normalized effective income tax rate. Adjusted net income, as defined in the accompanying reconciliation schedules, increased to $39.9 million from $27.7 million in the second quarter of 2011. Adjusted diluted net income per common share was $0.58 as compared to $0.41 per share in the second quarter of 2011.
  • Adjusted EBITDA increased to $54.6 million as compared to $37.6 million in the second quarter last year.
  • Cash flow from operations in the second quarter of 2012 was $21.1 million as compared to $15.3 million in the prior year quarter. Free cash flow was $17.8 million as compared to $13.5 million in the second quarter of 2011.
  • For the trailing four quarters, net income was $343.9 million; adjusted EBITDA, pro-forma for Magnum Products was $258.3 million; cash flow from operations was $201.4 million; and free cash flow was $187.3 million, which represents 90% of the adjusted net income reported during that time period.
  • The Company is raising its sales growth guidance for full-year 2012 to the low-20% range over the prior year, which represents an increase from the high-teens growth rate previously expected. As a result, Adjusted EBITDA for the full-year 2012 is now expected to increase in the high-teens range over the prior year, which is an increase from the mid-teens growth rate previously expected.

“Our second quarter results continue to demonstrate the progress we are making in executing our Powering Ahead strategic plan,” said Aaron Jagdfeld, President and Chief Executive Officer. “Growth in shipments of home standby and portable generators were again strong during the second quarter. In particular, the market for our home standby generators continues to develop as more home owners discover the importance of having backup power. In our commercial and industrial products, Magnum continues to perform well as demand for mobile equipment is benefiting from a shift towards renting versus buying. In addition, while still a smaller portion of the overall C&I market, our leadership position in natural gas backup generators within North America has allowed us to benefit from the increased demand for these products.”

Second Quarter 2012 Details

Residential product sales for the second quarter of 2012 increased 33.8% to $123.4 million from $92.2 million for the comparable period in 2011. The growth was primarily driven by strong double-digit increases in shipments for both home standby and portable generators. The Company’s efforts to increase awareness and availability of home standby generators together with execution in meeting the increased demand for these products have helped to drive baseline growth. In addition, expanded placement for portable generator products continues to lead to year-over-year market share gains. Increased revenue from the power washer product line, which began shipping in the second quarter of 2011, also contributed modestly to the year-over-year sales growth in residential products.

C&I product sales for the second quarter of 2012 increased 76.4% to $101.1 million from $57.3 million for the comparable period in 2011. The increase in net sales was primarily driven by the Magnum Products acquisition, and to a lesser extent, increased shipments of natural gas backup generators, partially offset by a decline in shipments to national account customers.

Gross profit margin for the second quarter of 2012 was 36.6% compared to 37.4% in the second quarter of 2011. Gross margin declined over the prior year due to the mix impact from the addition of Magnum Products sales, which was partially offset by a higher mix of home standby generators and the positive impact from price increases, improved overhead absorption and moderation in commodity costs relative to the prior year.

Operating expenses for the second quarter of 2012 increased by $11.7 million or 30.4% as compared to the second quarter of 2011. These additional expenses were driven primarily by operating expenses associated with Magnum, increased sales, engineering and administrative infrastructure to support the strategic growth initiatives and higher baseline sales levels of the Company, increased incentive compensation expenses as a result of the Company’s financial performance during the quarter, and increased variable operating expenses resulting from the double-digit increase in organic sales.

As previously announced, on May 30, 2012, the Company completed a refinancing of its senior secured credit facilities, pursuant to which it has incurred $900 million of senior secured term loans to replace its prior $575 million term loan facilities. Following the refinancing, the Company used the available proceeds from the new term loans and cash on hand to fund a special cash dividend to its stockholders of $6.00 per share and to pay related financing fees and expenses. The special dividend, which was paid on June 29, 2012, constituted a declared amount of approximately $408 million in the aggregate of which $404 million was paid in the quarter. In conjunction with this refinancing, an approximate $11.0 million non-recurring charge was recorded during the second quarter of 2012 relating to refinancing costs and other related expenses. As a result of the higher debt levels from the refinancing, interest expense in the second quarter of 2012 increased to $9.9 million compared to $5.9 million in the same period last year.

Net income in the current year quarter includes the impact of a normalized effective income tax rate of 40.5% as compared to a tax rate of 0.6% in the prior-year second quarter. Until the fourth quarter of 2011, a full valuation allowance was recorded on the Company’s net deferred tax assets, resulting in substantially no tax provision. A full valuation allowance is no longer required on the Company’s net deferred tax assets, and therefore, a normalized income tax provision was recorded in the second quarter of 2012. However, the Company’s cash tax obligations are expected to remain nominal given its current tax attributes.

Free cash flow was $17.8 million in the second quarter of 2012 as compared to $13.5 million in the same period last year. Strong operating earnings were partially offset by increased working capital investment driven by seasonal finished goods inventory replenishment and additional raw material safety stock for rapid demand response.

Outlook

The Company is revising upward its sales guidance for full-year 2012 as a result of solid execution in the second quarter of 2012 and an increased outlook for residential sales for the third quarter of 2012. Full-year 2012 total net sales are now expected to increase in the low-20% range over the prior year, which represents an increase from the high-teens growth rate previously expected. The higher revenue outlook is primarily attributable to recent major power outage events that occurred in the Midwest and Mid-Atlantic regions in late June and early July. The Company expects these events should result in improved shipments of portable and home standby generators, relative to prior guidance, due to the increased awareness and demand for back-up power. This revised guidance continues to assume no material changes in the macroeconomic environment, as well as no additional major power outage events during the remainder of 2012.

As a result of this higher sales outlook, Adjusted EBITDA for the full-year 2012 is now expected to increase in the high-teens range over the prior year, which is an increase from the mid-teens growth rate previously expected.

As previously announced, the Company’s guidance for interest expense for the full-year 2012 is expected to be in the range of $49.0 to $50.0 million, which includes $45.0 to $45.5 million of debt service costs, at current LIBOR rates, plus approximately $4.5 million for deferred financing cost and original issue discount amortization for the new credit facility. Interest expense during the third quarter of 2012, the first full quarter under the new capital structure, is expected to be approximately $17.1 to $17.3 million, which includes approximately $1.5 million of deferred financing cost and original issue discount amortization.

Mr. Jagdfeld continued, “Major outage events like the ones recently experienced in the Midwest and Mid-Atlantic regions demonstrate the fact that prolonged under investment in the aging electrical grid in the U.S. is leading to more frequent and longer power disruptions for homeowners and businesses. Given the relatively low awareness and penetration of home and light-commercial standby generators, we believe there is significant growth opportunity as the leader in this emerging product category. Our Powering Ahead strategic plan focuses on baseline sales growth within new and existing products and markets, and complements the powerful secular trends that continue to drive our business. Add to this the potential for future recovery in both residential investment and non-residential construction, and we believe Generac is well positioned over the long term to continue driving organic revenue growth, superior margins and strong free cash flow.”

Conference Call and Webcast

Generac management will hold a conference call at 9:00 a.m. EDT on Thursday, August 2, 2012 to discuss highlights of this earnings release. The conference call can be accessed by dialing (866) 314-4483 (domestic) or +1 (617) 213-8049 (international) and entering passcode 55783069.

The conference call will also be webcast simultaneously on Generac's website ( http://www.generac.com), under the Investor Relations link. The webcast link and supporting materials, if any, will be made available on the Company’s website prior to the start of the call.

Following the live webcast, a replay will be available on the Company's web site. A telephonic replay will also be available approximately one hour after the call and can be accessed by dialing (888) 286-8010 (domestic) or +1 (617) 801-6888 (international) and entering passcode 41917818. The telephonic replay will be available for 30 days.

Generac company news is available 24 hours a day, on-line at: http://www.generac.com .

About Generac

Since 1959, Generac has been a leading designer and manufacturer of a wide range of generators and other engine powered products. As a leader in power equipment serving residential, light commercial, industrial and construction markets, Generac's power products are available through a broad network of independent dealers, retailers, wholesalers and equipment rental companies. The Company markets and distributes its products primarily under its Generac and Magnum brand names.

Forward-looking Information

Certain statements contained in this news release, as well as other information provided from time to time by Generac Holdings Inc. or its employees, may contain forward looking statements that involve risks and uncertainties that could cause actual results to differ materially from those in the forward looking statements. Forward-looking statements give Generac's current expectations and projections relating to the Company's 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," "project," "plan," "intend," "believe," "confident," "may," "should," "can have," "likely," "future" 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.

Any such forward looking statements are not guarantees of performance or results, and involve risks, uncertainties (some of which are beyond the Company's control) and assumptions. Although Generac believes any forward-looking statements are based on reasonable assumptions, you should be aware that many factors could affect Generac's actual financial results and cause them to differ materially from those anticipated in any forward-looking statements, including:

  • demand for Generac products;
  • frequency and duration of major power outages;
  • availability, cost and quality of raw materials and key components used in producing Generac products;
  • the impact on our results of the substantial increases in our outstanding indebtedness and related interest expense due to the dividend recapitalization completed in May 2012;
  • the possibility that the expected synergies, efficiencies and cost savings of the acquisition of the Magnum Products business will not be realized, or will not be realized within the expected time period;
  • the risk that the Magnum Products business will not be integrated successfully;
  • competitive factors in the industry in which Generac operates;
  • Generac's dependence on its distribution network;
  • Generac's ability to invest in, develop or adapt to changing technologies and manufacturing techniques;
  • loss of key management and employees;
  • increase in product and other liability claims; and
  • changes in environmental, health and safety laws and regulations.

Should one or more of these risks or uncertainties materialize, Generac's 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 Generac's filings with the U.S. Securities and Exchange Commission (“SEC”).

Any forward-looking statement made by Generac in this press release speaks only as of the date on which it is made. Generac undertakes 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.

Reconciliations to GAAP Financial Metrics

Adjusted EBITDA

The computation of Adjusted EBITDA is based on the definition of EBITDA contained in Generac's credit agreement, dated as of May 30, 2012, which is substantially the same definition that was contained in the Company’s previous credit agreements. To supplement the Company's condensed consolidated financial statements presented in accordance with US GAAP, Generac provides a summary to show the computation of Adjusted EBITDA, taking into account certain charges and gains that were taken during the periods presented.

Adjusted Net Income

To further supplement Generac's condensed consolidated financial statements presented in accordance with US GAAP, the Company provides a summary to show the computation of Adjusted net income. Adjusted net income is defined as Net income before provision (benefit) for income taxes adjusted for the following items: cash income tax (expense) benefit, amortization of intangible assets, amortization of deferred financing costs and original issue discount related to the Company's debt, intangible impairment charges, certain transaction costs and other purchase accounting adjustments, and certain non-cash gains and losses.

Free Cash Flow

In addition, we reference free cash flow to further supplement Generac's condensed consolidated financial statements presented in accordance with US GAAP. Free cash flow is defined as Net cash provided by operating activities less Expenditures for property and equipment and is intended to be a measure of operational cash flow taking into account additional capital expenditure investment into the business.

The presentation of this additional information is not meant to be considered in isolation of, or as a substitute for, results prepared in accordance with US GAAP. Please see our SEC filings for additional discussion of the basis for Generac's reporting of Non-GAAP financial measures.
Generac Holdings Inc.
Condensed Consolidated Statements of Comprehensive Income
(Dollars in Thousands, Except Share and Per Share Data)
(Unaudited)
       
 
Three Months Ended June 30, Six Months Ended June 30,
  2012       2011     2012       2011  
 
 
Net sales $ 239,137 $ 161,363 $ 533,698 $ 285,344
Costs of goods sold   151,708       101,010     335,264       177,814  
Gross profit 87,429 60,353 198,434 107,530
 
Operating expenses:
Selling and service 22,122 17,317 47,248 31,622
Research and development 5,703 3,608 10,758 7,493
General and administrative 10,158 5,772 19,264 11,889
Amortization of intangibles   12,288       11,856     24,513       23,583  
Total operating expenses   50,271       38,553     101,783       74,587  
Income from operations 37,158 21,800 96,651 32,943
 
Other (expense) income:
Interest expense (9,894 ) (5,934 ) (15,568 ) (11,935 )
Investment income 29 23 48 59
Loss on extinguishment of debt (9,999 ) (186 ) (14,308 ) (186 )
Other, net   (1,595 )     (327 )   (2,020 )     (568 )
Total other expense, net   (21,459 )     (6,424 )   (31,848 )     (12,630 )
 
Income before provision for income taxes 15,699 15,376 64,803 20,313
Provision for income taxes   6,364       87     25,408       180  
Net income $ 9,335     $ 15,289   $ 39,395     $ 20,133  
 
Net income per common share - basic: $ 0.14 $ 0.23 $ 0.59 $ 0.30
Weighted average common shares outstanding - basic: 67,309,260 67,134,999 67,254,870 67,121,356
 
Net income per common share - diluted: $ 0.14 $ 0.23 $ 0.57 $ 0.30
Weighted average common shares outstanding - diluted: 68,645,533 67,718,654 68,599,867 67,463,440
 
Dividends declared per share $ 6.00 $ - $ 6.00 $ -
 
Comprehensive income $ 10,039 $ 12,587 $ 40,030 $ 17,986
   
Generac Holdings Inc.
Condensed Consolidated Balance Sheets
(Dollars in Thousands, Except Share and Per Share Data)
 
 
June 30, December 31,
  2012       2011  
(Unaudited) (Audited)
Assets
Current assets:
Cash and cash equivalents $ 10,307 $ 93,126
Accounts receivable, less allowance for doubtful accounts 100,108 109,705
Inventories 227,038 162,124
Deferred income taxes 17,000 14,395
Prepaid expenses and other assets   4,503       3,915  
Total current assets 358,956 383,265
 
Property and equipment, net 85,786 84,384
 
Customer lists, net 53,785 72,897
Patents, net 74,276 78,167
Other intangible assets, net 6,548 7,306
Deferred financing costs, net 15,078 3,459
Trade names, net 148,434 148,401
Goodwill 547,968 547,473
Deferred income taxes 200,900 227,363
Other assets   44       78  
Total assets $ 1,491,775     $ 1,552,793  
 
Liabilities and stockholders’ equity
Current liabilities:
Short-term borrowings $ 13,000 $
Accounts payable 75,391 81,053
Accrued wages and employee benefits 12,405 14,439
Other accrued liabilities 59,881 47,024
Current portion of long-term borrowings   6,750       22,874  
Total current liabilities 167,427 165,390
 
Long-term borrowings 875,513 575,000
Other long-term liabilities   44,229       43,514  
Total liabilities 1,087,169 783,904
 
Stockholders’ equity:
Common stock, par value $0.01, 500,000,000 shares authorized, 68,055,203 and 67,652,812 shares issued and outstanding at June 30, 2012 and December 31, 2011, respectively 680 676
Additional paid-in capital 738,384 1,142,701
Excess purchase price over predecessor basis (202,116 ) (202,116 )
Accumulated deficit (117,620 ) (157,015 )
Accumulated other comprehensive loss   (14,722 )     (15,357 )
Total stockholders’ equity   404,606       768,889  
Total liabilities and stockholders’ equity $ 1,491,775     $ 1,552,793  
Generac Holdings Inc.
Condensed Consolidated Statements of Cash Flows
(Dollars in Thousands)
(Unaudited)
   
Six Months Ended June 30,
  2012       2011  
 
Operating activities
Net income $ 39,395 $ 20,133
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 3,995 3,940
Amortization of intangible assets 24,513 23,583
Amortization of original issue discount 343
Amortization of deferred financing costs 1,016 996
Loss on extinguishment of debt 14,308 186
Provision for losses on accounts receivable 67 (29 )
Deferred income taxes 23,610
Loss on disposal of property and equipment 91 18
Share-based compensation expense 5,257 3,717
Net changes in operating assets and liabilities:
Accounts receivable 10,676 (16,627 )
Inventories (64,609 ) (12,591 )
Other assets (306 ) 1,183
Accounts payable (6,043 ) 2,927
Accrued wages and employee benefits (2,034 ) (19 )
Other accrued liabilities   9,428       567  
Net cash provided by operating activities 59,707 27,984
 
Investing activities
Proceeds from sale of property and equipment 16 4
Expenditures for property and equipment (5,504 ) (3,404 )
Acquisition of business   (2,279 )      
Net cash used in investing activities (7,767 ) (3,400 )
 
Financing activities
Proceeds from short-term borrowings 13,000
Proceeds from long-term borrowings 1,455,614
Repayments of long-term borrowings (1,172,874 ) (24,731 )
Payment of debt issuance costs (24,928 )
Cash dividends paid (404,332 )
Taxes paid related to the net share settlement of equity awards (2,785 )
Excess tax benefits from equity awards 1,546
Proceeds from exercise of stock options         310  
Net cash used in financing activities (134,759 ) (24,421 )
 
Net (decrease) increase in cash and cash equivalents (82,819 ) 163
Cash and cash equivalents at beginning of period   93,126       78,583  
Cash and cash equivalents at end of period $ 10,307     $ 78,746  
 
Generac Holdings Inc.
Reconciliation Schedules
(Dollars in Thousands, Except Share and Per Share Data)
         
Net income to Adjusted EBITDA reconciliation
Three Months Ended June 30, Six Months Ended June 30, Year Ended December 31,
2012 2011 2012 2011 2011
(unaudited) (unaudited) (unaudited) (unaudited) (unaudited)
 
Net income $ 9,335 $ 15,289 $ 39,395 $ 20,133 $ 324,643
Interest expense 9,894 5,934 15,568 11,935 23,718
Depreciation and amortization 14,290 13,860 28,508 27,523 56,123
Income taxes provision 6,364 87 25,408 180 (237,677 )
Non-cash impairment and other charges (1) 454 158 250 604 10,400
Non-cash share-based compensation expense (2) 2,818 1,717 5,257 3,717 8,646
Loss on extinguishment of debt 9,999 186 14,308 186 377
Transaction costs and credit facility fees (3) 1,284 258 1,419 431 1,719
Other   153       127     280       391     527  
Adjusted EBITDA $ 54,591     $ 37,616   $ 130,393     $ 65,100   $ 188,476  
 
(1) Includes losses on disposals of assets, amortization of earn-out discount and unrealized mark-to-market adjustments on commodity contracts. A full description of these and the other reconciliation adjustments contained in these schedules is included in Generac's SEC filings.
 
(2) Includes 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.
 
 
Net income to Adjusted net income reconciliation
Three Months Ended June 30, Six Months Ended June 30,
2012 2011 2012 2011
(unaudited) (unaudited) (unaudited) (unaudited)
 
Net income $ 9,335 $ 15,289 $ 39,395 $ 20,133
Provision for income taxes   6,364       87     25,408       180  
Income before provision for income taxes 15,699 15,376 64,803 20,313
Amortization of intangible assets 12,288 11,856 24,513 23,583
Amortization of deferred financing costs and original issue discount 853 494 1,359 996
Transaction costs and other purchase accounting adjustments (4) 1,292 - 1,292 -
Loss on extinguishment of debt   9,999       186     14,308       186  
Adjusted net income before provision for income taxes 40,131 27,912 106,275 45,078
Cash income tax expense   (272 )     (256 )   (327 )     (280 )
Adjusted net income $ 39,859     $ 27,656   $ 105,948     $ 44,798  
 
Adjusted net income per common share - diluted: $ 0.58 $ 0.41 $ 1.54 $ 0.66
 
Weighted average common shares outstanding - diluted: 68,645,533 67,718,654 68,599,867 67,463,440
 
(4) Represents transaction costs and other purchase accounting adjustments incurred directly in connection with any investment, as defined in our credit agreement, equity issuance or debt issuance or refinancing.
 
Free cash flow reconciliation
Three Months Ended June 30, Six Months Ended June 30,
2012 2011 2012 2011
(unaudited) (unaudited) (unaudited) (unaudited)
 
Net cash provided by operating activities $ 21,123 $ 15,313 $ 59,707 $ 27,984
Expenditures for property and equipment   (3,366 )     (1,835 )   (5,504 )     (3,404 )
Free cash flow $ 17,757     $ 13,478   $ 54,203     $ 24,580  
 
 
LTM June 30,
2012
(unaudited)
 
2011 net cash provided by operating activities, as reported $ 169,712
Add: June 2012 YTD net cash provided by operating activities, as reported 59,707
Less: June 2011 YTD net cash provided by operating activities, as reported   (27,984 )
LTM net cash provided by operating activities   201,435  
 
2011 expenditures for property and equipment, as reported (12,060 )
Include: June 2012 YTD expenditures for property and equipment, as reported (5,504 )
Exclude: June 2011 YTD expenditures for property and equipment, as reported   3,404  
LTM expenditures for property and equipment   (14,160 )
 
Free cash flow $ 187,275  
 
 
Pro forma sales reconciliation LTM June 30,
2012
(unaudited)
 
2011 net sales, as reported $ 791,976
Add: June 2012 YTD net sales, as reported 533,698
Less: June 2011 YTD net sales, as reported (285,344 )
Pro forma Magnum net sales (July 1, 2011 - September 30, 2011)   41,689  
Pro forma net sales $ 1,082,019  
 
 
Pro forma Adjusted EBITDA reconciliation LTM June 30,
2012
(unaudited)
 
2011 Adjusted EBITDA, as reported $ 188,476
Add: June 2012 YTD Adjusted EBITDA, as reported 130,393
Less: June 2011 YTD Adjusted EBITDA, as reported (65,100 )
Pro forma Magnum adjusted EBITDA (July 1, 2011 - September 30, 2011)   4,560  
Pro forma adjusted EBITDA $ 258,329  
 

SOURCE: Generac Holdings Inc.

Copyright Business Wire 2010

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