Generac Reports Fourth Quarter and Full-Year 2015 Results

Free cash flow a quarterly record of $101 million

WAUKESHA, Wis.–(BUSINESS WIRE)–Generac Holdings Inc. (NYSE: GNRC) (the “Company”), a leading designer
and manufacturer of power generation equipment and other engine powered
products, today reported financial results for its fourth quarter and
full-year ended December 31, 2015. Additionally, the Company initiated
its outlook for 2016.

Fourth Quarter 2015 Highlights

  • Net sales were $357.8 million during the fourth quarter of 2015 as
    compared to $404.0 million in the prior-year fourth quarter, including
    a $14.9 million contribution from a recent acquisition.

    • Residential product sales increased 1.8% to $198.5 million as
      compared to $194.9 million in the prior-year quarter, which was
      primarily due to the contribution from a recent acquisition,
      mostly offset by a decline in shipments of home standby generators
      as a result of lower power outage activity.
    • Commercial & Industrial (C&I) product sales were $131.9 million as
      compared to $185.0 million in the prior-year quarter, which was
      primarily due to a significant decline in shipments of mobile
      products into oil & gas and general rental markets driven by the
      substantial decline in energy prices.

    Full-Year 2015 Highlights

    • Net sales were $1.317 billion during 2015 as compared to $1.461
      billion during 2014.

      • Residential product sales were $673.8 million as compared to
        $722.2 million in the prior year. The decline from the prior year
        was primarily due to lower demand of home standby generators as a
        result of the significant decline in the power outage severity
        environment during 2015, partially offset by the contribution from
        recent acquisitions.
      • Commercial & Industrial product sales were $548.4 million as
        compared to $652.2 million in the prior year. The decline was
        primarily due to a significant reduction in shipments into oil &
        gas and general rental markets and, to a lesser extent, reduced
        shipments to telecom national account customers and the negative
        impact of foreign currency, partially offset by the contribution
        from recent acquisitions.
      • Net income during 2015 was $77.7 million, or $1.12 per share, as
        compared to $174.6 million, or $2.49 per share for 2014. Current-year
        net income includes the impact of $40.7 million of pre-tax, non-cash
        charges for the impairment of certain intangible assets as previously
        discussed. Net income for both years also includes the impact of
        changes in the contractual interest rate relating to the Company’s
        term loan credit agreement, resulting in a $16.0 million gain during
        2014 and $2.4 million loss during 2015.
      • Adjusted net income was $198.4 million, or $2.87 per share, as
        compared to $234.2 million, or $3.34 per share, in 2014.
      • Adjusted EBITDA for 2015 was $270.8 million as compared to $337.3
        million last year.
      • Cash flow from operations was $188.6 million as compared to $253.0
        million in the prior year. Free cash flow was $158.0 million as
        compared to $218.3 million in 2014.
      • On August 1, 2015, the Company acquired Country Home Products and its
        subsidiaries, a leading manufacturer of high-quality, innovative,
        professional-grade engine-powered equipment used in a wide variety of
        property maintenance applications, which are primarily sold in North
        America under the DR® Power Equipment brand.
      • Uses of cash during 2015 included $30.7 million for capital
        expenditures, $73.8 million related to acquisitions, $50.0 million for
        the pre-payment of term loan debt, and approximately $100 million for
        stock repurchases.

      “Despite the ongoing low power outage environment, shipments of
      residential products improved organically on a sequential basis during
      the fourth quarter and exceeded our expectations,” said Aaron Jagdfeld,
      President and Chief Executive Officer. “This strength helped to largely
      offset additional weakness with shipments of mobile products caused by
      the ongoing decline in energy prices. We achieved our second half 2015
      goals for inventory reductions and margin improvements, which led to a
      record level of free cash flow during the fourth quarter. On the
      acquisition front, the Pramac acquisition announced yesterday
      accelerates our strategy of expanding geographically and elevates us to
      a major player in the global power generation market.”

      Additional Fourth Quarter 2015 Highlights

      Residential product sales for the fourth quarter increased to $198.5
      million as compared to $194.9 million for the fourth quarter of 2014.
      The increase was due to a combination of the contribution from a recent
      acquisition and, to a lesser extent, an increase in shipments of
      portable generators due to expanded placement of new products. These
      increases were partially offset by a decline in shipments of home
      standby generators primarily driven by very low levels of power outage
      severity during the current year.

      C&I product sales were $131.9 million as compared to $185.0 million for
      the comparable period in 2014. The decline was primarily due to a
      significant decline in shipments of mobile products into oil & gas and
      general rental markets as a result of lower capital spending caused by
      the substantial decline in energy prices. To a lesser extent, shipments
      of C&I products during the current year were also impacted by declines
      in Latin America along with the negative impact of foreign currency.

      Gross profit margin was 36.6% compared to 34.3% in the prior-year fourth
      quarter. The increase was primarily driven by favorable product mix
      including the impact from a recent acquisition, along with the favorable
      impact of lower commodity costs and overseas sourcing benefits from a
      stronger U.S. dollar. In addition, gross margin in the prior year was
      negatively impacted by temporary increases in certain costs associated
      with the west coast port congestion as well as other overhead-related
      costs that did not repeat in the current-year quarter.

      Net income during the fourth quarter of 2015 includes the impact of
      $40.7 million of pre-tax, non-cash charges for the impairment of
      intangibles with nearly the entire amount relating to certain tradenames
      as a result of a new strategy to transition and consolidate various
      brands acquired through acquisitions over the past several years to the
      Generac® tradename.

      Operating expenses increased $44.5 million as compared to the fourth
      quarter of 2014, which includes the impact of the aforementioned $40.7
      million of intangible impairment charges. Excluding the impact of these
      charges, operating expenses for the quarter increased $3.8 million, or
      6.5%, as compared to the prior year. The increase was primarily driven
      by the addition of recurring operating expenses associated with a recent
      acquisition, partially offset by reductions in certain organic selling,
      general and administrative expenses.

      Free cash flow was $101.2 million as compared to $98.5 million in the
      same period last year, as the decline in operating earnings in the
      current year was more than offset by a larger benefit from a reduction
      in working capital investment, and to a lesser extent, a decline in cash
      income taxes and capital spending levels.

      The Company repurchased 1.15 million shares of its common stock during
      the fourth quarter of 2015 for $35.6 million under its share repurchase
      program which was announced in August 2015. The program authorizes the
      Company to repurchase up to $200 million of its common stock over a 24
      month period, and to date, a total of 3.3 million shares of common stock
      have been repurchased for approximately $100 million.

      2016 Outlook

      The Company is initiating guidance for 2016 with net sales expected to
      increase between 10 to 12% as compared to the prior year, which assumes
      the contribution from the Pramac acquisition that is anticipated to
      close before the end of the first quarter of 2016. Total organic sales
      on a constant currency basis are anticipated to be down between 5 to 7%,
      with nearly all of the decline expected to be from ongoing weakness in
      mobile product shipments into the oil & gas and general rental markets.
      This top-line guidance assumes no material changes in the current
      macroeconomic environment and also assumes no improvement in power
      outage severity relative to the very low levels experienced during 2015.
      Adjusted EBITDA margins are expected to be approximately 20.0% for the
      full-year 2016, and free cash flow generation is expected to be strong,
      with the conversion of adjusted net income anticipated to be over 90%.

      “While several of our major end markets experienced significant
      down-cycles during 2015, we still made important progress on a variety
      of strategic initiatives throughout the year,” continued Mr. Jagdfeld.
      “These included driving awareness for our products, developing and
      expanding our distribution, further investing in innovative new
      products, and implementing manufacturing improvements. In addition, we
      continued to execute on our capital allocation priorities including
      paying down debt, making another strategic acquisition and returning
      capital to shareholders. Despite a weaker demand environment that
      persists entering 2016, we remain optimistic regarding the overall
      long-term growth prospects for our business. With the Pramac
      acquisition, we enter the current year as a more globally diversified
      company with a strong liquidity position that gives us the flexibility
      to drive our Powering Ahead strategic plan forward.”

      Conference Call and Webcast

      Generac management will hold a conference call at 9:00 a.m. EST on
      Tuesday, February 16, 2016 to discuss highlights of the fourth quarter
      and full-year 2015 operating results. The conference call can be
      accessed by dialing (866) 415-3113 (domestic) or +1 (678) 509-7544
      (international) and entering passcode 39115113.

      The conference call will also be webcast simultaneously on Generac’s
      website (http://www.generac.com),
      under the Investor Relations link. The webcast link will be made
      available on the Company’s website prior to the start of the call within
      the Events section of the Investor Relations website.

      Following the live webcast, a replay will be available on the Company’s
      website. A telephonic replay will also be available approximately two
      hours after the call and can be accessed by dialing (855) 859-2056
      (domestic) or +1 (404) 537-3406 (international) and entering passcode
      39115113. The telephonic replay will be available for 30 days.

      About Generac

      Since 1959, Generac has been a leading designer and manufacturer of a
      wide range of power generation equipment and other engine powered
      products. As a leader in power equipment serving residential, light
      commercial, industrial, oil & gas, and construction markets, Generac’s
      power products are available globally through a broad network of
      independent dealers, distributors, retailers, wholesalers and equipment
      rental companies, as well as sold direct to certain end user customers.

      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,” “forecast,” “project,” “plan,” “intend,”
      “believe,” “confident,” “may,” “should,” “can have,” “likely,” “future,”
      “optimistic” and other words and terms of similar meaning in connection
      with any discussion of the timing or nature of future operating or
      financial performance or other events.

      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:

      • frequency and duration of power outages impacting demand for Generac
        products;
      • availability, cost and quality of raw materials and key components
        used in producing Generac products;
      • the impact on our results of possible fluctuations in interest rates
        and foreign currency exchange rates;
      • the possibility that the expected synergies, efficiencies and cost
        savings of our acquisitions will not be realized, or will not be
        realized within the expected time period;
      • the risk that our acquisitions will not be integrated successfully;
      • difficulties Generac may encounter as its business expands globally;
      • 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 or recalls; 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”), particularly in the Risk Factors section of our 2014 Annual
      Report on Form 10-K and in its periodic reports on Form 10-Q.
      Stockholders, potential investors and other readers should consider
      these factors carefully in evaluating the forward-looking statements.

      Any forward-looking statement made by 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 31, 2013, as
      amended. To supplement the Company’s condensed consolidated financial
      statements presented in accordance with U.S. GAAP, Generac provides a
      summary to show the computation of adjusted EBITDA, taking into account
      certain charges and gains that were recognized during the periods
      presented.

      Adjusted Net Income

      To further supplement Generac’s condensed consolidated financial
      statements presented in accordance with U.S. GAAP, the Company provides
      a summary to show the computation of adjusted net income. Adjusted net
      income is defined as net income before provision for income taxes
      adjusted for the following items: cash income tax expense, 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, losses on extinguishment of debt, business
      optimization expenses and certain other 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
      U.S. 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 U.S. GAAP. Please see our SEC filings for additional
      discussion of the basis for Generac’s reporting of Non-GAAP financial
      measures.

      Generac Holdings Inc.
      Consolidated Statements of Comprehensive Income
      (Dollars in Thousands, Except Share and Per Share Data)
       
        Three Months Ended December 31,       Year Ended December 31,
      2015   2014 2015   2014
      (Unaudited) (Unaudited) (Unaudited) (Audited)
       
      Net sales $ 357,830 $ 403,997 $ 1,317,299 $ 1,460,919
      Costs of goods sold   226,706     265,587     857,349     944,700  
      Gross profit 131,124 138,410 459,950 516,219
       
      Operating expenses:
      Selling and service 36,925 30,363 130,242 120,408
      Research and development 8,015 7,914 32,922 31,494
      General and administrative 12,050 15,715 52,947 54,795
      Amortization of intangibles 6,131 5,303 23,591 21,024
      Tradename and goodwill impairment 40,687 40,687
      Gain on remeasurement of contingent consideration               (4,877 )
      Total operating expenses   103,808     59,295     280,389     222,844  
      Income from operations 27,316 79,115 179,561 293,375
       
      Other (expense) income:
      Interest expense (10,602 ) (11,804 ) (42,843 ) (47,215 )
      Investment income 12 11 123 130
      Loss on extinguishment of debt (248 ) (4,795 ) (2,084 )
      Gain (loss) on change in contractual interest rate (2,381 ) 16,014
      Costs related to acquisition (1,042 ) (1,195 ) (396 )
      Other, net   (130 )   (220 )   (5,487 )   (1,462 )
      Total other expense, net   (11,762 )   (12,261 )   (56,578 )   (35,013 )
       
      Income before provision for income taxes 15,554 66,854 122,983 258,362
      Provision for income taxes   6,372     17,464     45,236     83,749  
      Net income $ 9,182 $ 49,390 $ 77,747 $ 174,613
       
      Net income per common share – basic: $ 0.14 $ 0.72 $ 1.14 $ 2.55
      Weighted average common shares outstanding – basic: 66,482,219 68,598,310 68,096,051 68,538,248
       
      Net income per common share – diluted: $ 0.14 $ 0.70 $ 1.12 $ 2.49
      Weighted average common shares outstanding – diluted: 67,472,321 70,170,300 69,200,297 70,171,044
       
      Other comprehensive income (loss):
      Foreign currency translation adjustment $ (1,069 ) $ (1,052 ) $ (7,624 ) $ (3,082 )
      Net unrealized gain (loss) on derivatives 1,106 (701 ) (965 ) (1,420 )
      Pension liability adjustment   1,881     (8,850 )   1,881     (8,850 )
      Other comprehensive income (loss)   1,918     (10,603 )   (6,708 )   (13,352 )
      Comprehensive income $ 11,100   $ 38,787   $ 71,039   $ 161,261  
      Generac Holdings Inc.
      Consolidated Balance Sheets
      (Dollars in Thousands, Except Share and Per Share Data)
         
      December 31,
      2015 2014
       
      Assets
      Current assets:
      Cash and cash equivalents $ 115,857 $ 189,761
      Accounts receivable, less allowance for doubtful accounts of $2,494
      at

       

       

      December 31, 2015 and $2,275 at December 31, 2014

      182,185

      189,107

      Inventories 325,375 319,385
      Deferred income taxes 29,355 22,841
      Prepaid expenses and other assets   8,600     9,384  
      Total current assets 661,372 730,478
       
      Property and equipment, net 184,213 168,821
       
      Customer lists, net 39,313 41,002
      Patents, net 53,772 56,894
      Other intangible assets, net 2,768 4,298
      Tradenames, net 161,057 182,684
      Goodwill 669,719 635,565
      Deferred financing costs, net 12,965 16,243
      Deferred income taxes 6,673 46,509
      Other assets   964     48  
      Total assets $ 1,792,816   $ 1,882,542  
       
      Liabilities and stockholders’ equity
      Current liabilities:
      Short-term borrowings $ 8,594 $ 5,359
      Accounts payable 108,332 132,248
      Accrued wages and employee benefits 13,101 17,544
      Other accrued liabilities 82,540 84,814
      Current portion of long-term borrowings and capital lease obligations   657     557  
      Total current liabilities 213,224 240,522
       
      Long-term borrowings and capital lease obligations 1,050,097 1,082,101
      Deferred income taxes 6,166 13,449
      Other long-term liabilities   57,458     56,671  
      Total liabilities 1,326,945 1,392,743
       
      Stockholders’ equity:
      Common stock, par value $0.01, 500,000,000 shares authorized,
      69,582,669
      and 69,122,271 shares issued at December 31, 2015 and 2014,
      respectively
      696 691
      Additional paid-in capital 443,109 434,906
      Treasury stock, at cost, 3,567,575 and 198,312 shares at December 31,
      2015 and 2014, respectively (111,516 ) (8,341 )
      Excess purchase price over predecessor basis (202,116 ) (202,116 )
      Retained earnings 358,173 280,426
      Accumulated other comprehensive loss   (22,475 )   (15,767 )
      Total stockholders’ equity 465,871 489,799
         
      Total liabilities and stockholders’ equity $ 1,792,816   $ 1,882,542  
      Generac Holdings Inc.
      Consolidated Statements of Cash Flows
      (Dollars in Thousands)
         
      Year Ended December 31,
      2015 2014
       
      Operating activities
      Net income $ 77,747 $ 174,613
      Adjustment to reconcile net income to net cash provided by operating
      activities:
      Depreciation 16,742 13,706
      Amortization of intangible assets 23,591 21,024
      Amortization of original issue discount 3,050 3,599
      Amortization of deferred financing costs 2,379 3,016
      Tradename and goodwill impairment 40,687
      Loss on extinguishment of debt 4,795 2,084
      (Gain) loss on change in contractual interest rate 2,381 (16,014 )
      Gain on remeasurement of contingent consideration (4,877 )
      Provision for losses on accounts receivable 481 672
      Deferred income taxes 26,955 37,878
      Loss on disposal of property and equipment 59 576
      Share-based compensation expense 8,241 12,612
      Net changes in operating assets and liabilities:
      Accounts receivable 9,610 (2,988 )
      Inventories 9,084 3,508
      Other assets 5,063 2,456
      Accounts payable (27,771 ) 15,269
      Accrued wages and employee benefits (5,361 ) (9,405 )
      Other accrued liabilities 445 6,229
      Excess tax benefits from equity awards   (9,559 )   (10,972 )
      Net cash provided by operating activities 188,619 252,986
       
      Investing activities
      Proceeds from sale of property and equipment 105 394
      Expenditures for property and equipment (30,651 ) (34,689 )
      Acquisition of businesses, net of cash acquired   (73,782 )   (61,196 )
      Net cash used in investing activities (104,328 ) (95,491 )
       
      Financing activities
      Proceeds from short-term borrowings 26,384 6,550
      Proceeds from long-term borrowings 100,000
      Repayments of short-term borrowings (23,149 ) (26,444 )
      Repayments of long-term borrowings and capital lease obligations (150,826 ) (94,035 )
      Stock repurchases (99,942 )
      Payment of debt issuance costs (2,117 ) (4 )
      Cash dividends paid (1,436 ) (902 )
      Taxes paid related to the net share settlement of equity awards (12,956 ) (12,160 )
      Excess tax benefits from equity awards   9,559     10,972  
      Net cash used in financing activities   (154,483 )   (116,023 )
       
      Effect of exchange rate changes on cash and cash equivalents (3,712 ) (1,858 )
       
      Net increase (decrease) in cash and cash equivalents (73,904 ) 39,614
      Cash and cash equivalents at beginning of period   189,761     150,147  
      Cash and cash equivalents at end of period $ 115,857   $ 189,761  
       
      Supplemental disclosure of cash flow information
      Cash paid during the period
      Interest $ 39,524 $ 42,592
      Income taxes 6,087 34,283

      Contacts

      Generac Holdings Inc.
      Michael W. Harris
      Vice President ?
      Finance
      (262) 544-4811 x2675
      Michael.Harris@Generac.com

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