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.
  • Gross profit margin during the fourth quarter improved 230 basis
    points over the prior-year quarter to 36.6% compared to 34.3%.
  • Net income during the fourth quarter of 2015 was $9.2 million, or
    $0.14 per share, as compared to net income of $49.4 million, or $0.70
    per share, for the same period of 2014. The current-year net income
    includes the impact of $40.7 million of pre-tax, non-cash charges for
    the impairment of certain intangible assets with nearly the entire
    amount relating to tradenames as a result of a new brand strategy to
    transition and consolidate various brands to the Generac® tradename.
  • Adjusted net income, as defined in the accompanying reconciliation
    schedules, was $65.3 million, or $0.97 per share, as compared to $68.4
    million, or $0.98 per share, in the fourth quarter of 2014.
  • Adjusted EBITDA, as defined in the accompanying reconciliation
    schedules, was $80.1 million as compared to $92.2 million in the
    fourth quarter last year.
  • Cash flow from operations was $111.8 million as compared to $110.5
    million in the prior year quarter. Free cash flow, as defined in the
    accompanying reconciliation schedules, was a quarterly record of
    $101.2 million as compared to $98.5 million in the fourth quarter of
    2014.
  • The Company repurchased 1.15 million shares of its common stock during
    the fourth quarter for $35.6 million under its previously announced
    $200 million share repurchase program.
  • As announced yesterday, the Company entered into an agreement to
    acquire a majority ownership interest of PR Industrial S.r.l and its
    subsidiaries (collectively Pramac), headquartered in Siena, Italy.
    With over 600 employees, four manufacturing plants and 14 commercial
    branches located around the world, Pramac is a leading global
    manufacturer of stationary, mobile and portable generators sold in
    over 150 countries through a broad distribution network. The
    acquisition is anticipated to close before the end of the first
    quarter of 2016.

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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