Generac Reports Third Quarter 2015 Results

28 Oct 2015, 05:00 AM EDT

Strong sequential improvement in sales and margins in line with
internal expectations

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 third quarter ended
September 30, 2015.

Third Quarter 2015 Highlights

Net sales during the third quarter of 2015 increased 2.0% to $359.3
million as compared to $352.3 million in the prior-year third quarter.
Third quarter of 2015 net sales increased 24.6% as compared to $288.4
million in the second quarter of 2015.

Residential product sales during the third quarter increased to
$185.0 million as compared to $183.7 million in the prior-year
quarter, which was primarily due to contributions from recent
acquisitions, mostly offset by a decline in shipments of home
standby generators as a result of continued record-low power
outage activity.
Commercial & Industrial (C&I) product sales increased 1.2% to
$148.2 million during the third quarter as compared to $146.4
million in the prior-year quarter, which was primarily due to
contributions from a recent acquisition and increased shipments to
industrial distributors, mostly offset by a significant decline in
shipments into oil & gas markets.

“We are pleased with our overall financial results for the quarter as we
saw strong sequential improvement in both sales and margins, which were
in line with our expectations,” said Aaron Jagdfeld, President and Chief
Executive Officer. “Despite the ongoing low power outage environment,
shipments of home standby generators increased significantly relative to
the first half of 2015 as field inventory returned to a more normalized
level. Contributions from C&I-related acquisitions in recent years had a
positive impact on the quarter as we further expanded and diversified
our industrial product offering. However, lower energy prices continued
to have a negative impact on year-over-year growth for certain mobile
products. We were also active on our recently-announced share repurchase
program, which we believe is an attractive use of capital for
shareholders given our long-term growth opportunities.”

Additional Third Quarter 2015 Highlights

Residential product sales for the third quarter increased to $185.0
million as compared to $183.7 million for the third quarter of 2014. The
increase was due to a combination of contributions from recent
acquisitions being mostly offset by a decline in shipments of home
standby generators. The softness in home standby shipments was primarily
driven by the continuation of record-low power outage severity that was
significantly below the prior year and, to a lesser extent, by a modest
level of inventory destocking in certain channels.

C&I product sales for the third quarter of 2015 were $148.2 million as
compared to $146.4 million for the comparable period in 2014. The
increase was primarily due to contributions from a recent acquisition
and higher shipments of stationary equipment to industrial distributors,
mostly offset by a significant decline in shipments of mobile products
into oil & gas markets as a result of lower capital spending caused by
the substantial decline in energy prices.

Gross profit margin for the third quarter of 2015 was 36.3% compared to
37.0% in the prior-year third quarter. The decline was primarily driven
by unfavorable product mix and, to a lesser extent, the impact from
recent acquisitions, partially offset by the favorable impact from
improved pricing along with lower commodity costs and benefits from
overseas components sourcing due to a stronger U.S. dollar.

Operating expenses for the third quarter of 2015 increased $3.0 million,
or 5.0%, as compared to the third quarter of 2014. The increase was
primarily driven by the addition of recurring operating expenses
associated with recent acquisitions, partially offset by reductions in
certain selling, general and administrative expenses.

Free cash flow was $29.4 million in the third quarter of 2015 as
compared to $47.8 million in the same period last year. The decline was
primarily the result of higher working capital investment being
partially offset by a decline in cash income taxes and capital spending
levels.

The Company repurchased 2.15 million shares of its common stock during
the third quarter of 2015 for $64.4 million under its share repurchase
program which was recently announced on August 6, 2015. The program
authorizes the Company to repurchase up to $200 million of its common
stock over a 24 month period.

2015 Outlook Update

Primarily due to the continued softness in the oil & gas markets, the
Company is updating its guidance for revenue and adjusted EBITDA for the
full year 2015. Assuming that power outages during the fourth quarter of
2015 don’t increase from the very low levels experienced thus far in
2015 and assuming energy prices remain at the current reduced levels,
net sales for the full year 2015 are expected to be approximately $1.3
billion. Given this revenue assumption, adjusted EBITDA for the full
year is expected to be approximately $270 million.

“Despite weakness in certain of our key end markets, we are confident in
our ability to continue to drive our Powering Ahead strategic plan
forward while also executing our capital allocation priorities,”
continued Mr. Jagdfeld. “We remain focused on the things we can control
including driving awareness for our products, developing and expanding
our distribution, launching innovative new products and controlling
costs. As we expect to generate significant free cash flow going
forward, we will continue to explore additional opportunities to further
diversify our revenue base and expand our geographic presence, as well
as to opportunistically return capital to shareholders.”

Conference Call and Webcast

Generac management will hold a conference call at 9:00 a.m. EDT on
Wednesday, October 28, 2015 to discuss highlights of the third quarter
operating results. The conference call can be accessed by dialing (866)
415-3113 (domestic) or +1 (678) 509-7544 (international) and entering
passcode 60061654.

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
60061654. 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.
Condensed Consolidated Statements of Comprehensive Income
(U.S. Dollars in Thousands, Except Share and Per Share Data)
(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014

Net sales	$	359,291		$	352,305		$	959,469		$	1,056,922
Costs of goods sold		228,965			222,022			630,643			679,113
Gross profit		130,326			130,283			328,826			377,809

Operating expenses:
Selling and service		34,715			32,961			93,317			90,045
Research and development		8,332			7,822			24,907			23,580
General and administrative		13,127			13,429			40,897			39,080
Amortization of intangible assets		6,285			5,277			17,460			15,721
Gain on remeasurement of contingent consideration		–			–			–			(4,877	)
Total operating expenses		62,459			59,489			176,581			163,549
Income from operations		67,867			70,794			152,245			214,260

Other (expense) income:
Interest expense		(10,210	)		(12,294	)		(32,241	)		(35,411	)
Investment income		39			38			111			119
Loss on extinguishment of debt		–			(1,836	)		(4,795	)		(1,836	)
Gain (loss) on change in contractual interest rate		(2,381	)		–			(2,381	)		16,014
Costs related to acquisitions		(153	)		(396	)		(153	)		(396	)
Other, net		(1,908	)		(1,444	)		(5,357	)		(1,242	)
Total other expense, net		(14,613	)		(15,932	)		(44,816	)		(22,752	)

Income before provision for income taxes		53,254			54,862			107,429			191,508
Provision for income taxes		19,218			18,365			38,864			66,285
Net income	$	34,036		$	36,497		$	68,565		$	125,223

Net income per common share – basic:	$	0.50		$	0.53		$	1.00		$	1.83
Weighted average common shares outstanding – basic:		68,175,466			68,556,051			68,642,479			68,511,409

Net income per common share – diluted:	$	0.49		$	0.52		$	0.98		$	1.79
Weighted average common shares outstanding – diluted:		69,182,465			70,033,224			69,781,300			70,050,953

Comprehensive income	$	31,899		$	35,472		$	59,939		$	122,474

Generac Holdings Inc.
Condensed Consolidated Balance Sheets
(U.S. Dollars in Thousands, Except Share and Per Share Data)

	September 30,			December 31,
	2015			2014
	(Unaudited)			(Audited)
Assets
Current assets:
Cash and cash equivalents	$	46,454		$	189,761
Accounts receivable, less allowance for doubtful accounts		207,205			189,107
Inventories		362,268			319,385
Deferred income taxes		25,974			22,841
Prepaid expenses and other assets		12,467			9,384
Total current assets		654,368			730,478

Property and equipment, net		178,120			168,821

Customer lists, net		44,256			41,002
Patents, net		55,887			56,894
Other intangible assets, net		2,782			4,298
Trade names, net		208,951			182,684
Goodwill		668,122			635,565
Deferred financing costs, net		13,420			16,243
Deferred income taxes		10,640			46,509
Other assets		1,033			48
Total assets	$	1,837,579		$	1,882,542

Liabilities and Stockholders’ Equity
Current liabilities:
Short-term borrowings	$	4,481		$	5,359
Accounts payable		123,186			132,248
Accrued wages and employee benefits		17,258			17,544
Other accrued liabilities		79,759			84,814
Current portion of long-term borrowings and capital lease obligations		302			557
Total current liabilities		224,986			240,522

Long-term borrowings and capital lease obligations		1,050,127			1,082,101
Deferred income taxes		15,014			13,449
Other long-term liabilities		58,180			56,671
Total liabilities		1,348,307			1,392,743

Stockholders’ equity:
Common stock, par value $0.01, 500,000,000 shares authorized, 69,509,423 and 69,122,271 shares issued at September 30, 2015 and December 31, 2014, respectively		696			691
Additional paid-in capital		442,007			434,906
Treasury stock, at cost		(75,913	)		(8,341	)
Excess purchase price over predecessor basis		(202,116	)		(202,116	)
Retained earnings		348,991			280,426
Accumulated other comprehensive loss		(24,393	)		(15,767	)
Total stockholders’ equity		489,272			489,799
Total liabilities and stockholders’ equity	$	1,837,579		$	1,882,542

Generac Holdings Inc.
Condensed Consolidated Statements of Cash Flows
(U.S. Dollars in Thousands)
(Unaudited)

	Nine Months Ended September 30,
	2015			2014

Operating Activities
Net income	$	68,565		$	125,223
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		12,300			10,024
Amortization of intangible assets		17,460			15,721
Amortization of original issue discount		2,494			2,573
Amortization of deferred financing costs		1,874			2,272
Loss on extinguishment of debt		4,795			1,836
(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		324			344
Deferred income taxes		27,319			35,572
Loss on disposal of property and equipment		53			135
Share-based compensation expense		6,889			9,403
Net changes in operating assets and liabilities:
Accounts receivable		(14,838	)		(28,747	)
Inventories		(28,319	)		(9,501	)
Other assets		572			2,768
Accounts payable		(12,226	)		20,215
Accrued wages and employee benefits		(1,167	)		(12,037	)
Other accrued liabilities		(2,644	)		(3,232	)
Excess tax benefits from equity awards		(8,973	)		(9,167	)
Net cash provided by operating activities		76,859			142,511

Investing Activities
Proceeds from sale of property and equipment		105			7
Expenditures for property and equipment		(20,108	)		(22,722	)
Acquisition of business		(74,477	)		(5,309	)
Net cash used in investing activities		(94,480	)		(28,024	)

Financing Activities
Proceeds from short-term borrowings		14,320			4,900
Proceeds from long-term borrowings		100,000			–
Repayments of short-term borrowings		(15,198	)		(24,741	)
Repayments of long-term borrowings and capital lease obligations		(150,595	)		(68,905	)
Stock repurchases		(64,378	)		–
Payment of debt issuance costs		(2,067	)		(4	)
Cash dividends paid		(1,429	)		(705	)
Taxes paid related to the net share settlement of equity awards		(12,387	)		(10,255	)
Excess tax benefits from equity awards		8,973			9,167
Proceeds from exercise of stock options		7			21
Net cash used in financing activities		(122,754	)		(90,522	)

Effect of exchange rate changes on cash and cash equivalents		(2,932	)		(950	)

Net (decrease) increase in cash and cash equivalents		(143,307	)		23,015
Cash and cash equivalents at beginning of period		189,761			150,147
Cash and cash equivalents at end of period	$	46,454		$	173,162

Generac Holdings Inc.
Reconciliation Schedules
(U.S. Dollars in Thousands, Except Share and Per Share Data)

Net income to Adjusted EBITDA reconciliation
	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
	(unaudited)			(unaudited)			(unaudited)			(unaudited)

Net income	$	34,036		$	36,497		$	68,565		$	125,223
Interest expense		10,210			12,294			32,241			35,411
Depreciation and amortization		10,597			8,789			29,760			25,745
Provision for income taxes		19,218			18,365			38,864			66,285
Non-cash write-down and other adjustments (1)		2,115			1,099			4,091			(4,653	)
Non-cash share-based compensation expense (2)		1,799			3,200			6,889			9,403
Loss on extinguishment of debt (3)		–			1,836			4,795			1,836
(Gain) loss on change in contractual interest rate (4)		2,381			–			2,381			(16,014	)
Transaction costs and credit facility fees (5)		317			889			999			1,590
Business optimization expenses (6)		5			–			1,743			–
Other		494			91			404			264
Adjusted EBITDA	$	81,172		$	83,060		$	190,732		$	245,090

(1) Includes gains/losses on disposals of assets, unrealized mark-to-market adjustments on commodity contracts, and certain foreign currency and purchase accounting related adjustments. Additionally, the nine months ended September 30, 2014 includes adjustments to certain earn-out obligations in connection with acquisitions ($4.9 million). A full description of these and the other reconciliation adjustments contained in these schedules is included in Generac’s SEC filings.

(2) Represents share-based compensation expense to account for stock options, restricted stock and other stock awards over their respective vesting periods.

(3) Represents the write-off of original issue discount and capitalized debt issuance costs due to voluntary debt prepayments.

(4) The amount for the three and nine months ended September 30, 2015 represents a non-cash loss relating to a 25 basis point increase in borrowing costs, effective third quarter 2015, as a result of the credit agreement leverage ratio rising above 3.0 times. The amount for the nine months ended September 30, 2014 represents a non-cash gain relating to a 25 basis point reduction in borrowing costs, effective second quarter 2014, as a result of the credit agreement leverage ratio falling below 3.0 times.

(5) 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.

(6) Represents severance and other non-recurring restructuring charges.

Net income to Adjusted net income reconciliation
	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
	(unaudited)			(unaudited)			(unaudited)			(unaudited)

Net income	$	34,036		$	36,497		$	68,565		$	125,223
Provision for income taxes		19,218			18,365			38,864			66,285
Income before provision for income taxes		53,254			54,862			107,429			191,508
Amortization of intangible assets		6,285			5,277			17,460			15,721
Amortization of deferred finance costs and original issue discount		1,024			1,824			4,368			4,845
Loss on extinguishment of debt (7)		–			1,836			4,795			1,836
(Gain) loss on change in contractual interest rate (8)		2,381			–			2,381			(16,014	)
Transaction costs and other purchase accounting adjustments (9)		979			565			1,482			(4,134	)
Business optimization expenses (10)		5			–			1,743			–
Adjusted net income before provision for income taxes		63,928			64,364			139,658			193,762
Cash income tax expense (11)		(500	)		(6,470	)		(6,535	)		(28,030	)
Adjusted net income	$	63,428		$	57,894		$	133,123		$	165,732

Adjusted net income per common share – diluted:	$	0.92		$	0.83		$	1.91		$	2.37
Weighted average common shares outstanding – diluted:		69,182,465			70,033,224			69,781,300			70,050,953

(7) Represents the write-off of original issue discount and capitalized debt issuance costs due to voluntary debt prepayments.

(8) The amount for the three and nine months ended September 30, 2015 represents a non-cash loss relating to a 25 basis point increase in borrowing costs, effective third quarter 2015, as a result of the credit agreement leverage ratio rising above 3.0 times. The amount for the nine months ended September 30, 2014 represents a non-cash gain relating to a 25 basis point reduction in borrowing costs, effective second quarter 2014, as a result of the credit agreement leverage ratio falling below 3.0 times.

(9) Represents transaction costs incurred directly in connection with any investment, as defined in our credit agreement, equity issuance or debt issuance or refinancing, and certain purchase accounting adjustments. The nine months ended September 30, 2014 also include adjustments to certain earn-out obligations in connection with acquisitions ($4.9 million).

(10) Represents severance and other non-recurring restructuring charges.

(11) Amount for the three and nine months ended September 30, 2015 is based on an anticipated cash income tax rate of approximately 4% for the full year-ended 2015. Amount for the three and nine months ended September 30, 2014 is based on an anticipated cash income tax rate of approximately 14% for the full year-ended 2014.

Free cash flow reconciliation
	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
	(unaudited)			(unaudited)			(unaudited)			(unaudited)

Net cash provided by operating activities	$	35,280		$	57,226		$	76,859		$	142,511
Expenditures for property and equipment		(5,850	)		(9,405	)		(20,108	)		(22,722	)
Free cash flow	$	29,430		$	47,821		$	56,751		$	119,789