OREANDA-NEWS. Generac Holdings Inc. (NYSE:GNRC) (the “Company”), a leading global designer and manufacturer of power generation equipment and other engine powered products, today reported financial results for its second quarter ended June 30, 2016.    

Second Quarter 2016 Highlights

  • Net sales increased 27.4% to $367.4 million during the second quarter of 2016 as compared to $288.4 million in the prior-year second quarter, including $88.1 million of contribution from recent acquisitions. 
    • Effective with the second quarter of 2016 results, the Company changed its segment reporting and, as a result, going forward will present results under two reporting segments – Domestic (U.S. and Canada) and International.  This change is primarily the result of the recent Pramac acquisition and the ongoing strategic plan to expand the business internationally.
    • Domestic segment sales increased 11.1% to $286.7 million as compared to $258.1 million in the prior-year quarter, which was primarily due to the contribution from the Country Home Products acquisition and increased shipments of residential products, partially offset by a continued decline in shipments of mobile products into oil & gas and general rental markets.
    • International segment sales increased to $80.7 million as compared to $30.2 million in the prior-year quarter, which was due to the contribution from the Pramac acquisition.       
  • Net income attributable to the Company during the second quarter of 2016 was $20.9 million, or $0.31 per share, as compared to $14.8 million, or $0.21 per share, for the same period of 2015. 
  • Adjusted net income attributable to the Company, as defined in the accompanying reconciliation schedules, was $42.7 million, or $0.64 per share, as compared to $35.3 million, or $0.50 per share, in the second quarter of 2015.
  • Adjusted EBITDA attributable to the Company, as defined in the accompanying reconciliation schedules, was $62.3 million as compared to $52.4 million in the second quarter last year.   
  • Cash flow from operations was $59.1 million as compared to $16.3 million in the prior year quarter.  Free cash flow, as defined in the accompanying reconciliation schedules, was $52.2 million as compared to $8.6 million in the second quarter of 2015.
  • The Company repurchased 935,000 shares of its common stock during the second quarter for $34.6 million under its previously announced share repurchase program.

“We are pleased with our overall financial results for the quarter as residential product organic sales grew solidly over the prior year,” said Aaron Jagdfeld, President and Chief Executive Officer.  “This performance helped to offset weaker sales of mobile products within domestic and international markets.  We have made encouraging progress on the integration of our recent Country Home Products and Pramac acquisitions, as the addition of these companies are an important element to diversifying the business and expanding internationally.  We also generated a strong level of operating and free cash flow during the quarter and resumed activity on our share repurchase program.”

Additional Second Quarter 2016 Consolidated Highlights

Net sales increased 27.4% to $367.4 million during the second quarter of 2016 as compared to $288.4 million in the prior-year second quarter.  Residential product sales increased 36.2% to $181.7 million as compared to $133.5 million in the prior year.  Commercial & Industrial (C&I) product sales increased 16.5% to $156.7 million as compared to $134.6 million in the prior year.

Gross profit margin improved 50 basis points to 33.8% compared to 33.3% in the prior-year second quarter, despite the current year including $3.4 million of expense relating to the purchase accounting adjustment for the step-up in value of inventories relating to the Pramac acquisition.  Excluding the impact of this adjustment, gross profit margin was 34.7%, an improvement of 140 basis points as compared to the prior year.  The increase was primarily driven by the impact of lower commodity costs and overseas sourcing benefits from a stronger U.S. dollar in recent quarters, along with favorable overall product mix, partially offset by the net mix impact from recent acquisitions.

Operating expenses increased $23.6 million, or 41.9%, as compared to the second quarter of 2015. The increase was primarily driven by the addition of recurring operating expenses associated with recent acquisitions.

Cash flow from operations was $59.1 million as compared to $16.3 million in the prior year, and free cash flow was $52.2 million as compared to $8.6 million in the same period last year.  The increases in cash flow were primarily driven by a large reduction in working capital during the current-year quarter as compared to a large increase in the prior year, along with an overall improvement in operating earnings. 

The Company repurchased 935,000 shares of its common stock during the second quarter of 2016 for $34.6 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 4.2 million shares of common stock have been repurchased for approximately $135 million.

Business Segment Results

Effective with the second quarter of 2016 results, the Company changed its segment reporting and, as a result, going forward will present results under two reporting segments – Domestic and International.  This change is primarily the result of the recent Pramac acquisition and the ongoing strategy to expand the business internationally.  The Domestic segment includes the legacy Generac business and the impact of acquisitions that are based in the United States, all of which have revenues that are substantially derived from the U.S. and Canada.  The International segment includes the Ottomotores, Tower Light and Pramac acquisitions, all of which have revenues that are substantially derived from outside the U.S. and Canada.

Domestic Segment

Domestic segment sales increased 11.1% to $286.7 million as compared to $258.1 million in the prior-year quarter.  The increase was primarily due to the contribution from the Country Home Products acquisition, which closed in August 2015, and an increase in shipments of home standby generators.  These increases were partially offset by the ongoing significant declines in shipments of mobile products into oil & gas and general rental markets.

Adjusted EBITDA for the segment increased 18.4% to $57.4 million, or 20.0% of net sales, as compared to $48.5 million in the prior year, or 18.8% of net sales.  The increase in adjusted EBITDA margin as compared to the prior year was primarily due to favorable product mix as well as the favorable impact of lower commodity costs and overseas sourcing benefits from a stronger U.S. dollar in recent quarters, partially offset by higher operating expenses.

International Segment

International segment sales, primarily consisting of C&I products, increased to $80.7 million as compared to $30.2 million in the prior-year quarter.  The increase was due to the contribution from the Pramac acquisition, which closed in March 2016, partially offset by declines in organic shipments into the United Kingdom and Latin American markets.

Adjusted EBITDA for the segment, before deducting for non-controlling interests, increased to $6.6 million, or 8.2% of net sales, as compared to $4.0 million, or 13.1% of net sales, in the prior year.  The decline in adjusted EBITDA margin as compared to the prior year was primarily due to unfavorable product and customer mix along with lower absorption of fixed manufacturing overhead costs and reduced leverage of operating expenses on the lower organic sales volumes. 

2016 Outlook Update

As a result of current end market conditions, the Company is revising its prior guidance for revenue growth and adjusted EBITDA margins for the full year 2016.  Net sales are now expected to increase between 6 to 8% over the prior year.  Total organic sales on a constant currency basis are now anticipated to be down between 10 and 13%.  This sales guidance assumes no material changes in the current macroeconomic environment and also assumes power outage severity during the second half is similar to the levels experienced during the first half of 2016, which remains well below the longer-term baseline average.  Should the baseline power outage environment normalize or if there is a “major” power outage event in 2016, it is likely the Company could exceed these expectations. 

Net income margins, before deducting for non-controlling interests, are expected to be approximately 7.0% and adjusted EBITDA margins, also before deducting for non-controlling interests, are now expected to be approximately 19.5% for the full-year 2016.  Operating and free cash flow generation is expected to increase over the prior year, benefitting from the strong conversion of adjusted net income.
       
“As we head into the second half of 2016, we’ve seen some additional weakening of end market demand primarily as a result of the ongoing very low power outage environment, continued weakness in oil & gas markets and Brexit-related uncertainty within Europe,” continued Mr. Jagdfeld.  “As a result, we remain focused on executing expense-reduction actions, including those announced last quarter, while also continuing to drive initiatives to advance our strategic plan forward.  As we think about the future, we remain optimistic regarding the long-term growth opportunities for our business, and we intend to further evaluate our priority uses of capital to increase shareholder value.”

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. 

Adjusted EBITDA

The computation of adjusted EBITDA attributable to the Company 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, which excludes the impact of non-controlling interests, 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 attributable to the Company. Adjusted net income attributable to the Company is defined as net income before non-controllable interests and 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, certain other non-cash gains and losses and adjusted net income attributable to non-controlling interests.

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, which includes why the Company believes these measures provide useful information to investors and the additional purposes for which management uses the non-GAAP financial information.

     
Generac Holdings Inc.    
Condensed Consolidated Statements of Comprehensive Income    
(U.S. Dollars in Thousands, Except Share and Per Share Data)    
(Unaudited)    
               
  Three Months Ended June 30,    Six Months Ended June 30,     
    2016       2015       2016       2015      
                   
Net sales $   367,376     $   288,360     $   653,911     $   600,178      
Costs of goods sold     243,229         192,463         431,704         401,678      
Gross profit     124,147         95,897         222,207         198,500      
                   
Operating expenses:                  
Selling and service     42,366         28,474         79,635         58,602      
Research and development     9,889         8,412         18,086         16,575      
General and administrative     19,593         13,564         37,426         27,770      
Amortization of intangibles     8,217         5,980         16,014         11,175      
Total operating expenses     80,065         56,430         151,161         114,122      
Income from operations     44,082         39,467         71,046         84,378      
                   
Other (expense) income:                  
Interest expense     (11,380 )       (10,763 )       (22,415 )       (22,031 )    
Investment income     4         35         36         72      
Loss on extinguishment of debt   –         (3,427 )     –         (4,795 )    
Costs related to acquisition   –         –         (417 )     –      
Other, net     158         (1,840 )       545         (3,449 )    
Total other expense, net     (11,218 )       (15,995 )       (22,251 )       (30,203 )    
                   
Income before provision for income taxes      32,864         23,472         48,795         54,175      
Provision for income taxes     11,921         8,628         17,640         19,646      
Net income      20,943         14,844         31,155         34,529      
Income attributable to noncontrolling interests     55         -          59         -       
Net income attributable to Generac Holdings Inc.  $   20,888     $   14,844     $   31,096     $   34,529      
                   
Net income attributable to Generac Holdings Inc. per                  
common share - basic: $   0.32     $   0.22     $   0.47     $   0.50      
Weighted average common shares outstanding - basic:     65,870,714       68,961,877         65,955,455         68,886,672      
                   
Net income attributable to Generac Holdings Inc. per                  
common share - diluted: $   0.31     $   0.21     $   0.47     $   0.49      
Weighted average common shares outstanding - diluted:     66,388,581       70,063,063         66,465,770         70,099,940      
                   
Comprehensive income $   7,622     $   15,173     $   19,076     $   28,040      
                   
Generac Holdings Inc.  
Condensed Consolidated Balance Sheets  
(U.S. Dollars in Thousands, Except Share and Per Share Data)  
         
  June 30,    December 31,   
    2016       2015    
  (Unaudited)   (Audited)  
Assets        
Current assets:        
Cash and cash equivalents $   75,641     $   115,857    
Accounts receivable, less allowance for doubtful accounts     243,087         182,185    
Inventories     366,745         325,375    
Prepaid expenses and other assets     13,125         8,600    
Total current assets     698,598         632,017    
         
Property and equipment, net     206,700         184,213    
         
Customer lists, net     49,883         39,313    
Patents, net     54,009         53,772    
Other intangible assets, net     3,179         2,768    
Tradenames, net     159,952         161,057    
Goodwill     716,845         669,719    
Deferred income taxes     24,421         34,812    
Other assets     2,948         964    
Total assets $   1,916,535     $   1,778,635    
         
Liabilities and stockholders’ equity        
Current liabilities:        
Short-term borrowings $   33,649     $   8,594    
Accounts payable      166,693         108,332    
Accrued wages and employee benefits     22,193         13,101    
Other accrued liabilities     88,609         82,540    
Current portion of long-term borrowings and capital lease obligations     12,897         657    
Total current liabilities     324,041         213,224    
         
Long-term borrowings and capital lease obligations     1,034,836         1,037,132    
Deferred income taxes     8,745         4,950    
Other long-term liabilities     62,890         57,458    
Total liabilities     1,430,512         1,312,764    
         
Redeemable noncontrolling interests     35,685       –    
         
Stockholders’ equity:        
Common stock, par value $0.01, 500,000,000 shares authorized, 70,142,664 and 69,582,669        
shares issued at June 30, 2016 and December 31, 2015, respectively     701         696    
Additional paid-in capital     443,833         443,109    
Treasury stock, at cost     (146,801 )       (111,516 )  
Excess purchase price over predecessor basis     (202,116 )       (202,116 )  
Retained earnings     389,269         358,173    
Accumulated other comprehensive loss     (34,495 )       (22,475 )  
Stockholders’ equity attributable to Generac Holdings, Inc.      450,391         465,871    
Noncontrolling interests     (53 )     –    
Total stockholders' equity     450,338         465,871    
Total liabilities and stockholders’ equity $   1,916,535     $   1,778,635    
         
Generac Holdings Inc.  
Condensed Consolidated Statements of Cash Flows  
(U.S. Dollars in Thousands)  
(Unaudited)  
         
  Six Months Ended June 30,  
    2016       2015    
         
Operating activities        
Net income $   31,155     $   34,529    
Adjustment to reconcile net income to net cash provided by operating activities:        
Depreciation     10,429         7,988    
Amortization of intangible assets     16,014         11,175    
Amortization of original issue discount and deferred financing costs     2,122         3,344    
Loss on extinguishment of debt   –         4,795    
Deferred income taxes     9,072         8,935    
Share-based compensation expense     5,386         5,090    
Other     46         285    
Net changes in operating assets and liabilities, net of acquisitions:        
Accounts receivable      (9,389 )       29,944    
Inventories     (1,046 )       (66,312 )  
Other assets     2,297         (3,198 )  
Accounts payable     17,537         17,377    
Accrued wages and employee benefits     6,166         (1,735 )  
Other accrued liabilities     (1,825 )       (1,744 )  
Excess tax benefits from equity awards     (6,729 )       (8,894 )  
Net cash provided by operating activities     81,235         41,579    
         
Investing activities        
Proceeds from sale of property and equipment      47         88    
Expenditures for property and equipment      (14,004 )       (14,258 )  
Acquisition of business, net of cash acquired     (60,886 )       233    
Net cash used in investing activities     (74,843 )       (13,937 )  
         
Financing activities                
Proceeds from short-term borrowings     10,278         9,000    
Proceeds from long-term borrowings   –         100,000    
Repayments of short-term borrowings     (6,327 )       (11,366 )  
Repayments of long-term borrowings and capital lease obligations     (10,652 )       (150,453 )  
Stock repurchases     (34,576 )     –    
Payment of debt issuance costs   –         (2,060 )  
Cash dividends paid     (76 )       (1,427 )  
Taxes paid related to the net share settlement of equity awards     (12,099 )       (12,347 )  
Excess tax benefits from equity awards     6,729         8,901    
Net cash used in financing activities     (46,723 )       (59,752 )  
         
Effect of exchange rate changes on cash and cash equivalents     115         (2,076 )  
         
Net decrease in cash and cash equivalents     (40,216 )       (34,186 )  
Cash and cash equivalents at beginning of period     115,857         189,761    
Cash and cash equivalents at end of period $   75,641     $   155,575    
         
Generac Holdings Inc.  
Segment Reporting and Product Class Information  
(U.S. Dollars in Thousands)  
(Unaudited)  
 
    Net Sales  
    Three Months Ended June 30,   Six Months Ended June 30,  
Reportable Segments   2016       2015       2016       2015    
Domestic $   286,720     $   258,117     $   534,736     $   545,729    
International     80,656         30,243         119,175         54,449    
Total net sales $   367,376     $   288,360     $   653,911     $   600,178    
                   
Product Classes                
Residential products $   181,735     $   133,466     $   340,716     $   290,300    
Commercial & industrial products     156,730         134,580         259,720         268,343    
Other     28,911         20,314         53,475         41,535    
Total net sales $   367,376     $   288,360     $   653,911     $   600,178    
                   
    Adjusted EBITDA  
    Three Months Ended June 30,   Six Months Ended June 30,  
      2016       2015       2016       2015    
Domestic $   57,352     $   48,457     $   104,212     $   102,901    
International     6,574         3,965         9,523         6,659    
Total adjusted EBITDA (1) $   63,926     $   52,422     $   113,735     $   109,560    
                   
(1) See reconciliation of Adjusted EBITDA to Net income attributable to Generac Holdings, Inc. on the following reconciliation schedule.   
                   
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 June 30,   Six Months Ended June 30,  
          2016       2015       2016       2015    
        (Unaudited)   (Unaudited)   (Unaudited)   (Unaudited)  
                       
Net income attributable to Generac Holdings Inc.  $   20,888     $   14,844     $   31,096     $   34,529    
Net income attributable to noncontrolling interests (1)     55         -          59         -     
Net income          20,943         14,844         31,155         34,529    
Interest expense         11,380         10,763         22,415         22,031    
Depreciation and amortization       13,650         10,129         26,443         19,163    
Provision for income taxes       11,921         8,628         17,640         19,646    
Non-cash write-down and other adjustments (2)     2,909         404         2,782         1,976    
Non-cash share-based compensation expense (3)     2,901         2,582         5,386         5,090    
Loss on extinguishment of debt (4)     -         3,427         -         4,795    
Transaction costs and credit facility fees (5)     237         481         760         682    
Business optimization expenses (6)       -         1,444         7,106         1,738    
Other           (15 )       (280 )       48         (90 )  
Adjusted EBITDA         63,926         52,422         113,735         109,560    
Adjusted EBITDA attributable to noncontrolling interests     1,623         -          2,307         -     
Adjusted EBITDA attributable to Generac Holdings Inc.  $   62,303     $   52,422     $   111,428     $   109,560    
                       
(1) Includes the noncontrolling interests' share of expenses related to Pramac purchase accounting adjustments, including the step-up in value of inventories and intangible amortization, totaling $4.3 million and $5.5 million for the three and six months ended June 30, 2016, respectively.   
                       
(2) Includes gains/losses on disposals of assets, unrealized mark-to-market adjustments on commodity contracts, foreign currency gains/losses, and certain purchase accounting related adjustments. A full description of these and the other reconciliation adjustments contained in these schedules is included in Generac's SEC filings.   
                       
(3) Represents share-based compensation expense to account for stock options, restricted stock and other stock awards over their respective vesting periods.  
                       
(4) Represents the write-off of original issue discount and capitalized debt issuance costs due to voluntary debt prepayments.   
                       
(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) For the six months ended June 30, 2016, represents charges relating to business optimization and restructuring costs to address the significant and extended downturn for capital spending within the oil & gas industry, consisting of $2.7 million classified within cost of goods sold and $4.4 million classified within operating expenses. For the three and six months ended June 30, 2015, represents severance and other non-recurring restructuring charges.   
                       
Net income to Adjusted net income reconciliation                
        Three Months Ended June 30,   Six Months Ended June 30,  
          2016       2015       2016       2015    
        (Unaudited)   (Unaudited)   (Unaudited)   (Unaudited)  
                       
Net income attributable to Generac Holdings Inc.  $   20,888     $   14,844     $   31,096     $   34,529    
Net income attributable to noncontrolling interests (1)     55         -          59         -     
Net income          20,943         14,844         31,155         34,529    
Provision for income taxes       11,921         8,628         17,640         19,646    
Income before provision for income taxes     32,864         23,472         48,795         54,175    
Amortization of intangible assets       8,217         5,980         16,014         11,175    
Amortization of deferred finance costs and original issue discount     1,066         1,639         2,122         3,344    
Loss on extinguishment of debt (4)     -         3,427         -         4,795    
Transaction costs and other purchase accounting adjustments (7)     3,443         240         4,690         503    
Business optimization expenses (6)       -         1,444         7,106         1,738    
Adjusted net income before provision for income taxes     45,590         36,202         78,727         75,730    
Cash income tax expense (8)       (1,450 )       (920 )       (3,270 )       (6,035 )  
Adjusted net income         44,140         35,282         75,457         69,695    
Adjusted net income attributable to noncontrolling interests     1,451         -          1,881         -     
Adjusted net income attributable to Generac Holdings Inc.  $   42,689     $   35,282     $   73,576     $   69,695    
                       
Adjusted net income attributable to Generac Holdings Inc. per                
common share - diluted: $   0.64     $   0.50     $   1.11     $   0.99    
Weighted average common shares outstanding - diluted:     66,388,581         70,063,063         66,465,770         70,099,940    
                       
(7) 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.  
                       
(8) Amount for the three and six months ended June 30, 2016 is based on an anticipated cash income tax rate of approximately 5% for the full year ended 2016. Amount for the three and six months ended June 30, 2015 is based on an anticipated cash income tax rate of approximately 6% for the full year ended 2015. Cash income tax expense for the respective periods is based on the projected taxable income and corresponding cash tax rate for the full year after considering the effects of current and deferred income tax items, and is calculated for each respective period by applying the derived cash tax rate to the period's pretax income.   
                       
Free Cash Flow Reconciliation                  
        Three Months Ended June 30,   Six Months Ended June 30,  
          2016       2015       2016       2015    
        (Unaudited)   (Unaudited)   (Unaudited)   (Unaudited)  
                       
Net cash provided by operating activities $   59,084     $   16,322     $   81,235     $   41,579    
Expenditures for property and equipment     (6,911 )       (7,730 )       (14,004 )       (14,258 )  
Free cash flow     $   52,173     $   8,592     $   67,231     $   27,321