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Generac Reports Record Quarterly Results

October 31, 2019 6:00 AM

WAUKESHA, Wis., Oct. 31, 2019 (GLOBE NEWSWIRE) -- Generac Holdings Inc. (NYSE: GNRC) (“Generac” or the “Company”), a leading global designer and manufacturer of energy solutions and other power products, today reported financial results for its third quarter ended September 30, 2019.

Third Quarter 2019 Highlights

“We are pleased with our results for the third quarter of 2019 as we posted all-time record net sales and adjusted EBITDA as a result of continued strong growth across various product categories,” said Aaron Jagdfeld, President and Chief Executive Officer. “Our performance in 2019 demonstrates the powerful secular growth opportunities around an aging electrical grid in the United States that is more susceptible to power outages due to a changing climate, the increasing penetration of natural gas power generation globally, and the importance of reliable telecommunication networks. In addition, with the growing threat of utility shut-offs in California, interest in our back-up power solutions is at all-time high. Finally, we are quickly scaling our Clean Energy product portfolio, supply chain, and go-to-market strategies to take advantage of the rapidly developing markets for energy monitoring, management and storage, and intend to launch our new product line in the fourth quarter.”

Additional Third Quarter 2019 Consolidated Highlights

Gross profit margin was 36.2% compared to 35.6% in the prior-year third quarter. Pricing actions and favorable sales mix, as well as lower realized commodity and currency input costs, were partially offset by increased regulatory tariffs. Operating expenses increased $18.1 million, or 19.3%, as compared to the third quarter of 2018. The increase was primarily driven by additional employee headcount related to strategic initiatives, higher marketing and promotional spend, recurring operating expenses from recent acquisitions and higher intangible amortization expenses.

Provision for income taxes for the current year quarter was $20.1 million, or an effective tax rate of 21.1%, as compared to $20.1 million, or a 20.8% effective tax rate, for the prior year.

Cash flow from operations was $111.2 million as compared to $59.3 million in the prior year quarter. Free cash flow, as defined in the accompanying reconciliation schedules, was $100.8 million as compared to $47.0 million in the third quarter of 2018. Improved working capital efficiency in the current year, as well as additional pension funding and interest payments in the prior year, drove the increase.

Business Segment Results

Domestic Segment

Domestic segment sales increased 9.2% to $498.2 million as compared to $456.1 million in the prior year quarter. Core sales growth, which excludes the impact of the Neurio and Pika acquisitions, was approximately 8.5%. The current year quarter experienced strong growth in shipments of home standby generators given continued strong end market conditions, while portable generator shipments were approximately flat compared to the prior year. In addition, C&I stationary generator shipments were also strong during the quarter primarily with our natural gas and telecom products. The overall Domestic segment growth was partially offset by lower shipments of C&I mobile products to national rental account customers.

Adjusted EBITDA for the segment was $121.2 million, or 24.3% of net sales, as compared to $117.1 million in the prior year, or 25.7% of net sales. Pricing initiatives and favorable sales mix, improved commodity and currency input costs, and fixed operating cost leverage were more than offset by the aforementioned regulatory tariffs and higher operating expenses.

International Segment

International segment sales decreased 3.1% to $103.0 million as compared to $106.3 million in the prior year quarter. Core sales, which excludes the unfavorable impact of currency and the impact of the Captiva acquisition, was approximately flat compared to the prior year as geopolitical headwinds caused economic softness in certain regions of the world.

Adjusted EBITDA for the segment, before deducting for noncontrolling interests, was $4.7 million, or 4.6% of net sales, as compared to $7.4 million, or 6.9% of net sales, in the prior year. Unfavorable sales mix and incremental operating expense investment contributed to the decline.

Updated 2019 Outlook The Company is increasing its full-year 2019 guidance for revenue growth reflecting stronger end market demand for residential products, partially offset by slowing commercial & industrial activity. We are now raising our full-year net sales growth to approximately 8 to 9%, with core sales growth now expected to be approximately 7% compared to the prior year.

Net income margin, before deducting for noncontrolling interests, is now expected to be approximately 11.5% for the full-year 2019, with corresponding Adjusted EBITDA margin of approximately 20.5%.

Despite the slower start to the year, Operating and Free Cash Flow generation for the full year is still expected to be strong, with the conversion of adjusted net income to free cash flow expected to be approximately 80%. Conference Call and Webcast

Generac management will hold a conference call at 9:00 a.m. EDT on Thursday, October 31, 2019 to discuss third quarter 2019 operating results. The conference call can be accessed by dialing (866) 415-3113 (domestic) or +1 (678) 509-7544 (international) and entering passcode 5737459.

The conference call will also be webcast simultaneously on Generac's website (http://www.generac.com), accessed 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 5737459. The telephonic replay will be available for 7 days. About Generac

Founded in 1959, Generac is a leading designer and manufacturer of energy solutions and other power products. As an industry leader serving residential, light commercial, and industrial markets, Generac's products and solutions 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:

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 the 2018 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.

Non-GAAP Financial Metrics

Core Sales

The Company references core sales to further supplement Generac's condensed consolidated financial statements presented in accordance with U.S. GAAP. Core sales excludes the impact of acquisitions and fluctuations in foreign currency translation. Management believes that core sales facilitates easier and more meaningful comparison of net sales performance with prior and future periods.

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 noncontrolling 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 noncontrolling 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, plus proceeds from beneficial interests in securitization transactions, 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 the accompanying Reconciliation Schedules and 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.

SOURCE: Generac Holdings Inc. CONTACT: York RagenChief Financial Officer (262) 506-6064 [email protected]

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,
2019 2018 2019 2018
Net sales$601,135 $562,388 $1,613,404 $1,460,060
Costs of goods sold 383,618 362,054 1,037,874 939,326
Gross profit 217,517 200,334 575,530 520,734
Operating expenses:
Selling and service 59,356 48,985 158,954 141,874
Research and development 17,603 13,653 48,906 38,122
General and administrative 27,596 25,499 80,016 75,613
Amortization of intangibles 7,406 5,678 19,999 16,792
Total operating expenses 111,961 93,815 307,875 272,401
Income from operations 105,556 106,519 267,655 248,333
Other (expense) income:
Interest expense (10,704) (9,824) (31,428) (30,939)
Investment income 523 382 1,889 1,095
Loss on extinguishment of debt – – – (1,332)
Other, net (414) (483) (1,868) (2,764)
Total other expense, net (10,595) (9,925) (31,407) (33,940)
Income before provision for income taxes 94,961 96,594 236,248 214,393
Provision for income taxes 20,064 20,072 53,876 49,870
Net income 74,897 76,522 182,372 164,523
Net (loss) income attributable to noncontrolling interests (677) 746 (21) 1,841
Net income attributable to Generac Holdings Inc.$75,574 $75,776 $182,393 $162,682
Net income attributable to common shareholders per common share - basic:$1.20 $1.12 $2.95 $2.36
Weighted average common shares outstanding - basic: 61,973,447 61,579,564 61,878,500 61,659,817
Net income attributable to common shareholders per common share - diluted:$1.18 $1.11 $2.92 $2.34
Weighted average common shares outstanding - diluted: 62,770,592 62,220,298 62,519,205 62,266,140
Comprehensive income attributable to Generac Holdings Inc.$64,904 $80,768 $161,828 $173,355

Generac Holdings Inc.
Condensed Consolidated Balance Sheets
(U.S. Dollars in Thousands, Except Share and Per Share Data)
(Unaudited)
September 30, December 31,
2019 2018
Assets
Current assets:
Cash and cash equivalents$216,038 $224,482
Accounts receivable, less allowance for doubtful accounts 373,591 326,133
Inventories 517,232 544,750
Prepaid expenses and other assets 30,570 25,404
Total current assets 1,137,431 1,120,769
Property and equipment, net 303,288 278,929
Customer lists, net 55,649 61,194
Patents, net 75,781 29,970
Other intangible assets, net 11,809 3,043
Tradenames, net 149,155 152,283
Goodwill 811,914 764,655
Deferred income taxes 3,217 163
Operating lease and other assets 45,877 15,308
Total assets$2,594,121 $2,426,314
Liabilities and stockholders’ equity
Current liabilities:
Short-term borrowings$66,985 $45,583
Accounts payable 241,290 328,091
Accrued wages and employee benefits 37,401 40,819
Other accrued liabilities 127,786 144,236
Current portion of long-term borrowings and finance lease obligations 2,554 1,977
Total current liabilities 476,016 560,706
Long-term borrowings and finance lease obligations 884,315 876,396
Deferred income taxes 92,520 71,300
Operating lease and other long-term liabilities 145,491 95,647
Total liabilities 1,598,342 1,604,049
Redeemable noncontrolling interest 56,564 61,004
Stockholders’ equity:
Common stock, par value $0.01, 500,000,000 shares authorized, 71,640,792 and 71,186,418
shares issued at September 30, 2019 and December 31, 2018, respectively 716 712
Additional paid-in capital 492,671 476,116
Treasury stock, at cost (324,351) (321,473)
Excess purchase price over predecessor basis (202,116) (202,116)
Retained earnings 1,013,707 831,123
Accumulated other comprehensive loss (46,363) (23,813)
Stockholders’ equity attributable to Generac Holdings Inc. 934,264 760,549
Noncontrolling interests 4,951 712
Total stockholders’ equity 939,215 761,261
Total liabilities and stockholders’ equity$2,594,121 $2,426,314

Generac Holdings Inc.
Condensed Consolidated Statements of Cash Flows
(U.S. Dollars in Thousands)
(Unaudited)
Nine Months Ended September 30,
2019 2018
Operating activities
Net income$182,372 $164,523
Adjustment to reconcile net income to net cash provided by operating activities:
Depreciation 22,842 18,332
Amortization of intangible assets 19,999 16,792
Amortization of original issue discount and deferred financing costs 3,597 3,554
Loss on extinguishment of debt – 1,332
Deferred income taxes 19,514 17,218
Share-based compensation expense 11,477 9,910
Other 557 1,249
Net changes in operating assets and liabilities:
Accounts receivable (45,543) (55,649)
Inventories 27,190 (99,957)
Other assets 1,488 (16,488)
Accounts payable (83,174) 47,559
Accrued wages and employee benefits (7,517) 13,044
Other accrued liabilities (17,092) 18,011
Excess tax benefits from equity awards (1,908) (432)
Net cash provided by operating activities 133,802 138,998
Investing activities
Proceeds from sale of property and equipment 83 213
Proceeds from beneficial interests in securitization transactions 2,036 2,825
Expenditures for property and equipment (45,447) (25,577)
Acquisition of business, net of cash acquired (120,863) (71,926)
Net cash used in investing activities (164,191) (94,465)
Financing activities
Proceeds from short-term borrowings 68,802 28,332
Proceeds from long-term borrowings – 51,425
Repayments of short-term borrowings (45,437) (12,478)
Repayments of long-term borrowings and finance lease obligations (3,110) (51,164)
Stock repurchases – (25,656)
Cash dividends paid to noncontrolling interest of subsidiary (285) (314)
Payment of debt issuance costs – (1,702)
Taxes paid related to equity awards (5,749) (2,777)
Proceeds from the exercise of stock options 7,957 5,191
Net cash provided by (used in) financing activities 22,178 (9,143)
Effect of exchange rate changes on cash and cash equivalents (233) 139
Net (decrease) increase in cash and cash equivalents (8,444) 35,529
Cash and cash equivalents at beginning of period 224,482 138,472
Cash and cash equivalents at end of period$216,038 $174,001

Generac Holdings Inc.
Segment Reporting and Product Class Information
(U.S. Dollars in Thousands)
(Unaudited)
Net Sales
Three Months Ended September 30, Nine Months Ended September 30,
Reportable Segments 2019 2018 2019 2018
Domestic (1)$498,163 $456,132 $1,283,348 $1,142,487
International 102,972 106,256 330,056 317,573
Total net sales$601,135 $562,388 $1,613,404 $1,460,060
Product Classes
Residential products$335,029 $311,918 $821,233 $748,790
Commercial & industrial products 214,905 206,366 654,458 597,119
Other (1) 51,201 44,104 137,713 114,151
Total net sales$601,135 $562,388 $1,613,404 $1,460,060
Adjusted EBITDA
Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 2019 2018
Domestic$121,217 $117,108 $306,723 $273,185
International 4,736 7,366 18,244 25,300
Total adjusted EBITDA (2)$125,953 $124,474 $324,967 $298,485
(1) In accordance with ASU 2014-09, Revenue from Contracts with Customers, extended warranty revenues are reported within net sales in the condensed consolidated statements of comprehensive income. Previously, these amounts were reported net within selling and service expense on the condensed consolidated statements of comprehensive income, in amounts that were not material. To report extended warranty in accordance with ASU 2014-09, the net sales and gross profit amounts for the three months ended September 30, 2018 have been revised by $2,873 and $2,449, respectively, and the net sales and gross profit amounts for the nine months ended September 30, 2018 have been revised by $7,962 and $6,604, respectively, from the amounts previously reported for the third quarter of 2018, with an equal offset to selling and service expenses. The revisions impacted the Domestic segment and the Other product class. There was no impact to income from operations, net income or comprehensive income, earnings per share, the condensed consolidated balance sheets, the condensed consolidated statements of stockholders’ equity, or the condensed consolidated statements of cash flows.
(2) 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)
(Unaudited)
Net income to Adjusted EBITDA reconciliation
Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 2019 2018
Net income attributable to Generac Holdings Inc.$75,574 $75,776 $182,393 $162,682
Net (loss) income attributable to noncontrolling interests (677) 746 (21) 1,841
Net income 74,897 76,522 182,372 164,523
Interest expense 10,704 9,824 31,428 30,939
Depreciation and amortization 15,494 11,841 42,841 35,124
Provision for income taxes 20,064 20,072 53,876 49,870
Non-cash write-down and other adjustments (1) 347 900 673 3,522
Non-cash share-based compensation expense (2) 3,549 2,919 11,477 9,910
Loss on extinguishment of debt – – - 1,332
Transaction costs and credit facility fees (3) 358 1,767 2,047 2,470
Business optimization expenses (4) 567 583 809 750
Other (27) 46 (556) 45
Adjusted EBITDA 125,953 124,474 324,967 298,485
Adjusted EBITDA attributable to noncontrolling interests 909 1,454 3,722 5,633
Adjusted EBITDA attributable to Generac Holdings Inc.$125,044 $123,020 $321,245 $292,852
(1) Includes certain foreign currency and purchase accounting related adjustments, gains/losses on disposals of assets and unrealized mark-to-market adjustments on commodity contracts. A full description of these and the other reconciliation adjustments contained in these schedules is included in Generac's SEC filings.
(2) Represents share-based compensation expense to account for stock options, restricted stock and other stock awards over their respective vesting periods.
(3) Represents transaction costs incurred directly in connection with any investment, as defined in our credit agreement, equity issuance or debt issuance or refinancing, together with certain fees relating to our senior secured credit facilities.
(4) Represents severance and other non-recurring restructuring charges related to the consolidation of certain of our facilities.
Net income to Adjusted net income reconciliation
Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 2019 2018
Net income attributable to Generac Holdings Inc.$75,574 $75,776 $182,393 $162,682
Net (loss) income attributable to noncontrolling interests (677) 746 (21) 1,841
Net income 74,897 76,522 182,372 164,523
Provision for income taxes 20,064 20,072 53,876 49,870
Income before provision for income taxes 94,961 96,594 236,248 214,393
Amortization of intangible assets 7,406 5,678 19,999 16,792
Amortization of deferred finance costs and original issue discount 1,221 1,187 3,597 3,554
Loss on extinguishment of debt – – - 1,332
Transaction costs and other purchase accounting adjustments (5) 165 702 1,373 1,516
Business optimization expenses (4) 567 583 809 750
Adjusted net income before provision for income taxes 104,320 104,744 262,026 238,337
Cash income tax expense (6) (15,083) (15,185) (39,698) (31,709)
Adjusted net income 89,237 89,559 222,328 206,628
Adjusted net income attributable to noncontrolling interests (738) 447 958 2,491
Adjusted net income attributable to Generac Holdings Inc.$89,975 $89,112 $221,370 $204,137
Adjusted net income attributable to Generac Holdings Inc. per
common share - diluted: $1.43 $1.43 $3.54 $3.28
Weighted average common shares outstanding - diluted: 62,770,592 62,220,298 62,519,205 62,266,140
(5) 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.
(6) Amounts for the three and nine months ended September 30, 2019 are now based on an anticipated cash income tax rate of approximately 17% respectively for the full year ended 2019. Amounts for the three and nine months ended September 30, 2018 are based on an anticipated cash income tax rate of approximately 15% for the full year ended 2018. 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 full year cash tax rate to the period’s pretax income.
Free Cash Flow Reconciliation
Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 2019 2018
Net cash provided by operating activities$111,188 $59,341 $133,802 $138,998
Proceeds from beneficial interests in securitization transactions 640 896 2,036 2,825
Expenditures for property and equipment (11,071) (13,251) (45,447) (25,577)
Free cash flow $100,757 $46,986 $90,391 $116,246
GAAP Earnings Per Share
Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 2019 2018
Numerator
Net income attributable to Generac Holdings Inc.$75,574 $75,776 $182,393 $162,682
Redeemable noncontrolling interest redemption value adjustment (1,485) (6,912) 191 (16,882)
Net income attributable to common shareholders$74,089 $68,864 $182,584 $145,800
Denominator
Weighted average shares, basic 61,973,447 61,579,564 61,878,500 61,659,817
Dilutive effect of stock compensation awards 797,145 640,734 640,705 606,323
Diluted shares 62,770,592 62,220,298 62,519,205 62,266,140
Net income attributable to common shareholders per share
Basic $1.20 $1.12 $2.95 $2.36
Diluted $1.18 $1.11 $2.92 $2.34

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Source: Generac Holdings Inc

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