Generac Reports Strong 1st Quarter 2012 Results

Significant organic revenue growth and Magnum Products acquisition drive substantial increase in earnings and cash flow - Outlook raised for full-year 2012 - Company announces proposed special cash dividend to shareholders

WAUKESHA, Wis., May 8 -- Generac Holdings Inc., a leading designer and manufacturer of generators and other engine powered products, today reported financial results for its first quarter ended March 31, 2012.

HIGHLIGHTS

• Net sales increased year-over-year by 137.6% to $294.6 million as compared to $124.0 million in the first quarter of 2011.
• Residential product sales increased 153.1% compared to the first quarter of 2011. 
• Commercial & Industrial (C&I) product sales increased 137.0% compared to the prior year first quarter.
• Net sales over the trailing four quarters were $962.6 million and on a pro-forma basis, when including the results for Magnum Products for the entire period, net sales were $1.038 billion.
• Net income increased year-over-year to $30.1 million as compared to $4.8 million for the first quarter of 2011. Adjusted net income increased to $66.1 million from $17.1 million in the first quarter of 2011.
• Diluted net income per common share was $0.44 as compared to $0.07 per share in the first quarter of 2011. Adjusted diluted net income per common share was $0.96 as compared to $0.25 per share in the first quarter of 2011.
• Adjusted EBITDA increased to $75.8 million as compared to $27.5 million in the first quarter last year.
• Cash flow from operations in the first quarter of 2012 was $38.6 million as compared to $12.7 million in the prior year quarter. Free cash flow was $36.4 million as compared to $11.1 million in the first quarter of 2011.
• For the trailing four quarters, net income was $349.9 million; adjusted EBITDA, pro-forma for Magnum Products was $245.9 million; cash flow from operations was $195.6 million; and free cash flow was $183.0 million, which represents 93% of the adjusted net income reported during that time period.

"Our first quarter results demonstrate the significant earnings power and strong free cash flow generation of Generac's business model. With the hard work of our employees and our flexible operations, we were able to quickly meet the increased demand for our products following the major outage events that took place in the second half of 2011," said Aaron Jagdfeld, President and Chief Executive Officer.

"Shipments of home standby generators were again robust during the first quarter, and we continue to gain share in portable generators, further solidifying our leadership position in these markets. Additionally, the Magnum acquisition outperformed our expectations again this quarter as demand for mobile equipment remained strong in the rental markets.

The significant growth that we delivered in the first quarter was a result of solid execution and further illustrates the powerful fundamentals that drive our business."

ADDITIONAL HIGHLIGHTS

Residential product sales for the first quarter of 2012 increased 153.1% to $175.1 million from $69.2 million for the comparable period in 2011. The substantial growth was primarily driven by strong demand for home standby generators resulting from the increased awareness following multiple major outage events in 2011, as well as improved lead times for these products due to increased production levels during the quarter.

Also contributing to the revenue growth were the continued expansion of the Company's distribution network, strong double-digit growth in portable generator shipments and increased revenue from the power washer product line, which was introduced in the first quarter of 2011.

C&I product sales for the first quarter of 2012 increased 137.0% to $105.0 million from $44.3 million for the comparable period in 2011. The increase in net sales was primarily driven by the Magnum Products acquisition and increased shipments into the telecom, healthcare and data center markets.

Additionally, our position as the largest producer of natural gas generators in North America has allowed us to benefit from the continuing shift in the market towards these products. C&I net sales during the first quarter also benefitted from the resolution of backlog related to a short-term gap in the supply of certain components sourced overseas.

Gross profit margin for the first quarter of 2012 was 37.7% compared to 36.8% in the fourth quarter of 2011 and 38.1% in the first quarter of 2011. The mix impact from the addition of Magnum Products sales reduced total company gross margins during the first quarter of 2012 as compared to the first quarter of last year.

This decline in gross margin was partially offset by a higher mix of home standby generators and lower mix of portable generators. In addition, the positive impact from price increases and improved overhead absorption was largely offset by higher commodity costs relative to the prior year.

Operating expenses for the first quarter of 2012 increased by $15.5 million or 43.0% as compared to the first quarter of 2011. These additional expenses were driven primarily by increased variable operating expenses on the substantial increase in organic sales, operating expenses associated with Magnum, increased sales, engineering and administrative infrastructure to support the strategic growth initiatives and higher baseline sales levels of the Company, and increased incentive compensation expenses as a result of the Company's financial performance during the quarter.

Free cash flow was $36.4 million in the first quarter of 2012 as compared to $11.1 million in the same period last year. Strong operating earnings were partially offset by increased working capital investment driven by the replenishment of inventory levels to support higher production rates and seasonal build requirements.

OUTLOOK

Primarily as a result of an increased full-year outlook for residential sales, the Company is revising upward its guidance for full-year 2012. Full-year 2012 total net sales are now expected to increase towards the high end of its previously disclosed mid-to-high teens rate as compared to 2011.

Specifically for the second quarter of 2012, net sales are forecasted to increase approximately 35-40% in comparison to the second quarter of 2011, which reflects the expectation of lead times for residential products returning to more normalized levels during the quarter.

This revised guidance continues to assume no material improvement in the macroeconomic environment and no comparable major outage events during the balance of 2012.

Despite the conservative macro assumptions included in our forecast, both residential and pro-forma C&I product sales during the second half of 2012 are expected to increase at a high-teens rate in comparison to the previous baseline level experienced in the second half of 2010, which is the most recent comparable period with no major outage events.

In accordance with our previously issued guidance, gross margins are expected to remain approximately flat during 2012 as compared to the prior year. In addition, consolidated operating expenses as a percentage of net sales, excluding amortization of intangibles, are also expected to remain slightly higher as compared to 2011, as the Company continues to invest in its infrastructure to support strategic growth initiatives and an overall higher level of baseline sales.

As a result of this revised outlook, Adjusted EBITDA for the full-year 2012 is expected to increase in the mid-teens range compared to 2011, while second quarter 2012 Adjusted EBITDA is expected to increase in the mid-20% range over the comparable prior year period.

PROPOSED SPECIAL CASH DIVIDEND TO SHAREHOLDERS

In addition to the upwardly revised outlook for full-year 2012, the Company is announcing its plan to execute a recapitalization in which it intends to incur, subject to market and other conditions, approximately $650 million of additional debt to fund in large part a special cash dividend of up to $10 per share on its outstanding common stock. As part of this transaction, the Company expects to enter into new debt financing in the aggregate amount of approximately $1.2 billion, which is expected to be comprised of approximately $800 million of senior secured financing and the remainder in senior unsecured financing, the proceeds of which will be used to pay the special cash dividend and refinance the Company's existing credit facilities.

In addition, the Company anticipates its current $150 million unfunded revolver will be replaced with a similar sized asset-backed revolver. The declaration of the special cash dividend will not occur unless new debt financing is obtained under acceptable terms. The Company expects its Board of Directors to declare and the Company to pay the special cash dividend before the end of the second quarter of 2012.

Mr. Jagdfeld continued, "Our ability to return significant capital to shareholders through a special cash dividend is directly attributable to our strong free cash flow and demonstrated track record of paying down debt. We believe a special cash dividend is an effective way for our shareholders to realize the value of our cash flows. We are confident this new capital structure will allow us to further invest in future organic growth initiatives and will provide the flexibility for potential acquisitions in the future."

"As we execute on our Powering Ahead strategic plan, we are focused on growth initiatives that will continue to drive our baseline business higher while also building a company that is significantly more diverse with respect to the products we manufacture and the markets we serve," concluded Mr. Jagdfeld.

 "As we look further out, we continue to be excited about the long-term growth potential for Generac. Given the macro growth drivers for our end markets and the potential for future recovery in residential investment and non-residential construction, we believe our growth prospects are very compelling."

ABOUT GENERAC

Since 1959, Generac has been a leading designer and manufacturer of a wide range of generators and other engine powered products. As a leader in power equipment serving residential, light commercial, industrial and construction markets.  Generac's power products are available through a broad network of independent dealers, retailers, wholesalers and equipment rental companies. The Company markets and distributes its products primarily under its Generac and Magnum brand names.