Generac Reports Strong Second Quarter 2012 Results

WAUKESHA, WI -- Aug. 2, 2012-- Generac Holdings Inc., a leading designer and manufacturer of generators and other engine powered products, today reported financial results for its second quarter ended June 30, 2012.

Highlights

• Net sales increased year-over-year by 48.2% to $239.1 million as compared to $161.4 million in the second quarter of 2011.
• Residential product sales increased 33.8% compared to the second quarter of 2011.
• Commercial & Industrial (C&I) product sales increased 76.4% compared to the prior year second quarter.
• Net sales over the trailing four quarters were $1.040 billion; on a pro-forma basis, when including the results for Magnum.
• Products for the entire period, net sales were $1.082 billion.
• Net income was $9.3 million or $0.14 per share for the second quarter of 2012 as compared to $15.3 million or $0.23 per share for the same period of 2011. The current year results include a charge for refinancing costs and a normalized effective income tax rate. Adjusted net income, as defined in the accompanying reconciliation schedules, increased to $39.9 million from $27.7 million in the second quarter of 2011. Adjusted diluted net income per common share was $0.58 as compared to $0.41 per share in the second quarter of 2011.
• Adjusted EBITDA increased to $54.6 million as compared to $37.6 million in the second quarter last year.
• Cash flow from operations in the second quarter of 2012 was $21.1 million as compared to $15.3 million in the prior year quarter. Free cash flow was $17.8 million as compared to $13.5 million in the second quarter of 2011.
• For the trailing four quarters, net income was $343.9 million; adjusted EBITDA, pro-forma for Magnum Products was $258.3 million; cash flow from operations was $201.4 million; and free cash flow was $187.3 million, which represents 90% of the adjusted net income reported during that time period.
• The Company is raising its sales growth guidance for full-year 2012 to the low-20% range over the prior year, which represents an increase from the high-teens growth rate previously expected. As a result, Adjusted EBITDA for the full-year 2012 is now expected to increase in the high-teens range over the prior year, which is an increase from the mid-teens growth rate previously expected.

“Our second quarter results continue to demonstrate the progress we are making in executing our Powering Ahead strategic plan,” said Aaron Jagdfeld, President and Chief Executive Officer. “Growth in shipments of home standby and portable generators were again strong during the second quarter. In particular, the market for our home standby generators continues to develop as more home owners discover the importance of having backup power. In our commercial and industrial products, Magnum continues to perform well as demand for mobile equipment is benefiting from a shift towards renting versus buying. In addition, while still a smaller portion of the overall market, our leadership position in natural gas backup generators within North America has allowed us to benefit from the increased demand for these products.”

Second Quarter 2012 Details

Residential product sales for the second quarter of 2012 increased 33.8% to $123.4 million from $92.2 million for the comparable period in 2011. The growth was primarily driven by strong double-digit increases in shipments for both home standby and portable generators. The Company’s efforts to increase awareness and availability of home standby generators together with execution in meeting the increased demand for these products have helped to drive baseline growth. In addition, expanded placement for portable generator products continues to lead to year-over-year market share gains. Increased revenue from the power washer product line, which began shipping in the second quarter of 2011, also contributed modestly to the year-over-year sales growth in residential products.

Product sales for the second quarter of 2012 increased 76.4% to $101.1 million from $57.3 million for the comparable period in 2011. The increase in net sales was primarily driven by the Magnum Products acquisition, and to a lesser extent, increased shipments of natural gas backup generators, partially offset by a decline in shipments to national account customers.

Gross profit margin for the second quarter of 2012 was 36.6% compared to 37.4% in the second quarter of 2011. Gross margin declined over the prior year due to the mix impact from the addition of Magnum Products sales, which was partially offset by a higher mix of home standby generators and the positive impact from price increases, improved overhead absorption and moderation in commodity costs relative to the prior year.

Operating expenses for the second quarter of 2012 increased by $11.7 million or 30.4% as compared to the second quarter of 2011. These additional expenses were driven primarily by 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, increased incentive compensation expenses as a result of the Company’s financial performance during the quarter, and increased variable operating expenses resulting from the double-digit increase in organic sales.

As previously announced, on May 30, 2012, the Company completed a refinancing of its senior secured credit facilities, pursuant to which it has incurred $900 million of senior secured term loans to replace its prior $575 million term loan facilities. Following the refinancing, the Company used the available proceeds from the new term loans and cash on hand to fund a special cash dividend to its stockholders of $6.00 per share and to pay related financing fees and expenses. The special dividend, which was paid on June 29, 2012, constituted a declared amount of approximately $408 million in the aggregate of which $404 million was paid in the quarter. In conjunction with this refinancing, an approximate $11.0 million non-recurring charge was recorded during the second quarter of 2012 relating to refinancing costs and other related expenses. As a result of the higher debt levels from the refinancing, interest expense in the second quarter of 2012 increased to $9.9 million compared to $5.9 million in the same period last year.

Net income in the current year quarter includes the impact of a normalized effective income tax rate of 40.5% as compared to a tax rate of 0.6% in the prior-year second quarter. Until the fourth quarter of 2011, a full valuation allowance was recorded on the Company’s net deferred tax assets, resulting in substantially no tax provision. A full valuation allowance is no longer required on the Company’s net deferred tax assets, and therefore, a normalized income tax provision was recorded in the second quarter of 2012. However, the Company’s cash tax obligations are expected to remain nominal given its current tax attributes.
Free cash flow was $17.8 million in the second quarter of 2012 as compared to $13.5 million in the same period last year. Strong operating earnings were partially offset by increased working capital investment driven by seasonal finished goods inventory replenishment and additional raw material safety stock for rapid demand response.

Outlook

The Company is revising upward its sales guidance for full-year 2012 as a result of solid execution in the second quarter of 2012 and an increased outlook for residential sales for the third quarter of 2012. Full-year 2012 total net sales are now expected to increase in the low-20% range over the prior year, which represents an increase from the high-teens growth rate previously expected. The higher revenue outlook is primarily attributable to recent major power outage events that occurred in the Midwest and Mid-Atlantic regions in late June and early July. The Company expects these events should result in improved shipments of portable and home standby generators, relative to prior guidance, due to the increased awareness and demand for back-up power. This revised guidance continues to assume no material changes in the macroeconomic environment, as well as no additional major power outage events during the remainder of 2012.

As a result of this higher sales outlook, Adjusted EBITDA for the full-year 2012 is now expected to increase in the high-teens range over the prior year, which is an increase from the mid-teens growth rate previously expected.

As previously announced, the Company’s guidance for interest expense for the full-year 2012 is expected to be in the range of $49.0 to $50.0 million, which includes $45.0 to $45.5 million of debt service costs, at current LIBOR rates, plus approximately $4.5 million for deferred financing cost and original issue discount amortization for the new credit facility. Interest expense during the third quarter of 2012, the first full quarter under the new capital structure, is expected to be approximately $17.1 to $17.3 million, which includes approximately $1.5 million of deferred financing cost and original issue discount amortization.

Mr. Jagdfeld continued, “Major outage events like the ones recently experienced in the Midwest and Mid-Atlantic regions demonstrate the fact that prolonged under investment in the aging electrical grid in the U.S. is leading to more frequent and longer power disruptions for homeowners and businesses. Given the relatively low awareness and penetration of home and light-commercial standby generators, we believe there is significant growth opportunity as the leader in this emerging product category. Our Powering Ahead strategic plan focuses on baseline sales growth within new and existing products and markets, and complements the powerful secular trends that continue to drive our business. Add to this the potential for future recovery in both residential investment and non-residential construction, and we believe Generac is well positioned over the long term to continue driving organic revenue growth, superior margins and strong free cash flow.”