Strong domestic end market demand continues; Potential California outages driving additional upside to 2019 outlook
WAUKESHA, Wis., Aug. 01, 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 second quarter ended June 30, 2019.
Second Quarter 2019 Highlights
Net sales increased 8.9% to $541.9 million during the second quarter of 2019 as compared to $497.6 million in the prior-year second quarter. Core sales growth, which excludes both the impact of acquisitions and foreign currency, was approximately 7%.
Residential product sales increased 8.9% to $268.4 million as compared to $246.4 million last year, with core sales growth of approximately 8%.
Commercial & Industrial (“C&I”) product sales increased 6.9% to $230.4 million as compared to $215.6 million in the prior year, with core sales growth of approximately 6%.
Net income attributable to the Company during the second quarter was $62.0 million, or $0.98 per share, as compared to $53.3 million, or $0.82 per share, for the same period of 2018.
Adjusted net income attributable to the Company, as defined in the accompanying reconciliation schedules, was $74.9 million, or $1.20 per share, as compared to $68.9 million, or $1.11 per share, in the second quarter of 2018.
Adjusted EBITDA before deducting for noncontrolling interests, as defined in the accompanying reconciliation schedules, was $111.9 million, or 20.6% of net sales, as compared to $102.2 million, or 20.5% of net sales, in the prior year.
“Domestic end market demand for both residential and C&I standby generators continued to be very favorable as our strong execution led to record sales and EBITDA in the second quarter,” said Aaron Jagdfeld, President and Chief Executive Officer. “As we continue to drive the company’s strategy forward, we remain focused on a number of key macro growth themes, which include expanding awareness around the need for backup power, improving 5G network reliability, developing the global opportunity for natural gas power generation, and most recently entering the rapidly growing clean energy market. In addition, we stand ready to execute should a major power outage event occur anywhere in North America, be it a landed hurricane or a utility shutoff in California.”
Additional Second Quarter 2019 Consolidated Highlights
Gross profit margin was 36.1% compared to 35.9% in the prior-year second quarter. Favorable sales mix and pricing actions were partially offset by realization of higher input costs, including regulatory tariffs, logistics costs, labor rates and commodities.
Operating expenses increased $11.9 million, or 12.8%, as compared to the second quarter of 2018. The increase was primarily driven by recurring operating expenses from recent acquisitions, an increase in employee headcount related to strategic initiatives, higher intangible amortization expenses, and higher variable costs given the increased sales volumes.
Provision for income taxes for the current year quarter was $18.8 million, or an effective tax rate of 23.4%, as compared to $18.4 million, or a 25.3% effective tax rate, for the prior year. A higher mix of domestic pre-tax income and additional stock compensation deductions drove the year-over-year decline in effective tax rate.
Cash flow from operations was $8.0 million as compared to $50.7 million in the prior year quarter. Free cash flow, as defined in the accompanying reconciliation schedules, was ($9.8) million as compared to $45.9 million in the second quarter of 2018. Higher operating earnings in the current year quarter were more than offset by additional working capital investments, the timing of tax payments and higher levels of capital expenditures compared to prior year.
Business Segment Results
Domestic segment sales increased 11.0% to $425.9 million as compared to $383.7 million in the prior-year quarter. Core sales growth, which excludes the impact of the Neurio and Pika acquisitions, was approximately 10.4%. The current-year quarter experienced strong growth in shipments of home standby generators given continued strong end market conditions. In addition, C&I stationary generator shipments were also strong during the quarter, primarily related to our telecom customers. The overall Domestic segment growth was partially offset by lower shipments of portable generators as the prior year quarter benefitted from channel replenishment following elevated outage activity.
Adjusted EBITDA for the segment was $104.5 million, or 24.5% of net sales, as compared to $90.6 million in the prior year, or 23.6% of net sales. Favorable sales mix, pricing initiatives and fixed operating cost leverage were partially offset by the aforementioned higher input costs, as well as increased employee costs and recurring operating expenses from recent acquisitions.
International segment sales increased 1.8% to $116.0 million as compared to $113.9 million in the prior-year quarter. Core sales, which excludes the impact of the Selmec and Captiva acquisitions, as well as the unfavorable impact of currency, declined by approximately 3% due to the timing of certain large projects that shipped during the prior year quarter.
Adjusted EBITDA for the segment, before deducting for noncontrolling interests, was $7.4 million, or 6.3% of net sales, as compared to $11.6 million, or 10.2% of net sales, in the prior year. Unfavorable sales mix and decreased operating leverage contributed to the decline.
Updated 2019 Outlook
The Company is increasing its prior guidance for revenue growth for full-year 2019 reflecting stronger domestic end market demand. Assuming no “major” outage events and a baseline power outage severity level similar to the longer-term average, we are raising our full-year as reported net sales growth to approximately 6 to 7%, with core sales growth now expected to be approximately 4 to 5%. In addition, should the outage environment in the second half of 2019 be higher due to an active hurricane season and widespread utility shut-offs in California, we could expect approximately 5% of incremental revenue growth.
Net income margin, before deducting for noncontrolling interests, is now expected to be approximately 11.0% for the full-year 2019, with corresponding Adjusted EBITDA margin of approximately 20.0% for the year assuming baseline power outage levels. Should the outage environment in the second half of 2019 be higher as noted above, net income margin, before deducting for noncontrolling interests, could be approximately 12.0%, with corresponding Adjusted EBITDA margin of approximately 21.0% for the full-year 2019.
Despite the slower start to the year, Operating and Free Cash Flow generation is still expected to be strong, with the conversion of adjusted net income to free cash flow expected to be approximately 80 to 90%.
Conference Call and Webcast
Generac management will hold a conference call at 9:00 a.m. EDT on Thursday, August 1, 2019 to discuss second 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 6898073.
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 6898073. The telephonic replay will be available for 7 days.
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.
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 our products;
availability, cost and quality of raw materials and key components and labor needed in producing our products;
the impact on our results of possible fluctuations in interest rates, foreign currency exchange rates, commodities, product mix and regulatory tariffs;
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 we may encounter as our business expands globally or into new markets;
our dependence on our distribution network;
our ability to invest in, develop or adapt to changing technologies and manufacturing techniques;
loss of our key management and employees;
increase in product and other liability claims or recalls;
failures or security breaches of our networks or information technology systems; and
changes in environmental, health and safety, or product compliance laws and regulations affecting our products or operations.
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
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.
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.