Generac (GNRC) 8-K Generac Reports Third Quarter 2010 Earnings

Generac Reports Third Quarter 2010 Earnings

Company delivers year-over-year net sales growth, together with net income growth

and continued strong cash flow generation

WAUKESHA, WISCONSIN, (November 4, 2010) – Generac Holdings Inc. (NYSE: GNRC), a leading designer and manufacturer of backup power generation products, today reported financial results for its third quarter ended September 30, 2010.

Third Quarter 2010 Highlights

·   Net sales increased year-over-year by 11.4% to $160.7 million as compared to $144.3 million in the third quarter of 2009.

·   Net income increased year-over-year by 60.6% to $23.0 million as compared to $14.3 million for the third quarter of 2009; Adjusted net income increased 35.3% to $36.7 million from $27.1 million in the third quarter of 2009.

·   Net cash provided by operating activities improved 50.0% year-over-year, from $24.3 million to $36.5 million during the third quarter 2010.

·   Diluted net income per common share was $0.34 per share; Adjusted diluted net income per common share was $0.55 per share.

·   The Company successfully launched its new economy home standby product, CorePowerTM Series, establishing a new lower opening price for the category.

“Despite the difficult operating environment which persisted throughout the third quarter of 2010, we achieved a double digit year-over-year increase in net sales, driven by increased sales for both our residential and industrial products.  Although we have not had the benefit of major outage activity this summer, improved industrial market conditions and our ability to expand distribution and create awareness for our residential products have helped us drive strong revenue growth in our business.” said Aaron Jagdfeld, President and Chief Executive Officer of Generac. 

Residential product sales of $101.0 million increased 12.6% in the third quarter 2010 from $89.7 million in the third quarter last year.  This year-over-year increase was driven primarily by our marketing programs for home standby generators, continued expansion of our residential products distribution network, and a shift towards in-season buying.

Industrial and commercial product sales of $49.6 million in the third quarter increased 7.6% from $46.0 million for the comparable period in 2009.  This increase was driven by an improvement in our focused end markets and expansion of our distribution.

The Company has also announced the following strategic initiatives designed to improve Generac’s long-term growth profile:

·   In October 2010, the Company announced it had reached a licensing agreement with Honeywell to be the exclusive licensee of Honeywell branded standby and portable generators. By leveraging Generac's product offering and support network, the Honeywell brand will provide incremental access to underpenetrated channels for the Company including security and HVAC.  

·   At the recent 2011 Green Industry and Equipment (GIE) Expo in Louisville, KY, the Company announced plans to re-enter the market for residential and contractor grade pressure washers, allowing it to leverage its existing customer base, supply-chain and engineering expertise.

Overall, gross profit margin increased sequentially to 41.9% from 39.0% in the second quarter 2010, but was down from 44.7% in the same period last year.  The year-over-year decline in gross margins was mostly attributable to increased commodity costs versus prior year and a higher mix of lower kilowatt residential products sold during the current quarter compared to the prior year quarter.

Operating expenses for the third quarter of 2010 increased 10.9% to $37.6 million compared to $33.9 million in third quarter of 2009.  The year-over-year increase in operating expenses was attributable to increased administrative costs related to operating as a public company, non-cash stock compensation expenses, higher engineering and product development costs, and higher variable operating expenses on higher net sales versus prior year.

Adjusted EBITDA of $45.7 million was relatively flat compared to $46.1 million in the third quarter of 2009.  Interest expense decreased in the third quarter of 2010 to $6.5 million, compared to $17.2 million in the same period last year due to debt repayments, lower LIBOR rates, and the termination of certain interest rate swap agreements.

Free cash flow generation remained strong, improving 51.1% year-over-year to $35.2 million during the third quarter 2010 from $23.3 million in the third quarter of 2009.

OUTLOOK

Mr. Jagdfeld concluded, "As we close out 2010, we expect to see continued year-over-year strength from our industrial & commercial products as demand in those markets continues to improve.  However, more than offsetting this improvement, we see our fourth quarter 2010 residential product sales down year-over-year as certain customers have approached seasonal stocking for lower kilowatt products more conservatively this year versus last year.  Despite this, we remain confident in our longer term growth initiatives including new product launches, continued expansion of our distribution network and our entry into new geographies and markets that will continue to drive sales growth and significant cash flow generation for our business.”

Conference Call and Webcast

Generac management will hold a conference call at 10:00am EDT on Thursday, November 4, 2010 to discuss highlights of this earnings release. The conference call can be accessed by dialing (800) 435-1398 (domestic) or +1 (617) 614-4078 (international) and entering passcode 74351458.

The conference call will also be webcast simultaneously on Generac's website (http://www.generac.com), under the Investor Relations link.

The webcast is also being distributed through the Thomson Reuters StreetEvents Network. Individual investors can listen to the call at http://www.earnings.com, Thomson Reuters' individual investor portal, powered by StreetEvents. Institutional investors can access the call via StreetEvents (http://www.streetevents.com), a password-protected event management site.

Following the live webcast, a replay will be available on the Company's web site. A telephonic replay will also be available three hours after the call and can be accessed by dialing (888) 286-8010 (domestic) or +1 (617) 801-6888 (international) and entering passcode 36086456. The telephonic replay will be available for 30 days.

Generac company news is available

24 hours a day, on-line at: http://www.generac.com.

About Generac

Since 1959, Generac has been a leading designer and manufacturer of a wide range of backup power generation products serving residential, light commercial and industrial markets. Generac's power systems range in output from 800 watts to 9 megawatts and are available through a broad network of independent dealers, retailers and wholesalers.

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," "project," "plan," "intend," "believe," "confident," "may," "should," "can have," "likely," "future" and other words and ter ms 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:

·   demand for Generac products;

·   frequency of major power outages;

·   availability of raw materials and key components used in producing Generac products;

·   competitive factors in the industry in which Generac operates;

·   Generac's dependence on its distribution network;

·   Generac's ability to invest in, develop or adapt to changing technologies and manufacturing techniques;

·   Generac's ability to adjust to operating as a public company;

·   loss of key management and employees;

·   increase in liability claims; and

·   changes in environmental, health and safety laws and regulations.

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 Securities and Exchange Commission, or SEC.

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.

Reconciliations to GAAP Financial Metrics

Adjusted EBITDA

To supplement the Company's condensed consolidated financial statements presented in accordance with US GAAP, Generac provides a summary to show the computation of Adjusted EBITDA, taking into account certain charges that were taken during the periods presented. The computation of Adjusted EBITDA is based on the definition of EBITDA contained in Generac's credit agreement, dated as of November 10, 2006.

Adjusted Net Income

To further supplement Generac's condensed consolidated financial statements presented in accordance with US GAAP, the Company provides a summary to show the computation of Adjusted net income (loss). Adjusted net income (loss) is defined as Net income (loss) before provision (benefit) for income taxes adjusted for the following items: cash income tax expense (benefit), amortization of intangible assets, amortization of deferred loan costs related to the Company's debt, intangible impairment charges, and certain non-cash gains.

Free Cash Flow

In addition, we reference free cash flow to further supplement Generac's condensed consolidated financial statements presented in accordance with US 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 US GAAP.  Please see our SEC filings for additional discussion of the basis for Generac's reporting of Non-GAAP financial measures.

Generac Holdings Inc.
Condensed Consolidated Statements of Operations
(Dollars in Thousands, Except Share and Per Share Data)
(Unaudited)
	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
Net sales	$	160,666		$	144,261		$	431,839		$	434,284
Costs of goods sold		93,304			79,770			258,314			262,078
Gross profit		67,362			64,491			173,525			172,206
Operating expenses:
Selling and service		15,295			14,620			43,416			44,863
Research and development		3,580			2,515			10,784			7,752
General and administrative		5,654			3,671			16,492			11,538
Amortization of intangibles		13,063			13,097			38,745			38,863
Total operating expenses		37,592			33,903			109,437			103,016
Income from operations		29,770			30,588			64,088			69,190
Other (expense) income:
Interest expense		(6,540	)		(17,204	)		(20,752	)		(53,652	)
Investment income		62			129			172			2,089
Gain on extinguishment of debt		–			1,235			–			14,745
Write-off of deferred financing costs related to debt extinguishment		–			–			(4,180	)		–
Other, net		(216	)		(320	)		(791	)		(941	)
Total other expense, net		(6,694	)		(16,160	)		(25,551	)		(37,759	)
Income before provision for income taxes		23,076			14,428			38,537			31,431
Provision for income taxes		78			112			237			324
Net income		22,998			14,316			38,300			31,107
Preferential distribution to:
Series A preferred stockholders		–			(3,709	)		(2,042	)		(9,821	)
Class B common stockholders		–			(25,349	)		(12,133	)		(74,208	)
Beneficial conversion - see note 1		–			–			(140,690	)		–
Net income (loss) attributable to common stockholders (formerly Class A common stockholders)	$	22,998		$	(14,742	)	$	(116,565	)	$	(52,922	)
Net income (loss) per common share - basic (2):
Common stock (formerly Class A common stock)	$	0.34		$	(8,492	)	$	(2.05	)	$	(30,485	)
Class B common stock		n/a		$	1,055		$	3,364		$	3,090
Net income (loss) per common share - diluted (2):
Common stock (formerly Class A common stock)	$	0.34		$	(8,492	)	$	(2.05	)	$	(30,485	)
Class B common stock		n/a		$	1,055		$	3,364		$	3,090
Weighted average common shares outstanding - basic (2):
Common stock (formerly Class A common stock)		67,094,447			1,736			56,760,150			1,736
Class B common stock		n/a			24,018			3,607			24,018
Weighted average common shares outstanding - diluted (2):
Common stock (formerly Class A common stock)		67,231,403			1,736			56,760,150			1,736
Class B common stock		n/a			24,018			3,607			24,018
(1) Beneficial conversion feature related to Class B common stock and Series A preferred stock was reflected during the first quarter as a result of Generac's corporate reorganization and IPO. See discussion of Generac's equity structure and corporate reorganization in the 2009 Annual Report on Form 10-K for the fiscal year ended December 31, 2009.
(2) 2010 Net income (loss) per common share and weighted average common shares outstanding reflect the corporate reorganization and IPO that occurred on February 10, 2010. The share structure prior to February 10, 2010 has been retroactively restated to only reflect the reverse stock split that occurred with the corporate reorganization.

Generac Holdings Inc.
Condensed Consolidated Balance Sheets
(Dollars in Thousands, Except Share and Per Share Data)
	September 30,			December 31,
	2010			2009
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	128,334		$	161,307
Accounts and notes receivable, less allowance for doubtful accounts		73,787			54,130
Inventories		127,358			123,700
Prepaid expenses and other assets		3,526			5,880
Total current assets		333,005			345,017
Property and equipment, net		71,852			73,374
Customer lists, net		106,047			134,674
Patents, net		86,904			92,753
Other intangible assets, net		6,781			7,791
Deferred financing costs, net		7,020			13,070
Trade names		141,148			144,407
Goodwill		525,875			525,875
Other assets		527			282
Total assets	$	1,279,159		$	1,337,243
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	61,487		$	33,639
Accrued wages and employee benefits		6,390			6,930
Other accrued liabilities		36,006			52,326
Current portion of long-term debt		–			39,076
Total current liabilities		103,883			131,971
Long-term debt		731,422			1,052,463
Other long-term liabilities		22,987			17,418
Total liabilities		858,292			1,201,852
Class B convertible voting common stock, par value $0.01, 110,000 shares authorized, 0 and 24,018 shares issued at September 30, 2010 and December 31, 2009, respectively		–			765,096
Series A convertible non-voting preferred stock, par value $0.01, 30,000 shares authorized, 0 and 11,311 shares issued at September 30, 2010 and December 31, 2009, respectively		–			113,109
Stockholders’ equity (deficit):
Common stock (formerly Class A common stock), par value $0.01, 500,000,000 shares authorized, 67,522,096 and 1,617 shares issued at September 30, 2010 and December 31, 2009, respectively		675			–
Additional paid-in capital		1,132,189			2,394
Excess purchase price over predecessor basis		(202,116	)		(202,116	)
Accumulated deficit		(500,271	)		(538,571	)
Accumulated other comprehensive loss		(9,610	)		(4,492	)
Stockholder notes receivable		–			(29	)
Total stockholders’ equity (deficit)		420,867			(742,814	)
Total liabilities and stockholders’ equity	$	1,279,159		$	1,337,243

Generac Holdings Inc.
Condensed Consolidated Statements of Cash Flows
(Dollars in Thousands)
(Unaudited)
	Nine Months Ended September 30,
	2010			2009
Operating activities
Net income	$	38,300		$	31,107
Adjustment to reconcile net income to net cash provided by operating activities:
Depreciation		5,777			5,818
Amortization		38,745			38,863
Gain on extinguishment of debt		–			(14,745	)
Write-off of deferred financing costs related to debt extinguishment		4,180			–
Amortization of deferred finance costs		1,870			2,562
Amortization of unrealized loss on interest rate swaps		–			18,167
Provision for losses on accounts receivable		1			89
Loss on disposal of property and equipment		31			36
Share-based compensation expense		4,634			28
Net changes in operating assets and liabilities:
Accounts receivable		(19,658	)		6,094
Inventories		(3,658	)		(19,711	)
Other assets		1,431			1,369
Accounts payable		27,848			9,421
Accrued wages and employee benefits		(511	)		(14	)
Other accrued liabilities		(15,869	)		(33,953	)
Net cash provided by operating activities		83,121			45,131
Investing activities
Proceeds from sale of property and equipment		38			56
Expenditures for property and equipment		(4,324	)		(2,902	)
Collections on receivable notes		–			105
Net cash used in investing activities		(4,286	)		(2,741	)
Financing activities
Stockholders’ contributions of capital –  Series A preferred stock		–			20,000
Proceeds from issuance of common stock		248,309			–
Payment of short-term and long-term debt		(360,117	)		(9,500	)
Net cash (used in) provided by financing activities		(111,808	)		10,500
Net (decrease) increase in cash and cash equivalents		(32,973	)		52,890
Cash and cash equivalents at beginning of period		161,307			81,229
Cash and cash equivalents at end of period	$	128,334		$	134,119
Supplemental disclosure of noncash financing and investing activities
Contributions of capital related to debt extinguishment	$	–		$	14,754

Generac Holdings Inc.
Reconciliation Schedules
(Dollars in Thousands, Except Share and Per Share Data)
Net income to Adjusted EBITDA
reconciliation	Three months ended September 30,						Nine months ended September 30,
	2010			2009			2010			2009
	(unaudited)			(unaudited)			(unaudited)			(unaudited)
Net income	$	22,998		$	14,316		$	38,300		$	31,107
Interest expense		6,540			17,204			20,752			53,652
Depreciation and amortization		15,011			15,060			44,522			44,681
Income taxes provision		78			112			237			324
Non-cash impairment and other charges (1)		(781	)		(23	)		(217	)		(1,389	)
Non-cash share-based compensation expense (2)		1,675			-			4,634			-
Write-off of deferred financing costs related to debt extinguishment		-			-			4,180			-
Transaction costs and credit facility fees		183			458			850			1,168
Non-cash gains (3)		-			(1,235	)		-			(14,745	)
Other		9			198			245			208
Adjusted EBITDA	$	45,713		$	46,090		$	113,503		$	115,006
(1) Includes 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) Includes share-based compensation expense to account for stock options, restricted stock and other stock awards issued in connection with Generac's initial public offering over their respective vesting periods.
(3) Includes gains on extinguishment of debt.

Net income to Adjusted net income
reconciliation	Three months ended September 30,						Nine months ended September 30,
	2010			2009			2010			2009
	(unaudited)			(unaudited)			(unaudited)			(unaudited)
Net income	$	22,998		$	14,316		$	38,300		$	31,107
Provision for income taxes		78			112			237			324
Income before provision for income taxes		23,076			14,428			38,537			31,431
Amortization of intangible assets		13,063			13,097			38,745			38,863
Amortization of deferred loan costs		569			852			1,870			2,562
Write-off of deferred financing costs related to debt extinguishment		-			-			4,180			-
Gain on extinguishment of debt		-			(1,235	)		-			(14,745	)
Adjusted net income before provision for income taxes		36,708			27,142			83,332			58,111
Cash income tax expense		(22	)		(26	)		(395	)		(389	)
Adjusted net income	$	36,686		$	27,116		$	82,937		$	57,722
Adjusted net income per common share - diluted (4):	$	0.55			n/m			n/m			n/m
Weighted average common shares outstanding - diluted (4):		67,231,403			n/m			n/m			n/m
(4) pre-IPO share and per share data is not meaningful due to the corporate reorganization which occurred in conjunction with the IPO during the first quarter of 2010.

Free Cash Flow Reconciliation
	Three months ended September 30,						Nine months ended September 30,
	2010			2009			2010			2009
	(unaudited)			(unaudited)			(unaudited)			(unaudited)
Net cash provided by operating activities	$	36,476		$	24,310		$	83,121		$	45,131
Expenditures for property and equipment		(1,289	)		(1,017	)		(4,324	)		(2,902	)
Free Cash Flow	$	35,187		$	23,293		$	78,797		$	42,229

SOURCE: Generac Holdings Inc.

For Investor Inquiries:

Generac Holdings Inc.

York Ragen

Chief Financial Officer

262-506-6064