1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 1, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 33-73247
GENERAC PORTABLE PRODUCTS, INC.
GENERAC PORTABLE PRODUCTS, LLC
GPPW, INC.
(EXACT NAME OF REGISTRANTS AS SPECIFIED IN THEIR RESPECTIVE CHARTERS)
DELAWARE 13-4006887
DELAWARE 39-1932782
WISCONSIN 13-4012695
(STATE OR OTHER JURISDICTION (I.R.S EMPLOYER
OF INCORPORATION OR IDENTIFICATION NUMBERS)
ORGANIZATION)
1 GENERAC WAY
JEFFERSON, WISCONSIN 53549
(920) 674-3750
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes X No
The number of shares of common stock of Generac Portable Products, Inc. and
GPPW, Inc. outstanding as of May 10, 2000 is as follows:
Generac Portable Products, Inc. 12,633,125
GPPW, Inc. 1,000
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GENERAC PORTABLE PRODUCTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN 000'S)
April 1, December 31,
2000 1999
------------- -----------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 831 $ 384
Accounts receivable (less allowances of $380 and $548, respectively) 60,950 55,465
Inventories 82,620 58,372
Prepaid expenses and other current assets 3,758 1,315
--------- ---------
Total current assets 148,159 115,536
Property, plant and equipment, net 29,727 28,911
Intangible assets, net 204,887 206,229
Deferred financing costs 6,373 6,608
Other 15 205
--------- ---------
Total assets $ 389,161 $ 357,489
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 8,864 $ 8,869
Trade accounts payable 39,847 23,793
Accrued employee compensation, benefits and payroll withholdings 2,237 3,263
Other accrued liabilities 11,357 18,991
--------- ---------
Total current liabilities 62,305 54,916
Long-term debt obligations 205,570 180,520
Other long-term obligations 1,133 1,089
Deferred income taxes 6,777 5,717
Commitments and contingencies (Note 4)
Stockholders' equity:
Common stock, $.01 par value, 40,000 shares authorized; 12,633 shares
issued and outstanding 126 126
Additional paid-in capital 109,874 109,874
Retained earnings 16,267 17,741
Accumulated other comprehensive loss (1,233) (836)
Excess of purchase price over book value of net assets acquired
from entities partially under common control (11,658) (11,658)
--------- ---------
Total stockholders' equity 113,376 115,247
--------- ---------
Total liabilities and stockholders' equity $ 389,161 $ 357,489
========= =========
The accompanying notes are an integral part of the financial statements.
3
GENERAC PORTABLE PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(Unaudited)
(AMOUNTS IN $000'S)
For the Quarter For the Quarter
Ended Ended
April 1, 2000 March 31, 1999
----------------------- ------------------------
Net sales $ 73,052 $ 92,887
Cost of sales 56,841 68,730
----------------------- ------------------------
Gross profit 16,211 24,157
Operating expenses:
Selling and service 9,527 11,152
General and administrative 2,303 2,001
Intangible asset amortization 1,341 1,341
======================= ========================
Income from operations 3,040 9,663
Other expense:
Interest expense 5,109 5,096
Deferred financing cost amortization 235 213
Other expense (income), net (25) 5
----------------------- ------------------------
Income (loss) before income taxes (2,279) 4,349
Provision (benefit) for income taxes (805) 1,524
------------------------ ------------------------
Net income (loss) $ (1,474) $ 2,825
======================== ========================
The accompanying notes are an integral part of the financial statements.
4
GENERAC PORTABLE PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(AMOUNTS IN $000'S)
For the Quarter For the Quarter
Ended Ended
April 1, 2000 March 31, 1999
--------------------- --------------------
Operating activities:
Net income (loss) $ (1,474) $ 2,825
Adjustments to reconcile net income (loss) to net cash used for
operating activities
Depreciation 958 584
Amortization 1,576 1,554
Deferred income taxes (805) 756
Increase (decrease) in cash due to changes in:
Accounts receivable (5,764) (26,534)
Inventories (24,307) (12,933)
Other assets (405) (138)
Trade accounts payable 16,061 19,550
Accrued liabilities (8,495) (753)
-------------------- --------------------
Net cash used for operating activities (22,655) (15,089)
-------------------- --------------------
Investing activities:
Capital expenditures (1,812) (1,885)
-------------------- --------------------
Net cash used for investing activities (1,812) (1,885)
-------------------- --------------------
Financing activities:
Net borrowings under revolving loan facility 27,100 18,400
Payments on other long-term debt obligations (2,055) (1,468)
Payment of deferred financing costs - (35)
-------------------- --------------------
Net cash provided by financing activities 25,045 16,897
-------------------- --------------------
Effect of exchange rate changes on cash (131) (44)
-------------------- --------------------
Net increase (decrease) in cash and cash equivalents 447 (121)
Cash and cash equivalents:
Beginning of period $ 384 $ 1,528
-------------------- --------------------
End of period $ 831 $ 1,407
==================== ====================
Supplemental cash flow information:
Cash paid for interest $ 8,336 $ 7,874
==================== ====================
Cash paid for taxes $ 135 $ 790
==================== ====================
The accompanying notes are an integral part of the financial statements.
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GENERAC PORTABLE PRODUCTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
APRIL 1, 2000
(Dollar amounts in thousands unless indicated)
1. BASIS OF PRESENTATION
Generac Portable Products, Inc. (together with its subsidiaries,
including Generac Portable Products, LLC and GPPW, Inc. on a consolidated basis,
"Generac" or the "company"), has domestic operations located in Jefferson,
Wisconsin and branch operations in the United Kingdom, Germany and Spain, and is
a leader in the design, manufacture and sale of portable generators and pressure
washers for use in both industrial and residential applications. Generac sells
primarily to large home center retailers throughout the United States, Canada
and Europe.
These financial statements have been prepared by Generac pursuant to
the rules and regulations of the Securities and Exchange Commission (the "SEC")
and, in the opinion of Generac's management, include all adjustments (all of
which are normal and recurring in nature) necessary to present fairly the
financial position, results of operations and cash flows of Generac for the
interim periods presented. These financial statements include the accounts of
Generac's wholly owned subsidiaries, and all significant intercompany
transactions have been eliminated. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed and omitted pursuant to such
rules and regulations. These unaudited consolidated financial statements should
be read in conjunction with Generac's audited financial statements for the year
ended December 31, 1999 included in the company's Form 10-K as filed with the
SEC on March 29, 2000.
2. INVENTORIES
Inventories consist of the following:
April 1, 2000 December 31, 1999
------------------------ ------------------------
Raw materials and sub-assemblies $49,370 $33,814
Finished goods 33,250 24,558
------------------------ ------------------------
$82,620 $58,372
======================== ========================
3. INCOME TAXES
Generac recorded an income tax provision (benefit) by estimating the
annual effective income tax rate and applying that rate to pretax income (loss).
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4. COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS
In the normal course of business, Generac is involved in certain legal
actions and claims. Management believes that such litigation and claims will be
resolved without material adverse effect on Generac's financial position,
results of operations or cash flows.
In connection with the purchase by Generac Portable Products, LLC of
substantially all of the assets of the Portable Products Division (the
"Predecessor") of Generac Power Systems, Inc. ("GPSI"), formerly known as
Generac Corporation, on July 9, 1998 (the "Acquisition"), Generac entered into
an OEM engine supply agreement with GPSI to supply the company with the engine
used in certain of Generac's pressure washers and portable generators. The
engine supply agreement allows for Generac to make minimum purchases of engines
from GPSI in each of the next nine years and gives Generac the right to increase
the amount of purchases based upon forecasted requirements. This agreement is an
exclusive arrangement related to such products subject to the minimum purchase
requirements. As Generac maintains relationships with other major engine
suppliers, management believes that the minimum purchase quantities and unit
prices under this agreement will not have an adverse effect on Generac.
Management also considers the provisions of the engine supply agreement to
reflect arms-length terms. For the quarters ended April 1, 2000 and March 31,
1999, Generac purchased products approximating $5.7 million and $11.5 million,
respectively, under this agreement. In addition, Generac also purchased other
components from GPSI approximating $.8 million and $5.6 million, respectively,
for the quarters ended April 1, 2000 and March 31, 1999. Included in accounts
payable are amounts due to GPSI of approximately $1.3 million and $6.7 million
at April 1, 2000 and December 31, 1999, respectively.
On September 29, 1999, Generac commenced an arbitration against GPSI,
entitled In the Matter of An Arbitration Between Generac Portable Products, Inc.
and Generac Power Systems, Inc., formerly known as Generac Corporation, under
the auspices of the American Arbitration Association in Milwaukee, Wisconsin.
The dispute concerns the respective rights of the company and GPSI to
manufacture and sell in the retail market portable generators with an output
level greater than ten kilowatts and home standby stationary generators. The
company has alleged that GPSI has improperly taken the position with both the
company and the company's retail customers that a mutual agreement not to
compete executed by the parties in connection with the Acquisition prohibits the
company from manufacturing or selling those products. It is the company's
position that the noncompete agreement does not preclude the company from
manufacturing or selling those products to retailers and that the
parties' contractual arrangements preclude GPSI from interfering with the
company's rights to do so by, among other things, attempting to sell home
standby stationary generators to retailers, including the company's retail
customers. The company also has alleged that GPSI has breached its obligations
under a generator supply contract by refusing for nine months to negotiate a
price for home standby stationary generators and to provide such generators to
the company for resale and by selling those generators directly to the company's
retail customers. Generac is seeking (i) a declaration that GPSI has breached
its contractual obligations to the company, including the implied covenant of
good faith and fair dealing; (ii) a declaration that Generac is free to
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manufacture and sell to retailers portable generators with an output level
greater than ten kilowatts and home standby generators; (iii) to enjoin GPSI
from taking actions which would delay or displace the company's efforts to
market those products to retailers; (iv) to enjoin GPSI from engaging in the
sale of home standby stationary generators to retailers, at least during the
pendency of the generator supply contract; and (v) to hold GPSI liable for
compensatory and punitive damages resulting from GPSI's conduct. On October 19,
1999, GPSI responded to the company's claims by filing an Answering Statement
denying the company's allegations and reiterating its position that the relevant
agreements give GPSI the exclusive right to manufacture and sell home standby
stationary generators and generators with an output level greater than ten
kilowatts in any distribution channel.
The arbitration hearing is scheduled to commence May 22, 2000. A
decision is expected by mid-summer. The company does not believe the arbitration
dispute discussed above will have an adverse effect on its relationship with
GPSI under the OEM engine supply agreement.
5. COMPREHENSIVE INCOME (LOSS)
Total comprehensive income (loss) totaled $(1,871) and $1,923 for the
quarters ended April 1, 2000 and March 31, 1999, respectively. For the quarter
ended April 1, 2000, total comprehensive income is comprised of a net loss of
$(1,474) and accumulated other comprehensive loss of $(397). For the quarter
ended March 31, 1999, total comprehensive income is comprised of net income of
$2,825 and accumulated other comprehensive loss of $(902). Accumulated other
comprehensive income and loss is comprised entirely of foreign currency
translation adjustments.
6. SEPARATE FINANCIAL INFORMATION OF CO-ISSUERS AND GUARANTOR OF THE NOTES
In connection with the Acquisition, Generac Portable Products, LLC and
GPPW, Inc. ("GPPW") co-issued $110 million of 11 1/4% senior subordinated notes
due 2006 (the "Notes") which are guaranteed by Generac Portable Products, Inc.
While Generac Portable Products, LLC and GPPW are jointly and severally liable
for the obligations under the Notes, GPPW does not conduct any operations, or
have any assets of any kind other than its investment in Generac Portable
Products, LLC. The following unaudited condensed supplemental consolidating
financial information as of April 1, 2000 and for the quarters ended April 1,
2000 and March 31, 1999, reflects the investments of Generac Portable Products,
Inc., GPPW and GPPD, Inc. ("GPPD") in Generac Portable Products, LLC using the
equity method. Generac Portable Products, Inc., GPPW and GPPD are dependent upon
Generac Portable Products, LLC for cash flows to fund their income tax
liabilities arising from their respective investments. GPPW and GPPD are
wholly-owned subsidiaries of Generac Portable Products, Inc., and GPPW and GPPD
hold a 5% and 95% ownership interest in Generac Portable Products, LLC,
respectively.
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AS OF APRIL 1, 2000
===================
GENERAC PORTABLE GENERAC PORTABLE
PRODUCTS, INC. GPPW GPPD PRODUCTS, LLC ELIMINATIONS CONSOLIDATED
-------------- ---- ---- ------------- ------------ ------------
Current assets $ - $ 152 $ 2,885 $ 145,122 $ - $ 148,159
Investment in affiliates 120,373 6,456 122,654 - (249,483) -
Noncurrent assets - - - 241,002 - 241,002
---------------- ------------- ------------- ------------------ -------------- ---------------
$ 120,373 $ 6,608 $ 125,539 $ 386,124 $ (249,483) $ 389,161
================ ============= ============= ================== ============== ===============
Current liabilities $ - $ 17 $ 319 $ 61,969 $ - $ 62,305
Long-term debt - - - 205,570 - 205,570
Other long-term obligations - 339 6,438 1,133 - 7,910
Stockholders' equity 120,373 6,252 118,782 117,452 (249,483) 113,376
---------------- ------------- ------------- ------------------ -------------- ---------------
$ 120,373 $ 6,608 $ 125,539 $ 386,124 $ (249,483) $ 389,161
================ ============= ============= ================== ============== ===============
AS OF DECEMBER 31, 1999
=======================
GENERAC PORTABLE GENERAC PORTABLE
PRODUCTS, INC. GPPW GPPD PRODUCTS, LLC ELIMINATIONS CONSOLIDATED
-------------- ---- ---- ------------- ------------ ------------
Current assets $ - $ 59 $ 1,112 $ 114,365 $ - $ 115,536
Investment in affiliates 122,357 6,596 125,303 - (254,256) -
Noncurrent assets - - - 241,953 - 241,953
---------------- ------------- ------------- ------------------ -------------- ---------------
$ 122,357 $ 6,655 $ 126,415 $ 356,318 $ (254,256) $ 357,489
================ ============= ============= ================== ============== ===============
Current liabilities $ - $ 23 $ 425 $ 54,468 $ - $ 54,916
Long-term debt - - - 180,520 - 180,520
Other long-term obligations - 286 5,431 1,089 - 6,806
Stockholders' equity 122,357 6,346 120,559 120,241 (254,256) 115,247
---------------- ------------- ------------- ------------------ -------------- ---------------
$ 122,357 $ 6,655 $ 126,415 $ 356,318 $ (254,256) $ 357,489
================ ============= ============= ================== ============== ===============
FOR THE QUARTER ENDED APRIL 1, 2000
===================================
GENERAC PORTABLE GENERAC PORTABLE
PRODUCTS, INC. GPPW GPPD PRODUCTS, LLC ELIMINATIONS CONSOLIDATED
-------------- ---- ---- ------------- ------------ ------------
Net sales $ - $ - $ - $ 73,052 $ - $ 73,052
Gross profit - - - 16,211 - 16,211
Operating expenses - - - 13,171 - 13,171
---------------- ------------- ------------- ------------------ -------------- ---------------
Operating income - - - 3,040 - 3,040
Interest expense - - - 5,109 - 5,109
Other expense (income), net - - - 210 - 210
Equity in earnings of affiliates (1,474) (114) (2,165) - 3,753 -
---------------- ------------- ------------- ------------------ -------------- ---------------
Loss before income taxes (1,474) (114) (2,165) (2,279) 3,753 (2,279)
Benefit for income taxes - (40) (765) - - (805)
---------------- ------------- ------------- ------------------ -------------- ---------------
Net loss $ (1,474) $ (74) $ (1,400) $ (2,279) $ 3,753 $ (1,474)
================ ============= ============= ================== ============== ===============
FOR THE QUARTER ENDED MARCH 31, 1999
====================================
GENERAC PORTABLE GENERAC PORTABLE
PRODUCTS, INC. GPPW GPPD PRODUCTS, LLC ELIMINATIONS CONSOLIDATED
-------------- ---- ---- ------------- ------------ ------------
Net sales $ - $ - $ - $ 92,887 $ - $ 92,887
Gross profit - - - 24,157 - 24,157
Operating expenses - - - 14,494 - 14,494
------------------ ------------ ------------ ------------------ -------------- ---------------
Operating income - - - 9,663 - 9,663
Interest expense - - - 5,096 - 5,096
Other expense (income), net - - - 218 - 218
Equity in earnings of affiliates 2,825 217 4,132 - (7,174) -
------------------ ------------ ------------ ------------------ -------------- ---------------
Income before income taxes 2,825 217 4,132 4,349 (7,174) 4,349
Provision for income taxes - 76 1,448 - - 1,524
------------------ ------------ ------------ ------------------ -------------- ---------------
Net income $ 2,825 $ 141 $ 2,684 $ 4,349 $ (7,174) $ 2,825
================== ============ ============ ================== ============== ===============
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7. LONG-TERM DEBT OBLIGATIONS
Effective May 10, 2000, the company amended its credit facility which,
among other things, revised requirements relating to certain financial ratios
and tests, including maximum levels of leverage, minimum levels of interest
coverage and minimum required levels of earnings before interest, income taxes,
depreciation and amortization.
8. SEGMENT INFORMATION
Generac is a leader in the design, manufacture and sale of portable
generators and pressure washers. Engineering, manufacturing, marketing and
administrative resources are generally not product specific and Generac
evaluates operating performance based upon the combined results of these product
lines.
Information regarding Generac's geographic areas is summarized below:
UNITED
STATES EUROPE CONSOLIDATED
------ ------ ------------
Net sales - for the quarter ended April 1, 2000 $66,471 $6,581 $ 73,052
Net sales - for the quarter ended March 31, 1999 87,897 4,990 92,887
Long-lived assets - as of April 1, 2000 238,551 2,451 241,002
Generac sells primarily to large home center retailers. Two customers
accounted for approximately 65% and 66% of net sales for quarters ended April 1,
2000 and March 31, 1999, respectively. Both customers individually comprise more
than 10% of Generac's net sales. Accounts receivable from these two customers
approximated $37,623 and $29,314 at April 1, 2000 and December 31, 1999,
respectively.
9. CHANGE IN INTERIM ACCOUNTING PERIODS
During the quarter ended April 1, 2000, Generac changed its interim
accounting period from a calendar quarter-end to a 13-week period. Consequently,
the first quarter of 2000 covers the period from January 1, 2000 to April 1,
2000. Subsequent quarterly financial periods will also be 13 weeks. The
company's fourth quarter-end and fiscal year-end will continue to be December
31, 2000. This change did not have a material effect on reported results for the
quarter ended April 1, 2000, and the company does not believe that this change
in interim accounting periods will have a material effect on its interim
financial statements of future periods.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations included as part of the company's Form 10-K as filed with the SEC on
March 29, 2000. This report on Form 10-Q includes forward-looking statements
based on management's current expectations. Reference is made in particular to
the description of the company's plans and objectives for future operations,
assumptions underlying such plans and objectives and other forward-looking
statements in this report. Such forward-looking statements generally are
identifiable by words such as "believes," "intends," "estimates," "expects," and
similar expressions. Although management believes that the expectations
reflected in the forward-looking statements are reasonable, management cannot
guarantee future results, levels of activity, performance or achievements.
Moreover, neither management nor any other person assumes responsibility for the
accuracy and completeness of such statements.
Overview
Generac is a leader in the design, manufacture and sale of portable
generators and pressure washers for use in both consumer and commercial
applications. Generac has domestic operations located in Jefferson, Wisconsin
and branch operations in the United Kingdom, Germany and Spain. Generac sells
primarily to large home center retailers throughout the United States, Canada
and Europe. References to "Generac" or the "company" means Generac Portable
Products, Inc. and its subsidiaries, on a consolidated basis and, as the context
requires, Generac's Predecessor. The "Predecessor" refers to the Portable
Products Division of GPSI.
The table below sets forth the company's results of operations for the
periods indicated. Included in the table is a presentation of EBITDA, which
represents earnings before interest, taxes, depreciation, amortization and
certain other non-recurring charges. EBITDA is a widely recognized financial
indicator of a company's ability to service or incur debt. EBITDA is not a
measure of operating performance computed in accordance with generally accepted
accounting principles and should not be considered as a substitute for operating
performance computed in accordance with generally accepted accounting principles
or as a substitute for operating income, net income, cash flows from operations,
or other statement of operations or cash flow data prepared in accordance with
generally accepted accounting principles, or as a measure of profitability or
liquidity. In addition, EBITDA may not be comparable to similarly titled
measures of other companies. EBITDA may not be indicative of the company's
historical operating results or of the company's Predecessor, nor is it meant to
be predictive of future results of operations or cash flows. See also the
statement of cash flows contained within the financial statements included
elsewhere in this document.
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RESULTS OF OPERATIONS
(dollars - in millions)
For the For the
Quarter Ended Quarter Ended
April 1, 2000 March 31, 1999
----------------- ------------------
Net sales (unaudited)
Domestic $ 66.5 $ 87.9
International 6.6 5.0
----------------- ------------------
Total net sales 73.1 92.9
Gross profit 16.2 24.2
Operating expenses 13.2 14.5
Operating income 3.0 9.7
Net income (loss) (1.5) 2.8
EBITDA 5.4 11.6
QUARTER ENDED APRIL 1, 2000 COMPARED TO THE QUARTER ENDED MARCH 31,
1999
Net sales. Net sales decreased $19.8 million or 21.3%, to $73.1
million for the quarter ended April 1, 2000 from $92.9 million for the quarter
ended March 31, 1999.
Domestic sales decreased $21.4 million, or 24.3%, to $66.5 million for
the quarter ended April 1, 2000 from $87.9 million for the quarter ended March
31, 1999. This decrease was primarily reflective of increased demand for
generators during 1999 resulting from consumer concerns relating to possible
Year 2000 power outages. These consumer concerns subsided during the quarter
ended April 1, 2000, resulting in significant generator inventory levels at
retail customer locations and consequently, a lower volume of customer orders
for generators. The decrease in generator sales was partially offset by an
increase in pressure washer sales due primarily to the introduction of pressure
washer products at Sam's Club and an expanded pressure washer product offering
at Sears.
International sales increased $1.6 million, or 32.0%, to $6.6 million
for the quarter ended April 1, 2000 from $5.0 million for the quarter ended
March 31, 1999. This increase was reflective of increased generator sales to
home center retailers in Germany and an increase in generator sales into Spain
resulting primarily from the establishment of branch operations in Spain during
July 1999.
Gross profit. Gross profit decreased $8.0 million, or 33.1%, to $16.2
million for the quarter ended April 1, 2000 from $24.2 million for the quarter
ended March 31, 1999. This decrease was reflective of decreased overall sales as
described above and decreased gross margins due to a greater sales mix of lower
margin pressure washers. Gross profit margin decreased to 22.2% for the quarter
ended April 1, 2000 from 26.0% for the quarter ended March 31, 1999.
12
Operating expenses. Operating expenses decreased $1.3 million, or 9.0%,
to $13.2 million for the quarter ended April 1, 2000 from $14.5 million for the
quarter ended March 31, 1999. The decrease was due primarily to decreases in
selling and service expenses partially offset by an increase in general and
administrative expenses. Selling and service expenses decreased due to decrease
in selling and distribution costs that are impacted by sales volume. The
increase in general and administrative expenses was primarily reflective of
increased research and development expenditures relating to new product
development and cost savings initiatives and an increase in costs incurred to
support the company's new business software which was implemented during the
last six months of 1999. As a percentage of sales, operating expenses increased
to 18.1% for the quarter ended April 1, 2000 from 15.6% for the quarter ended
March 31, 1999.
Net income (loss). Net income decreased $4.3 million to a net loss of
$1.5 million for the quarter ended April 1, 2000 from net income of $2.8 million
for the quarter ended March 31, 1999. This decrease in net income was primarily
due to the decreased availability of operating earnings, resulting from
decreased sales volumes combined with lower gross margins, to cover certain
fixed charges. As a percentage of sales, net income decreased to a net loss of
(2.1)% for the quarter ended April 1, 2000 from net income of 3.0% for the
quarter ended March 31, 1999.
EBITDA. EBITDA decreased $6.2 million, or 53.4%, to $5.4 million for
the quarter ended April 1, 2000 from $11.6 million for the quarter ended March
31, 1999. This decrease was due to decreased sales volumes and gross margins as
described above. As a percentage of sales, EBITDA decreased to 7.4% for the
quarter ended April 1, 2000 from 12.5% for the quarter ended March 31, 1999.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES AT APRIL 1, 2000
To finance its capital expenditure program and fund its operational and
liquidity needs, Generac has relied principally on cash flow generated from
operations and borrowings under the $30.0 million revolving credit portion of
the company's $115 million credit facility between it and its lenders, with
Bankers Trust Company as administrative agent. Generac's principal uses of
liquidity are to meet debt service requirements, finance its capital
expenditures and provide working capital.
At April 1, 2000, Generac had approximately $214.4 million of
outstanding debt, including $110.0 million of senior notes payable, $102.7
million under its credit facility (including $27.1 million under the revolving
credit portion) and $1.7 million under capital lease obligations. In addition,
as of April 1, 2000, Generac had available cash of approximately $.8 million.
13
Cash used in operating activities totaled $22.7 million in the first
quarter of 2000 compared to cash used of approximately $15.1 million during the
first quarter of 1999. The activity in operating cash flows during the quarter
ended April 1, 2000 was primarily a result of the seasonal buildup of inventory
to support increased pressure washer sales activity anticipated during the
second quarter of 2000, higher levels of inventory for generators and related
components resulting from low levels of customer orders and a decrease in other
liabilities resulting primarily from the settlement of significant 1999 year-end
sales incentives with the company's major customers. This increase was partially
offset by other timing differences relating to supplier payments and customer
receipts. Due to seasonal factors related to pressure washer sales, the
company's level of receivables and inventory is typically highest during the
first and second quarters of the year as compared to levels during the third and
fourth quarters of the year.
Capital expenditures totaled $1.8 million and $1.9 million for the
quarters ended April 1, 2000 and March 31, 1999, respectively. The first quarter
2000 capital expenditures related primarily to new production machinery and
costs incurred to update management information systems. Generac expects to
spend approximately $1.2 million throughout the remainder of 2000 for various
capital projects, including cost improvement and quality enhancement initiatives
and updating management information systems. Generac spent approximately $.8
million and $.6 million on research and development during the quarters ended
April 1, 2000 and March 31, 1999, respectively.
Effective May 10, 2000, the company amended its credit facility which,
among other things, revised requirements relating to certain financial ratios
and tests, including maximum levels of leverage, minimum levels of interest
coverage and minimum required levels of earnings before interest, income taxes,
depreciation and amortization.
The company expects its principal sources of liquidity to be from its
operating activities and funding from the revolving portion of the amended
credit facility. Based upon the current level of operations and anticipated
activities, Generac believes that future cash flow from operations, together
with available borrowings under the amended credit facility will be adequate to
meet Generac's anticipated requirements for capital expenditures, working
capital, interest payments and scheduled principal payments for at least the
next 12 months.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Generac is exposed to market risk from changes in interest rates and,
to a lesser extent, foreign exchange rates and commodities. To reduce such
risks, Generac selectively uses derivative financial instruments. All hedging
transactions are authorized and executed pursuant to clearly defined policies
and procedures, which strictly prohibit the use of derivative financial
instruments for trading purposes. There have been no material changes in the
company's market risk exposures from the end of the fiscal year ended December
31, 1999 (as set forth in the company's Form 10-K as filed with the SEC on March
29, 2000) to April 1, 2000.
14
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, Generac is subject to legal proceedings and other
claims arising in the ordinary course of its business. Generac maintains
insurance coverage against claims in the amount which it believes to be
adequate. Generac believes that it is not presently a party to any litigation
the outcome of which would have a material adverse effect on its financial
condition, the results of operations or cash flows.
On September 29, 1999, Generac commenced an arbitration against GPSI,
entitled In the Matter of An Arbitration Between Generac Portable Products, Inc.
and Generac Power Systems, Inc., formerly known as Generac Corporation, under
the auspices of the American Arbitration Association in Milwaukee, Wisconsin.
The dispute concerns the respective rights of the company and GPSI to
manufacture and sell in the retail market portable generators with an output
level greater than ten kilowatts and home standby stationary generators. The
company has alleged that GPSI has improperly taken the position with both the
company and the company's retail customers that a mutual agreement not to
compete executed by the parties in connection with the company's acquisition of
the Portable Products Division of GPSI prohibits the company from manufacturing
or selling those products. It is the company's position that the noncompete
agreement does not preclude the company from manufacturing or selling those
products to retailers and that the parties' contractual arrangements preclude
GPSI from interfering with the company's rights to do so by, among other things,
attempting to sell home standby stationary generators to retailers, including
the company's retail customers. The company also has alleged that GPSI has
breached its obligations under a generator supply contract by refusing for nine
months to negotiate a price for home standby stationary generators and to
provide such generators to the company for resale and by selling those
generators directly to the company's retail customers. Generac is seeking (i) a
declaration that GPSI has breached its contractual obligations to the company,
including the implied covenant of good faith and fair dealing; (ii) a
declaration that Generac is free to manufacture and sell to retailers portable
generators with an output level greater than ten kilowatts and home standby
generators; (iii) to enjoin GPSI from taking actions which would delay or
displace the company's efforts to market those products to retailers; (iv) to
enjoin GPSI from engaging in the sale of home standby stationary generators to
retailers, at least during the pendency of the generator supply contract; and
(v) to hold GPSI liable for compensatory and punitive damages resulting from
GPSI's conduct. On October 19, 1999, GPSI responded to the company's claims by
filing an Answering Statement denying the company's allegations and reiterating
its position that the relevant agreements give GPSI the exclusive right to
manufacture and sell home standby stationary generators and generators with an
output level greater than ten kilowatts in any distribution channel.
The arbitration hearing is scheduled to commence May 22, 2000. A
decision is expected by mid-summer. The company does not believe the
arbitration dispute discussed above will have an adverse effect on its
relationship with GPSI under the OEM engine supply agreement.
15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Description
------- -----------
27.1 Financial Data Schedule
(b) No current reports on Form 8-K were filed during the quarter ended April 1,
2000.
16
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrants have duly caused this report to be signed on their behalf
by the undersigned thereunto duly authorized.
GENERAC PORTABLE PRODUCTS, INC.
(Registrant)
Date May 11, 2000 By /s/ ERIC R. WILKINSON
------------------------
Eric R. Wilkinson
PRESIDENT
(Authorized officer and principal financial officer)
GENERAC PORTABLE PRODUCTS, LLC
(Registrant)
Date May 11, 2000 By /s/ DORRANCE J. NOONAN, JR
----------------------------
Dorrance J. Noonan, Jr.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date May 11, 2000 By /s/ GARY J. LATO
-----------------
Gary J. Lato
CHIEF FINANCIAL OFFICER
GPPW, INC.
(Registrant)
Date May 11, 2000 By /s/ FAITH ROSENFELD
---------------------
Faith Rosenfeld
PRESIDENT
(Authorized officer and principal financial officer)