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 SEPTEMBER 30, 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 November 10, 2000 is as follows:
Generac Portable Products, Inc. 8,500
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, EXCEPT SHARE DATA)
September 30, December 31,
2000 1999
------------- ------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 143 $ 384
Accounts receivable (less allowances of $375 and $548, respectively) 29,565 55,465
Inventories 68,750 58,372
Prepaid expenses and other current assets 5,861 1,315
------------ ------------
Total current assets 104,319 115,536
Property, plant and equipment, net 28,413 28,911
Intangible assets, net 203,115 206,229
Deferred financing costs 6,053 6,608
Other 15 205
------------ ------------
Total assets $ 341,915 $ 357,489
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 8,207 $ 8,869
Trade accounts payable 8,572 23,793
Accrued employee compensation, benefits and payroll withholdings 2,080 3,263
Other accrued liabilities 9,250 18,991
------------ ------------
Total current liabilities 28,109 54,916
Long-term debt obligations 199,860 180,520
Other long-term obligations 1,223 1,089
Deferred income taxes 5,621 5,717
Commitments and contingencies (Note 4)
Stockholders' equity:
Common stock, $.01 par value, 12,000 shares authorized; 8,500 shares
issued and outstanding 1 1
Additional paid-in capital 109,999 109,999
Retained earnings 10,933 17,741
Accumulated other comprehensive loss (2,173) (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 107,102 115,247
------------- ----------------
Total liabilities and stockholders' equity $ 341,915 $ 357,489
============= ================
The accompanying notes are an integral part of the financial statements.
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GENERAC PORTABLE PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(AMOUNTS IN $000'S)
Quarter Ended September 30, Year-To-Date September 30,
--------------------------- --------------------------
2000 1999 2000 1999
---------- ----------- ----------- ----------
Net sales $ 47,190 $ 96,467 $ 199,738 $ 294,917
Cost of sales 37,561 69,345 157,490 214,943
---------- ----------- ----------- ----------
Gross profit 9,629 27,122 42,248 79,974
Operating expenses:
Selling and service 7,073 11,571 25,959 35,212
General and administrative 1,958 2,499 6,040 6,642
Intangible asset amortization 1,371 1,343 4,065 4,025
---------- ----------- ----------- ----------
Income (loss) from operations (773) 11,709 6,184 34,095
Other expense:
Interest expense 5,438 5,386 15,903 15,791
Deferred financing cost amortization 249 244 818 670
Expenses from withdrawn common stock offering (Note 10) - - 1,160
Other expense (income), net 8 (22) (43) 27
---------- ----------- ----------- ----------
Income (loss) before income taxes (6,468) 6,101 (10,494) 16,447
Provision (benefit) for income taxes (2,263) 2,135 (3,686) 5,756
---------- ----------- ----------- ----------
Net income (loss) $ (4,205) $ 3,966 $ (6,808) $ 10,691
========== =========== =========== ==========
The accompanying notes are an integral part of the financial statements.
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GENERAC PORTABLE PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(AMOUNTS IN $000'S)
Year-To-Date September 30,
----------------------------
2000 1999
----------- -----------
Operating activities:
Net income (loss) $ (6,808) $ 10,691
Adjustments to reconcile net income (loss) to net
cash used for operating activities
Depreciation 3,003 1,985
Amortization 4,883 4,695
Deferred income taxes (3,686) 2,268
Loss on sale of fixed assets - 5
Increase (decrease) in cash due to changes in:
Accounts receivable 25,196 (30,905)
Inventories (11,030) (17,467)
Other assets (1,804) 169
Trade accounts payable (14,936) 13,566
Accrued liabilities (10,607) 6,715
----------- ----------
Net cash used for operating activities (15,789) (8,278)
----------- ----------
Investing activities:
Capital expenditures (2,738) (10,983)
Proceeds from sale of fixed assets - 17
----------- ----------
Net cash used for investing activities (2,738) (10,966)
----------- ----------
Financing activities:
Net borrowings under revolving loan facility 25,500 26,300
Payments on other long-term debt obligations (6,821) (6,350)
Payment of deferred financing costs (262) (333)
----------- ----------
Net cash provided by financing activities 18,417 19,617
----------- ----------
Effect of exchange rate changes on cash (131) (64)
----------- ----------
Net increase (decrease) in cash and cash equivalents (241) 309
Cash and cash equivalents:
Beginning of period $ 384 $ 1,528
----------- ----------
End of period $ 143 $ 1,837
=========== ==========
Supplemental cash flow information:
Cash paid for interest $ 18,974 $ 19,644
=========== ==========
Cash paid for taxes $ 280 $ 860
=========== ==========
The accompanying notes are an integral part of the financial statements.
5
GENERAC PORTABLE PRODUCTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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:
September 30, 2000 December 31, 1999
------------------ -----------------
Raw materials and sub-assemblies $ 36,617 $ 33,814
Finished goods 32,133 24,558
------------------ -----------------
$ 68,750 $ 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 AND CONTINGENCIES
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.
On September 29, 1999, Generac commenced an arbitration against
Generac Power Systems, Inc. ("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 concerned 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. On May 18, 2000, the company and GPSI
reached an agreement which amended and further clarified the original
non-compete agreement between the two companies. The agreement provides for,
among other things, that the company has the right to manufacture and sell
certain portable air-cooled generators and air-cooled home standby generators up
to and including twenty kilowatts, that GPSI is restricted from manufacturing
any portable air-cooled generator below 12.5 kilowatts and that the company
will pay a 2% royalty on sales of home standby stationary generators in excess
of $15 million during the term of the agreement to GPSI.
The company capitalized costs incurred in conjunction with the
development of the amended non-compete agreement approximating $702, and will
amortize these costs over the remaining life of the non-compete agreement.
5. COMPREHENSIVE INCOME (LOSS)
Components of total comprehensive income (loss) for the periods ended
September 30, 2000 and September 30, 1999, consist of the following.
Accumulated Total
Net Other Comprehensive Comprehensive
Income (loss) Income (loss) Income (loss)
------------- ------------- -------------
For the quarter ended September 30, 2000 $ (4,205) $ (775) $ (4,980)
For the quarter ended September 30, 1999 3,966 620 4,586
Year-to-date September 30, 2000 (6,808) (1,337) (8,145)
Year-to-date September 30, 1999 10,691 (811) 9,880
Accumulated other comprehensive income and loss is comprised entirely
of foreign currency translation adjustments.
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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 September 30, 2000 and December 31, 1999 and for the
periods ended September 30, 2000 and September 30, 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.
AS OF SEPTEMBER 30, 2000
GENERAC PORTABLE GENERAC PORTABLE
PRODUCTS, INC. GPPW GPPD PRODUCTS, LLC ELIMINATIONS CONSOLIDATED
-------------- ---- ---- ------------- ------------ ------------
Current assets $ 5,048 $ 238 $ 4,523 $ 99,558 $ (5,048) $ 104,319
Investment in affiliates 118,760 5,996 113,911 -- (238,667) --
Noncurrent assets 5,621 -- -- 237,596 (5,621) 237,596
--------- --------- --------- --------- --------- ---------
$ 129,429 $ 6,234 $ 118,434 $ 337,154 $(249,336) $ 341,915
========= ========= ========= ========= ========= =========
Current liabilities $ 5,048 $ 14 $ 273 $ 27,822 $ (5,048) $ 28,109
Long-term debt -- -- -- 199,860 -- 199,860
Other long-term obligations 5,621 281 5,340 1,223 (5,621) 6,844
Stockholders' equity 118,760 5,939 112,821 108,249 (238,667) 107,102
--------- --------- --------- --------- --------- ---------
$ 129,429 $ 6,234 $ 118,434 $ 337,154 $(249,336) $ 341,915
========= ========= ========= ========= ========= =========
AS OF DECEMBER 31, 1999
GENERAC PORTABLE GENERAC PORTABLE
PRODUCTS, INC. GPPW GPPD PRODUCTS, LLC ELIMINATIONS CONSOLIDATED
-------------- ---- ---- ------------- ------------ ------------
Current assets $ 1,619 $ 59 $ 1,112 $ 114,365 $ (1,619) $ 115,536
Investment in affiliates 126,905 6,596 125,303 -- (258,804) --
Noncurrent assets 5,717 -- -- 241,953 (5,717) 241,953
--------- --------- --------- --------- --------- ---------
$ 134,241 $ 6,655 $ 126,415 $ 356,318 $(266,140) $ 357,489
========= ========= ========= ========= ========= =========
Current liabilities $ 1,619 $ 23 $ 425 $ 54,468 $ (1,619) $ 54,916
Long-term debt -- -- -- 180,520 -- 180,520
Other long-term obligations 5,717 286 5,431 1,089 (5,717) 6,806
Stockholders' equity 126,905 6,346 120,559 120,241 (258,804) 115,247
--------- --------- --------- --------- --------- ---------
$ 134,241 $ 6,655 $ 126,415 $ 356,318 $(266,140) $ 357,489
========= ========= ========= ========= ========= =========
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FOR THE QUARTER ENDED SEPTEMBER 30, 2000
GENERAC PORTABLE GENERAC PORTABLE
PRODUCTS, INC. GPPW GPPD PRODUCTS, LLC ELIMINATIONS CONSOLIDATED
-------------- ---- ---- ------------- ------------ ------------
Net sales $ - $ - $ - $ 47,190 $ - $ 47,190
Gross profit - - - 9,629 - 9,629
Operating expenses - - - 10,402 - 10,402
------------ ------------- ------------- ------------------- -------------- ---------------
Operating income - - - (773) - (773)
Interest expense - - - 5,687 - 5,687
Other expense (income), net - - - 8 - 8
Equity in earnings of affiliates (4,205) (323) (6,145) - 10,673 -
------------ ------------- ------------- ------------------- -------------- ---------------
Loss before income taxes (4,205) (323) (6,145) (6,468) 10,673 (6,468)
Benefit for income taxes - (113) (2,150) - - (2,263)
------------- ------------- ------------- ------------------- -------------- ---------------
Net loss $ (4,205) $ (210) $ (3,995) $ (6,468) $ 10,673 $ (4,205)
============= ============= ============= =================== ============== ===============
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
GENERAC PORTABLE GENERAC PORTABLE
PRODUCTS, INC. GPPW GPPD PRODUCTS, LLC ELIMINATIONS CONSOLIDATED
-------------- ---- ---- ------------- ------------ ------------
Net sales $ - $ - $ - $ 96,467 $ - $ 96,467
Gross profit - - - 27,122 - 27,122
Operating expenses - - - 15,413 - 15,413
------------ ------------- ------------- ------------------- -------------- ---------------
Operating income - - - 11,709 - 11,709
Interest expense - - - 5,630 - 5,630
Other expense (income), net - - - (22) - (22)
Equity in earnings of affiliates 3,966 305 5,796 - (10,067) -
------------ ------------- ------------- ------------------- -------------- ---------------
Income before income taxes 3,966 305 5,796 6,101 (10,067) 6,101
Provision for income taxes - 106 2,029 - - 2,135
------------ ------------- ------------- ------------------- -------------- ---------------
Net income $ 3,966 $ 199 $ 3,767 $ 6,101 $ (10,067) $ 3,966
============ ============= ============= =================== ============== ===============
YEAR-TO-DATE SEPTEMBER 30, 2000
GENERAC PORTABLE GENERAC PORTABLE
PRODUCTS, INC. GPPW GPPD PRODUCTS, LLC ELIMINATIONS CONSOLIDATED
-------------- ---- ---- ------------- ------------ ------------
Net sales $ - $ - $ - $ 199,738 $ - $ 199,738
Gross profit - - - 42,248 - 42,248
Operating expenses - - - 36,064 - 36,064
------------ ------------- ------------- ------------------- -------------- ---------------
Operating income - - - 6,184 - 6,184
Interest expense - - - 16,721 - 16,721
Other expense (income), net - - - (43) - (43)
Equity in earnings of affiliates (6,808) (525) (9,969) - 17,302 -
------------ ------------- ------------- ------------------- -------------- ---------------
Loss before income taxes (6,808) (525) (9,969) (10,494) 17,302 (10,494)
Benefit for income taxes - (185) (3,501) - - (3,686)
------------ ------------- ------------- ------------------- -------------- ---------------
Net loss $ (6,808) $ (340) $ (6,468) $ (10,494) $ 17,302 $ (6,808)
============ ============= ============= =================== ============== ===============
YEAR-TO-DATE SEPTEMBER 30, 1999
GENERAC PORTABLE GENERAC PORTABLE
PRODUCTS, INC. GPPW GPPD PRODUCTS, LLC ELIMINATIONS CONSOLIDATED
-------------- ---- ---- ------------- ------------ ------------
Net sales $ - $ - $ - $ 294,917 $ - $ 294,917
Gross profit - - - 79,974 - 79,974
Operating expenses - - - 45,879 - 45,879
------------ ------------- ------------- ------------------- -------------- ---------------
Operating income - - - 34,095 - 34,095
Interest expense - - - 16,461 - 16,461
Other expense (income), net - - - 1,187 - 1,187
Equity in earnings of affiliates 10,691 822 15,625 - (27,138) -
------------ ------------- ------------- ------------------- -------------- ----------------
Income before income taxes 10,691 822 15,625 16,447 (27,138) 16,447
Provision for income taxes - 287 5,469 - - 5,756
------------ ------------- ------------- ------------------- -------------- ----------------
Net income $ 10,691 $ 535 $ 10,156 $ 16,447 $ (27,138)$ 10,691
============ ============= ============= =================== ============== ================
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7. LONG-TERM DEBT OBLIGATIONS
On October 18, 2000, Generac obtained a commitment from The Beacon
Group III - focus Value Fund, L.P. (the "Fund"), its majority stockholder, under
what the Fund or a designee of the Fund, or both, will purchase a unit
consisting of a newly issued senior zero coupon note due July 1, 2006 and a
warrant to purchase 340 shares of the common stock of Generac in exchange for an
aggregate of $15 million in cash. The proceeds from the sale of this unit, if
consummated, will be used by Generac to repay the principal of, and interest on,
revolving indebtedness, and for general corporate purposes. This commitment
requires the Fund to purchase the unit on November 20, 2000 or such other date
as is mutually agreed to by the Fund, Generac, and Generac's lenders under its
credit facility.
Effective October 30, 2000, the company amended its credit facility
which, among other things, waived existing financial covenant violations at
September 30, 2000 and revised requirements relating to certain financial ratios
and tests for periods through December 31, 2001 including maximum levels of
leverage, minimum levels of interest coverage and minimum required levels of
earnings before interest, income taxes, depreciation and amortization. The
amendment requires Generac to sell to the Fund the unit described above
generating net cash proceeds of $15 million by no later than November 20, 2000,
the proceeds of which shall be applied to repay outstanding revolving
indebtedness. Additionally, the amendment provides certain limits on the amount
of outstanding revolving loans through March 31, 2001. While management believes
that the Company will be able to comply with the revised financial ratios and
tests included in the amended credit facility during the next twelve months, it
is at least reasonably possible that the Company will not satisfy one or more of
such requirements. In such event, the Company would need to again request the
lenders to waive compliance with any related covenants in order to avoid an
acceleration of amounts outstanding under the credit facility. Management
believes that they would be able to successfully negotiate additional waivers
or further amendments to the credit facility with its lenders, if necessary.
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 September 30, 2000 $ 42,379 $ 4,811 $ 47,190
Net sales - for the quarter ended September 30, 1999 83,939 12,528 96,467
Net sales - year-to-date September 30, 2000 182,156 17,582 199,738
Net sales - year-to-date September 30, 1999 268,233 26,684 294,917
Long-lived assets - as of September 30, 2000 235,401 2,195 237,596
Long-lived assets - as of December 31, 1999 239,448 2,505 241,953
Generac sells primarily to large home center retailers. Two customers
accounted for approximately 62% of net sales for the quarterly and year-to-date
periods ended September 30, 2000 and 61% and 62% of net sales for the quarterly
and year-to-date periods ended September 30, 1999, respectively. Both customers
individually comprised more than 10% of Generac's net
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sales for the respective periods. Accounts receivable from these two customers
approximated $16,226 and $29,314 at September 30, 2000 and December 31, 1999,
respectively.
Generac purchases its materials from a broad supplier base. Three
suppliers accounted for approximately 44% and 43% of purchases for the
quarterly and year-to-date periods ended September 30, 2000, respectively.
Accounts payable to these three suppliers approximated $1,444 at September 30,
2000. Two suppliers accounted for approximately 44% and 43% of purchases for
the quarterly and year-to-date periods ended September 30, 1999, respectively.
Accounts payable to these two suppliers approximated $7,049 at December 31,
1999. Each of these suppliers individually comprised more than 10% of Generac's
purchases for the respective periods.
9. CHANGE IN INTERIM ACCOUNTING PERIODS
During the year-to-date period ended September 30, 2000, Generac
changed its interim accounting period from a calendar quarter-end to a 13-week
period. The change was made by Generac to achieve standard interim period cutoff
dates. Consequently, the third quarter of 2000 covers the period from July 2,
2000 to September 30, 2000 and year-to-date 2000 covers the period from January
1, 2000 to September 30, 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 and year-to-date periods ended September 30, 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.
10. STOCK SPLITS
On May 20, 1999, the company effected a 1,250 for one common stock
split and on May 28, 1999, the company effected a 1.189 for one common stock
split. On June 9, 2000, the company effected a one for 1,486.25 reverse common
stock split. All share information in these consolidated financial statements
has been retroactively adjusted to reflect these stock splits.
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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" in this Item 2 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 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.
12
RESULTS OF OPERATIONS
(unaudited - in millions)
For the Quarter Year-To-Date
Ended September 30, September 30,
----------------------- ------------------------
2000 1999 2000 1999
---------- --------- ---------- ----------
Net sales
Domestic $ 42.4 $ 83.9 $ 182.1 $ 268.2
International 4.8 12.5 17.6 26.7
---------- --------- ---------- ----------
Total net sales 47.2 96.4 199.7 294.9
Gross profit 9.6 27.1 42.2 80.0
Operating expenses 10.4 15.4 36.0 45.9
Operating income (loss) (0.8) 11.7 6.2 34.1
Net income (loss) (4.2) 4.0 (6.8) 10.7
EBITDA 1.6 13.8 13.3 40.0
QUARTER ENDED SEPTEMBER 30, 2000 COMPARED TO THE QUARTER ENDED
SEPTEMBER 30, 1999
Net sales. Net sales decreased $49.2 million or 51.0%, to $47.2 million
for the quarter ended September 30, 2000 from $96.4 million for the quarter
ended September 30, 1999.
Domestic sales decreased $41.5 million, or 49.5%, to $42.4 million for
the quarter ended September 30, 2000 from $83.9 million for the quarter ended
September 30, 1999. This decrease was primarily reflective of increased demand
for generators during 1999 resulting from higher than normal levels of tropical
storm and severe weather activity creating power outages, and from consumer
concerns relating to possible Year 2000 power outages. These levels of weather
activity and consumer concerns related to Year 2000 were not present during the
quarter ended September 30, 2000, which, combined with higher than normal
generator inventory levels at retail customer locations, has resulted in a lower
volume of customer orders for generators. The decrease in generator sales was
minimally offset by an increase in pressure washer sales due primarily to new
retail product placements at Sam's Club and Menards, and an expanded pressure
washer product offering at Sears.
International sales decreased $7.7 million, or 61.6%, to $4.8 million
for the quarter ended September 30, 2000 from $12.5 million for the quarter
ended September 30, 1999. This decrease was primarily reflective of increased
generator sales in 1999 by the company's branch in the United Kingdom to meet
the strong demand of existing domestic customers as described above.
Gross profit. Gross profit decreased $17.5 million, or 64.6%, to $9.6
million for the quarter ended September 30, 2000 from $27.1 million for the
quarter ended September 30, 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
13
decreased to 20.3% for the quarter ended September 30, 2000 from 28.1% for the
quarter ended September 30, 1999.
Operating expenses. Operating expenses decreased $5.0 million, or
32.5%, to $10.4 million for the quarter ended September 30, 2000 from $15.4
million for the quarter ended September 30, 1999. The decrease was due primarily
to decreases in both selling and service expenses and general and administrative
expenses. Selling and service expenses decreased due to decreases in selling and
distribution costs that are impacted by sales volume. The decrease in general
and administrative expenses was primarily reflective of a decrease in costs
incurred to support the company's new business software which was implemented
during 1999 and headcount reductions made during 2000 to more appropriately
match the company's sales volume. As a percentage of sales, operating expenses
increased to 22.0% for the quarter ended September 30, 2000 from 16.0% for the
quarter ended September 30, 1999.
Net income (loss). Net income decreased $8.2 million to a net loss of
$4.2 million for the quarter ended September 30, 2000 from net income of $4.0
million for the quarter ended September 30, 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
(8.9)% for the quarter ended September 30, 2000 from net income of 4.1% for the
quarter ended September 30, 1999.
EBITDA. EBITDA decreased $12.2 million, or 88.4%, to $1.6 million for
the quarter ended September 30, 2000 from $13.8 million for the quarter ended
September 30, 1999. This decrease was due to decreased sales volumes and gross
margins as described above. As a percentage of sales, EBITDA decreased to 3.4%
for the quarter ended September 30, 2000 from 14.3% for the quarter ended
September 30, 1999.
YEAR-TO-DATE PERIOD ENDED SEPTEMBER 30, 2000 COMPARED TO THE
YEAR-TO-DATE PERIOD ENDED SEPTEMBER 30, 1999
Net sales. Net sales decreased $95.2 million or 32.3%, to $199.7
million for the year-to-date period ended September 30, 2000 from $294.9 million
for the year-to-date period ended September 30, 1999.
Domestic sales decreased $86.1 million, or 32.1%, to $182.1 million for
the year-to-date period ended September 30, 2000 from $268.2 million for the
year-to-date period ended September 30, 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 were not present during the year-to-date period ended September 30,
2000, which combined with higher than normal generator inventory levels at
retail customer locations has resulted in a lower volume of customer orders for
generators. Furthermore, the lack of tropical storms and weather events in 2000
as compared to 1999 adversely effected generator demand. The decrease in
generator sales was partially offset by an increase in pressure
14
washer sales due primarily to the introduction of pressure washer products at
Sam's Club and Menards, and an expanded pressure washer product offering at
Sears.
International sales decreased $9.1 million, or 34.1%, to $17.6 million
for the year-to-date period ended September 30, 2000 from $26.7 million for the
year-to-date period ended September 30, 1999. This decrease was primarily
reflective of increased generator sales in 1999 by the company's branch in the
United Kingdom to meet the strong demand of existing domestic customers as
described above. This decrease in sales was partially offset by 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 $37.8 million, or 47.3%, to $42.2
million for the year-to-date period ended September 30, 2000 from $80.0 million
for the year-to-date period ended September 30, 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 21.1% for the year-to-date period ended September 30,
2000 from 27.1% for the year-to-date period ended September 30, 1999.
Operating expenses. Operating expenses decreased $9.9 million, or
21.6%, to $36.0 million for the year-to-date period ended September 30, 2000
from $45.9 million for the year-to-date period ended September 30, 1999. The
decrease was due primarily to decreases in both selling and service expenses and
general and administrative expenses. Selling and service expenses decreased due
to decreases in selling and distribution costs that are impacted by sales
volume. The decrease in general and administrative expenses was primarily
reflective of a decrease in costs incurred to support the company's new business
software which was implemented during 1999 and headcount reductions made during
2000 to more appropriately match the company's sales volume. As a percentage of
sales, operating expenses increased to 18.0% for the year-to-date period ended
September 30, 2000 from 15.6% for the year-to-date period ended September 30,
1999.
Net income (loss). Net income decreased $17.5 million to a net loss of
$6.8 million for the year-to-date period ended September 30, 2000 from net
income of $10.7 million for the year-to-date period ended September 30, 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. This decrease in net income was
partially offset by approximately $1.2 million in costs incurred during 1999 in
conjunction with the company's planned initial public offering of its common
stock, which was withdrawn in July 1999. As a percentage of sales, net income
decreased to a net loss of (3.4)% for the year-to-date period ended September
30, 2000 from net income of 3.6% for the year-to-date period ended September 30,
1999.
EBITDA. EBITDA decreased $26.7 million, or 66.8%, to $13.3 million for
the year-to-date period ended September 30, 2000 from $40.0 million for the
year-to-date period ended September 30, 1999. This decrease was due to decreased
sales volumes and gross margins as described above. As a percentage of sales,
EBITDA decreased to 6.7% for the year-to-date
15
period ended September 30, 2000 from 13.6% for the year-to-date period ended
September 30, 1999.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES AT SEPTEMBER 30, 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.
On October 18, 2000, Generac obtained a commitment from The Beacon
Group III - focus Value Fund, L.P. (the "Fund"), its majority stockholder, under
what the Fund or a designee of the Fund, or both, will purchase a unit
consisting of a newly issued senior zero coupon note due July 1, 2006 and a
warrant to purchase 340 shares of the common stock of Generac in exchange for an
aggregate of $15 million in cash. The proceeds from the sale of this unit, if
consummated, will be used by Generac to repay the principal of, and interest on,
revolving indebtedness, and for general corporate purposes. This commitment
requires the Fund to purchase the unit on November 20, 2000 or such other date
as is mutually agreed to by the Fund, Generac, and Generac's lenders under its
credit facility.
At September 30, 2000, Generac had approximately $208.1 million of
outstanding debt, including $110.0 million of senior notes payable, $96.6
million under its credit facility (including $25.5 million under the revolving
credit portion) and $1.5 million under capital lease obligations.
Cash used in operating activities totaled $15.8 million during the
year-to-date period ended September 30, 2000 compared to cash used of
approximately $8.3 million during the year-to-date period ended September 30,
1999. The activity in operating cash flows during the first three quarters of
2000 was primarily a result of the decreased net income, higher levels of
inventory for generators and related components resulting from low levels of
customer orders and a decrease in accrued liabilities resulting primarily from
the settlement of significant 1999 year-end sales incentives with the company's
major customers. This decrease was partially offset by other timing differences
relating to supplier payments and customer receipts. Activity in operating cash
flows for the first three quarters of 1999 related primarily to an increase in
accounts receivable during that period.
Capital expenditures totaled $2.7 million and $11.0 million for the
year-to-date periods ended September 30, 2000 and September 30, 1999,
respectively. Capital expenditures during the first three quarters of 2000
related primarily to production machinery and costs incurred to update
management information systems. Generac expects to spend approximately $.3
million throughout the remainder of 2000 for various capital projects, including
cost improvement and quality enhancement initiatives. Generac spent
approximately $2.0 million on research and development during the year-to-date
periods ended September 30, 2000 and September 30, 1999, respectively.
16
Effective October 30, 2000, the company amended its credit facility
which, among other things, waived existing financial covenant violations at
September 30, 2000 and revised requirements relating to certain financial
ratios and tests for periods through December 31, 2001 including maximum levels
of leverage, minimum levels of interest coverage and minimum required levels of
earnings before interest, income taxes, depreciation and amortization. The
amendment requires Generac to sell to the Fund the unit described above
generating net cash proceeds of $15 million by no later than November 20, 2000,
the proceeds of which shall be applied to repay outstanding revolving
indebtedness. Additionally, the amendment provides certain limits on the amount
of outstanding revolving loans through March 31, 2001. While management
believes that the company will be able to comply with the revised financial
ratios and tests included in the amended credit facility during the next twelve
months, it is at least reasonably possible that the company will not satisfy
one or more of such requirements. In such event, the company would need to
again request the lenders to waive compliance with any related covenants in
order to avoid an acceleration of amounts outstanding under the credit facility.
Management believes that they would be able to successfully negotiate additional
waivers or further amendments to the credit facility with its lenders, if
necessary.
The company expects its principal sources of liquidity to be from its
operating activities, funding from the revolving portion of the amended credit
facility and the $15 million senior notes discussed above. 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 and proceeds from the issuance of the senior notes 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 September 30, 2000.
ITEM 4. FUTURE ACCOUNTING CHANGES
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133 "Accounting for Derivative Instruments and Hedging Activities". This
statement requires all derivative instruments to be recorded in the consolidated
balance sheets at their fair value. Changes in fair value of derivatives are
required to be recorded each period in current earnings or other comprehensive
income, depending on whether the derivative is designated as part of a hedge
transaction and if it is, the type of hedge transaction. It will be effective
January 1, 2001 for Generac. Due to the company's current limited use of
derivative instruments, the adoption of this statement is not expected to have a
material effect on Generac's financial condition or results of operations.
17
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
Generac Power Systems, Inc. ("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 concerned 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. On May 18, 2000, the company and GPSI
reached an agreement which amended and further clarified the original
non-compete agreement between the two companies. The agreement provides for,
among other things, that the company has the right to manufacture and sell
certain portable air-cooled generators and air-cooled home standby generators
up to and including twenty kilowatts, that GPSI is restricted from
manufacturing any portable air-cooled generator below 12.5 kilowatts and that
the company will pay a 2% royalty on sales of home standby stationary generators
in excess of $15 million during the term of the agreement to GPSI.
The company capitalized costs incurred in conjunction with the
development of the amended non-compete agreement approximating $702, and will
amortize these costs over the remaining life of the non-compete agreement.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On May 20, 1999, the company effected a 1,250 for one common stock
split and on May 28, 1999, the company effected a 1,189 for one common stock
split. On June 9, 2000, the company effected a one for 1,486.25 reverse common
stock split. All share information in these consolidated financial statements
has been retroactively adjusted to reflect these stock splits.
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 September
30, 2000.
18
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 November 13, 2000 By /s/ ERIC R. WILKINSON
-------------------------------------
Eric R. Wilkinson
PRESIDENT
(Authorized officer and principal
financial officer)
GENERAC PORTABLE PRODUCTS, LLC
(Registrant)
Date November 13, 2000 By /s/ DORRANCE J. NOONAN, JR
-------------------------------------
Dorrance J. Noonan, Jr.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date November 13, 2000 By /s/ GARY J. LATO
-------------------------------------
Gary J. Lato
CHIEF FINANCIAL OFFICER
GPPW, INC.
(Registrant)
Date November 13, 2000 By /s/ FAITH ROSENFELD
------------------------------------
Faith Rosenfeld
PRESIDENT
(Authorized officer and principal
financial officer)