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, 1999
[ ] 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, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
(REGISTRANTS' PRINCIPAL EXECUTIVE OFFICES)
Indicate by check mark whether the registrant (1) has 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 registrant
was required to file such reports), and (2) has 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 October 12, 1999 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)
September 30, December 31,
1999 1998
------------------- ------------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 1,837 $ 1,528
Accounts receivable (less allowances of $375 and $242, respectively) 75,434 44,695
Inventories 63,479 46,651
Prepaid expenses and other current assets 744 1,037
------------------ ----------------
Total current assets 141,494 93,911
Property, plant and equipment, net 28,535 19,437
Intangible assets, net 207,571 211,407
Deferred financing costs 6,648 6,985
Other 10 262
------------------ ----------------
Total assets $ 384,258 $ 332,002
================== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 7,619 $ 7,922
Trade accounts payable 26,196 12,839
Accrued employee compensation, benefits and payroll withholdings 2,656 1,185
Other accrued liabilities 19,714 14,424
------------------ ----------------
Total current liabilities 56,185 36,370
Long-term debt obligations 210,114 189,861
Other long-term obligations 1,039 999
Deferred income taxes 3,773 1,505
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 14,893 4,202
Accumulated other comprehensive (loss) income (88) 723
Excess of purchase price over book value of net assets acquired
from entities partially under common control (11,658) (11,658)
------------------ ----------------
Total stockholders' equity 113,147 103,267
================== ================
Total liabilities and stockholders' equity $ 384,258 $ 332,002
================== ================
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)
For the For the
Three Months Nine Months
Ended Ended
September 30, 1999 September 30, 1999
------------------ ------------------
Net sales $ 96,467 $ 294,917
Cost of sales 69,345 214,943
------------------ ------------------
Gross profit 27,122 79,974
Operating expenses:
Selling and service 11,571 35,212
General and administrative 2,499 6,642
Intangible asset amortization 1,343 4,025
------------------ ------------------
Income from operations 11,709 34,095
Other expense:
Interest expense 5,386 15,791
Deferred financing cost amortization 244 670
Expenses from withdrawn common stock offering (Note 9) - 1,160
Other expenses (income), net (22) 27
------------------ ------------------
Income before income taxes 6,101 16,447
Provision for income taxes 2,135 5,756
------------------ ------------------
Net income $ 3,966 $ 10,691
================== ==================
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
Nine Months
Ended
September 30, 1999
------------------
Operating activities:
Net income $ 10,691
Adjustments to reconcile net income to net cash used for operating activities
Depreciation 1,985
Amortization 4,695
Deferred income taxes 2,268
Loss on sale of fixed assets 5
Increase (decrease) in cash due to changes in:
Accounts receivable (30,905)
Inventories (17,467)
Other assets 169
Trade accounts payable 13,566
Accrued liabilities 6,715
------------------
Net cash used for operating activities (8,278)
------------------
Investing activities:
Capital expenditures (10,983)
Proceeds from sale of fixed assets 17
------------------
Net cash used for investing activities (10,966)
------------------
Financing activities:
Net borrowings under revolving loan facility 26,300
Payments on other long-term debt obligations (6,350)
Payment of deferred financing costs (333)
------------------
Net cash provided by financing activities 19,617
----------------
Effect of exchange rate changes on cash (64)
------------------
Net increase in cash and cash equivalents 309
Cash and cash equivalents:
Beginning of period $ 1,528
------------------
End of period $ 1,837
==================
Supplemental cash flow information:
Cash paid for interest $ 19,644
==================
Cash paid for taxes $ 860
==================
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
SEPTEMBER 30, 1999
(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 Portable Products" 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 Portable Products sells primarily to large home center
retailers throughout the United States, Canada and Europe.
These financial statements have been prepared by Generac Portable
Products pursuant to the rules and regulations of the Securities and Exchange
Commission (the "SEC") and, in the opinion of Generac Portable Products
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 Portable Products for the interim periods
presented. These financial statements include the accounts of Generac Portable
Products' 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 Portable Products' audited financial
statements for the period July 10, 1998 through December 31, 1998, and the
company's unaudited pro forma consolidated financial information included in the
company's Amendment No. 3 to Form S-4 Registration Statement as filed with the
SEC on July 26, 1999 and declared effective on July 30, 1999.
2. INVENTORIES
Inventories consist of the following:
September 30, 1999 December 31, 1999
------------------ -----------------
Raw materials and sub-assemblies $ 35,689 $ 27,721
Finished goods 27,790 18,930
------------------ -----------------
$ 63,479 $ 46,651
================== =================
3. INCOME TAXES
Generac Portable Products recorded an income tax provision by
estimating the annual effective income tax rate and applying that rate to pretax
income.
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4. COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS
In the normal course of business, Generac Portable Products is involved
in certain legal actions and claims. Management believes that such litigation
and claims will be resolved without material adverse effect on Generac Portable
Products' 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 Corporation on July 9, 1998 (the "Acquisition"),
Generac Portable Products entered into an OEM engine supply agreement with
Generac Corporation to supply the company with the engine used in certain of
Generac Portable Products' pressure washers and consumer portable generators.
The engine supply agreement allows for Generac Portable Products to make minimum
purchases of engines from Generac Corporation in each of the next nine years and
gives Generac Portable Products 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 Portable Products 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 Portable
Products. Management also considers the provisions of the engine supply
agreement to reflect arms-length terms. For the three months and nine months
ended September 30, 1999, Generac Portable Products purchased products
approximating $16.0 million and $36.9 million, respectively, under this
agreement. In addition, Generac Portable Products also purchased other
components from Generac Corporation approximating $.8 million and $10.7 million,
respectively, for the three months and nine months ended September 30, 1999.
Included in accounts payable are amounts due to Generac Corporation of
approximately $7.4 million and $4.7 million at September 30, 1999 and December
31, 1998, respectively.
On September 29, 1999, Generac Portable Products commenced an
arbitration against Generac Power Systems, Inc., the successors of Generac
Corporation ("Power Systems"), 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 Power Systems 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 Power Systems 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
Power Systems 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 Power Systems 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
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provide such generators to the company for resale and by selling those
generators directly to the company's retail customers. Generac Portable Products
is seeking (i) a declaration that Power Systems has breached its contractual
obligations to the company, including the implied covenant of good faith and
fair dealing; (ii) a declaration that Generac Portable Products 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 Power
Systems from taking actions which would delay or displace the company's efforts
to market those products to retailers; (iv) to enjoin Power Systems 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
Power Systems liable for compensatory and punitive damages resulting from Power
Systems' conduct. On October 19, 1999, Power Systems 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 Power Systems 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 parties are now in the preliminary stages of selecting an
arbitrator.
The company does not believe the arbitration dispute discussed above
will have an adverse effect on its relationship with Power Systems under the OEM
engine supply agreement.
5. COMPREHENSIVE INCOME
Total comprehensive income totaled $4,586 and $9,880 for the three
months and nine months ended September 30, 1999, respectively. For the three
months ended September 30, 1999, total comprehensive income is comprised of net
income of $3,966 and accumulated other comprehensive income of $620. For the
nine months ended September 30, 1999, total comprehensive income is comprised of
net income of $10,691 and accumulated other comprehensive loss of $811.
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, 1999 and for the three months and nine
months ended 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, 1999
GENERNAC GENERAL
PORTABLE PORTABLE
PRODUCTS, INC. GPPW GPPD PRODUCTS, LLC ELIMINATIONS CONSOLIDATED
-------------- ---- ---- ------------- ------------ ------------
Current assets $ -- $ 7 $ 132 $141,355 $ -- $141,494
Investment in affiliates 123,996 6,597 125,335 -- (255,928) --
Noncurrent assets -- -- -- 242,764 -- 242,764
-------- ------ -------- -------- --------- --------
$123,996 $6,604 $125,467 $384,119 $(255,928) $384,258
======== ====== ======== ======== ========== ========
Current liabilities $ -- $ 174 $ 3,319 $ 52,692 $ -- $ 56,185
Long-term debt -- -- -- 210,114 -- 210,114
Other long-term obligations -- 189 3,584 1,039 -- 4,812
Stockholders' equity 123,996 6,241 118,564 120,274 (255,928) 113,147
-------- ------ -------- -------- --------- --------
$123,996 $6,604 $125,467 $384,119 $(255,928) $384,258
======== ====== ======== ======== ========= ========
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999
GENERNAC GENERAL
PORTABLE 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
====== ===== ====== ======== ========= ========
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FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
GENERAC PORTABLE GENERAC PORTABLE
PRODUCTS, INC. GPPW GPPD PRODUCTS, LLC ELIMINATORS 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
=============== ======= ========= =============== =========== ============
7. 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. All share information in these consolidated financial statements has been
retroactively adjusted to reflect these stock splits.
8. SEGMENT INFORMATION
Generac Portable Products 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 Portable Products evaluates operating performance based upon the
combined results of these product lines.
Information regarding Generac Portable Products' geographic areas is summarized
below:
UNITED
STATES EUROPE CONSOLIDATED
------ ------ ------------
Net sales - for the three months ended September 30, 1999 $ 83,939 $12,528 $ 96,467
Net sales - for the nine months ended September 30, 1999 268,233 26,684 294,917
Long-lived assets - as of September 30, 1999 240,168 2,596 242,764
Generac Portable Products sells primarily to large home center
retailers. Two customers accounted for approximately 61% and 62% of net sales
for the three months and nine months ended September 30, 1999, respectively.
Both customers individually comprise more than 10% of Generac Portable Products'
net sales. Accounts receivable from these two customers approximated $54,012 and
$24,202 at September 30, 1999 and December 31, 1998, respectively.
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9. EXPENSES FROM WITHDRAWN COMMON STOCK OFFERING
During the nine months ended September 30, 1999, Generac Portable
Products incurred certain fees and expenses in conjunction with its efforts to
complete an initial public offering of its common stock. Generac Portable
Products decided to withdraw its initial public stock offering during July 1999.
Expenses related to this offering of approximately $1.2 million were recorded
during the nine months ended September 30, 1999.
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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 Amendment No. 3 to Form S-4
Registration Statement as filed with the SEC on July 26, 1999 and declared
effective on July 30, 1999. 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 Portable Products, Inc. (together with its subsidiaries,
including Generac Portable Products, LLC and GPPW, Inc. on a consolidated basis,
"Generac Portable Products" 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 Portable Products sells primarily to large home center
retailers throughout the United States, Canada and Europe. References to Generac
Portable Products means Generac Portable Products, Inc. and its subsidiaries, on
a consolidated basis and, as the context requires, Generac Portable Products'
Predecessor. The "Predecessor" refers to the Portable Products Division of
Generac Corporation.
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 (principally the expenses from the withdrawn
common stock offering). 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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1. RESULTS OF OPERATIONS
(unaudited - in millions)
Company Pro Forma
---------------------------------------- ----------------------------------------
Three Months Nine Months Three Months Nine Months
Ended Ended Ended Ended
September 30, 1999 September 30, 1999 September 30, 1998 September 30, 1998
------------------ ------------------ ------------------ ------------------
Net sales
Domestic $ 83.9 $ 268.2 $ 67.9 $ 191.8
International 12.5 26.7 5.3 15.8
------------------ ------------------ ------------------ ------------------
Total net sales 96.4 294.9 73.2 207.6
Gross profit 27.1 80.0 20.0 55.0
Operating expenses 15.4 45.9 11.5 32.4
Operating income 11.7 34.1 8.5 22.6
Net income 4.0 10.7 2.1 4.5
EBITDA 13.8 40.1 10.5 27.9
The Pro Forma Results of Operations for the three months and nine
months ended September 30, 1998 combines the results of the Predecessor for the
period January 1, 1998 through July 9, 1998 with the company's results for the
period July 10, 1998 through September 30, 1998 and have been prepared to
reflect the consummation of the acquisition of the Portable Products Division of
Generac Corporation on July 9, 1998, as if it had occurred on January 1, 1998,
using the purchase method of accounting.
THREE MONTHS ENDED SEPTEMBER 30, 1999 (COMPANY) COMPARED TO THE THREE
MONTHS ENDED SEPTEMBER 30, 1998 (PRO FORMA)
Net sales. Net sales increased $23.2 million or 31.7%, to $96.4 million
for the three months ended September 30, 1999 from $73.2 million for the three
months ended September 30, 1998.
Domestic sales increased $16.0 million, or 23.6%, to $83.9 million for
the three months ended September 30, 1999 from $67.9 million for the three
months ended September 30, 1998. This increase was primarily reflective of
increased sales of generators and related accessories to existing customers
resulting from new store additions and sales to new customers. A portion of the
increased generator demand may relate to consumer concerns relating to possible
Year 2000 power outages and accordingly, any such increase in sales may not be
sustainable in future periods. Furthermore, Generac Portable Products was able
to meet additional generator demand due to the expansion of production capacity
during the three months ended September 30, 1999.
International sales increased $7.2 million, or 135.8%, to $12.5 million
for the three months ended September 30, 1999 from $5.3 million for the three
months ended September 30, 1998. This increase was reflective of increased
generator sales by the company's branch in the United Kingdom to meet the demand
of existing domestic customers.
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Gross profit. Gross profit increased $7.1 million, or 35.5%, to $27.1
million for the three months ended September 30, 1999 from $20.0 million for the
three months ended September 30, 1998. This increase was reflective of increased
overall sales as described above and improved gross margins due to a greater
sales mix of higher margin generators. Gross profit margin increased to 28.1%
for the three months ended September 30, 1999 from 27.3% for the three months
ended September 30, 1998.
Operating expenses. Operating expenses increased $3.9 million, or
33.9%, to $15.4 million for the three months ended September 30, 1999 from $11.5
million for the three months ended September 30, 1998. The increase was due
primarily to increases in selling and service expenses and general and
administrative expenses. Selling and service expenses increased due to selling
and distribution costs that are impacted by sales volume, increases in sales
force personnel and certain sales incentives offered to new domestic customers.
The increase in general and administrative expenses was reflective of increased
training and support costs related to the company's new business software
implementation and increases in personnel to support certain finance, accounting
and human resource functions which had previously been shared with Generac
Corporation. As a percentage of sales, operating expenses increased to 16.0% for
the three months ended September 30, 1999 from 15.7% for the three months ended
September 30, 1998.
Net income. Net income increased $1.9 million, or 90.5%, to $4.0
million for the three months ended September 30, 1999 from $2.1 million for the
three months ended September 30, 1998. This increase in net income was primarily
due to the availability of operating earnings from the increased sales volume to
cover certain fixed charges. As a percentage of sales, net income increased to
4.1% for the three months ended September 30, 1999 from 2.9% for the three
months ended September 30, 1998.
EBITDA. EBITDA increased $3.3 million, or 31.4%, to $13.8 million for
the three months ended September 30, 1999 from $10.5 million for the three
months ended September 30, 1998. This increase was due to increased sales volume
and improved gross margins as described above. As a percentage of sales, EBITDA
remained consistent at 14.3% for the three months ended September 30, 1999 and
the three months ended September 30, 1998.
14
NINE MONTHS ENDED SEPTEMBER 30, 1999 (COMPANY) COMPARED TO THE NINE
MONTHS ENDED SEPTEMBER 30, 1998 (PRO FORMA)
Net sales. Net sales increased $87.3 million or 42.1%, to $294.9
million for the nine months ended September 30, 1999 from $207.6 million for the
nine months ended September 30, 1998.
Domestic sales increased $76.4 million or 39.8%, to $268.2 million for
the nine months ended September 30, 1999 from $191.8 million for the nine months
ended September 30, 1998. This increase was primarily reflective of increased
sales of generators and related accessories to existing customers resulting from
new store additions and sales to new customers. A portion of the increased
demand for generators may relate to consumer concerns relating to possible Year
2000 power outages and accordingly, any such increase in sales may not be
sustainable in future periods.
International sales increased $10.9 million, or 69.0%, to $26.7 million
for the nine months ended September 30, 1999 from $15.8 million for the nine
months ended September 30, 1998. This increase was reflective of increased
generator sales by the company's branch in the United Kingdom to meet the demand
of existing domestic customers.
Gross profit. Gross profit increased $25.0 million, or 45.5%, to $80.0
million for the nine months ended September 30, 1999 from $55.0 million for the
nine months ended September 30, 1998. This increase was reflective of increased
overall sales as described above and improved gross margins due to a greater
sales mix of higher margin generators, partially offset by higher costs incurred
for certain engines. Gross profit margin increased to 27.1% for the nine months
ended September 30, 1999 from 26.5% for the nine months ended September 30,
1998.
Operating expenses. Operating expenses increased $13.5 million, or
41.7%, to $45.9 million for the nine months ended September 30, 1999 from $32.4
million for the nine months ended September 30, 1998. The increase was due to
increases in selling and service expenses and general and administrative
expenses. Selling and service expenses increased due to selling and distribution
costs that are impacted by sales volume and increases in sales force personnel,
promotional expenses for new pressure washer product offerings, certain sales
incentives offered to new domestic customers and incentives for sales into home
centers in Germany. The increase in general and administrative expenses was
reflective of increased training and support costs related to the company's new
business software implementation and increases in personnel to support certain
finance, accounting and human resource functions which had previously been
shared with Generac Corporation. As a percentage of sales, operating expenses
remained consistent at 15.6% for the nine months ended September 30, 1999 and
the nine months ended September 30, 1998.
Net income. Net income increased $6.2 million, or 137.8%, to $10.7
million for the nine months ended September 30, 1999 from $4.5 million for the
nine months ended September 30, 1998. This increase in net income was primarily
due to the availability of operating earnings from the increased sales volume to
cover certain fixed charges. The increase was partially offset by the fact that
Generac Portable Products recognized approximately $1.2 million in costs
15
incurred 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 increased to 3.6% for the nine months ended September 30, 1999 from
2.2% for the nine months ended September 30, 1998.
EBITDA. EBITDA increased $12.2 million, or 43.7%, to $40.1 million for
the nine months ended September 30, 1999 from $27.9 million for the nine months
ended September 30, 1998. This increase was due to increased sales volume and
improved gross margins as described above. As a percentage of sales, EBITDA
increased to 13.6% for the nine months ended September 30, 1999 from 13.4% for
the nine months ended September 30, 1998.
2. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES AT
SEPTEMBER 30, 1999
To finance its capital expenditure program and fund its operational and
liquidity needs, Generac Portable Products has relied principally on cash flow
generated from operations and borrowings under the company's $115 million credit
facility between it and its lenders, with Bankers Trust Company as
administrative agent. Generac Portable Products' principal uses of liquidity are
to meet debt service requirements, finance its capital expenditures and provide
working capital. Based on current levels of operations and anticipated growth,
the management of Generac Portable Products expects that net cash from
operations and available amounts under its credit facility will be sufficient to
fund the company's debt obligations, permit anticipated capital expenditures and
fund its liquidity needs.
At September 30, 1999, Generac Portable Products had approximately
$217.7 million of outstanding debt, including $110.0 million of senior notes
payable, $105.7 million under its credit facility (including $26.9 million under
the $30.0 million revolving credit portion of the credit facility) and $2.0
million under capital lease obligations. In addition, as of September 30, 1999,
Generac Portable Products had available cash of approximately $1.8 million.
Generac Portable Product's ability to make scheduled payments of
principal, or to pay the interest on its indebtedness, or to fund planned
capital expenditures, will depend on its future performance, which in turn, is
subject to general economic, financial, competitive and other factors that are
beyond its control. Based upon the current level of operations and anticipated
growth, Generac Portable Products believes that future cash flow from
operations, together with available borrowings under the credit facility will be
adequate to meet Generac Portable Products' anticipated requirements for capital
expenditures, working capital, interest payments and scheduled principal
payments. There can be no assurance, however, that Generac Portable Products'
business will continue to generate sufficient cash flow from operations in the
future to service its debt and make necessary capital expenditures after
satisfying certain liabilities arising in the ordinary course of business. If
unable to generate sufficient cash flow, Generac Portable Products may be
required to delay necessary capital expenditures, refinance all or a portion of
its existing debt, sell assets or obtain additional financing. There can be no
assurance that any such refinancing would be available or that any such sales of
assets or additional financing could be obtained.
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Cash used in operating activities for the nine months ended September
30, 1999 totaled $8.3 million. The activity in operating cash flows was
primarily a result of a buildup of inventory and receivables to support
increased sales activity. The increase was partially offset by an increase in
trade accounts payable and other accrued liabilities. The increase in accounts
receivable was in part the result of certain billing delays which arose in
connection with the implementation of the company's new business information
system, which also resulted in an increase in borrowings under its revolving
credit facility. Borrowings under the revolving credit facility have been
reduced by $11.9 million from September 30, 1999 through November 11, 1999,
primarily as a result of accounts receivable reductions.
Capital expenditures for the nine months ended September 30, 1999
totaled $11.0 million. The capital expenditures related primarily to plant
expansions at the company's facilities, production machinery and software. In an
economic downturn, Generac Portable Products believes it will be able to adjust
the amount spent on capital expenditures without compromising the base
requirements of its operations. Generac Portable Products expects to spend
approximately $12.0 million in 1999 for various capital projects, including
increased capacity through plant expansion, cost improvement and quality
enhancement initiatives, administrative offices expansion, and updating
management information systems. Generac Portable Products spent approximately
$2.0 million on research and development during the nine months ended September
30, 1999.
3. INITIAL PUBLIC OFFERING COSTS
During the nine months ended September 30, 1999, Generac Portable
Products incurred approximately $1.2 million of expenses in conjunction with its
efforts to complete an initial public offering of its common stock. Generac
Portable Products decided to withdraw its initial public stock offering during
July 1999 as it did not believe that the price at which the stock could be sold
adequately represented the value of the company. Consequently, these costs were
expensed during the nine months ended September 30, 1999.
4. EURO CONVERSION
On January 1, 1999, member countries of the European Monetary Union
(EMU) began a three-year transition from their national currencies to a new
common currency, the "Euro". In the first phase, the permanent rates of exchange
between the members' national currency and the Euro were established and
monetary, capital, foreign exchange and interbank markets were converted to the
Euro. National currencies will continue to exist as legal tender and may
continue to be used in commercial transactions. By January 2002, Euro currency
will be issued and by July 2002, the respective national currencies will be
withdrawn. Generac Portable Products has operations in member countries of the
EMU and, accordingly, has established action plans that are continuing to be
implemented to address the Euro's impact on information systems, currency
exchange rate risk, taxation, contracts, competition and pricing. Based on its
current assessment, management believes that the costs of the Euro conversion
will not have a
17
material impact on the operations, cash flows or financial condition of Generac
Portable Products.
5. FUTURE ACCOUNTING CHANGES
The Financial Accounting Standards Board has issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities" which is
effective for periods beginning after June 15, 2000. Due to the company's
limited use of derivative instruments, the adoption of this statement is not
expected to have a material effect on the company's financial condition or
results of operations.
6. YEAR 2000 STRATEGY
Many currently installed computer systems and software products use two
digits rather than four to define the applicable year. For example, date
sensitive software may recognize a date using "00" as the year 1900 rather than
the year 2000. This could result in systems failures or miscalculations causing
disruptions of the company's operations. Generac Portable Products is completing
a three-phase approach of assessment, correction and testing of its business
systems to ensure that it does not experience any loss of critical business
functionality due to the Year 2000 issue. The scope of the project has included
all internal software, hardware, operating systems, non-information technology
systems, products and assessment of risk to the business from vendors and other
parties' Year 2000 issues. Furthermore, Generac Portable Products has completed
the assessment of its products, determining that the Year 2000 will not impact
its products because its products do not contain date sensitive sub-systems.
Generac Portable Products believes that this formal assessment (including
prioritization of business risk), correction (including conversions to new
software), and testing of necessary changes has adequately addressed the
business risk of Year 2000 from internal systems.
Although Generac Portable Products has not yet fully completed its Year
2000 project, management estimates that assessment, correction and testing has
been completed for approximately 95% of the company's information sub-systems
and consequently, these sub-systems are Year 2000 ready. The balance of the
company's systems have been or are currently being modified or replaced, with
all significant systems targeted for Year 2000 readiness by December 6, 1999.
Contingency plans have been developed and continue to be evaluated as this
target date approaches. In most instances, Generac Portable Products has
replaced, or is in the process of replacing, older software with new programs
and systems, rather than modifying existing systems solely to become Year 2000
ready. Replacing these systems results in a significant upgrade in systems and
capabilities, as well as providing the ability to properly interpret Year 2000
data. Although the timing of the system replacements is influenced by the Year
2000, in most instances these systems would have been replaced in the normal
course of business.
18
Generac Portable Products is currently unable to predict the extent to
which Year 2000 issues will affect vendors with which Generac Portable Products
does a material amount of business, or the extent to which Generac Portable
Products would be vulnerable to the failure of any of these vendors to convert
their systems on a timely basis. Generac Portable Products could face a material
financial risk if its customers or suppliers are unable to complete critical
Year 2000 readiness efforts in a timely manner. Generac Portable Products is
continuing to work with its customers and suppliers to evaluate their Year 2000
readiness, identify material business risks, and develop solutions so that all
critical processes needed to conduct its business are Year 2000 ready. As part
of the evaluation of the Year 2000 readiness of the company's customers and
suppliers, Generac Portable Products has requested that its customers and
suppliers complete a Year 2000 questionnaire which has facilitated the company's
assessment of the Year 2000 readiness of relevant third parties. Although
Generac Portable Products believes that customer and supplier representations
have been made in good faith, there is no assurance that such representations
would be legally binding. In addition, the company's exposure to these external
risks is partially mitigated by the size and sophistication of its primary
customers, as well as by the diversity of its suppliers and geographic
locations.
Generac Portable Products spent approximately $.9 million during 1998
and $3.1 million during the nine months ended September 30, 1999 to upgrade and
replace its systems to ensure Year 2000 readiness. Generac Portable Products
estimates it will incur additional costs of approximately $1.1 million to
upgrade and replace its systems, the majority of which will be incurred during
the last three months of 1999. Generac Portable Products believes it continues
to appropriately reduce the risks of not being Year 2000 ready through the
identification and remediation process described above.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Generac Portable Products 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 Portable Products 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 as compared to those
discussed in the company's Amendment No. 3 to Form S-4 Registration Statement as
filed with the SEC on July 26, 1999 and declared effective on July 30, 1999.
19
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, Generac Portable Products is subject to legal
proceedings and other claims arising in the ordinary course of its business.
Generac Portable Products maintains insurance coverage against claims in the
amount which it believes to be adequate. Generac Portable Products 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 Portable Products commenced an
arbitration against Generac Power Systems, Inc. ("Power Systems"), 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 Power Systems 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 Power Systems 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 Power Systems 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 Power Systems 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 Portable Products is seeking (i) a
declaration that Power Systems has breached its contractual obligations to the
company, including the implied covenant of good faith and fair dealing; (ii) a
declaration that Generac Portable Products 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 Power Systems from taking actions
which would delay or displace the company's efforts to market those products to
retailers; (iv) to enjoin Power Systems 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 Power Systems liable for compensatory
and punitive damages resulting from Power Systems' conduct. On October 19, 1999,
Power Systems 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 Power Systems 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 parties are now in the
preliminary stages of selecting an arbitrator.
20
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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Description
------- -----------
27 Financial Data Schedule
21
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 11, 1999 By /s/ ERIC R. WILKINSON
-----------------------
Eric R. Wilkinson
PRESIDENT
GENERAC PORTABLE PRODUCTS, LLC
(Registrant)
Date November 11, 1999 By /s/ DORRANCE J. NOONAN, JR.
-----------------------------
Dorrance J. Noonan, Jr.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
GPPW, INC.
(Registrant)
Date November 11, 1999 By /s/ FAITH ROSENFELD
---------------------
Faith Rosenfeld
PRESIDENT