Generac Holdings (“Generac” or the “Company”), a global designer and manufacturer of power generation equipment and other engine powered products, reports financial results for its second quarter ended June 30, 2018.
Second Quarter 2018 Highlights
- Net sales increased 25.3% to $494.9 million during the second quarter of 2018 as compared to $394.9 million in the prior-year second quarter, including $4.0 million of contribution from the Selmec acquisition, which closed on June 1, 2018. Core sales growth, which excludes both the favorable impact of acquisitions and foreign currency, was approximately 23%.
- Gross profit margin improved 190 basis points to 35.6% as compared to 33.7% in the second quarter of 2017.
- Net income attributable to the Company during the second quarter was $53.3 million, or $0.82 per share, as compared to $25.3 million, or $0.41 per share, for the same period of 2017.
- Adjusted net income attributable to the Company, as defined in the accompanying reconciliation schedules, was $68.9 million, or $1.11 per share, as compared to $42.7 million, or $0.68 per share, in the second quarter of 2017.
- Adjusted EBITDA attributable to the Company, as defined in the accompanying reconciliation schedules, was $99.6 million as compared to $68.3 million in the second quarter last year.
- Cash flow from operations was $50.7 million as compared to $59.5 million in the prior year quarter. Free cash flow, as defined in the accompanying reconciliation schedules, was $45.9 million as compared to $53.7 million in the second quarter of 2017.
- As a result of the continued strong demand for both residential and commercial & industrial (“C&I”) products, together with the closing of the Selmec acquisition, the Company is increasing its full-year 2018 sales growth guidance to approximately 13 to 14% with Adjusted EBITDA margins of approximately 20.0%.
“Our second quarter results further demonstrate the tremendous earnings power of Generac as solid execution across our entire business helped drive a 300 basis point expansion in EBITDA margins over the prior year,” said Aaron Jagdfeld, President and Chief Executive Officer. “We continue to see robust demand across all of our end markets and geographies, with particular strength coming from residential products as power outages over the last twelve months have been well above the long-term average. Global interest for our C&I mobile and stationary products has also been strong primarily driven by an increase in telecom, healthcare and other large projects, as well as the continued investment in fleet equipment by our rental account customers. Lastly, on June 1st, we closed on the acquisition of Selmec, further expanding our presence in the important Latin American backup power market.”
Additional Second Quarter 2018 Consolidated Highlights
Residential product sales increased 24.1% to $246.4 million as compared to $198.5 million in the prior year. C&I product sales increased 26.9% to $215.6 million as compared to $169.9 million in the prior year, with core sales growth of approximately 21%.
Gross profit margin improved 190 basis points to 35.6% as compared to 33.7% in the prior-year second quarter. The increase reflected better leverage of fixed manufacturing costs on the significant increase in sales, a more favorable pricing environment, and focused initiatives to improve margins. These items were partially offset by general inflationary pressures from higher commodities, currencies, wages and logistics costs.
Operating expenses increased $9.7 million, or 11.9%, as compared to the second quarter of 2017. The increase was primarily driven by higher variable operating expenses given the higher sales volumes, an increase in employee costs including additional incentive compensation, and increased International operating expenses given the stronger Euro. These items were partially offset by lower promotional costs as well as lower intangible amortization expense.
Consolidated Adjusted EBITDA, before deducting for non-controlling interests, improved to $102.2 million, or 20.7% of net sales, as compared to $69.7 million, or 17.7% of net sales, in the prior year.
Cash flow from operations was $50.7 million as compared to $59.5 million in the prior-year second quarter, and free cash flow was $45.9 millionas compared to $53.7 million in the same quarter last year. The year-over-year decline in second quarter cash flow reflected increased working capital investment driven by organic sales growth and the replenishment of inventory levels in anticipation of the summer storm season.
The current year earnings per share calculation of $0.82 includes the impact of a $2.3 million adjustment to increase the value of the redeemable noncontrolling interest for the Pramac acquisition, resulting in a $0.04 reduction in earnings per share. Under U.S. GAAP accounting rules, any adjustments to the redemption value are recorded directly to retained earnings. However, the redemption value adjustments are required to be reflected in the earnings per share calculation as detailed in the accompanying reconciliation schedules.
On January 1, 2018, the Company adopted Accounting Standards Update 2014-09, Revenue from Contracts with Customers, and all related amendments, commonly known as the “new revenue recognition standard”. The full retrospective method was elected under this standard, which requires application to all periods presented. As a result, the prior-year 2017 results have been restated accordingly. However, the adoption of this standard did not have a material impact on the Company’s financial statements.
Business Segment Results
Domestic segment sales increased 24.8% to $381.0 million as compared to $305.4 million in the prior-year quarter. The current-year quarter continued to experience strong growth in shipments of home standby and portable generators and also benefitted from robust C&I shipments driven by mobile products fleet replacement and strength in stationary generators through national accounts. Increased service part sales also contributed to the year-over-year growth.
Adjusted EBITDA for the segment was $90.6 million, or 23.8% of net sales, as compared to $63.7 million in the prior year, or 20.9% of net sales. Adjusted EBITDA margin in the current year benefitted from improved overall operating leverage on the higher organic sales volumes, a favorable pricing environment, lower promotional costs, and focused margin improvement initiatives. These benefits were partially offset by an increase in employee costs, including higher incentive compensation, and general inflationary pressures.
International segment sales increased 27.3% to $113.9 million as compared to $89.5 million in the prior-year quarter, including $4.0 million of contribution from the Selmec acquisition. Core sales growth was approximately 16%, primarily due to broad-based growth of C&I products across Europe, Asia and Latin America.
Adjusted EBITDA for the segment, before deducting for non-controlling interests, improved to $11.6 million, or 10.2% of net sales, as compared to $6.0 million, or 6.7% of net sales, in the prior year. The improvement was primarily due to increased leverage of fixed operating costs on the higher organic sales and favorable mix. These favorable impacts were partially offset by higher commodity prices, along with the expansion of certain branch operations.
Updated 2018 Outlook
The Company is increasing its prior guidance for revenue growth for full-year 2018 due to improving end-market conditions and the closing of the Selmec acquisition. Full year net sales are now expected to grow between 13 to 14% over the prior year, which is an increase from the 6 to 8% growth previously expected. Core sales growth is expected to be approximately 10%, which is an increase from the 5 to 6% growth previously expected. This top-line guidance assumes no “major” outage events and a baseline power outage severity level similar to the longer-term average for the remainder of the year. Should the baseline power outage environment in 2018 be higher, or if there is a “major” event during the year, the Company could exceed these expectations.
Given the increase in net sales guidance, net income margins, before deducting for non-controlling interests, are now expected to be approximately 10.5% for the full-year 2018, which is an increase from the 9.5 to 10.0% guidance previously expected. Adjusted EBITDA margins, also before deducting for non-controlling interests, are now expected to be approximately 20.0% for the year, up from the prior 19.0 to 19.5% guidance.
Operating and free cash flow generation is expected to remain strong, with the conversion of adjusted net income to free cash flow still forecasted to be over 90%.
Founded in 1959, Generac is a leading designer and manufacturer of a wide range of power generation equipment and other engine powered products. As a leader in power equipment serving residential, light commercial, and industrial markets, Generac's power products are available globally through a broad network of independent dealers, distributors, retailers, wholesalers and equipment rental companies, as well as sold direct to certain end user customers.