WAUKESHA, Wis. -- Generac Holdings Inc. (NYSE: GNRC), a global designer and manufacturer of energy technology solutions and other power products, today reported financial results for its first quarter ended March 31, 2020 and provided an update on its outlook for the full year 2020.
First Quarter 2020 Highlights
- Net sales increased 1.2% to $475.9 million during the first quarter of 2020 as compared to $470.4 million in the prior-year first quarter. Core sales growth, which excludes both the impact of acquisitions and foreign currency, declined approximately 3%.
- Residential product sales increased 18.3% to $257.6 million as compared to $217.8 million last year, with core sales growth of approximately 9% when excluding the impact of the Neurio and Pika acquisitions.
- Commercial & Industrial (“C&I”) product sales decreased 17.7% to $172.1 million as compared to $209.1 million in the prior year, with core sales declining approximately 17%.
- Net income attributable to the Company during the first quarter was $44.5 million, or $0.68 per share, as compared to $44.9 million, or $0.76 per share, for the same period of 2019. See accompanying reconciliation schedules for related earnings per share calculations.
- Adjusted net income attributable to the Company, as defined in the accompanying reconciliation schedules, was $55.1 million, or $0.87 per share, as compared to $56.5 million, or $0.91 per share, in the first quarter of 2019.
- Adjusted EBITDA before deducting for noncontrolling interests, as defined in the accompanying reconciliation schedules, was $86.0 million, or 18.1% of net sales, as compared to $87.1 million, or 18.5% of net sales, in the prior year.
- As of March 31, 2020, the Company had $573 million of liquidity between $307 million of cash and equivalents and $266 million available under its ABL revolving credit facility, which matures in June 2023. Also, the Company has no financial covenants and no maturities on its term loan until December 2026.
“First quarter revenue met our expectations and EBITDA margins exceeded despite the challenges faced by the initial impact of the COVID-19 pandemic,” said Aaron Jagdfeld, President and Chief Executive Officer. “Home standby shipments continued the strength seen over the past several quarters, including robust demand in California. Shipments of the PWRcell energy storage system met our expectations in the first full quarter after its commercial launch in December, and were well received in the marketplace. This strong performance was mostly offset by lower domestic C&I product shipments to telecom and rental equipment customers, and continued weakness in international markets that accelerated following the onset of the COVID-19 pandemic. More importantly in this uncertain environment, Generac is in the fortunate position of having a strong balance sheet and liquidity position, giving us the flexibility to remain focused on providing innovative products and services that are essential to the safety and security of residential homes, businesses and critical infrastructure across the globe.”
Additional First Quarter 2020 Consolidated Highlights
Gross profit margin improved 170 basis points to 36.2% compared to 34.5% in the prior-year first quarter as favorable sales mix was partially offset by the unfavorable mix impact from acquisitions.
Operating expenses increased $18.5 million, or 20.3%, as compared to the first quarter of 2019. The increase was primarily driven by recurring operating expenses from recent acquisitions, greater marketing and promotional spend, higher employee costs and additional intangible amortization.
Provision for income taxes for the current year quarter was $9.4 million, or an effective tax rate of 17.9%, as compared to $15.0 million, or a 24.7% effective tax rate, for the prior year. The lower effective tax rate in the current year is driven by higher share-based compensation deductions and favorable geographical mix of earnings.
Cashflow from operations was $11.3 million as compared to $14.6 million in the prior year. Free cashflow, as defined in the accompanying reconciliation schedules, was $(0.9) million as compared to $(0.6) million in 2019. Over the last 12 months ended March 31, 2020, cashflow from operations was $305.7 million and free cashflow was $250.4 million.
Business Segment Results
Domestic segment sales increased 5.5% to $376.0 million as compared to $356.5 million in the prior year quarter. Core sales growth, which excludes the impact of the Neurio and Pika acquisitions, was approximately flat. The current year quarter continued to experience strong growth in shipments of home standby generators. This core growth was offset by lower shipments of C&I products to national telecom customers as compared to a strong prior-year comparison, as well as a decline in sales of mobile products primarily due to weakness caused from the onset of the COVID-19 pandemic and collapse in oil prices.
Adjusted EBITDA for the segment was $82.8 million, or 22.0% of net sales, as compared to $81.2 million in the prior year, or 22.8% of net sales. Favorable sales mix was more than offset by the aforementioned impact from acquisitions and higher core operating expense investments.
International segment sales decreased 12.3% to $99.9 million as compared to $113.9 million in the prior year quarter. Core sales, which excludes the unfavorable impact of currency and the impact of the Captiva acquisition, declined approximately 10% compared to the prior year. The decline was primarily driven by a sharp drop in demand caused by the COVID-19 pandemic and its impact on certain key regions of the world, which magnified the slower economic growth and geopolitical headwinds already being experienced.
Adjusted EBITDA for the segment, before deducting for noncontrolling interests, was $3.3 million, or 3.3% of net sales, as compared to $5.9 million, or 5.2% of net sales, in the prior year. Decreased operating leverage on the lower sales volumes was the primary contributor to the margin decline.
Updated 2020 Outlook
As a result of the COVID-19 pandemic, the remainder of the year is expected to be impacted by a significant decline in economic activity across the globe with a more pronounced decline expected in the second quarter. This downturn is expected to be particularly severe within C&I products, both domestically and internationally. However, demand for residential products has historically proven to be more resilient and tends to decouple from the broader economic environment as demand is more driven by power outages. More recently, there are also considerable opportunities to grow the backup power market specifically in California as well as the attachment rates of energy storage overall. In addition, with more people working and learning from home, backup power for residential applications has now become more important than ever. These residential demand drivers are expected to mostly offset the potentially lower consumer spending environment due to COVID-19.
As a result of these factors, the Company is revising its outlook for the full-year 2020, and now expects net sales to decline between approximately 5 to 10%.bThis guidance assumes a level of power outages in line with the longer-term baseline average, but includes the benefit of one significant power shut-off event in California. Should there be a major event, such as a landed hurricane, along with additional public safety power shut-offs in California, we could expect approximately 3 to 5% of revenue growth in addition to the baseline guidance, resulting in an upside case as-reported sales growth of approximately flat to down 7%.
Net income margin, before deducting for non-controlling interests and excluding any potential restructuring, is now expected to be between 9.5% to 10.5% for the full-year 2020, with corresponding adjusted EBITDA margin now expected to be between 19.0% to 20.0%. Should there be a more active outage environment during 2020, margins could increase by approximately 50 basis points above this baseline guidance.
Mr. Jagdfeld concluded, “As the events from the COVID-19 situation continue to evolve, we are focused first and foremost on preventative measures to address the health, safety and well-being of our employees, customers, suppliers and the communities across the world where we operate and do business. I’m extremely proud of our team’s efforts in responding to this crisis as we are focused on maintaining our operations to the extent possible, which is especially important considering that our products and services are both essential and critical. Generac is built for moments like this with our long history in supporting customers through difficult times. Using our strong balance sheet and liquidity, we remain well positioned to execute on our strategic plan, and following this pandemic, we believe our future growth prospects will be as compelling as ever driven by the overall mega trends and powerful macro secular drivers for our business.”