Generac Reports Fourth Quarter and Full-Year 2017 Results

WAUKESHA, Wis., Feb. 13, 2018 (GLOBE NEWSWIRE) -- Generac Holdings Inc. GNRC ("Generac" or the "Company"), a leading global designer and manufacturer of power generation equipment and other engine powered products, today reported financial results for its fourth quarter and full-year ended December 31, 2017. Additionally, the Company initiated its outlook for 2018. 

Fourth Quarter 2017 Highlights

• Net sales increased 16.9% to $488.0 million during the fourth quarter of 2017 as compared to $417.4 million in the prior-year fourth quarter, including $9.6 million of contribution from the Motortech acquisition. 
  
  
• Net income attributable to the Company during the fourth quarter was $81.2 million, or $1.30 per share, as compared to $41.5 million, or $0.64 per share, for the same period of 2016.  The current year net income includes the impact of a $28.4 million non-cash gain, or $0.45 per share, largely from the revaluation of the Company's net deferred tax liabilities associated with the enactment of the Tax Cuts and Jobs Act of 2017 ("Tax Reform Act").
  
  
• Adjusted net income attributable to the Company, as defined in the accompanying reconciliation schedules, was $85.9 million, or $1.37 per share, as compared to $71.4 million, or $1.12 per share, in the fourth quarter of 2016.  The current-year adjusted net income includes the favorable impact from the acceleration of certain tax deductions, mostly in response to the Tax Reform Act, that resulted in a $0.15 benefit on a per share basis.
  
  
• Adjusted EBITDA attributable to the Company, as defined in the accompanying reconciliation schedules, was $108.6 million as compared to $91.0 million in the fourth quarter last year.  
  
  
• Cash flow from operations was a quarterly record of $138.4 million as compared to $123.9 million in the prior year quarter.  Free cash flow, as defined in the accompanying reconciliation schedules, was also a quarterly record of $121.8 million as compared to $114.3 million in the fourth quarter of 2016.
  
  
• The Company amended its Term Loan credit facility which reduced the applicable margin interest rate by 25 basis points from the level previously in effect, and eliminated the annual excess cash flow payment requirement if the consolidated net debt to adjusted EBITDA leverage ratio ("net leverage ratio") is maintained below 3.75 times.  The net leverage ratio, as defined in the accompanying reconciliation schedules, declined to 2.5 times as of December 31, 2017 compared to 3.6 times as of December 31, 2016.

Full-Year 2017 Highlights

• Net sales increased 15.8% to $1.672 billion during 2017 as compared to $1.444 billion during 2016, including $69.7 million of contribution from acquisitions, resulting in total organic sales growth for the year of 11.0%.  Domestic segment sales increased 10.5% to $1.297 billion as compared to $1.174 billion in the prior year.  International segment sales increased 38.8% to $375.9 million as compared to $270.9 million in the prior year.
  
  
• Net income attributable to the Company during 2017 was $159.4 million, or $2.56 per share, as compared to $98.8 million, or $1.50 per share for 2016.  Net income for 2017 includes the impact of the $28.4 million non-cash gain as a result of the Tax Reform Act.  The prior-year net income includes the impact of $7.1 million of non-recurring, pre-tax charges relating to the downturn for capital spending within the oil & gas industry.
  
  
• Adjusted net income attributable to the Company was $212.9 million, or $3.40 per share, as compared to $198.3 million, or $3.03 per share, in 2016.
  
  
• Adjusted EBITDA attributable to the Company for 2017 was $311.7 million as compared to $274.6 million last year.
  
  
• Cash flow from operations was $261.1 million as compared to $253.4 million in the prior year.  Free cash flow was $227.9 million as compared to $222.9 million in 2016.

"Our fourth quarter results put an exclamation point on a great 2017 as strong organic sales growth led to record quarterly sales and cash flow," said Aaron Jagdfeld, President and Chief Executive Officer.  "Shipments of home standby generators during the quarter were near record levels as higher power outage activity drove significant awareness for the product category during the second half of the year.  The increased interest in home standby generators translated to elevated levels of sales leads during the quarter and helped to push our residential dealer count to an all-time high.  Shipments of commercial and industrial products were also strong during the quarter driven mainly by our rental customers continued spending on new fleet equipment such as light towers and mobile generators.  In addition to our fantastic Domestic segment results for the quarter, our continued focus to create a more global company resulted in our best ever level of shipments outside the U.S. and Canada as our International segment experienced very strong organic sales growth and a substantial increase in margins."   

Additional Fourth Quarter 2017 Consolidated Highlights

Residential product sales increased 11.2% to $265.5 million as compared to $238.9 million in the prior year.  Commercial & Industrial (C&I) product sales increased 27.1% to $188.3 million as compared to $148.1 million in the prior year.

Gross profit margin was largely flat at 36.8% compared to 36.9% in the prior-year fourth quarter, which was due to a variety of factors.  Favorable pricing impacts along with improved leverage of fixed manufacturing costs were offset by unfavorable sales mix attributable to significantly higher International segment and mobile products sales compared to prior year along with higher commodity prices.

Operating expenses increased $8.7 million, or 11.4%, as compared to the fourth quarter of 2016.  The increase was primarily driven by the Motortech acquisition, higher variable costs on the strong growth in organic sales, and an increase in employee costs including higher incentive compensation, partially offset by lower promotional costs benefitting from the higher power outage environment.

Cash flow from operations was $138.4 million as compared to $123.9 million in the prior-year fourth quarter, and free cash flow was $121.8 million as compared to $114.3 million in the same quarter last year.  The improvements in cash flow were driven by a variety of factors including the increase in operating earnings as compared to the prior year and a larger benefit from working capital reduction during the current year, partially offset by higher cash income taxes and capital expenditures.

On December 8, 2017, the Company amended its Term Loan credit facility which, among other items, modified the pricing by reducing the applicable margin rate to a fixed rate of 2.00%, resulting in a 25 basis point reduction in overall interest rate from the level previously in effect, or approximately $2.3 million of annualized interest savings.  In addition, certain terms were amended to increase the Company's flexibility regarding repayment obligations, including the elimination of the annual excess cash flow payment requirement if the consolidated net leverage ratio is maintained below 3.75 times. 

Business Segment Results

Domestic Segment

Domestic segment sales increased 11.2% to $377.9 million as compared to $339.7 million in the prior-year quarter.  The current-year fourth quarter experienced strong growth in shipments of home standby generators driven by increased outage activity, along with the continuation of significant growth for mobile products.  Also contributing to the year-over-year sales growth were increases in service parts.

Adjusted EBITDA for the segment was $100.6 million, or 26.6% of net sales, as compared to $87.9 million in the prior year, or 25.9% of net sales.  Adjusted EBITDA margin in the current year benefitted from a favorable pricing environment including lower promotional costs, and improved overall leverage of fixed operating costs on the higher organic sales volumes.  These impacts were partially offset by higher commodity prices and an increase in employee costs including higher incentive compensation.

International Segment

International segment sales increased 41.8% to $110.2 million as compared to $77.7 million in the prior-year quarter, including $9.6 million of contribution from the Motortech acquisition.  The significant organic growth compared to the prior year was due to increased shipments of both C&I and residential products primarily within the European region, together with large project activity and the favorable impact of the stronger Euro.

Adjusted EBITDA for the segment, before deducting for non-controlling interests, improved to $10.5 million, or 9.6% of net sales, as compared to $3.9 million, or 5.0% of net sales, in the prior year.  The significant improvement in adjusted EBITDA margin as compared to the prior year was primarily due to improved leverage of fixed operating costs on the significant increase in organic sales, as well as favorable sales mix from higher-margin large project activity.  These favorable impacts were partially offset by higher commodity prices and increased operating expenses associated with the expansion of certain branch operations. 

2018 Outlook

The Company is initiating guidance for 2018 with net sales expected to increase between 3 to 5% as compared to the prior year, which includes a favorable foreign currency impact of between 1 to 2%.  Excluding the benefit of elevated portable generator shipments during 2017 related to major outage events from the active hurricane season, net sales are expected to increase between 7 to 9% as compared to the prior year.  This top-line guidance assumes no major outage events and a baseline power outage severity level similar to the longer-term average. Should the baseline power outage environment in 2018 be higher, or if there is "major" outage activity during the year, it is likely the Company could exceed these expectations. 

Net income margins, before deducting for non-controlling interests, are expected to be between 9.5 to 10.0% for the full-year 2018, with adjusted EBITDA margins, also before deducting for non-controlling interests, expected to be between 19.0 to 19.5% for the year. 

Operating and free cash flow generation is expected to be strong, with the conversion of adjusted net income to free cash flow expected to be over 90%.

Tax Reform

As a result of the Tax Reform Act, the Company recognized a one-time, non-cash gain of $28.4 million in the fourth quarter primarily from the impact of the revaluation of net deferred tax liabilities. Excluding this gain, the effective tax rate during the fourth quarter and full-year 2017 were 34.9% and 35.2%, respectively.  While the Company continues to assess the full impact of tax reform, the preliminary analysis suggests a meaningful benefit from the legislation.  Specifically for 2018, the effective tax rate is expected to decline to between 25 to 26%, resulting in a corresponding benefit to cash flow of between $10 to $12 million based on the outlook being provided.                                                                                                                                                      

Conference Call and Webcast

Generac management will hold a conference call at 9:00 a.m. EST on Tuesday, February 13, 2018 to discuss highlights of the fourth quarter of 2017 operating results. The conference call can be accessed by dialing (866) 415-3113 (domestic) or +1 (678) 509-7544 (international) and entering passcode 1776607.

The conference call will also be webcast simultaneously on Generac's website (http://www.generac.com), under the Investor Relations link. The webcast link will be made available on the Company's website prior to the start of the call within the Events section of the Investor Relations website.

Following the live webcast, a replay will be available on the Company's website. A telephonic replay will also be available approximately two hours after the call and can be accessed by dialing (855) 859-2056 (domestic) or +1 (404) 537-3406 (international) and entering passcode 1776607. The telephonic replay will be available for 7 days.
               
About Generac

Since 1959, Generac has been 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. 

Forward-looking Information

Certain statements contained in this news release, as well as other information provided from time to time by Generac Holdings Inc. or its employees, may contain forward looking statements that involve risks and uncertainties that could cause actual results to differ materially from those in the forward looking statements. Forward-looking statements give Generac's current expectations and projections relating to the Company's financial condition, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as "anticipate," "estimate," "expect," "forecast," "project," "plan," "intend," "believe," "confident," "may," "should," "can have," "likely," "future," "optimistic" and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events.

Any such forward looking statements are not guarantees of performance or results, and involve risks, uncertainties (some of which are beyond the Company's control) and assumptions. Although Generac believes any forward-looking statements are based on reasonable assumptions, you should be aware that many factors could affect Generac's actual financial results and cause them to differ materially from those anticipated in any forward-looking statements, including:

• frequency and duration of power outages impacting demand for Generac products;
• availability, cost and quality of raw materials and key components used in producing Generac products;
• the impact on our results of possible fluctuations in interest rates, foreign currency exchange rates, commodities and product mix;
• the possibility that the expected synergies, efficiencies and cost savings of our acquisitions will not be realized, or will not be realized within the expected time period;
• the risk that our acquisitions will not be integrated successfully;
• difficulties Generac may encounter as its business expands globally;
• Generac's dependence on its distribution network;
• Generac's ability to invest in, develop or adapt to changing technologies and manufacturing techniques;
• loss of key management and employees;
• increase in product and other liability claims or recalls; and
• changes in environmental, health and safety laws and regulations.

Should one or more of these risks or uncertainties materialize, Generac's actual results may vary in material respects from those projected in any forward-looking statements. A detailed discussion of these and other factors that may affect future results is contained in Generac's filings with the U.S. Securities and Exchange Commission ("SEC"), particularly in the Risk Factors section of the 2016 Annual Report on Form 10-K and in its periodic reports on Form 10-Q. Stockholders, potential investors and other readers should consider these factors carefully in evaluating the forward-looking statements.

Any forward-looking statement made by Generac in this press release speaks only as of the date on which it is made.  Generac undertakes no obligation to update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.

Reconciliations to GAAP Financial Metrics

Adjusted EBITDA

The computation of adjusted EBITDA attributable to the Company is based on the definition of EBITDA contained in Generac's credit agreement dated as of May 31, 2013, as amended.  To supplement the Company's condensed consolidated financial statements presented in accordance with U.S. GAAP, Generac provides a summary to show the computation of adjusted EBITDA, which excludes the impact of non-controlling interests, taking into account certain charges and gains that were recognized during the periods presented. 

Adjusted Net Income

To further supplement Generac's condensed consolidated financial statements presented in accordance with U.S. GAAP, the Company provides a summary to show the computation of adjusted net income attributable to the Company. Adjusted net income attributable to the Company is defined as net income before non-controlling interests and provision for income taxes adjusted for the following items: cash income tax expense, amortization of intangible assets, amortization of deferred financing costs and original issue discount related to the Company's debt, intangible impairment charges, certain transaction costs and other purchase accounting adjustments, losses on extinguishment of debt, business optimization expenses, certain other non-cash gains and losses, and adjusted net income attributable to non-controlling interests.

Free Cash Flow

In addition, we reference free cash flow to further supplement Generac's condensed consolidated financial statements presented in accordance with U.S. GAAP.  Free cash flow is defined as net cash provided by operating activities less expenditures for property and equipment and is intended to be a measure of operational cash flow taking into account additional capital expenditure investment into the business. 

The presentation of this additional information is not meant to be considered in isolation of, or as a substitute for, results prepared in accordance with U.S. GAAP.  Please see our SEC filings for additional discussion of the basis for Generac's reporting of Non-GAAP financial measures, which includes why the Company believes these measures provide useful information to investors and the additional purposes for which management uses the non-GAAP financial information.

SOURCE: Generac Holdings Inc.

CONTACT:
Michael W. Harris
Vice President – Finance  
(262) 544-4811 x2675
Michael.Harris@Generac.com